**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-Q**

 

**(Mark One)**

 

| **ý**                                        | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                              |
| **For the  Quarterly Period Ended June 30, 2004** |
|                                              |
| **OR**                                            |
|                                              |
| o                                                 | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from         to        .**

 

**CommissionFile No.  1-14371**

 

**INFORMATIONHOLDINGS INC.**

(Exactname of Registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **06-1518007**                     |
|-----------------------------------------------------------------|------------|------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (IRS Employer  Identification No.) |
|                                                            | ** ** | ** **                         |
| **2777 Summer Street, Suite  602  Stamford, Connecticut**       | ** ** | **06905**                          |
| (Address of principal  executive offices)                       |       | (Zip Code)                         |
|                                                            |       |                               |
| **(203) 961-9106**                                              |
| (Registrant’s telephone  number, including area code)      |

 

Indicate bycheck mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.
|   |   | ýYes oNo |
|--------|--------|---------------|

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).
|   |   | ýYes oNo |
|--------|--------|---------------|

 

As of August 3, 2004, there were 20,922,714shares of the Company’s common stock, par value $0.01 per share, outstanding.

 

 

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**INFORMATIONHOLDINGS INC.**

Form 10-Q for the Quarter EndedJune 30, 2004

 

Table ofContents

 
| **PART I.    FINANCIAL  INFORMATION** |                                                                                        |
|-----------------------------------------------------------|---------------------------------------------------------------------------------------------|
|                                                      |                                                                                        |   |
| Item  1.                                                  | Financial  Statements:                                                                      |   |
|                                                      |                                                                                        |   |
|                                                      | Consolidated Balance Sheets                                                                 |   |
|                                                      | As of June 30, 2004  (Unaudited) and December 31, 2003                                      |   |
|                                                      |                                                                                        |   |
|                                                      | Consolidated  Statements of Operations (Unaudited) for the                                  |   |
|                                                      | Three Months  Ended June 30, 2004 and 2003 and                                              |   |
|                                                      | Six Months Ended  June 30, 2004 and 2003                                                    |   |
|                                                      |                                                                                        |   |
|                                                      | Consolidated  Statements of Cash Flows (Unaudited) for the                                  |   |
|                                                      | Six Months Ended  June 30, 2004 and 2003                                                    |   |
|                                                      |                                                                                        |   |
|                                                      | Notes  to Consolidated Financial Statements (Unaudited)                                     |   |
|                                                      |                                                                                        |   |
| Item 2.                                                   | Management’s Discussion and Analysis of Financial Condition and  Results of Operations |   |
|                                                      |                                                                                        |   |
| Item 3.                                                   | Quantitative and Qualitative Disclosures About Market Risk                                  |   |
|                                                      |                                                                                        |   |
| Item 4.                                                   | Controls and Procedures                                                                     |   |
|                                                      |                                                                                        |   |
| **PART II.    OTHER INFORMATION**     |                                                                                        |
|                                                      |                                                                                        |   |
| Item 1.                                                   | Legal Proceedings                                                                           |   |
|                                                      |                                                                                        |   |
| Item 4.                                                   | Submission of Matters to a Vote of Security  Holders                                        |   |
|                                                      |                                                                                        |   |
| Item 6.                                                   | Exhibits  and Reports on Form 8-K                                                           |   |
|                                                      |                                                                                        |   |
|                                                      | Signature                                                                                   |   |

 

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**INFORMATION HOLDINGS INC.**

*CONSOLIDATED BALANCE SHEETS*

*(In thousands, except share data)*

 
| ** **                                                                                                                                                                      | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **(Unaudited)**    | ** ** | ** **             | ** ** |
| ***ASSETS***                                                                                                                                                                    |       |               |       |                   |       |
| *CURRENT ASSETS:*                                                                                                                                                               |       |               |       |                   |       |
| Cash and cash equivalents                                                                                                                                                       |       | $                  | 41,765     |                   | $          | 39,693 |   |
| Short-term investments                                                                                                                                                          |       | 8,875              |       | 12,271                 |       |
| Restricted cash                                                                                                                                                                 |       | —             |       | 3,000                  |       |
| Accounts receivable *(net of  allowance for doubtful accounts of $538 and $693, respectively)*                                                                                  |       | 39,434             |       | 37,650                 |       |
| Prepaid expenses and other current assets                                                                                                                                       |       | 3,699              |       | 5,669                  |       |
| Income taxes receivable                                                                                                                                                         |       | 1,638              |       | 11,899                 |       |
| Deferred income taxes                                                                                                                                                           |       | 2,001              |       | 2,001                  |       |
| Total current assets                                                                                                                                                            |       | 97,412             |       | 112,183                |       |
| Investments                                                                                                                                                                     |       | 97,219             |       | 83,207                 |       |
| Property and equipment, net                                                                                                                                                     |       | 3,864              |       | 4,281                  |       |
| Identified intangible assets,  net                                                                                                                                              |       | 67,078             |       | 70,248                 |       |
| Goodwill                                                                                                                                                                        |       | 99,431             |       | 100,871                |       |
| Other assets                                                                                                                                                                    |       | 5,150              |       | 3,880                  |       |
| TOTAL                                                                                                                                                                           |       | $                  | 370,154    |                   | $          | 374,670 |   |
|                                                                                                                                                                            |       |               |       |                   |       |
| ***LIABILITIES AND  STOCKHOLDERS’ EQUITY***                                                                                                                                |       |               |       |                   |       |
| *CURRENT LIABILITIES:*                                                                                                                                                          |       |               |       |                   |       |
| Accounts payable                                                                                                                                                                |       | $                  | 32,154     |                   | $          | 32,073 |   |
| Accrued expenses                                                                                                                                                                |       | 12,746             |       | 18,124                 |       |
| Deferred revenue                                                                                                                                                                |       | 24,546             |       | 25,753                 |       |
| Total current liabilities                                                                                                                                                       |       | 69,446             |       | 75,950                 |       |
| Long-term deferred income taxes                                                                                                                                                 |       | 14,957             |       | 16,307                 |       |
| Total liabilities                                                                                                                                                               |       | 84,403             |       | 92,257                 |       |
| *STOCKHOLDERS’ EQUITY:*                                                                                                                                                    |       |               |       |                   |       |
| Preferred stock, $.01 par value; 1,000,000  shares authorized; none issued                                                                                                      |       | $                  | —     |                   | $          | — |   |
| Common stock, $.01 par value; authorized  50,000,000 shares; issued 21,924,273 and 21,882,604 shares, respectively;  outstanding 20,917,073 and 20,875,404 shares, respectively |       | 219                |       | 219                    |       |
| Additional paid-in capital                                                                                                                                                      |       | 248,844            |       | 247,964                |       |
| Retained earnings                                                                                                                                                               |       | 42,456             |       | 38,304                 |       |
| Treasury stock, at cost, 1,007,200 shares,  in both periods                                                                                                                     |       | (14,723            | )          | (14,723                | )          |
| Accumulated other comprehensive income                                                                                                                                          |       | 8,955              |       | 10,649                 |       |
| Total stockholders’ equity                                                                                                                                                 |       | 285,751            |       | 282,413                |       |
| TOTAL                                                                                                                                                                           |       | $                  | 370,154    |                   | $          | 374,670 |   |

 

*See notes to unaudited consolidated financial statements.*

 

1

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**INFORMATION HOLDINGS INC.**

*CONSOLIDATED STATEMENTS OFOPERATIONS*

(Unaudited)

*(In thousands, except per sharedata)*

 
| ** **                                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                       | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                                        |       |                             |       |                           |       |   |   |   |   |
| Product                                                          |       | $                                | 12,961     |                           | $          | 11,845 |   | $ | 28,159 |   | $ | 23,906 |   |
| Service                                                          |       | 10,119                           |       | 7,910                          |       | 19,521 |   | 15,506 |   |
| Total revenues                                                   |       | 23,080                           |       | 19,755                         |       | 47,680 |   | 39,412 |   |
| Cost of sales:                                                   |       |                             |       |                           |       |   |   |   |   |
| Product                                                          |       | 3,173                            |       | 3,067                          |       | 6,402 |   | 6,063 |   |
| Service                                                          |       | 3,755                            |       | 3,320                          |       | 7,037 |   | 6,692 |   |
| Total cost of sales                                              |       | 6,928                            |       | 6,387                          |       | 13,439 |   | 12,755 |   |
| Gross profit                                                     |       | 16,152                           |       | 13,368                         |       | 34,241 |   | 26,657 |   |
| Operating expenses:                                              |       |                             |       |                           |       |   |   |   |   |
| Selling, general and administrative                              |       | 9,983                            |       | 9,183                          |       | 21,023 |   | 18,040 |   |
| Depreciation and amortization                                    |       | 3,000                            |       | 2,645                          |       | 6,037 |   | 5,354 |   |
| Total operating expenses                                         |       | 12,983                           |       | 11,828                         |       | 27,060 |   | 23,394 |   |
| Income from operations                                           |       | 3,169                            |       | 1,540                          |       | 7,181 |   | 3,263 |   |
| Other income (expense):                                          |       |                             |       |                           |       |   |   |   |   |
| Interest income, net                                             |       | 735                              |       | 676                            |       | 1,575 |   | 808 |   |
| Costs associated with pending merger                             |       | (590                             | )          | —                         |       | (590 | ) | — |   |
| Early termination of credit agreement                            |       | —                           |       | —                         |       | — |   | (575 | ) |
| Other income, net                                                |       | 15                               |       | —                         |       | 318 |   | — |   |
| Income from continuing operations before  income taxes           |       | 3,329                            |       | 2,216                          |       | 8,484 |   | 3,496 |   |
| Provision for income taxes                                       |       | 1,152                            |       | 833                            |       | 2,971 |   | 1,230 |   |
| Income from continuing operations                                |       | 2,177                            |       | 1,383                          |       | 5,513 |   | 2,266 |   |
| (Loss) income from discontinued operations,  net of income taxes |       | (1,256                           | )          | 29,389                         |       | (1,361 | ) | 29,600 |   |
| Net income                                                       |       | $                                | 921        |                           | $          | 30,772 |   | $ | 4,152 |   | $ | 31,866 |   |
| Net income (loss) per basic common share:                        |       |                             |       |                           |       |   |   |   |   |
| Continuing operations                                            |       | $                                | 0.10       |                           | $          | 0.07 |   | $ | 0.26 |   | $ | 0.11 |   |
| Discontinued operations                                          |       | (0.06                            | )          | 1.39                           |       | (0.07 | ) | 1.39 |   |
| Net income                                                       |       | $                                | 0.04       |                           | $          | 1.45 |   | $ | 0.20 |   | $ | 1.50 |   |
| Net income (loss) per diluted common share:                      |       |                             |       |                           |       |   |   |   |   |
| Continuing operations                                            |       | $                                | 0.10       |                           | $          | 0.07 |   | $ | 0.26 |   | $ | 0.11 |   |
| Discontinued operations                                          |       | (0.06                            | )          | 1.39                           |       | (0.06 | ) | 1.39 |   |
| Net income                                                       |       | $                                | 0.04       |                           | $          | 1.45 |   | $ | 0.20 |   | $ | 1.49 |   |
| Weighted number of common shares  outstanding:                   |       |                             |       |                           |       |   |   |   |   |
| Basic                                                            |       | 20,901                           |       | 21,167                         |       | 20,893 |   | 21,302 |   |
| Diluted                                                          |       | 21,066                           |       | 21,198                         |       | 21,027 |   | 21,330 |   |

 

*See notes to unaudited consolidated financialstatements*.

 

2

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**INFORMATION HOLDINGS INC.**

##### *CONSOLIDATEDSTATEMENTS OF CASH FLOWS*

(Unaudited) (*i**n thousands)*

 
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                       | ** ** | **2003** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                           |       |   |   |
| Net income                                                                         |       | $                              | 4,152      |   | $ | 31,866 |   |
| Gain on sale of assets of discontinued  operations                                 |       | —                         |       | (30,332 | ) |
| Loss from discontinued operations                                                  |       | 1,361                          |       | 732 |   |
| Income from continuing operations                                                  |       | 5,513                          |       | 2,266 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                           |       |   |   |
| Depreciation                                                                       |       | 1,981                          |       | 1,954 |   |
| Amortization of other intangible assets                                            |       | 4,056                          |       | 3,400 |   |
| Gain on sale of assets                                                             |       | (418                           | )          | — |   |
| Change in deferred income taxes                                                    |       | (1,532                         | )          | (773 | ) |
| Termination of credit facility                                                     |       | —                         |       | 494 |   |
| Net amortization of premiums on investments  available for sale                    |       | 1,236                          |       | — |   |
| Other                                                                              |       | (763                           | )          | 108 |   |
| Changes in operating assets and  liabilities:                                      |       |                           |       |   |   |
| (Increase) decrease in accounts receivable,  net                                   |       | (1,972                         | )          | 3,301 |   |
| Decrease in prepaid and other current  assets                                      |       | 1,230                          |       | 1,497 |   |
| Decrease in accounts payable and accrued  expenses                                 |       | (5,471                         | )          | (1,533 | ) |
| Income tax benefit from stock options  exercised                                   |       | 99                             |       | 99 |   |
| Net change in income taxes payable  (receivable)                                   |       | 11,081                         |       | (2,533 | ) |
| Decrease in deferred revenue                                                       |       | (1,409                         | )          | (1,197 | ) |
| Net change in other assets and liabilities                                         |       | 38                             |       | (193 | ) |
| Net Cash Provided by Continuing Operations                                         |       | 13,669                         |       | 6,890 |   |
| Net Cash Provided by Discontinued  Operations                                      |       | —                         |       | 1,801 |   |
| Net Cash Provided by Operating Activities                                          |       | 13,669                         |       | 8,691 |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                           |       |   |   |
| Proceeds from sale of discontinued  operations, net of transaction costs           |       | (798                           | )          | 91,969 |   |
| Purchases of property and equipment                                                |       | (1,150                         | )          | (860 | ) |
| Purchases of other investments held to  maturity                                   |       | —                         |       | (6,742 | ) |
| Purchases of investments available for sale                                        |       | (61,314                        | )          | (23,642 | ) |
| Proceeds from sales and maturities of  investments available for sale              |       | 49,462                         |       | — |   |
| Net proceeds on sale of assets                                                     |       | 515                            |       | — |   |
| Amounts received from (deposited in) escrow  funds                                 |       | 3,000                          |       | (3,000 | ) |
| Capitalized software development cost                                              |       | (1,647                         | )          | (493 | ) |
| Capitalized internal-use software                                                  |       | (189                           | )          | (304 | ) |
| Net Cash (Used in) Provided by Continuing  Operations                              |       | (12,121                        | )          | 56,928 |   |
| Net Cash Used in Discontinued Operations                                           |       | —                         |       | (827 | ) |
| Net Cash (Used in) Provided by Investing  Activities                               |       | (12,121                        | )          | 56,101 |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |                           |       |   |   |
| Common stock issued from stock options  exercised                                  |       | 781                            |       | 642 |   |
| Purchase of common stock for treasury                                              |       | —                         |       | (9,496 | ) |
| Principal payments on capital leases                                               |       | (63                            | )          | (71 | ) |
| Net Cash Provided by Continuing Operations                                         |       | 718                            |       | (8,925 | ) |
| Net Cash Used in Discontinued Operations                                           |       | —                         |       | (106 | ) |
| Net Cash Provided by Financing Activities                                          |       | 718                            |       | (9,031 | ) |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                            |       | (194                           | )          | 165 |   |
| NET INCREASE IN CASH AND EQUIVALENTS                                               |       | 2,072                          |       | 55,926 |   |
| CASH AND EQUIVALENTS, BEGINNING OF PERIOD                                          |       | 39,693                         |       | 53,910 |   |
| CASH AND EQUIVALENTS, END OF PERIOD                                                |       | $                              | 41,765     |   | $ | 109,836 |   |

 

*See notes to unaudited consolidated financial statements.*

 

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**INFORMATION HOLDINGS INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

**A.****                                    THECOMPANY**

 

Information Holdings Inc. (IHI or the Company) is a leading provider ofintellectual property and regulatory information products, software andservices to professional end-users. IHI’s data businesses, which include MicroPatent, Master Data Center(MDC) and IDRAC, provide a broad array of databases, information products andcomplementary services for intellectual property and regulatoryprofessionals.  IHI’s software segmentincludes Liquent, a leading provider of life science regulatory intelligenceand publishing solutions.

 

**B.**                                    **THE THOMSON MERGER AGREEMENT**

 

On June 28, 2004, the Company entered into an Agreement and Plan ofMerger (the Merger Agreement) with The Thomson Corporation (Thomson), a globalleader in providing integrated information solutions to business andprofessional customers whose common shares are traded on the Toronto StockExchange (TSX:TOC) and the New York Stock Exchange (NYSE:TOC).  The provisions of the Merger Agreementare complicated and not easily summarized. Readers should review the definitive proxy statement and proxy statementsupplement (the Proxy Statement) filed with the SEC on July 27, 2004 and August6, 2004, respectively which contains additional information about the mergerand includes a copy of the Merger Agreement.

 

Under the terms of the Merger Agreement, a Thomson subsidiary willacquire all of the outstanding common stock of Information Holdings Inc. at aprice of $28.00 per share in cash, representing an aggregate cost ofapproximately $441 million, net of cash and investments held by IHI, as of thedate of the Merger Agreement. Consummation of the transaction is subject to various conditions,including approval by IHI’s stockholders and regulatory approvals.  The Company will hold a special meeting ofits stockholders to consider and vote on proposals to approve the merger andrelated matters on August 31, 2004 (the Special Meeting).  At the time the merger becomes effective,each share of the Company’s common stock will be converted into the right toreceive $28.00 in cash. Options to acquire shares under the Company’s 1998Stock Option Plan will become fully vested and be converted into the right toreceive the excess of $28.00 per share over the applicable stock optionexercise price.  Fees associated with thetransaction and incurred for the three and six months ended June 30, 2004approximated $0.6 million.  IHI expectsto incur additional expenses related to this transaction totaling betweenapproximately $5 million and $6 million, which include:  investment banking, legal and accountingfees, certain fees related to the filing, printing and mailing of the related ProxyStatement, and other fees and expenses associated with the transaction.

 

The Company has agreed that from the date of the signing of the MergerAgreement, until the closing date of the merger, it will cause each of itssubsidiaries to carry on business in the ordinary course, and use commerciallyreasonable efforts to preserve intact its respective current businessorganizations, to keep its assets in good working condition, to maintain theconfidential nature of and legal protections applicable to materialintellectual property rights, to keep available the services its respective currentexecutive officers and key employees and to maintain good working relationshipswith persons having a material business relationship with the Company.  The Company has also agreed to certainrestrictions during this period related to items including, among other things:changes in capital structure, dividends, changes in organizational documents,acquisitions and dispositions, material agreements, employee benefits

 

4

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and compensation, accounting and tax practices, and capitalexpenditures.  These items are discussedin greater detail in the Proxy Statement.

 

TheProxy Statement includes a description of the termination provisions includedin the Merger Agreement.  Pursuant to theMerger Agreement, the Company must pay to Thomson an amount equal to$20 million if the Merger Agreement is terminated under the circumstancesset forth in the Merger Agreement and the Proxy Statement.  As described in the proxy statementsupplement, under the terms of the proposed settlement of the purported classaction lawsuit described in Note K - *SubsequentEvent,* the termination fee payable to Thomson will be reduced from$20 million to $18.5 million.

 

**C.****                                    BASIS OFPRESENTATION**

 

The consolidated balancesheet of the Company at December 31, 2003 has been derived from IHI’s AnnualReport on Form 10-K for the year then ended. All other consolidated financial statements contained herein have beenprepared by IHI and are unaudited.  Theseconsolidated financial statements should be read in conjunction with theconsolidated financial statements for the year ended December 31, 2003 and thenotes thereto contained in IHI’s Annual Report on Form 10-K.

 

Theaccompanying unaudited consolidated financial statements have been prepared in accordancewith the instructions to Form 10-Q and Article 10 of Regulation S-X, and do notinclude all information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.  However, in the opinion of management, theaccompanying unaudited consolidated financial statements contain alladjustments, consisting of normal recurring adjustments, necessary to presentfairly the consolidated financial position of IHI as of June 30, 2004, and theconsolidated results of operations and cash flows for the periods presentedherein.  Operating results for the threeand six months ended June 30, 2004 are not necessarily indicative of theresults that may be expected for the year ended December 31, 2004.

 

The consolidated financial statements include the accounts of IHI andits wholly owned subsidiaries.  Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

 

During 2003, the Company sold substantially all of the assets andcertain liabilities of its wholly owned subsidiaries Transcender LLC and CRCPress and Subsidiaries (See Note F – *Discontinued Operations*).  Accordingly, for financial statementpurposes, the assets, liabilities, results of operations and cash flows ofthese components have been segregated from those of continuing operations andare presented in the Company’s consolidated financial statements asdiscontinued operations for all periods presented herein.

 

5

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**D.****                                    ACCOUNTINGFOR STOCK-BASED COMPENSATION**

 

Underthe terms of the Merger Agreement, the Company is not permitted to grant futurestock options between the date of the Merger Agreement and the effective dateof the merger without Thomson’s consent. Prior to the date of the Merger Agreement, the Company granted stockoptions for a fixed number of shares to employees and non-employee directorswith an exercise price equal to the fair value of the shares at the date ofgrant.  The Company accounts for its stockoption grants under the provisions of Accounting Principles Board Opinion No.25, *Accounting for Stock Issued toEmployees,*which utilizes the intrinsic value method.  Since stock options were granted by theCompany with exercise prices equal to the market price of the underlying stockat the date of grant, no compensation expense has been recognized in theCompany’s Consolidated Statements of Operations.

 

Hadcompensation cost for the Company’s stock option plan been recognized basedupon the estimated fair value of the options at the dates of grant consistentwith the requirements of Statement of Financial Accounting Standards (SFAS) No.123, *Accounting for Stock-Based Compensation*,as amended by SFAS No. 148, *Accounting forStock-Based Compensation – Transition and Disclosure*, the Company’snet income and earnings per share would have been the pro forma amountsindicated below:

 
| ** **                                                                                                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(In thousands, except per share  data):**                                                                                          | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Net income as reported                                                                                                               |       | $                                | 921        |                           | $          | 30,772 |   | $ | 4,152 |   | $ | 31,866 |   |
| Deduct: Total stock-based compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | (287                             | )          | (506                           | )          | (907 | ) | (1,394 | ) |
| Pro forma net income                                                                                                                 |       | $                                | 634        |                           | $          | 30,266 |   | $ | 3,245 |   | $ | 30,472 |   |
|                                                                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Earnings per common share:                                                                                                           |       |                             |       |                           |       |   |   |   |   |
| Basic – as reported                                                                                                             |       | $                                | 0.04       |                           | $          | 1.45 |   | $ | 0.20 |   | $ | 1.50 |   |
| Basic – pro forma                                                                                                               |       | $                                | 0.03       |                           | $          | 1.43 |   | $ | 0.16 |   | $ | 1.43 |   |
| Diluted – as reported                                                                                                           |       | $                                | 0.04       |                           | $          | 1.45 |   | $ | 0.20 |   | $ | 1.49 |   |
| Diluted – pro forma                                                                                                             |       | $                                | 0.03       |                           | $          | 1.43 |   | $ | 0.15 |   | $ | 1.43 |   |

 

Theeffects on pro forma net income and earnings per share of expensing theestimated fair value of stock options are not necessarily representative of theeffects on reported net income for future years due to such factors as thevesting period of the stock options and the potential for issuance ofadditional stock options in future years. For purposes of pro forma disclosure, the estimated fair value ofoptions granted is amortized to expense over the option vesting period.

 

TheCompany estimates the fair value of each option grant on the date of grantusing the Black-Scholes option-pricing model (the Black-Scholes Model) usingcertain assumptions.  These assumptionsare evaluated and revised, as necessary, to reflect market conditions and theCompany’s experience.  The Black-ScholesModel was developed for use in estimating the value of traded options that haveno vesting restrictions and are fully transferable.  Because the Company’s employee stock optionshave characteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect theestimate, in management’s opinion, the existing Black-Scholes Model may notprovide a reliable measure of the fair value of the Company’s employee stockoptions.

 

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**E.****                                      ACQUISITION**

 

OnDecember 1, 2003, the Company acquired the issued share capital of CDCSolutions Limited (CDC), a private company based in the United Kingdom for cashconsideration of approximately $26,287,000 (Cash Consideration).  CDC is a leading provider of life scienceregulatory intelligence and publishing solutions.  The Cash Consideration includes approximately$22,126,000 of initial consideration, approximately $3,836,000 currently heldin escrow for estimated guaranteed earnouts as defined and calculated inaccordance with the underlying Share Purchase Agreement (SPA), andapproximately $325,000 of closing costs associated with the transaction.

 

In thefirst quarter of 2004 the Company received a valuation of the fair value of theidentified intangible assets and their estimated useful lives which range fromfour to ten years.  The purchase price ofCDC was accordingly adjusted to reflect acquired identified intangible assetsof $4,810,000, and the related deferred tax liability recorded as a result ofthe gross up of acquired intangible assets was adjusted to $1,443,000 based onthe valuation.  In addition, during thefirst six months of 2004 certain other adjustments to the purchase price wererecorded to increase net tangible assets acquired to $12,000.  Accordingly, non-deductible goodwill wasadjusted to $22,908,000.

 

Inaccordance with the Company’s plan to integrate the CDC business with itsLiquent business, the Company accrued as of the acquisition date approximately$765,000 of costs at CDC related to severance and for the remaining lease costsrelated to abandoned property.  As ofJune 30, 2004, the Company paid $398,000 of severance and $94,000 of leasecosts against the liability.  For theyear ended December 31, 2003, severance and integration costs of $749,000 hadbeen charged to expense at Liquent related to the CDC integration.  The remaining liability at December 31, 2003related to these costs was $606,000. During the first quarter of 2004, Liquent charged additional severancecosts related to the CDC integration of approximately $108,000 to Selling,general and administrative expense.  TheCompany paid $256,000 of severance costs and $155,000 of lease costs during thefirst six months of 2004.  The balance ofthe severance costs are expected to be paid by the third quarter of 2004 andthe lease costs over the life of the lease, which terminates in October 2005.

 

Inaddition to guaranteed future consideration of approximately $3,836,000, whichhas been paid into escrow, the sellers were entitled to additionalconsideration dependent on the revenue of CDC for the year ended December 31,2003.  Based on calculations outlined inthe SPA, the Company accrued additional consideration as of December 31, 2003of approximately $1,147,000, which was paid during the second quarter of 2004.

 

TheCompany has a further liability to the sellers for Earnout Consideration (asdefined in the SPA) which is to be calculated by March 31, 2007 based onformulas related to revenues and EBITDA (earnings before interest, taxes,depreciation and amortization) of the combined Liquent-CDC business for thethree-year period ending December 31, 2006 (the Earnout Period).  Amounts due for the Earnout Consideration, ifany, will be paid during the second quarter of 2007, unless the provisionsrelated to a change in control discussed below come into effect.  Earnout Consideration will become due if thecombined business has greater than 10% annual compound revenue growth duringthe Earnout Period, or if EBITDA exceeds $15,000,000 for either the year endingDecember 31, 2006 or on average for the three years of the Earnout Period.  The Earnout Consideration is subject to amaximum of £10,000,000and could be as low as zero.  The Companycurrently believes that Earnout Consideration could reasonably range from $6million to $10 million.

 

7

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In theevent of a sale of all or substantially all of the share capital of the Companyor the combined Liquent-CDC business during the Earnout Period, the sellershave the right, but not an obligation, to elect a payout of the Earnout Consideration.  The payout of the Earnout Consideration inthe event of a sale varies depending on the year of such sale and the operatingperformance of the combined business through the date of sale.  The range of payout is zero to £5,000,000 if a saleoccurs in 2004, zero to £7,500,000if a sale occurs in 2005 and zero to  £10,000,000 if asale occurs in 2006.

 

TheCDC acquisition has been accounted for using the purchase method of accountingand, accordingly, the results of its operations have been included in theCompany’s results of operations from its date of acquisition.

 

The following unaudited pro forma information presentsthe results of operations of the Company as if the 2003 acquisition of CDC hadtaken place on January 1, 2003:

 
| **(In thousands, except per share  data)** | ** ** | **Three Months  Ended  June 30,  2003** | ** ** | **Six Months  Ended  June 30,  2003** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
|                                       |       |                                    |       |                                  |       |
| Revenues                                   |       | $                                       | 22,659     |                                  | $          | 45,023 |   |
| Net income                                 |       | $                                       | 523        |                                  | $          | 520 |   |
| Basic income per common share              |       | $                                       | 0.02       |                                  | $          | 0.02 |   |
| Diluted income per common share            |       | $                                       | 0.02       |                                  | $          | 0.02 |   |

 

These pro forma resultsof operations have been prepared for comparative purposes only and do notpurport to be indicative of the operating results that would have occurred had the acquisition beenconsummated as of the above date, nor are they necessarily indicative of futureoperating results.

 

**F.****                                      DISCONTINUED OPERATIONS**

 

OnDecember 22, 2003, the Company entered into an Asset Purchase Agreement to sellsubstantially all of the assets and certainliabilities of Transcender LLC (Transcender) to Self Test Software, Inc., asubsidiary of Kaplan, Inc. (the Transcender Buyer).  The transaction was completed on December 31,2003.  The Company received net proceedsof $9.2 million, representing the cash consideration for the assets sold lessdeal related expenses.  During the firstsix months of 2004, the Company recorded a loss on sale of $1.4 million, net ofincome tax benefits, within discontinued operations primarily related tocharges for abandoned real estate lease commitments and severance costs relatedto employees terminated in 2004.  Priorto sale, Transcender was included as part of the software segment (See Note I –*Segment Information*).

 

Pursuantto an Interim Transition Services Agreement (the TSA) between the Company andthe Transcender Buyer, the Company acted as a service provider to theTranscender Buyer for the period from December 31, 2003 to May 31, 2004 (theTransition Period).  The TSA required theCompany to retain all employees of Transcender through March 31, 2004 andcertain employees through May 31, 2004. The Transcender Buyer reimbursed the Company in full for all employeecosts and incidental expenses during the Transition Period.  The Company was responsible to pay severancecosts to any employee that was not offered employment or did not acceptemployment with the Transcender Buyer (the Terminated Employees).  During the firstsix months of 2004, the Company accrued and paid severance and related costs ofapproximately $0.3 million to the Terminated Employees; which costs resulted ina charge in discontinued operations of

 

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approximately$0.2 million, net of income taxbenefits.  TheCompany does not expect to incur any additional severance and related costsassociated with the Terminated Employees subsequent to June 30, 2004.  The Transcender Buyer also reimbursed theCompany in full for all real estate costs through March 31, 2004 and for aportion of real estate costs from April 1, 2004 through May 31, 2004.  Effective May 31, 2004 (the AbandonmentDate), the Company abandoned office andwarehouse space associated with its former Transcender operations (theTranscender Space).  As of theAbandonment Date, the Company accrued approximately $1.7 million representing future lease commitments, net of estimated sublease income of $1.0 millionassociated with the Transcender Space. The Company recorded a charge of $1.1 million, net of income taxbenefits, in discontinued operations during the second quarter of 2004 related tothe abandoned properties.  The Company paid approximately $0.1 million oflease costs during the second quarter of 2004. The remaining lease commitment is expected to be paid over the life ofthe lease, which expires in March 2008. The Company is actively seeking to sublet the Transcender Space, butthere is no assurance that the Company will be able to sublet the space.  Accordingly, the Company may incur anadditional charge to discontinued operations related to the remaining leasecommitment in the future.

 

On February27, 2003, the Company entered into a definitive purchase agreement (thePurchase Agreement) to sell substantially all of the assets and certainliabilities of its wholly owned subsidiaries CRC Press LLC (CRC Press), CRCPress (U.K.) LLC and Parthenon Publishing Group, Inc. (together, CRC), to CRCPress I LLC and Routledge No. 2Limited, both wholly owned subsidiaries of Taylor & Francis Group plc.  The transaction was completed on April 8,2003.  The Company received net proceedsof approximately $90 million, representing the cash consideration for theassets sold less deal related expenses and an adjustment made based on theclosing balance sheet of CRC in accordance with the Purchase Agreement.  On April 8, 2004 the Company received $3.0million of proceeds previously held in escrow related to representations andwarranties contained in the Purchase Agreement. CRC comprised the entirety of the Company’s former scientific andtechnology information (STI) segment. Subsequent to the date of sale, the Company no longer has operations inthe STI segment (See Note I – *SegmentInformation*).

 

Summary operating results for the discontinued operations follow:

 
| ** **                                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(In thousands)**                                                   | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues                                                             |       | $                                | —     |                           | $          | 2,342 |   | $ | — |   | $ | 15,698 |   |
|                                                                 |       |                             |       |                           |       |   |   |   |   |
| Loss from discontinued operations before  income taxes               |       | —                           |       | (1,477                         | )          | — |   | (1,098 | ) |
| Benefit from income taxes on discontinued  operations                |       | —                           |       | (534                           | )          | — |   | (366 | ) |
| (Loss) gain on sale of discontinued operations,  net of income taxes |       | (1,256                           | )          | 30,332                         |       | (1,361 | ) | 30,332 |   |
| (Loss) income from discontinued operations,  net of income taxes     |       | $                                | (1,256     | )                              | $          | 29,389 |   | $ | (1,361 | ) | $ | 29,600 |   |

 

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**G.****                                    EARNINGS(LOSS) PER SHARE**

 

Thefollowing table sets forth the denominators used in computing basic and dilutedearnings (loss) per common share for the periods indicated:

 
| ** **                                                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(In thousands)**                                                             | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                           |       |                             |       |                           |       |   |   |   |   |
| Weighted average common shares outstanding:                                    |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                          |       | 20,901                           |       | 21,167                         |       | 20,893 |   | 21,302 |   |
| Net effect of dilutive stock options –based  on the treasury stock method |       | 165                              |       | 31                             |       | 134 |   | 28 |   |
| Diluted                                                                        |       | 21,066                           |       | 21,198                         |       | 21,027 |   | 21,330 |   |

 

For the three monthsended June 30, 2004 and 2003, 401,748 and 998,239 stock options, respectively,were excluded from the computation of diluted earnings per common share due totheir antidilutive effect.  For the sixmonths ended June 30, 2004 and 2003, 410,748 and 1,011,239 stock options,respectively, were excluded from the computation of diluted earnings per commonshare due to their antidilutive effect.

 

**H.****                                    COMMITMENTSAND CONTINGENCIES**

 

***Legal Proceedings***

 

On December 5, 2002, Venturetek, L.P., Richard Elkin,Antoine Bernheim, Stacy Bernheim and Genstar, Ltd., derivatively asshareholders of Rand Publishing Co., Inc. (Rand) and individually, on their ownbehalf (the Plaintiffs) filed a complaint in the Supreme Court of the State ofNew York against the Company (the IHI Action) alleging that the Company’spredecessor fraudulently acquired assets or businesses that were corporateopportunities of Rand and that such acquisitions constituted a“conversion”.  The Plaintiffs sought aconstructive trust over all of the Company’s shares and options and damages ofapproximately $750 million. Additionally, the Company’s President and Chief Executive Officer, MasonP. Slaine, and Michael E. Danziger, a member of the Board of Directors,were named as defendants in a related action entitled Venturetek, L.P., etal. v. Rand Publishing Co., Inc., et al., filed in the Supreme Court of theState of New York (the Rand Action). Similar to the IHI Action, the Plaintiffsin the Rand Action alleged that certain acquisitions of assets and businessesby the Company constituted corporate opportunities usurped from Rand and thatMessrs. Slaine and Danziger breached their fiduciary duties in connectiontherewith. The Plaintiffs in the Rand action sought a constructive trust over Messrs.Slaine’s and Danziger’s shares of the Company and damages alleged to be inexcess of $150 million.  In February2003, the Company moved to dismiss the complaint in its entirety on the groundsthat it failed to state a claim as a matter of law and that it was barred bythe applicable statutes of limitations. In a written Memorandum Decision dated April 21, 2004, the Court grantedthe Company’s motion and dismissed the complaint in its entirety.  By Notice of Appeal filed May 13, 2004, thePlaintiffs appealed the trial court’s dismissal of the action to the SupremeCourt, Appellate Division, First Department. The Company believes that the complaint in its entirety is without meritand it intends to vigorously contest the claims.

 

In addition, from time totime the Company is a party to other legal and administrative proceedings,claims, and litigation arising in the ordinary course of its business. Whilethe outcome of these matters is currently not determinable, management does not expect that the

 

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ultimate costs to resolvethese matters either singularly or in aggregate will have a material adverseeffect on the Company’s consolidated financial position, results of operationsor cash flows (See Note K – *Subsequent Event*).

 

***Merger Commitments***

 

In connection with the termination provisions of theMerger Agreement, the Company could be required to pay Thomson a terminationfee equal to $20 million under certain conditions as described in the MergerAgreement and as described in the Proxy Statement.  As described in the proxy statement supplement, under the terms of theproposed settlement of the purported class action lawsuit described in Note K -*Subsequent Event,* the terminationfee payable to Thomson will be reduced from $20 million to $18.5 million.  In addition, the Company has anengagement letter with Morgan Stanley & Company that provides for thepayment of a transaction fee equal to 1% of the transaction value uponcompletion of the merger.  The transactionvalue, estimated at $441 million as of the date of the Merger Agreement, isdefined as the gross proceeds to the stockholders, less the amount of cash andmarketable securities held by the Company at the closing date.

 

***Lease Commitments***

 

The Company primarilyleases office space, and office and computer equipment, for its primary domestic operating units based principally in the following states:  Connecticut, Michigan, Pennsylvania andVirginia.  The Company also leases officespace for its primary foreign operating units based principally in France andEngland. The leases generally provide for the lessee to pay taxes,maintenance, insurance and certain other operating costs of the leasedproperty, and certain leases include escalation clauses.

####  

During the second quarter of 2004, the Company’sMicroPatent and Liquent units entered into new office leases for its operationsin California and in Pennsylvania.  Thenew leases are replacements of expiring leases previously existing at December31, 2003 and will expire in 2007 and in 2015, respectively.  Alsoduring the second quarter of 2004, the Company abandoned office and warehousespace associated with its Transcender Space. Future lease obligations associated with the Transcender Space arereflected below, net of estimated sublease income (See Note F – *Discontinued Operations*).

 

Future annual minimum lease payments includingestimated escalation amounts under noncancelable operating leases as of June30, 2004 are as follows (in thousands):

 
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------|------------|------------|------------|
| 2004 (remaining six months)  |       | $          | 1,664      |   |
| 2005                         |       | 2,662      |       |
| 2006                         |       | 1,624      |       |
| 2007                         |       | 1,371      |       |
| 2008                         |       | 910        |       |
| Thereafter                   |       | 3,470      |       |
| Total minimum lease payments |       | $          | 11,701     |   |

 

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**I.****                                         SEGMENTINFORMATION**

 

Operating segments are defined as components of an enterprise for whichseparate financial information is available and regularly reviewed by theCompany’s senior management.  The Companyevaluates performance based on EBITDA of the respective business units.

 

The Company has two reportable segments contributing to its resultsfrom continuing operations: data and software. The data segment, which includes MicroPatent, MDC and IDRAC, provides abroad array of databases, information products and complementary services forintellectual property and regulatory professionals.  The software segment is comprised solely ofLiquent, a leading provider of life science regulatory intelligence andpublishing solutions.  Other includesunallocated corporate items, which primarily consists of corporate expenses andinterest income earned on the Company’s taxable fixed income portfolioprogram.  Corporate assets consistprincipally of cash, cash equivalents and investments.

 

The following tables set forth the information for the Company’sreportable segments of continuing operations for the periods indicated (inthousands):

 
| ** **                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| REVENUES FROM EXTERNAL CUSTOMERS: |       |                             |       |                           |       |   |   |   |   |
| Data                              |       | $                                | 16,042     |                           | $          | 14,394 |   | $ | 31,594 |   | $ | 28,209 |   |
| Software (1)                      |       | 7,038                            |       | 5,354                          |       | 16,086 |   | 11,196 |   |
| Other                             |       | —                           |       | 7                              |       | — |   | 7 |   |
|                              |       | $                                | 23,080     |                           | $          | 19,755 |   | $ | 47,680 |   | $ | 39,412 |   |
|                              |       |                             |       |                           |       |   |   |   |   |
| EBITDA:                           |       |                             |       |                           |       |   |   |   |   |
| Data                              |       | $                                | 6,869      |                           | $          | 5,609 |   | $ | 13,648 |   | $ | 11,160 |   |
| Software (1)                      |       | 565                              |       | 42                             |       | 2,652 |   | 383 |   |
| Other                             |       | (1,765                           | )          | (1,417                         | )          | (3,204 | ) | (3,416 | ) |
|                              |       | $                                | 5,669      |                           | $          | 4,234 |   | $ | 13,096 |   | $ | 8,127 |   |
|                              |       |                             |       |                           |       |   |   |   |   |
| INCOME (LOSS) FROM OPERATIONS:    |       |                             |       |                           |       |   |   |   |   |
| Data                              |       | $                                | 4,593      |                           | $          | 3,524 |   | $ | 8,670 |   | $ | 6,993 |   |
| Software (1)                      |       | (246                             | )          | (558                           | )          | 1,011 |   | (860 | ) |
| Other                             |       | (1,178                           | )          | (1,426                         | )          | (2,500 | ) | (2,870 | ) |
|                              |       | $                                | 3,169      |                           | $          | 1,540 |   | $ | 7,181 |   | $ | 3,263 |   |

 

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(1)                      Resultsinclude operations of CDC from the date of the acquisition December 1, 2003only (See Note E - *Acquisition*).

 

The Company evaluates theperformance of its segments based primarily on revenues and EBITDA. The Companybelieves that EBITDA is the most useful measure of business unit earningsbecause it more closely approximates the cash generating ability of eachbusiness compared to income (loss) from operations.  Income (loss) from operations includescharges for depreciation and amortization, the majority of which relate toamortization of intangible assets.  TheCompany generally does not incur capital expenditures to replace intangibleassets within existing operations.

 

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A reconciliation ofEBITDA to income from continuing operations is as follows (in thousands):

 
| ** **                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| EBITDA                                                 |       | $                                | 5,669      |                           | $          | 4,234 |   | $ | 13,096 |   | $ | 8,127 |   |
| Depreciation  and amortization (1)                     |       | (3,075                           | )          | (2,694                         | )          | (6,187 | ) | (5,439 | ) |
| Interest  income, net                                  |       | 735                              |       | 676                            |       | 1,575 |   | 808 |   |
| Income  from continuing operations before income taxes |       | 3,329                            |       | 2,216                          |       | 8,484 |   | 3,496 |   |
| Provision  for income taxes                            |       | 1,152                            |       | 833                            |       | 2,971 |   | 1,230 |   |
| Income  from continuing operations                     |       | $                                | 2,177      |                           | $          | 1,383 |   | $ | 5,513 |   | $ | 2,266 |   |

 

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(1)                      Depreciationand amortization includes $75,000 and $49,000 of amortization of capitalized software,classified as Cost of sales for the three months ended June 30, 2004 and 2003,respectively.  For the six months endedJune 30, 2004 and 2003, respectively, depreciation and amortization includes$150,000 and $85,000 of amortization of capitalized software classified as Costof sales.

 

**J.****                                      COMPREHENSIVE INCOME (LOSS)**

 

Comprehensive income iscomprised of net income and other comprehensive income (loss).  Accumulated other comprehensive incomeincludes foreign currency translation adjustments and unrealized gains andlosses, net of the related tax effect, on available-for-sale securities and onderivative instruments designated and qualifying as cash flow hedges.  The following table is a reconciliation ofthe Company’s net income to comprehensive income  (loss):

 
| ** **                                                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                         |       |                             |       |                           |       |   |   |   |   |
| Net income                                                                   |       | $                                | 921        |                           | $          | 30,772 |   | $ | 4,152 |   | $ | 31,866 |   |
| Other comprehensive income:                                                  |       |                             |       |                           |       |   |   |   |   |
| Change in net unrealized gains and losses  on available-for-sale investments |       | (1,812                           | )          | —                         |       | (1,600 | ) | — |   |
| Change in net unrealized gains and losses  on cash flow hedges               |       | 212                              |       | —                         |       | (166 | ) | — |   |
| Reclass adjustment for net (losses) gains  realized in net income            |       | (41                              | )          | —                         |       | 165 |   | — |   |
| Foreign currency translation adjustments                                     |       | (444                             | )          | (223                           | )          | (701 | ) | (409 | ) |
| Estimated tax benefit                                                        |       | 622                              |       | —                         |       | 608 |   | — |   |
| Net change in other comprehensive (loss)  income                             |       | (1,463                           | )          | (223                           | )          | (1,694 | ) | (409 | ) |
|                                                                         |       |                             |       |                           |       |   |   |   |   |
| Comprehensive (loss) income                                                  |       | $                                | (542       | )                              | $          | 30,549 |   | $ | 2,458 |   | $ | 31,457 |   |

 

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**K.****                                    SUBSEQUENTEVENT**

 

On July 1, 2004, an action was filed as a purportedclass action in the Court of Chancery of the State of Delaware in and for NewCastle County (Myszkowski v. Information Holdings Inc. et al., C.A. No. 537-N)against IHI, its directors and Thomson (the Class Action).  The complaint alleges, among other things,that approval of the merger by the Company’s directors amounted to a breach offiduciary duty, that the $28.00 cash consideration per share to be received bythe Company’s stockholders in the merger does not represent the true value ofIHI and that there were relationships among Thomson, Warburg Pincus LLC, a NewYork limited liability company that manages Warburg, Pincus Ventures L.P., andsome of the Company’s directors that created conflicts of interest preventingthese directors from acting in the best interest of the Company’sstockholders.  The complaint asks for aninjunction againstthe merger and damages as well as awarding the plaintiffs the costs anddisbursements of this Class Action, including attorneys’ and experts’fees.  The plaintiff and the defendantshave negotiated a settlement to dismiss the action with prejudice, subject to(i) the drafting and execution of the settlement documents and the otheragreements necessary to effectuate the terms of the proposed settlement; (ii)the completion by the plaintiff and his counsel of appropriate confirmatorydiscovery in the action sufficient to satisfy the plaintiff’s counsel that theproposed settlement is fair and reasonable; (iii) final court approval of thesettlement and dismissal of the action with prejudice and without awardingcosts to any party, except as agreed by the parties; and (iv) consummation ofthe merger, provided, that this condition (iv) shall be deemed to havebeen satisfied if the merger is not consummated due to (a) the merger notreceiving the requisite vote of holders of outstanding shares of IHI commonstock or (b) circumstances that give rise to the right of Thomson to receivefrom IHI a termination fee pursuant to the terms of the Merger Agreement.  As part of the settlement, IHI has agreed toprovide the additional disclosure set forth in the proxy statement supplementand to pay fees and expenses of the plaintiff’s counsel in the amount of$280,000.  Additionally, Thomson agreedto reduce from $20 million to $18.5 million the termination fee to which it isentitled if the Merger Agreement is terminated under certain circumstances asdescribed in the Merger Agreement and the Proxy Statement.  IHI and the other defendants continue to denyall of the allegations of wrongdoing contained in the complaint. The settlementis not, and should not be construed as, an admission of wrongdoing or liabilityby any defendant.

 

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**Item 2***.**                                   **Management’s Discussion and Analysis of FinancialCondition and Results of Operations***

 

*The following discussion andanalysis presents a review of Information Holdings Inc. (IHI or the Company)for the three and six months ended June 30, 2004 and 2003.  This review should be read in conjunctionwith the consolidated financial statements and notes presented herein as wellas Management’s Discussion and Analysis of Financial Condition and Results ofOperations contained in the Company’s 2003 Annual Report on Form 10-K.*

 

*Certain statements in this report contain forward-looking statements,including, without limitation, statements relating to the Company’s plans,strategies, objectives, expectations, and intentions that are made pursuant tothe “safe harbor” provisions of the Private Securities Litigation Reform Act of1995.  Actual results of the Companycould differ materially from those anticipated in these forward-lookingstatements as a result of certain risks and uncertainties.  Readers are cautioned not to place unduereliance on the forward-looking statements and that forward-looking statementscontained in this Form 10-Q should be read in conjunction with the Company’sdisclosures within this Item 2 and under the heading Item 1.  Business – Risk Factors contained in theCompany’s 2003 Annual Report on Form 10-K. The Company undertakes no obligation to publicly update or revise anyforward-looking statement, whether as a result of future events, newinformation or otherwise.*

 

**ProposedMerger with Thomson**

 

On June 28, 2004, the Company entered into an Agreement and Plan ofMerger (the Merger Agreement) with The Thomson Corporation (Thomson), a globalleader in providing integrated information solutions to business andprofessional customers.  Under the termsof the Merger Agreement, a Thomson subsidiary will acquire all of theoutstanding common stock of Information Holdings Inc. at a price of $28.00 pershare in cash, representing an aggregate cost of approximately $441 million,net of cash and investments held by IHI, as of the date of the MergerAgreement.  Consummation of thetransaction is subject to various conditions, including approval by IHI’sstockholders and standard regulatory approvals. The Company will hold a special meeting of its stockholdersto consider and vote on proposals to approve the merger and related matters onAugust 31, 2004 (the Special Meeting). At the time the merger becomes effective, each share of the Company’scommon stock will be converted into the right to receive $28.00 in cash.Options to acquire shares under the Company’s 1998 stock option plan willbecome fully vested and be converted into the right to receive the excess of$28.00 per share over the applicable stock option exercise price.  Fees associated with the transaction andincurred for the three and six months ended June 30, 2004 approximated $0.6million.  IHI expects to incur additionalexpenses related to this transaction totaling between approximately $5 millionand $6 million, which include: investment banking, legal and accounting fees; certain fees related tothe filing, printing and mailing of the related Proxy Statement; and other feesand expenses associated with the transaction.

 

The Company has agreed that from the date of the signing of the MergerAgreement, until the closing date of the merger, it will cause each of itssubsidiaries to carry on business in the ordinary course, and use commerciallyreasonable efforts to preserve intact its respective current businessorganizations, to keep its assets in good working condition, to maintain theconfidential nature of and legal protections applicable to materialintellectual property rights, to keep available the services its respectivecurrent executive officers and key employees and to maintain good working relationshipswith persons having a material business relationship with the Company.  The Company has also agreed to certainrestrictions during this period related to items including, among otherthings:  changes in capital structure,dividends, changes in organizational documents, acquisitions and dispositions,material agreements, employee benefits and compensation, accounting and taxpractices, and capital expenditures.

 

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**Overview**

 

The discussions that follow do not take intoaccount the potential impact of the Company’s proposed merger with Thomsonannounced on June 28, 2004, except for costs associated with the planned mergerwhich are reflected in the Company’s results for the three and six months endedJune 30, 2004.

 

*Impact of Acquisitions and Divestitures*

A key component of the Company’s historical growth has been to pursueacquisitions where opportunities exist to internally grow the acquiredcompanies’ revenues and increase profitability through operatingefficiencies.  Since beginning operationsin January 1997, the Company has completed 15 substantial acquisitions,including seven in the data segment, two in the software segment and six in theformer scientific and technology information and IT learning segments, as wellas some minor acquisitions that are not otherwise disclosed herein.

 

The Company has two reportable segments contributing to its resultsfrom continuing operations: data and software. The data segment, which includes MicroPatent, Master Data Center (MDC)and IDRAC, provides a broad array of databases, information products andcomplementary services for intellectual property and regulatoryprofessionals.  The software segment iscomprised solely of Liquent, a leading provider of life science regulatoryintelligence and publishing solutions. Other includes unallocated corporate items, which primarily consists ofcorporate expenses and interest income earned on the Company’s taxable fixedincome portfolio program (the Investment Program).  Corporate assets consist principally of cashand cash equivalents and investments.

 

On February 27, 2003, the Company entered into a definitive purchase agreement(the Purchase Agreement) to sell substantially all of the assets and certainliabilities of CRC Press and its subsidiaries (CRC) to CRC Press I LLC andRoutledge No. 2 Limited, both wholly owned subsidiaries of Taylor & FrancisGroup plc.  The transaction was completedon April 8, 2003.

 

On December 1, 2003, the Company acquired the issued share capital ofCDC Solutions Limited (CDC) for cash consideration of approximately $26.3million.  CDC is a leading provider oflife science regulatory intelligence and publishing solutions that is beingintegrated with the Company’s Liquent business.  Theresults of operations of the acquired business has been included in theConsolidated Statement of Operations from the date of acquisition.  Since CDC has been combined with Liquent, CDCoperations are included in the software segment for reporting purposes.

 

On December22, 2003, the Company sold its Transcender LLC (Transcender) business to asubsidiary of Kaplan, Inc. (Kaplan). Under the terms of the Asset Purchase Agreement , Kaplan acquiredsubstantially all of the assets and assumed certain operating liabilities.  The transaction had an effective date ofDecember 31, 2003.

 

Inaccordance with Statement of Financial Accounting Standards No. 144, *Accounting for the Impairment orDisposal of Long-Lived Assets*, all assets, liabilities, results of operationsand cash flows of Transcender and CRC have been segregated from those ofcontinuing operations and are presented in the Company’s financial statementsas discontinued operations. Additionally, the Company’s financial statements have been reclassifiedto reflect Transcender and CRC as discontinued operations for all prior periodspresented herein.

 

**CriticalAccounting Policies**

 

Thediscussion and analysis of the Company’s financial condition and results ofoperations are based on the Company’s consolidated financial statements.  The preparation of these financial statementsin conformity with accounting principles generally accepted inthe United States requires management to

 

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makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  These estimatesinclude, but are not limited to, revenue recognition, bad debt allowances,income taxes, and the valuation of goodwill and other identified intangibleassets.  The Company bases its estimateson historical experience and on various other assumptions that it believes tobe reasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.

 

The Company’s criticalaccounting policies are disclosed in the Company’s 2003 Annual Report on Form10-K.  There have been no materialchanges to these policies during the first six months of fiscal 2004.

 

**ConsolidatedResults of Operations**

 

*Three Months Ended June 30, 2004 Compared toThree Months Ended June 30, 2003*

 

*Summary*

 

Total revenues increased $3.3million, or 17%, to $23.1 million from $19.8 million.  Revenues increased by $1.6 million, or 11%,in the data segment and $1.7 million, or 32%, in the software segment.  During the quarter ended June 30, 2004, theCompany derived approximately 56.2% of its revenues from product sales andapproximately 43.8% from its service revenues.

 

Product revenues, which are derived from software license agreements,database subscriptions, and the sale of patent searching, retrieval andanalysis products, increased $1.1 million, or 9%, to $13.0 million from $11.8million.  Overall, new and existingcustomers increased demand for the Company’s products in 2004.  MicroPatent experienced increased volume ofcore subscription product sales and in file history transactional revenues, whileIDRAC experienced an increase in database subscriptions.  Product revenues also increased as the resultof the acquisition of CDC in December 2003. Service revenues, which include fees for software maintenance,consulting and training, as well as from patent annuity and trademark renewalpayment services, increased $2.2 million, or 28%, to $10.1 million from $7.9million.  The increase was primarilyattributable to the growth of the service business as a result of theacquisition of CDC.  Service revenuesalso increased at MDC primarily as the result of volume increases inintellectual property management services, due to increased sales of existingservices to new customers, in addition to increased average pricing.

 

Total cost of sales increased $0.5 million, or 8%, to $6.9 million from$6.4 million.  Gross profit marginsincreased to 70.0% in the second quarter of 2004, from 67.7% for thecorresponding period in 2003.  Theimprovement in gross profits was due to a shift in sales mix towards higher marginproducts at MicroPatent and a favorable impact on foreign exchange at IDRAC, aswell as cost efficiencies as a result of the successful integration of theCompany’s Liquent and CDC business units.

 

Selling, general and administrative expenses(SG&A) increased by $0.8 million, or 9%, to $10.0 millionfrom $9.2 million due primarily to operating expenses related to CDC.  Depreciation and amortization increased by$0.4 million, or 13%, to $3.0 million from $2.6 million due primarily toamortization of intangible assets associated with the acquisition of CDC andthe impact of foreign exchange fluctuations on amortization of intangibleassets in the Company’s IDRAC unit during the second quarter of 2004.

 

17

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Based on the factors above, income fromoperations increased $1.6 million, or 106%, to $3.2 million from$1.5 million.

 

During the second quarter of 2004, the Company recorded $0.6 million ofnon-operating expenses directly related to legal and accounting servicesassociated with the recently announced merger with Thomson.

 

Net interest income remained constant at $0.7 million in theperiods.  Interest income increased byapproximately $0.2 million in 2004 due primarily to increased interest incomeresulting from higher yields earned in the Company’s Investment Programinitiated in August 2003, coupled with interest earned on the invested cashproceeds received from the sale of Transcender.  This increase was offset by foreign exchangelosses of $0.2 million related to interest earned on a corporate loan withIDRAC.

 

Based on the factors above, income from continuing operations beforeincome taxes increased by $1.1 million to $3.3 million from $2.2 million.

 

The provision for income taxes as a percentage of pre-tax income wasapproximately 35% in the second quarter of 2004, compared to approximately 38%for the corresponding period in 2003. The effective tax rate differs from statutory rates primarily as aresult of state, local and foreign income taxes and permanent items.  The decrease in the tax rate is due to thefavorable impact of permanent book-tax differences, which increased in dollaramount due to the CDC acquisition, partially offset by the increase in pre-taxincome.

 

Based on the factors above, income from continuing operations increasedby $0.8 million to $2.2 million, or $0.10 per diluted common share, in thesecond quarter of 2004 from $1.4 million, or $0.07 per diluted common share, inthe second quarter of 2003.

 

(Loss) income from discontinued operations approximated $(1.3) million,or $(0.06) per diluted common share, in the second quarter of 2004, compared to$29.4 million, or $1.39 per diluted common share, in the second quarter of2003.  Loss from discontinued operationsin the second quarter of 2004 is related to charges for remaining abandonedreal estate obligations and severance following the disposition ofTranscender.  Income from discontinuedoperations in the second quarter of 2003 is related to a gain on thedisposition of the assets of CRC.  Thegain totaled $30.3 million, net of income taxes associated with the transactionof $15.9 million.

 

The Company evaluates the performance of its segments based primarilyon revenues and EBITDA (earnings before interest, taxes, depreciation andamortization).  The Company believes thatEBITDA is the most useful measure of business unit earnings because it moreclosely approximates the cash generating ability of each business compared toincome (loss) from operations.  Income(loss) from operations includes charges for depreciation and amortization, themajority of which relate to amortization of intangible assets.  The Company generally does not incur capitalexpenditures to replace intangible assets within existing operations.  A reconciliation of segment EBITDA to income(loss) from continuing operations before income taxes is presented after thediscussion of operating results.

 

*Segment Review*

 

*Data*

 

Total revenues increased $1.6 million, or 11%, to $16.0 million from$14.4 million.  During the quarter endedJune 30, 2004, the data segment derived approximately 72.1% of its revenuesfrom product sales and approximately 27.9% from service revenues.  Product revenues increased $0.9 million, or8%, to $11.6 million from $10.7 million. The strongest areas of product revenue growth included:  revenues

 

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from patent information subscriptions, as a result of strong growth incore subscriptions and an increase in transactional revenues related to filehistories at MicroPatent; and database subscriptions at IDRAC.  The primary growth driver in each area wasincreased volume.  MicroPatent volumegrowth relates primarily to sales of PatentWeb and Aureka products to newcustomers, as well as file history sales to both new and existingcustomers.  IDRAC volume growth relatesprimarily to increased sales of existing products and services to newcustomers, as well as a favorable foreign exchange impact due to strengtheningof the Euro versus the U.S. dollar. Service revenues increased $0.8 million, or 20%, to $4.5 million from$3.7 million.  Data segment servicerevenues, which are derived solely from MDC, increased primarily as the resultof volume increases in intellectual property management services due toincreased sales of existing services to new customers, in addition to increasedaverage pricing.

 

Total segment cost of sales increased $0.4 million, or 10%, to $4.7million from $4.3 million.  Total segmentgross profit margins increased to 70.8% in the second quarter of 2004, from70.4% for the corresponding period in 2003. Gross product profit margins increased to 74.2% from 72.8%, while grossservice profit margins decreased to 62.1% from 63.5%.   The increase in gross product profit marginsis due primarily to higher gross profits at MicroPatent resulting fromincreased web based transactions which have relatively fixed costs, while thedecrease in gross service profit margins is attributable to the increasedproduction and customer service-related compensation expense at MDC.  The Company expects gross service profits atMDC to improve during the last half of 2004 as a result of projected increasesin revenues and relatively stable costs.

 

Income from operations increased $1.1 million, or 30%, to $4.6 millionfrom $3.5 million.  Income fromoperations increased due primarily to the revenue increases noted above,partially offset by the impact of foreign exchange fluctuations on amortizationof intangible assets at IDRAC and an increase in compensation for management,production and customer service-related employees at MDC, based on volumegrowth.

 

EBITDA increased $1.3 million, or 22%, to $6.9 million from $5.6million.  EBITDA margins approximated 43%in the second quarter of 2004, compared to 39% for the corresponding period in2003.  The most significant factors inthe increase were the growth in segment revenues, partially offset by increasedcompensation expense.

 

*Software*

 

Revenues increased $1.7 million, or 31%, to $7.0 million from $5.4million.  All revenues in the segmentrelate to Liquent.  During the quarterended June 30, 2004, Liquent derived approximately 80.2% of its revenues fromservice revenues and approximately 19.8% from product sales.  Service revenues increased $1.5 million, or 35%,to $5.6 million from $4.2 million.  Theincrease is mainly attributable to increased volume in maintenance revenues asa result of the acquisition of CDC, coupled with volume growth related to salesof core software products to existing customers of Liquent and CDC.  Product revenues increased $0.2 million, or20%, to $1.4 million from $1.2 million due to revenues associated with theacquisition of CDC.  Software productrevenues were below expected levels due to delayed license deals.  A significant number of transactions expectedto be closed in the second quarter of 2004 remain in the sales pipeline forcompletion in the second half of 2004. In addition, the Company expects to generate increased license sales fromits new InSight product line during the last half of 2004.

 

Total segment cost of sales increased $0.1 million, or 6%, to $2.2million from $2.1 million.  Total segmentgross profits increased to 68.0% during the second quarter of 2004, from 60.3%for the corresponding period in 2003. Gross service profit margins increased to 63.5% from 53.1%, while grossproduct profit margins increased to 86.3% from 86.0%.  Total software segment gross profitsincreased

 

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primarily as a result of cost reduction initiatives and efficienciesresulting from the successful integration of the Company’s Liquent and CDCbusiness units.

 

Loss from operations in this segment decreased $0.3 million to $0.2million from $0.6 million.  The decreaseis due primarily to revenue increases as a result of the acquisition of CDC,partially offset by:  a full quarter ofcosts associated with CDC in the second quarter of 2004; the impact of belowexpected overall software revenues due to delayed license deals; and the impactof additional amortization of CDC intangible assets.

 

EBITDA in this segment increased $0.5 million to $0.6 million from $0.1million.  EBITDA margins approximated 8%in the second quarter of 2004, compared to 1% in the second quarter of 2003.  The most significant factors in the increasewere increased revenues and cost efficiencies resulting from the integration ofCDC.

 

*Other*

 

Losses from other operations decreased by $0.2 million, to $1.2 millionin second quarter of 2004 from $1.4 million in second quarter of 2003, dueprimarily to decreased legal expense and corporate bonuses.

 

During the second quarter of 2004, the Company recorded $0.6 million ofnon-operating expenses directly related to legal and accounting servicesassociated with the recently announced merger with Thomson.

 

*Six Months Ended June 30, 2004 Compared to Six Months Ended June 30,2003*

 

*Summary*

 

Total revenues increased $8.3 million, or 21%, to $47.7 million from$39.4 million.  Revenues increased by$3.4 million, or 12%, in the data segment and $4.9 million, or 44%, in thesoftware segment.  During the first sixmonths of 2004, the Company derived approximately 59.1% of its revenues fromproduct sales and approximately 40.9% from service revenues.

 

Product revenues increased $4.3 million, or 18%, to $28.2 million from$23.9 million.  Overall, new and existingcustomers increased demand for the Company’s products in 2004.  MicroPatent experienced increased volume ofcore subscription product sales and in file history transactional revenues,while IDRAC experienced an increase in database subscriptions.   Product revenues also increased as theresult of the acquisition of CDC in December 2003.  Service revenues increased $4.0 million, or26%, to $19.5 million from $15.5 million. The increase was primarily attributable to the growth of the servicebusiness as a result of the acquisition of CDC. Service revenues also increased at MDC primarily as the result of volumeincreases in intellectual property management services, due to increased salesof existing services to new customers, in addition to increased averagepricing.

 

Total cost of sales increased $0.7 million, or 5%, to $13.4 millionfrom $12.8 million.  Gross profit marginsincreased to 71.8% in the first six months of 2004, from 67.6% in thecorresponding period of 2003.  Theimprovement in gross profits was due to a shift in sales mix towards highermargin products at MicroPatent, as well as cost efficiencies as a result of thesuccessful integration of the Company’s Liquent and CDC business units.

 

SG&A increased by $3.0million, or 17%, to $21.0 million from $18.0 million due primarily to operatingexpenses related to CDC.  Depreciationand amortization increased by $0.7 million, or 13%, to $6.0 million from $5.4 milliondue primarily to amortization of intangible assets associated with the

 

20

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acquisition of CDC and the impact of foreign exchange fluctuations onamortization of intangible assets in the Company’s IDRAC unit during the firstsix months of 2004.

 

Based on the factors above, income fromoperations increased $3.9 million, or 120%, to $7.2 million from$3.3 million.

 

During the first six months of 2004, the Company recorded $0.6 millionof non-operating expenses directly related to legal and accounting servicesassociated with the recently announced merger with Thomson.  The merger expenses were partially offset bya $0.4 million gain on sale of patents at MicroPatent recorded in 2004.  During the first six months of 2003, theCompany charged approximately $0.6 million to non-operating expenses associatedwith the early termination of a credit agreement.  The early termination costs includedapproximately $0.5 million for the write-off of unamortized fees, representinga non-cash charge.

 

Net interest income increased by $0.8 million, or 95%, to $1.6 millionfrom $0.8 million.  Interest incomeincreased by approximately $1.0 million in 2004 due primarily to increasedinterest income resulting from higher yields earned in the Company’s InvestmentProgram initiated in August 2003, coupled with interest earned on the investedcash proceeds received from the sales of CRC and Transcender.  Interest income includesrealized gains on the sale of bonds equal to approximately $0.2 million in thefirst six months of 2004.  This increasewas partially offset by foreign exchange losses of $0.2 million related tointerest earned on a corporate loan with IDRAC.

 

Based on the factors above, income from continuing operations beforeincome taxes increased by $5.0 million to $8.5 million from $3.5 million.

 

The provision for income taxes as a percentage of pre-tax incomeremained relatively stable at approximately 35% in the first six months of 2004and 2003.  The effective tax rate differsfrom statutory rates primarily as a result of state, local and foreign incometaxes and permanent items.  The tax rateremained relatively constant due to the favorable impact of permanent book-taxdifferences, which increased in dollar amount as a result of the CDCacquisition, offset by the increase in pre-tax income.

 

Based on the factors above, income from continuing operations increasedby $3.2 million to $5.5 million, or $0.26 per diluted common share, in thefirst six months of 2004 from $2.3 million, or $0.11 per diluted common share,in the first six months of 2003.

 

(Loss) income from discontinued operations approximated $(1.4) million,or $(0.06) per diluted common share, in the first six months of 2004, comparedto $29.6 million, or $1.39 per diluted common share, in the first six months of2003.  Loss from discontinued operationsin the first six months of 2004 is related to charges for remaining abandonedreal estate obligations and severance following the disposition ofTranscender.  Income from discontinuedoperations in the first six months of 2003 is related to a gain on thedisposition of the assets of CRC.  Thegain totaled $30.3 million, net of income taxes associated with the transactionof $15.9 million.

 

A reconciliation of segment EBITDA to income (loss) from continuingoperations before income taxes is presented after the discussion of operatingresults.

 

21

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*Segment Review*

 

*Data*

 

Total revenues increased $3.4 million, or 12%, to $31.6 million from$28.2 million.  During the first sixmonths of 2004, the data segment derived approximately 73.0% of its revenuesfrom product sales and approximately 27.0% from service revenues.  Product revenues increased $2.0 million, or10%, to $23.1 million from $21.0 million. The strongest areas of product revenue growth included:  revenues from patent informationsubscriptions, as a result of strong growth in core subscriptions and anincrease in transactional revenues related to file histories at MicroPatent;and database subscriptions at IDRAC.  Theprimary growth driver in each area was increased volume.  MicroPatent volume growth relates primarilyto sales of PatentWeb and Aureka products to new customers, as well as filehistory sales to both new and existing customers.  IDRAC volume growth relates primarily toincreased sales of existing products and services to new customers, as well asa favorable foreign exchange impact due to strengthening of the Euro versus theU.S. dollar.  Service revenues increased$1.3 million, or 19%, to $8.5 million from $7.2 million.  Data segment service revenues, which arederived solely from MDC, increased primarily as the result of volume increasesin intellectual property management services due to increased sales of existingservices to new customers, in addition to increased average pricing.

 

Total segment cost of sales increased $0.8 million, or 10%, to $9.2million from $8.3 million.  Total segmentgross profit margins increased to 71.0% in the first six months of 2004, from70.5% for the corresponding period in 2003. Gross product profit margins increased to 74.6% from 73.0%, while grossservice profit margins decreased to 61.2% from 63.0%.   The increase in gross product profit marginsis due primarily to higher gross profits at MicroPatent resulting fromincreased web based transactions which have relatively fixed costs, while thedecrease in gross service profit margins is attributable to the increasedproduction and customer service-related compensation expense at MDC.  The Company expects gross service profits atMDC to improve during the last half of 2004 as a result of projected increasesin revenues and relatively stable costs.

 

Income from operations increased $1.7 million, or 24%, to $8.7 millionfrom $7.0 million.  Income fromoperations increased due primarily to the revenue increases noted above,partially offset by: increased compensation in information technology-relatedareas at MicroPatent; the impact of foreign exchange fluctuations onamortization of intangible assets at IDRAC; and an increase in compensation formanagement, production and customer service-related employees at MDC, based onvolume growth.

 

During the first six months of 2004, MicroPatent recorded a gain of$0.4 million, net of associated deal costs of $0.2 million, related to the saleof patents.

 

EBITDA increased $2.5 million, or 22%, to $13.6 million from $11.2million.  EBITDA margins approximated 43%in the first six months of 2004, compared to 40% in the first six months of2003.  The most significant factors inthe increase were the growth in segment revenues, partially offset by increasedcompensation expense.

 

*Software*

 

Revenues increased $4.9 million, or 44%, to $16.1 million from $11.2million.  All revenues in the segmentrelate to Liquent.  During the first sixmonths of 2004, Liquent derived approximately 68.4% of its revenues fromservice revenues and approximately 31.6% from product sales.  Service revenues increased $2.7 million, or32%, to $11.0 million from $8.3 million. The increase is mainly attributable to increased volume in maintenancerevenues as a result of the acquisition of CDC, coupled with volume growthrelated to sales of core software products to existing customers of Liquent andCDC.  Product revenues increased $2.2million, or 77%, to $5.1 million from $2.9 million, due primarily to

 

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revenues associated with the acquisition of CDC.  Software product revenues for the first sixmonths of 2004 were below expected levels due to delayed license deals.  A significant number of transactions expectedto be closed in the second quarter of 2004 remain in the sales pipeline forcompletion in the second half of 2004. In addition, the Company expects to generate increased license salesfrom its new InSight product line during the last half of 2004.

 

Total segment cost of sales decreased $0.1 million, or 3%, to $4.3million from $4.4 million.  Total segmentgross margins increased 73.4% in the first six months of 2004, from 60.4% forthe corresponding period in 2003.  Grossservice margins increased to 66.1% from 51.5%, while gross product marginsincreased to 89.2% from 86.3%.   Totalsoftware segment gross margins increased primarily as a result of costreduction initiatives and efficiencies resulting from the successfulintegration of the Company’s Liquent and CDC business units.

 

Income (loss) from operations in this segment increased $1.9 million to$1.0 million from $(0.9) million.  Incomefrom operations increased at Liquent due primarily to the revenue increasesresulting from the December 2003 acquisition of CDC, partially offset by:  a full six months of costs associated withCDC in 2004; the impact of below expected overall software revenues due todelayed license deals; and the impact of additional amortization of CDCintangible assets.

 

EBITDA in this segment increased $2.3 million to $2.7 million from $0.4million.  EBITDA margins approximated 16%in the first six months of 2004, compared to 3% in the first six months of2003.  The most significant factors inthe increase were increased revenues and cost efficiencies resulting from theintegration of CDC.

 

*Other*

 

Losses from other operations decreased by $0.4 million, to $2.5 millionin the first six months of 2004 from $2.9 million in the first six months of2003.  Losses from other operationsdecreased primarily as a result of decreased patent licensing activities in theCompany’s LPS unit.

 

During the first six months of 2004, the Company recorded $0.6 million ofnon-operating expenses directly related to legal and accounting servicesassociated with the recently announced merger with Thomson.  During the first six months of 2003, theCompany charged approximately $0.6 million to non-operating expenses associatedwith the early termination of a credit agreement.  The early termination costs includedapproximately $0.5 million for the write-off of unamortized fees, representinga non-cash charge.

 

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A reconciliation of segmentEBITDA to income (loss) from continuing operations before income taxes follows:

 
| ** **                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(In  thousands)**                                           | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| *Data segment*                                                |       |                             |       |                           |       |   |   |   |   |
| EBITDA                                                        |       | $                                | 6,869      |                           | $          | 5,609 |   | $ | 13,648 |   | $ | 11,160 |   |
| Amortization of capitalized software                          |       | —                           |       | (4                             | )          | (1 | ) | (9 | ) |
| Depreciation and amortization                                 |       | (2,273                           | )          | (2,090                         | )          | (4,560 | ) | (4,176 | ) |
| Interest income, net                                          |       | 48                               |       | 66                             |       | 90 |   | 119 |   |
| Income from continuing operations before  income taxes        |       | $                                | 4,644      |                           | $          | 3,581 |   | $ | 9,177 |   | $ | 7,094 |   |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| *Software segment*                                            |       |                             |       |                           |       |   |   |   |   |
| EBITDA                                                        |       | $                                | 565        |                           | $          | 42 |   | $ | 2,652 |   | $ | 383 |   |
| Amortization of capitalized software                          |       | (75                              | )          | (45                            | )          | (149 | ) | (76 | ) |
| Depreciation and amortization                                 |       | (724                             | )          | (546                           | )          | (1,468 | ) | (1,149 | ) |
| Interest income (expense), net                                |       | 1                                |       | (3                             | )          | 6 |   | (7 | ) |
| (Loss) income from continuing operations  before income taxes |       | $                                | (233       | )                              | $          | (552 | ) | $ | 1,041 |   | $ | (849 | ) |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| *Other*                                                       |       |                             |       |                           |       |   |   |   |   |
| EBITDA                                                        |       | $                                | (1,765     | )                              | $          | (1,417 | ) | $ | (3,204 | ) | $ | (3,416 | ) |
| Depreciation and amortization                                 |       | (3                               | )          | (9                             | )          | (9 | ) | (29 | ) |
| Interest income, net                                          |       | 686                              |       | 613                            |       | 1,479 |   | 696 |   |
| Loss from continuing operations before  income taxes          |       | $                                | (1,082     | )                              | $          | (813 | ) | $ | (1,734 | ) | $ | (2,749 | ) |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| *Total*                                                       |       |                             |       |                           |       |   |   |   |   |
| EBITDA                                                        |       | $                                | 5,669      |                           | $          | 4,234 |   | $ | 13,096 |   | $ | 8,127 |   |
| Amortization of capitalized software                          |       | (75                              | )          | (49                            | )          | (150 | ) | (85 | ) |
| Depreciation and amortization                                 |       | (3,000                           | )          | (2,645                         | )          | (6,037 | ) | (5,354 | ) |
| Interest income, net                                          |       | 735                              |       | 676                            |       | 1,575 |   | 808 |   |
| Income from continuing operations before  income taxes        |       | $                                | 3,329      |                           | $          | 2,216 |   | $ | 8,484 |   | $ | 3,496 |   |

 

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**Liquidityand Capital Resources**

 

*The Thomson Merger Agreement*

 

On June 28, 2004, the Company entered into a Merger Agreement withThomson, a global leader in providing integrated information solutions tobusiness and professional customers. Under the terms of the Merger Agreement, a Thomson subsidiary willacquire all of the outstanding common stock of Information Holdings Inc. at aprice of $28.00 per share in cash, representing an aggregate cost of approximately $441 million, net of cash andinvestments held by IHI, as of the date of the Merger Agreement.  Consummation of the transaction is subject tovarious conditions, including approval by IHI’s stockholders and standardregulatory approvals.  Fees associatedwith the transaction and incurred for the three and six months ended June 30,2004 approximated $0.6 million.  IHIexpects to incur additional expenses related to this transaction totalingbetween approximately $5 million and $6 million, which include:  investment banking, legal and accountingfees, certain fees related to the filing, printing and mailing of the related ProxyStatement, and other fees and expenses associated with the transaction.  A significant amount of these costs will beincurred whether or not the merger is completed.

 

The Company has agreed to certain restrictions during the periodbetween the signing of the Merger Agreement and the completion of the mergerrelated to items including, among other things: changes in capital structure,dividends, changes in organizational documents, acquisitions and dispositions,material agreements, employee benefits and compensation, accounting and taxpractices, and capital expenditures.  These restrictions may limit the Company’s ability to engage in certaintransactions and to fund certain projects it may have otherwise engagedin.  Additionally, the Company must payto Thomson an amount equal to $20 million if the Merger Agreement isterminated under circumstances set forth in the Merger Agreement and asdescribed in the Proxy Statement.  Asdescribed in the proxy statement supplement, under the terms of the proposedsettlement of the purported class action lawsuit described in Note K - *Subsequent Event,* the termination feepayable to Thomson will be reduced from $20 million to $18.5 million.  Any payment of any such terminationfee would materially reduce the Company’s cash and working capital.

 

During the periodbetween the signing of the Merger Agreement and the completion of the merger,the Company has certain restrictions on the use of its cash, as discussed inNote B – *The Thomson Merger Agreement*. The primary provision related to cash and investments requires the Company toreinvest proceeds from investments that mature into short-term (less than30-day) U.S. dollar deposits.

 

*TranscenderSale*

 

On December 31, 2003, the Company completed the sale of its Transcenderbusiness unit.  The Company received netproceeds of $9.2 million representing the cash consideration for the assetssold less deal related expenses.  TheCompany estimates that the majority of the remaining $1.8 million in dealrelated costs will be paid ratably in subsequent periods through March 2008.

 

In connection with the sale of the assets of Transcender, the Companyentered into an Interim Transition Services Agreement (the TSA) with thepurchaser that required the Company to retain all employees of Transcenderthrough March 31, 2004 and certain employees through May 31, 2004.  The purchaser reimbursed the Company in fullfor all employee costs and incidental expenses during the TSA period.  The Company was responsible to pay severancecosts to any employee that was not offered employment or did not acceptemployment with the purchaser (the Terminated Employees).  During the first six months of 2004, the Companypaid severance and related costs of approximately $0.3 million to theTerminated Employees.  The Company doesnot expect to incur any additional severance and related costs associated withthe Terminated Employees subsequent to June 30, 2004.  The purchaser also

 

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reimbursed the Company in full for all real estate costs through March31, 2004 and for a portion of real estate costs from April 1, 2004 through May31, 2004.  Effective May 31, 2004, the Company abandoned office and warehouse spaceassociated with its former Transcender operations (the Transcender Space).  As of June 30, 2004, the Company has accrued approximately $1.6 million representing remaining future lease commitments, net of estimated sublease income associated withthe Transcender Space.  The remaininglease commitment is expected to be paid over the life of the lease  which expires in March 2008.  The Company is actively seeking tosublet the Transcender Space, but there is no assurance that the Company willbe able to sublet the space. Accordingly, the Company may incur an additional charge to discontinuedoperations related to the remaining lease commitment in the future.

 

*CRCSale*

 

On April 8, 2003, the Company completed the sale of CRC and receivednet proceeds of approximately $90 million, representing the cash considerationfor the assets sold less deal related expenses and an adjustment made based onthe closing balance sheet of CRC in accordance with the underlying PurchaseAgreement. On April 8, 2004, the Company received $3.0 million of proceedspreviously held in escrow related to certain representations and warrantiescontained in the Purchase Agreement.  Allproceeds previously held in escrow were classified as Restricted cash in theConsolidated Balance Sheets.  The Companyestimates that approximately $0.4 million in deal related costs will be paidratably in subsequent periods through December 2005.

 

*MicroPatent Patent Sale*

 

Under the terms of a Patent Purchase Agreement dated March 23, 2004(the Patent Agreement), the Company’s MicroPatent unit sold its right, titleand interest in certain patents (the Patents) to Rose Blush Software LLC (thePatent Buyer) for cash consideration of approximately $0.6 million.  Additionally, under the terms of the PatentAgreement, the Company sold all rights to collect royalties under the Patentsto the Patent Buyer.  Closing costsassociated with the transaction totaled approximately $0.2 million.  The Company recognized a pre-tax gain on saleof approximately $0.4 million during the first quarter of 2004.

 

The proceeds from the above noted sales, net of income taxes associatedwith the transactions, have been invested in accordance with the Company’sInvestment Program, which the Company entered into in August 2003 to increaseinvestment returns on cash not immediately needed in operations.  The Investment Program portfolio consists ofU.S. denominated taxable fixed income securities with maximum effectivematurities of three years.

 

*CDC Acquisition*

 

On December 1, 2003, the Company acquired the issued share capital ofCDC for cash consideration of approximately $26.3 million, includingapproximately $3.8 million currently held in escrow for estimated guaranteedearnouts as defined and calculated in accordance with the underlying SharePurchase Agreement (SPA).  The Companyexpects to pay additional closing costs associated with the transaction ofapproximately $0.4 million subsequent to June 30, 2004.

 

Under the terms of the SPA, the sellers are entitled to potentialfuture consideration dependent on future operating results.  In addition to guaranteed futureconsideration of approximately $3.8 million, which has been paid into escrow,the Company had recorded additional consideration related to the revenue of CDCfor the year ended December 31, 2003 of approximately $1.1 million, which waspaid during the second quarter of 2004. The Company has a further liability to the sellers based on the combinedfuture operating results of Liquent and CDC for the three year period endingDecember 31, 2006 (the Earnout Consideration). The specific provisions of each contingency are detailed in Note E - *Acquisition*.  The Company currently believes that theEarnout Consideration could reasonably range from $6 million to 

 

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$10 million.  Amounts due forEarnout Consideration, if any, will be paid during the second quarter of 2007unless the provisions related to a change in control as outlined in Note E – *Acquisition* come into effect.

 

All payments associated with the transaction are expected to be paidfrom cash on hand or from operating cash flow from existing businesses.

 

*SixMonths Ended June 30, 2004 Cash Flows*

 

Cash and cash equivalents, including short-term investments, totaled$50.6 million at June 30, 2004 compared to $52.0 million at December 31,2003.  During the first half of 2004, theCompany received a federal income tax refund of approximately $10.8 million asa result of the sale of Transcender and $3.0 million for amounts previouslyheld in escrow related to the sale of CRC. The aforementioned funds have been invested in accordance with theCompany’s Investment Program.  At June30, 2004, the Company’s Investment Program also included $97.2 million oflong-term investments, comprised of U.S. government notes, collateralizedmortgage obligations, and corporate notes and bonds.  Maturities of the Company’s long-term investmentsrange from one to three years.  Excludingcash, cash equivalents and short-term investments, the Company’s continuingoperations had working capital deficits at June 30, 2004 and at December 31,2003.  The Company receives patentannuity payments and subscription payments in advance and, therefore, theCompany’s existing operations are expected to maintain very low or negativeworking capital balances, excluding cash, cash equivalents and short-terminvestments.  Included in currentliabilities at June 30, 2004, are obligations related to patent annuitypayments of approximately $30.9 million and deferred revenue of approximately$24.5 million.  The Company’s cashposition remains strong with currently over $145 million in cash, cashequivalents and investments, and no debt. These funds will be used for cash requirements of the Company’s existingoperations for the foreseeable future including all contractual obligations asthey become due.  The Company currentlydoes not have any agreements, arrangements or understandings with respect toany prospective material acquisitions. Pending such uses, the Company will continue to manage the funds inaccordance with IHI’s Investment Program and the terms of the Merger Agreement.

 

Cash generated from operating activities ofcontinuing operations was $13.7 million for the six months ended June 30, 2004,derived from income of $5.5 million plus non-cash charges of $4.6 million and adecrease in net operating assets of $3.6 million during the period.  The decrease in net operating assets relatesprimarily to a decrease in income taxes receivable, resulting from a federalincome tax refund of approximately $10.8 million received during March2004.  Estimated income tax payments madeduring 2003 were refunded to the Company in 2004 as a result of tax lossesrealized from the sale of Transcender in December 2003.  The decrease in net operating assets waspartially offset by an increase in accounts receivable.  The most significant receivables increaseswere at MDC, due to timing of customer cash receipts, and at Liquent, due tothe timing of maintenance renewals and 2004 license sales.  These increases in accounts receivable werepartially offset by significant collections at MicroPatent and IDRAC.  In addition, accrued expenses decreased atLiquent based on the payment of integration and deal related costs associatedwith the acquisition of CDC, a business acquired in December 2003.  Accrued expenses also decreased at MDC, primarilyrelated to the timing of patent annuity payments.

 

Cash used in investing activities from continuing operations was $12.1million for the six months ended June 30, 2004 due primarily to an increase ininvestment purchases, net of sales and maturities, of $11.8 million andadditional transaction costs of $1.1 million paid in the first six months of2004 related to the dispositions of CRC and Transcender.  These uses of cash were partially offset bythe receipt of $3.0 million of proceeds previously held in escrow related tothe sale of CRC, net proceeds received by the Company of $0.5 million resultingfrom the Patent Sale and $0.3 million of additional proceeds received

 

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on the sale of Transcender as aresult of a post-closing adjustment.  Capitalexpenditures, including capitalized software costs, approximated $3.0 millionin the first half of 2004.  Excludingacquisitions of businesses, the Company’s existing operations are not capitalintensive.

 

Cash provided by financing activities from continuing operations was$0.7 million for the six months ended June 30, 2004, primarily the result ofnet cash proceeds received from the issuance of common stock from stock optionexercises.  As of June 30, 2004, approximately$35 million remains authorized for future common stock repurchases pursuant tothe Company’s share buyback program. During the period between the signing of the Merger Agreement and thecompletion of the merger, the Company is prohibited from repurchasing shares.

 

The effect of exchange rates on cash and cash equivalents totaled$(0.2) million.  Exchange rates wereimpacted by foreign currency translation of local currency to the U.S. dollarof balances recorded within the Company’s European subsidiaries IDRAC andLiquent.

 

*Future Noncancelable Minimum Lease Payments*

 

Future annual minimum leasepayments including estimated escalation amounts under noncancelable operatingleases as of June 30, 2004 are asfollows (in thousands):

 
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------|------------|------------|------------|
| 2004 (remaining six months)  |       | $          | 1,664      |   |
| 2005                         |       | 2,662      |       |
| 2006                         |       | 1,624      |       |
| 2007                         |       | 1,371      |       |
| 2008                         |       | 910        |       |
| Thereafter                   |       | 3,470      |       |
| Total minimum lease payments |       | $          | 11,701     |   |

 

Based on past performance andcurrent expectations, the Company believes that available cash and cashequivalents, together with funds generated from operations and amounts includedin its Investment Program will be sufficient to fund the cash requirements ofits existing operations for the foreseeable future including all contractualobligations as they become due. Other than normal operating expenses, cashrequirements for the balance of 2004 are expected to consist primarily ofcapital expenditures related to enhancements to the Company’s productioncapacity and information systems and the relocation of its Liquent unit. Future operating requirements and capital needs may be subject to economicconditions and other factors, many of which are beyond the Company’s control.

 

During the period between the signing of the MergerAgreement and the completion of the merger, the Company has certainrestrictions on the use of its cash, as discussed in Note B – *The Thomson Merger Agreement*.  Amongthese restrictions is the requirement to obtain the consent of Thomson foracquisitions and for capital expenditures on an individual basis in excess of$250,000 or in an aggregate amount in excess of $1.5 million per quarter. The Company believes that it can fund its normal capital requirements withinthe prescribed limits.

 

**Seasonality and Quarterly Results**

 

The Company does not believe its businesses havesignificant seasonality.  However, newproduct launches and the timing of license sales may affect quarterlyresults.  Accordingly, results for anyquarter are not necessarily indicative of the results that may be achieved forthe full year.

 

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**Item 3****.****                              *Quantitative and Qualitative Disclosure About MarketRisk***

 

*InterestRate Risk* - The primary objective of theCompany’s investment activities is to preserve the principal while at the sametime maximizing yields without significantly increasing the risk.  To achieve this objective, the Companymaintains its portfolio of cash equivalents and investments in a variety ofsecurities, including U.S. government notes, collateralized mortgage obligations,and corporate notes and bonds.  As ofJune 30, 2004, approximately 8% of the Company’s portfolio matures in one yearor less, with the remainder maturing in less than three years.   The Company does not use derivativefinancial instruments in its investment portfolio.  Investments are placed with high creditquality issuers and, by policy, the Company limits the amount of creditexposure to any one issuer.  The Companydoes not hold securities for trading purposes.

 

At any time, a sharp rise in interest rates couldhave a material adverse impact on the fair value of the Company’s investmentportfolio.  Conversely, declines ininterest rates could have a material favorable impact on interest earnings fromthe Company’s investment portfolio.  As of June 30, 2004, the aggregate fair valueof available-for-sale securities yielding unrealized losses amounted toapproximately $101,704,000.  As of June30, 2004, all such securities have been in unrealized loss positions forperiods of less than four months.  Due tothe short-term nature of unrealized loss positions, no unrealized losses areconsidered to be other than temporary.  The Company does not currently hedge interest rate exposures.

 

*ForeignCurrency Exchange Rate Risk*-**Thefinancial statements of the Company’s foreign subsidiaries are translated fromthe local currency into U.S. dollars. Assets and liabilities are translated using exchange rates in effect atthe balance sheet date, except certain accounts of subsidiaries whosefunctional currency is the U.S. dollar, and translation adjustments areaccumulated in a separate component of stockholders’ equity.  Revenue and expenses are translated ataverage monthly exchange rates, and translation adjustments are charged andcredited to income.  As such, theCompany’s operating results are affected by fluctuations in the value of theU.S. dollar compared to the British pound and the Euro.  During the quarters ended June 30,2004 and 2003, the Company’s operating results include net foreign exchangegains of $88,000 and $72,000, respectively. During the six months ended June 30, 2004 and 2003, the Company’soperating results include net foreign exchange losses of $3,000 and $5,000,respectively.

 

A subsidiary of the Companyroutinely enters into forward contracts to acquire various internationalcurrencies in an effort to hedge foreign currency transaction exposures of itsoperations.  Such forward contracts havebeen designated as hedges for future annual patent payments to relatedinternational regulatory agencies.  AtJune 30, 2004, the subsidiary of the Company had entered into forward contractsto acquire various international currencies, all having maturities of less thanseven months, aggregating approximately $29,384,000.  Net realized gains relating to forwardcontracts for the three and six months ended June 30, 2004 were $102,000 and$123,000, respectively.  Net realizedgains and losses relating to forward contracts were immaterial for the threeand six months ended June 30, 2003.

 

The Company has only limitedinvolvement with derivative financial instruments and does not use them fortrading purposes.

 

**Item 4****.****                              *Controls and Procedures***

 

As of June 30, 2004, anevaluation was performed under the supervision and with the participation ofthe Company’s management, including the Chief Executive Officer (CEO) and ChiefFinancial Officer (CFO), of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures pursuant to Rules 13a-15(e)and 15d-15(e) under the Securities Exchange Act of 1934, as amended.  Based on that evaluation, the Company’smanagement, including the CEO and CFO, concluded that the Company’s currentdisclosure controls and procedures were effective as of June 30, 2004.  There have been no significant changes in theCompany’s internal controls over financial reporting during the most recentquarter that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting.

 

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**PARTII. OTHER INFORMATION**

 

**Item1.****                              *Legal Proceedings***

 

On April 21, 2004 TheSupreme Court of the State of New York dismissed a complaint brought byVenturetek, L.P. RichardElkin, Antoine Bernheim, Stacy Bernheim and Genstar, Ltd., derivately asshareholders of Rand Publishing Co., Inc., and individually, on their ownbehalf (the Plaintiffs) against the Company.  By Notice of Appeal filedMay 13, 2004, the Plaintiffs appealed the trial court’s dismissal of the actionto the Supreme Court, Appellate Division, First Department. See Note H – *Commitments and Contingencies*, which ishereby incorporated by reference.

 

On July 1, 2004, an action was filed as a purportedclass action in the Court of Chancery of the State of Delaware in and for NewCastle County (Myszkowski v. Information Holdings Inc. et al., C.A. No. 537-N)against IHI, its directors and Thomson. The plaintiff and the defendants have negotiated a settlement to dismissthe action with prejudice, subject to (i) the drafting and execution of thesettlement documents and the other agreements necessary to effectuate the termsof the proposed settlement; (ii) the completion by the plaintiff and hiscounsel of appropriate confirmatory discovery in the action sufficient to satisfythe plaintiff’s counsel that the proposed settlement is fair and reasonable;(iii) final court approval of the settlement and dismissal of the action withprejudice and without awarding costs to any party, except as agreed by theparties; and (iv) consummation of the merger, provided, that thiscondition (iv) shall be deemed to have been satisfied if the merger is notconsummated due to (a) the merger not receiving the requisite vote of holdersof outstanding shares of IHI common stock or (b) circumstances that give riseto the right of Thomson to receive from IHI a termination fee pursuant to theterms of the Merger Agreement.  As partof the settlement, IHI has agreed to provide the additional disclosure setforth in the proxy statement supplement and to pay fees and expenses of theplaintiff’s counsel in the amount of $280,000. Additionally, Thomson agreed to reduce from $20 million to $18.5 millionthe termination fee to which it is entitled if the Merger Agreement isterminated under certain circumstances as described in the Merger Agreement andthe Proxy Statement.  IHI and the otherdefendants continue to deny all of the allegations of wrongdoing contained inthe complaint. The settlement is not, and should not be construed as, anadmission of wrongdoing or liability by any defendant.  SeeNote K – *Subsequent Event*, whichis hereby incorporated by reference.

 

In addition, from time totime the Company is a party to other legal and administrative proceedings,claims, and litigation arising in the ordinary course of its business.  While the outcome of these matters iscurrently not determinable, management does not expect that the ultimate coststo resolve these matters either singularly or in aggregate will have a materialadverse effect on the Company’s consolidated financial position, results ofoperations or cash flows.

 

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**Item 4.****                              *Submission of Matters to a Voteof Security Holders***

 

At the Company’s Annual Meetingof Stockholders on April 20, 2004 a total of 19,986,591 shares, or 95% ofoutstanding shares, were represented and entitled to vote.

 

(a)                                  The following members were elected to the Boardof Directors:

 
| ** **          | ** ** | **Total Vote For  Each Director** | ** ** | **Total Vote Withheld  From Each Director** | ** ** |
|---------------------|------------|-----------------------------------|------------|---------------------------------------------|------------|
| Michael E. Danziger |       | 19,012,814                        |       | 973,777                                     |       |
| David R. Haas       |       | 19,014,484                        |       | 972,107                                     |       |
| Keith B. Jarrett    |       | 19,058,247                        |       | 928,344                                     |       |
| Sidney Lapidus      |       | 18,953,940                        |       | 1,032,651                                   |       |
| Martin D. Payson    |       | 19,014,484                        |       | 972,107                                     |       |
| Mason P. Slaine     |       | 19,043,831                        |       | 942,760                                     |       |
| John L. Vogelstein  |       | 19,006,421                        |       | 980,170                                     |       |

 

(b)                                 The following proposal was approved:

 

Ratification of Ernst &Young LLP as the independent auditors for the Company for the 2004 fiscal year.

 
| Affirmative Votes |   | 19,915,233 |   |
|-------------------|--------|------------|--------|
| Negative Votes    |   | 71,258     |   |
| Abstain           |   | 100        |   |

 

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**Item 6.****                *Exhibits and Reports on Form 8-K***

 

(a)                                  Exhibits

 
| **No.** | ** ** | **Description**                                                                                                                                                                                                                                                              |
|---------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.4     |       | Agreement and Plan of Merger, dated as of June 28,  2004, by and among Information Holdings Inc., The Thomson Corporation and  Thyme Corporation (Incorporated herein by reference to Exhibit 2.1 to the  Company’s Current Report on Form 8-K, filed on June 29, 2004) |
| 10.11   |       | Voting and Proxy Agreement, dated as of June 28,  2004, by and between The Thomson Corporation and each other person and entity  listed on the signature pages thereto                                                                                                       |
| 10.12   |       | Release, dated as of June 28, 2004, by and between  Michael Danziger and The Thomson Corporation                                                                                                                                                                             |
| 10.13   |       | Amendment to Employment Agreement, dated as of June  28, 2004, between Information Holdings Inc. and Mason P. Slaine                                                                                                                                                         |
| 10.14   |       | Amendment to Employment Agreement, dated as of July  22, 2004, between Information Holdings Inc. and Jay Nadler                                                                                                                                                              |
| 10.15   |       | Amendment to Employment Agreement, dated as of July  22, 2004, between MicroPatent LLC and Daniel Videtto                                                                                                                                                                    |
| 10.16   |       | Retention Bonus Agreement, dated as of April 20,  2004, between Information Holdings Inc. and Vincent A. Chippari                                                                                                                                                            |
| 10.17   |       | Retention Bonus Agreement, dated as of April 20,  2004, between Information Holdings Inc. and Jay Nadler                                                                                                                                                                     |
| 10.18   |       | Retention Bonus Agreement, dated as of April 20,  2004, between Information Holdings Inc. and Daniel Videtto                                                                                                                                                                 |
| 31.1    |       | Certification of Principal Executive Officer  pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                          |
| 31.2    |       | Certification of Principal Financial Officer  pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                          |
| 32.1    |       | Certification of Principal Executive Officer pursuant  to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002                                                                                                   |
| 32.2    |       | Certification of Principal Financial Officer  pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                   |
|         |            |                                                                                                                                                                                                                                                                              |  |

 

(b)                                 Reports on Form 8-K

 

On April 22, 2004, theCompany furnished a Current Report on Form 8-K announcing the preliminaryfinancial results of the Company for the quarter ended March 31, 2004.  In accordance with Item 12 of Form 8-K, theForm 8-K and the press release attached as an exhibit thereto were furnishedand not “filed” with the SEC.

 

On May 21, 2004, theCompany filed a Current Report on Form 8-K announcing that it had issued apress release responding to market rumors (the Press Release). The PressRelease was attached thereto as an exhibit and was incorporated therein byreference.

 

On June 29, 2004, theCompany filed a Current Report on Form 8-K announcing that it entered into anAgreement and Plan of Merger, dated as of June 28, 2004 (the Agreement), withThe Thomson Corporation, an Ontario, Canada corporation (Thomson). Under theterms of the Agreement, a Thomson subsidiary will acquire all of theoutstanding common stock of Information Holdings Inc. at a price of $28.00 pershare in cash, for an aggregate cost of approximately $441 million, net of cashand investments currently held by the Company. The Agreement and the pressrelease announcing the transaction were attached thereto as exhibits and wereincorporated therein by reference.

 

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**SIGNATURE**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, as amended, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                            | INFORMATION HOLDINGS INC. |
|---------------------------------|---------------------------|
|                            |                      |
|                            |                      |
| Date:  August 9, 2004 | 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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