**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-Q**

** **

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterlyperiod ended:        September 30, 2002**

 

**Commission FileNumber:                1-14371**

 

**INFORMATION HOLDINGS INC.**

**(Exact name ofregistrant as specified in its charter)**

** **

| **DELAWARE**                             |   | **06-1518007**                       |
|------------------------------------------|--------|--------------------------------------|
| (State of incorporation)                 |   | (IRS Employer Identification Number) |
|                                     |   |                                 |
| **2777 Summer Street, Suite 209**        |   |                                 |
| **Stamford, Connecticut**                |   | **06905**                            |
| (Address of principal executive offices) |   | (Zip Code)                           |

 

**(203) 961-9106**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.                    o  Yes   ý  No

 

As of September 30, 2002, there were 21,815,677 shares of the Company’scommon stock, par value $0.01 per share outstanding.

 

 

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INFORMATION HOLDINGS INC. 

 

INDEX

 

 
| PART I.  | FINANCIAL INFORMATION                                                                                                                                           |   |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                                                                                            |   |
| Item 1.  | Financial Statements:                                                                                                                                           |   |
|     |                                                                                                                                                            |   |
|     | Consolidated Balance Sheets   As of September 30, 2002 (Unaudited) and December 31, 2001                                                                        |   |
|     |                                                                                                                                                            |   |
|     | Consolidated Statements of Operations  (Unaudited) for the   Three Months Ended September 30, 2002 and 2001 and   Nine Months Ended September 30, 2002 and 2001 |   |
|     |                                                                                                                                                            |   |
|     | Consolidated Statements of Cash Flows  (Unaudited) for the   Nine Months Ended September 30, 2002 and 2001                                                      |   |
|     |                                                                                                                                                            |   |
|     | 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 2.  | Changes in Securities and Use of Proceeds                                                                                                                       |   |
|     |                                                                                                                                                            |   |
| Item 5.  | Other Information                                                                                                                                               |   |
|     |                                                                                                                                                            |   |
| Item 6.  | Exhibits and Reports on Form 8-K                                                                                                                                |   |
|     |                                                                                                                                                            |   |
|     | Signature                                                                                                                                                       |   |
|     |                                                                                                                                                            |   |
|     | Quarterly Certifications Pursuant to  Section 302 of the   Sarbanes-Oxley Act of 2002                                                                           |   |

 

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**INFORMATION HOLDINGS INC.**

 

*CONSOLIDATED BALANCE SHEETS*

*(In thousands, except share data)*

 
|                                                                                                                                                                    |   | ***September 30,*** |    | ***December 31,*** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|--------------------|--------|
|                                                                                                                                                                    |   | ***2002***          |    | ***2001***         |   |
|                                                                                                                                                                    |   | **(Unaudited)**     |    |               |   |
| ***ASSETS***                                                                                                                                                            |   |                |    |               |   |
|                                                                                                                                                                    |   |                |    |               |   |
| *CURRENT ASSETS:*                                                                                                                                                       |   |                |    |               |   |
| Cash and  equivalents                                                                                                                                                   |   | $                   | 48,624  |               | $      | 38,612 |   |
| Short-term  investments                                                                                                                                                 |   | 9,754               |    | 17,762             |   |
| Accounts  receivable *(net of allowance for doubtful accounts and sales returns of $4,414  and $3,273, respectively)*                                                   |   | 39,425              |    | 35,130             |   |
| Inventories                                                                                                                                                             |   | 7,240               |    | 7,323              |   |
| Prepaid  expenses and other current assets                                                                                                                              |   | 6,564               |    | 7,268              |   |
| Deferred  income taxes                                                                                                                                                  |   | 3,423               |    | 3,423              |   |
| Total current assets                                                                                                                                                    |   | 115,030             |    | 109,518            |   |
| Property and  equipment, net                                                                                                                                            |   | 8,750               |    | 9,868              |   |
| Pre-publication  costs *(net  of accumulated amortization of $8,192 and $5,758, respectively)*                                                                          |   | 5,151               |    | 4,750              |   |
| Identified  intangible assets, net                                                                                                                                      |   | 102,246             |    | 111,463            |   |
| Goodwill *(net of  accumulated amortization of $7,075 and $6,624, respectively)*                                                                                        |   | 118,947             |    | 102,666            |   |
| Other assets                                                                                                                                                            |   | 6,256               |    | 8,292              |   |
|                                                                                                                                                                    |   |                |    |               |   |
| TOTAL                                                                                                                                                                   |   | $                   | 356,380 |               | $      | 346,557 |   |
|                                                                                                                                                                    |   |                |    |               |   |
| ***LIABILITIES AND STOCKHOLDERS’ EQUITY***                                                                                                                         |   |                |    |               |   |
|                                                                                                                                                                    |   |                |    |               |   |
| *CURRENT LIABILITIES:*                                                                                                                                                  |   |                |    |               |   |
| Current portion of  capitalized lease obligations                                                                                                                       |   | $                   | 537     |               | $      | 490 |   |
| Accounts  payable                                                                                                                                                       |   | 32,690              |    | 21,598             |   |
| Accrued expenses                                                                                                                                                        |   | 11,586              |    | 17,793             |   |
| Royalties  payable                                                                                                                                                      |   | 1,602               |    | 1,625              |   |
| Deferred  revenue                                                                                                                                                       |   | 18,567              |    | 18,293             |   |
| Total current  liabilities                                                                                                                                              |   | 64,982              |    | 59,799             |   |
|                                                                                                                                                                    |   |                |    |               |   |
| Capital leases                                                                                                                                                          |   | 1,550               |    | 1,959              |   |
| Deferred income taxes                                                                                                                                                   |   | 15,073              |    | 16,826             |   |
| Other  long-term liabilities                                                                                                                                            |   | 791                 |    | 1,023              |   |
| Total  liabilities                                                                                                                                                      |   | 82,396              |    | 79,607             |   |
|                                                                                                                                                                    |   |                |    |               |   |
| *STOCKHOLDERS’ EQUITY:*                                                                                                                                            |   |                |    |               |   |
| Preferred stock, $.01  par value; 1,000,000 shares authorized; none issued                                                                                              |   | $                   | —  |               | $      | — |   |
| Common  stock, $.01 par value; 50,000,000 shares authorized;issued  and outstanding 21,815,677 shares at September 30, 2002  and 21,758,052 shares at December 31, 2001 |   | 218                 |    | 218                |   |
| Additional  paid-in capital                                                                                                                                             |   | 247,026             |    | 245,911            |   |
| Retained earnings                                                                                                                                                       |   | 26,636              |    | 20,821             |   |
| Accumulated  other comprehensive income                                                                                                                                 |   | 104                 |    | —             |   |
| Total stockholders’  equity                                                                                                                                        |   | 273,984             |    | 266,950            |   |
|                                                                                                                                                                    |   |                |    |               |   |
| TOTAL                                                                                                                                                                   |   | $                   | 356,380 |               | $      | 346,557 |   |

 

*See notes to unaudited consolidated financial statements.*

 

1

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**INFORMATIONHOLDINGS INC.**

*CONSOLIDATED STATEMENTS OF OPERATIONS*

(Unaudited)

*(In thousands, except per share data)*

 
|                                                  |   | ***Three Months  Ended   September 30,*** |   | ***Nine Months  Ended   September 30,*** |   |
|-------------------------------------------------------|--------|-------------------------------------------|--------|------------------------------------------|--------|
|                                                  |   | ***2002***                                |   | ***2001***                               |   | ***2002*** |   | ***2001*** |   |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| Revenues                                              |   | $                                         | 34,585 |                                     | $      | 26,427 |   | $ | 103,518 |   | $ | 75,985 |   |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| Cost of sales                                         |   | 10,676                                    |   | 6,998                                    |   | 30,556 |   | 18,540 |   |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| Gross profit                                          |   | 23,909                                    |   | 19,429                                   |   | 72,962 |   | 57,445 |   |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| Operating  expenses:                                  |   |                                      |   |                                     |   |   |   |   |   |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| Selling, general and  administrative                  |   | 16,885                                    |   | 12,754                                   |   | 48,445 |   | 36,310 |   |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| Depreciation  and amortization                        |   | 4,322                                     |   | 4,768                                    |   | 12,873 |   | 13,366 |   |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| Impairment of  long-lived assets                      |   | 3,063                                     |   | —                                   |   | 3,063 |   | — |   |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| Total  operating expenses                             |   | 24,270                                    |   | 17,522                                   |   | 64,381 |   | 49,676 |   |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| (Loss) income  from operations                        |   | (361                                      | )      | 1,907                                    |   | 8,581 |   | 7,769 |   |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| Other income (expense):                               |   |                                      |   |                                     |   |   |   |   |   |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| Interest  income                                      |   | 235                                       |   | 813                                      |   | 766 |   | 3,515 |   |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| Interest expense                                      |   | (131                                      | )      | (135                                     | )      | (402 | ) | (407 | ) |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| Other income                                          |   | 11                                        |   | 3                                        |   | 8 |   | — |   |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| (Loss) income  before income taxes                    |   | (246                                      | )      | 2,588                                    |   | 8,953 |   | 10,877 |   |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| (Benefit from)  provision for income taxes            |   | (179                                      | )      | 1,120                                    |   | 3,138 |   | 4,501 |   |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| Net (loss)  income                                    |   | $                                         | (67    | )                                        | $      | 1,468 |   | $ | 5,815 |   | $ | 6,376 |   |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| Basic and  diluted earnings per common share amounts: |   |                                      |   |                                     |   |   |   |   |   |
|                                                  |   |                                      |   |                                     |   |   |   |   |   |
| Net income                                            |   | $                                         | 0.00   |                                     | $      | 0.07 |   | $ | 0.27 |   | $ | 0.29 |   |

 

*See notes to unaudited consolidated financialstatements*.

 

2

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**INFORMATION HOLDINGS INC.**

*CONSOLIDATED STATEMENTS OF CASH FLOW**S*

(Unaudited)

*(In thousands)*

* *
|                                                                               |   | ***Nine Months Ended September  30,*** |   |
|------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                               |   | ***2002***                             |   | ***2001*** |   |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                             |   |                                   |   |   |   |
| Net income                                                                         |   | $                                      | 5,815  |   | $ | 6,376 |   |
| Adjustments to reconcile net  income to net cash provided by operating activities: |   |                                   |   |   |   |
| Depreciation                                                                       |   | 4,368                                  |   | 2,389 |   |
| Amortization of goodwill                                                           |   | —                                 |   | 3,429 |   |
| Amortization of other  intangible assets                                           |   | 8,505                                  |   | 7,548 |   |
| Amortization of pre-publication costs                                              |   | 2,478                                  |   | 2,124 |   |
| Change in non-current deferred income tax  liabilities                             |   | (1,238                                 | )      | (808 | ) |
| Impairment of long-lived assets                                                    |   | 3,063                                  |   | — |   |
| Other                                                                              |   | 173                                    |   | 104 |   |
| Changes in operating assets and  liabilities, net of effect of acquisitions:       |   |                                   |   |   |   |
| Increase in accounts receivable, net                                               |   | (3,579                                 | )      | (1,451 | ) |
| Decrease (increase) in inventories                                                 |   | 83                                     |   | (358 | ) |
| Decrease (increase) in prepaid and other  current assets                           |   | 1,045                                  |   | (1,065 | ) |
| Increase (decrease) in accounts payable and  accrued expenses                      |   | 1,628                                  |   | (6,653 | ) |
| Income tax benefit from stock options  exercised                                   |   | 329                                    |   | 830 |   |
| Decrease (increase) in income taxes  receivable                                    |   | 1,460                                  |   | (2,995 | ) |
| Decrease in deferred revenue                                                       |   | (1,381                                 | )      | (2,273 | ) |
| Net change in other assets and liabilities                                         |   | (668                                   | )      | (512 | ) |
| Net Cash Provided by Operating Activities                                          |   | 22,081                                 |   | 6,685 |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |   |                                   |   |   |   |
| Acquisitions of businesses and equity  interests                                   |   | (14,043                                | )      | (36,881 | ) |
| Purchases of property and equipment                                                |   | (2,314                                 | )      | (3,287 | ) |
| Investment in pre-publication costs                                                |   | (2,881                                 | )      | (2,490 | ) |
| Sales (purchases) of short-term investments                                        |   | 8,008                                  |   | (98 | ) |
| Capitalized internal-use software                                                  |   | (728                                   | )      | (804 | ) |
| Capitalized software development costs                                             |   | (589                                   | )      | — |   |
| Proceeds from disposal of property and  equipment                                  |   | 54                                     |   | 5 |   |
| Net Cash Used in Investing Activities                                              |   | (12,493                                | )      | (43,555 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |   |                                   |   |   |   |
| Common stock issued from stock options  exercised                                  |   | 786                                    |   | 1,991 |   |
| Principal payments on capital leases                                               |   | (362                                   | )      | (228 | ) |
| Net Cash Provided by Financing Activities                                          |   | 424                                    |   | 1,763 |   |
| NET INCREASE (DECREASE) IN CASH AND  EQUIVALENTS                                   |   | 10,012                                 |   | (35,107 | ) |
|                                                                               |   |                                   |   |   |   |
| CASH AND EQUIVALENTS AT BEGINNING OF PERIOD                                        |   | 38,612                                 |   | 96,375 |   |
|                                                                               |   |                                   |   |   |   |
| CASH AND EQUIVALENTS AT END OF PERIOD                                              |   | $                                      | 48,624 |   | $ | 61,268 |   |

 

*See notes to unaudited consolidated financial statements.*

 

3

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**INFORMATION HOLDINGSINC.**

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

# **A.            BASISOF PRESENTATION**

 

The consolidated balance sheet of Information HoldingsInc. (IHI, or the Company) at December 31, 2001 has been derived from IHI’sAnnual Report on Form 10-K for the year then ended.  All other consolidated financial statements contained herein havebeen prepared by IHI and are unaudited. These consolidated financial statements should be read in conjunctionwith the consolidated financial statements for the year ended December 31, 2001and the notes thereto contained in IHI’s Annual Report on Form 10-K.

 

The accompanying unaudited consolidated financial statements have beenprepared in accordance with the instructions to Form 10-Q and Article 10 ofRegulation S-X, and do not include all information and footnotes required byaccounting principles generally accepted in the United States for completefinancial statements.  However, in theopinion of management, the accompanying unaudited consolidated financialstatements contain all adjustments, consisting of normal recurring adjustments,necessary to present fairly the consolidated financial position of IHI as ofSeptember 30, 2002, and the consolidated results of operations and cash flowsfor the periods presented herein. Operating results for the three and nine months ended September 30, 2002are not necessarily indicative of the results that may be expected for the yearended December 31, 2002.

 

Certainreclassifications have been made to the financial statements of the priorperiod to conform to the September 30,2002 presentation.

 

# **B.            INVENTORIES**

 

Inventories,consisting primarily of finished goods, are stated at the lower of cost(first-in, first-out method) or market. Shipping costs, which consist of transportation costs associated withthe delivery of the Company’s products to customers, and handling costs areincluded in cost of sales.  The vastmajority of inventories are books, which are reviewed monthly on atitle-by-title basis for salability. The cost of inventory determined to be impaired is charged to income inthe period of determination.

 

**C.            IMPAIRMENTOF LONG-LIVED ASSETS**

 

The Companyperiodically evaluates the recoverability of long-lived assets not held forsale by measuring the carrying amount of the assets against their current fairvalues.  If the Company determines,based on such measures, that the carrying amount is impaired, the assets willbe written down to its recoverable value with a corresponding charge toearnings.

 

During 2001the Company acquired a 49% interest in GSI Office Management GmbH (GSI), basedin Germany, a provider of intellectual property management software.  In the third quarter of 2002, the Companydetermined that the value of its investment in GSI was impaired due to theinability of GSI to generate significant revenues.  The Company recorded a charge of $3,063,000 to the Company’sintellectual properties businesses to write down the entire carrying amount ofthe investment.

 

4

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# **D.            EARNINGS PER SHAREDATA**

 

The following table sets forththe computation of basic and diluted earnings per common share for the periodsindicated:

 
|                                                                            |   | ***Three Months  Ended   September 30,*** |   | ***Nine Months  Ended   September 30,*** |   |
|---------------------------------------------------------------------------------|--------|-------------------------------------------|--------|------------------------------------------|--------|
| ***(In thousands, except per share data)***                                     |   | ***2002***                                |   | ***2001***                               |   | ***2002*** |   | ***2001*** | *** *** |
|                                                                            |   |                                      |   |                                     |   |   |   |   |   |
| Basic:                                                                          |   |                                      |   |                                     |   |   |   |   |   |
| Net (loss) income                                                               |   | $                                         | (67    | )                                        | $      | 1,468 |   | $ | 5,815 |   | $ | 6,376 |   |
| Average common shares outstanding                                               |   | 21,814                                    |   | 21,739                                   |   | 21,794 |   | 21,662 |   |
|                                                                            |   |                                      |   |                                     |   |   |   |   |   |
| Basic EPS                                                                       |   | $                                         | 0.00   |                                     | $      | 0.07 |   | $ | 0.27 |   | $ | 0.29 |   |
| Diluted:                                                                        |   |                                      |   |                                     |   |   |   |   |   |
| Net (loss)  income                                                              |   | $                                         | (67    | )                                        | $      | 1,468 |   | $ | 5,815 |   | $ | 6,376 |   |
|                                                                            |   |                                      |   |                                     |   |   |   |   |   |
| Average common  shares outstanding                                              |   | 21,814                                    |   | 21,739                                   |   | 21,794 |   | 21,662 |   |
| Net effect of  dilutive stock options – based on the treasury stock method |   | —                                    |   | 114                                      |   | 138 |   | 119 |   |
|                                                                            |   |                                      |   |                                     |   |   |   |   |   |
| Total                                                                           |   | 21,814                                    |   | 21,853                                   |   | 21,932 |   | 21,781 |   |
|                                                                            |   |                                      |   |                                     |   |   |   |   |   |
| Diluted EPS                                                                     |   | $                                         | 0.00   |                                     | $      | 0.07 |   | $ | 0.27 |   | $ | 0.29 |   |

 

During the first nine months of 2002, employeesexercised stock options to acquire 57,625 shares at an exercise price ofbetween $12.00 and $21.09 per share.  Forthe three and nine months ended September 30, 2002 and 2001, 1,131,832 and703,398 stock options and 590,768 and 580,768 stock options, respectively, wereexcluded from the computation of diluted earnings per common share due to theirantidilutive effect.

 

**E.**                                      ACQUISITIONS

 

On May 9, 2002, the Company acquired substantially all ofthe assets of Aurigin Systems, Inc. (Aurigin) for cash consideration ofapproximately $14,043,000 including the assumption of certain liabilities.  Aurigin provides intellectual propertymanagement systems used primarily by corporations to search, analyze, annotateand group patent information, as well as proprietary corporate data.  The purchase price was preliminarilyallocated to net tangible liabilities of $1,592,000, identified intangibleassets of $1,600,000 and goodwill of $14,035,000.  The Company has obtained an independent appraisal of the fairvalue of the identified intangible assets and their remaining useful lives.

 

5

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On December 20, 2001, the Company completed atender offer and acquired all of the outstanding common shares of Liquent, Inc.(Liquent) for cash consideration equal to $2.27 per share, or approximately$41,100,000.  Liquent is a leadingprovider of software and service solutions that aid in content assembly andpublishing for the life sciences industry. The purchase price was allocated to net tangible assets of $6,026,000,identified intangible assets of $6,790,000 and non-deductible goodwill of$25,875,000.  The Company has obtainedan independent appraisal of the fair value of the identified intangible assetsand their remaining useful lives.  TheCompany also recorded a deferred income tax asset as a result of Liquent’s netoperating loss carryforwards of $5,010,000, offset by a deferred income taxliability as a result of the gross up of acquired intangible assets in theamount of $2,565,000.

 

On May 15, 2001, the Company acquired the stock of Parthenon PublishingGroup (Parthenon), for cash consideration of approximately $8,300,000.  Parthenon, based in the United Kingdom, is aleading provider of medical and environmental reference products, includingbooks, journals and medical communication services.

 

OnMarch 29, 2001, the Company acquired the IDRAC business of IMS Health andentered into multiple perpetual agreements with IMS Health and certainaffiliates, for aggregate cash consideration of approximately $20,400,000.  IDRAC, based in France, is a leading providerto pharmaceutical companies worldwide of regulatory and intellectual propertyinformation related to pharmaceutical product registrations.

 

All acquisitions have been accounted for using the purchase method ofaccounting and, accordingly, the results of their operations have been includedin the Company’s results of operations from their respective date ofacquisition.  In accordance with SFASNo. 142, *Goodwill and Other IntangibleAssets*, no goodwill amortization was recorded for acquisitions afterJune 30, 2001, which includes Liquent and Aurigin.

 

The following unaudited pro forma information presents the results ofoperations of the Company, as if the 2002 acquisition of Aurigin and the 2001acquisitions of IDRAC and Liquent had taken place as of January 1, 2001, is asfollows:

 
|                                         |   | ***Three Months***EndedSeptember  30, |   | ***Nine Months Ended  September 30,*** |   |
|----------------------------------------------|--------|---------------------------------------|--------|----------------------------------------|--------|
| ***(In thousands,  except per share data)*** |   | ***2001***                            |   | ***2002***                             |   | ***2001*** |   |
|                                         |   |                                  |   |                                   |   |   |   |
| Revenues                                     |   | $                                     | 35,108 |                                   | $      | 105,598 |   | $ | 99,024 |   |
| Net (loss) income                            |   | $                                     | (1,021 | )                                      | $      | 5,672 |   | $ | (3,965 | ) |
| Basic (loss)  earnings per common share      |   | $                                     | (0.05  | )                                      | $      | 0.26 |   | $ | (0.18 | ) |
| Diluted  (loss) earnings per common share    |   | $                                     | (0.05  | )                                      | $      | 0.26 |   | $ | (0.18 | ) |

 

These pro formaresults of operations have been prepared for comparative purposes only and donot purport to be indicative of the operating results that would have occurredhad the acquisitions been consummated as of the above date, nor are theynecessarily indicative of future operating results.

 

6

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**F.****                                      GOODWILLAND IDENTIFIED INTANGIBLE ASSETS**

 

Effective as of January 1, 2002,the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,*Goodwill and Other Intangible Assets.*  Under SFAS No. 142, goodwill and intangibleassets with indefinite lives are no longer amortized but are reviewed at leastannually, or more frequently if impairment indicators arise.

 

During the year ended December 31,2001, the Company began the required transitional impairment review of goodwilland intangible assets with indefinite lives. This review required the Company to estimate the fair value of itsidentified reporting units as of December 31, 2001.  For each of the reporting units, the estimated fair value wasdetermined utilizing the expected present value of the future cash flows of theunits.  In all instances, the estimatedfair value of the reporting units exceeded their respective book values andtherefore no write-down of goodwill or intangible assets with indefinite liveswas required as of January 1, 2002.  Inaddition, as of January 1, 2002, the Company ceased the amortization ofgoodwill and intangible assets with indefinite lives and reclassified theDecember 31, 2001 carrying value of its assembled workforce acquired intangibleassets included in other identified intangibles to goodwill.

 

The following unaudited reconciliationpresents pro forma net income, basic and diluted EPS as if SFAS No. 142 hadbeen adopted on January 1, 2001, is as follows:

 
|                                                            |   | ***Three MonthsEnded   September 30,*** |   | ***Nine MonthsEnded****September 30,* |         |
|-----------------------------------------------------------------|--------|-----------------------------------------|--------|---------------------------------------|--------------|
| ***(In thousands, except per share data)***                     |   | ***2001***                              |   | ***2001***                            | *** *** |
|                                                            |   |                                    |   |                                  | *** *** |
| Reported net income                                             |   | $                                       | 1,468  |                                  | $            | 6,376 |   |
| Adjustment for goodwill  amortization, net of tax               |   | 865                                     |   | 2,467                                 |         |
| Adjustment for trademark and tradename amortization, net of tax |   | 78                                      |   | 233                                   |         |
| Pro forma net income                                            |   | $                                       | 2,411  |                                  | $            | 9,076 |   |
|                                                            |   |                                    |   |                                  |         |
| Basic  and diluted earnings per common share:                   |   |                                    |   |                                  |         |
| As reported                                                     |   | $                                       | 0.07   |                                  | $            | 0.29 |   |
| Pro forma                                                       |   | $                                       | 0.11   |                                  | $            | 0.42 |   |

 

7

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Identified intangibleassets and goodwill subject to amortization consisted of the following (inthousands):

 
|                             |   | ***September 30, 2002***   |    |                          |
|----------------------------------|--------|----------------------------|---------|-------------------------------|
|                             |   | **Gross  Carrying Amount** |    | **Accumulated  Amortization** |   | **Net  Balance** |   | **Amortization  Period   (Years)** |   |
| Trademarks  and tradenames       |   | $                          | 11,469  |                          | $ | 2,463 |   | $ | 9,006 |   |  6-20 |   |
| Publishing rights                |   | 23,571                     |    | 5,629                         |   | 17,942 |   |  7-20 |   |
| Customer lists and relationships |   | 46,548                     |    | 9,941                         |   | 36,607 |   | 10-20 |   |
| Databases and content            |   | 27,400                     |    | 6,741                         |   | 20,659 |   |  5-20 |   |
| Other identified intangibles     |   | 11,714                     |    | 2,489                         |   | 9,225 |   |  3-20 |   |
|                             |   | $                          | 120,702 |                          | $ | 27,263 |   | $ | 93,439 |   |   |   |
|                                  |        |                            |         |                               |  |  |  |  |  |  |  |  |  |  |

*** ***
|                             |   | ***December 31, 2001***    |    |
|----------------------------------|--------|----------------------------|---------|
|                             |   | **Gross  Carrying Amount** |    | **Accumulated  Amortization** |   | **Net  Balance** |   | **Amortization  Period (Years)** |   |
| Trademarks  and tradenames       |   | $                          | 21,129  |   | $ | 2,792 |   | $ | 18,337 |   |  6-20 |   |
| Publishing rights                |   | 23,572                     |    | 4,611 |   | 18,961 |   |  7-20 |   |
| Customer lists and relationships |   | 46,548                     |    | 7,039 |   | 39,509 |   | 10-20 |   |
| Databases and content            |   | 27,400                     |    | 4,479 |   | 22,921 |   |  5-20 |   |
| Other identified intangibles     |   | 20,531                     |    | 8,796 |   | 11,735 |   |  2-20 |   |
|                             |   | 139,180                    |    | 27,717 |   | 111,463 |   |   |   |
| Goodwill subject to amortization |   | 82,367                     |    | 6,624 |   | 75,743 |   | 10-20 |   |
|                             |   | $                          | 221,547 |   | $ | 34,341 |   | $ | 187,206 |   |   |   |

 

Total amortizationexpense of goodwill and identified intangible assets amounted to $8,505,000 and$15,252,000 for the nine months ended September 30, 2002 and the year endedDecember 31, 2001, respectively.

 

During the first ninemonths of 2002, the Company removed from its Balance Sheet fully amortizedother identified intangibles with a cost of approximately $7,300,000.

 

8

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Identified intangibleassets and goodwill not subject to amortization consisted of the following (inthousands):

 
|                       |   | ***September 30, 2002***   |    |
|----------------------------|--------|----------------------------|---------|
|                       |   | **Gross  Carrying Amount** |    | **Accumulated  Amortization** |   | **Net  Balance** |   |
| Trademarks  and tradenames |   | $                          | 10,000  |   | $ | 1,193 |   | $ | 8,807 |   |
| Goodwill                   |   | 126,022                    |    | 7,075 |   | 118,947 |   |
|                       |   | $                          | 136,022 |   | $ | 8,268 |   | $ | 127,754 |   |

 
|     |   | ***December 31, 2001***    |   |
|----------|--------|----------------------------|--------|
|     |   | **Gross  Carrying Amount** |   | **Accumulated  Amortization** |   | **Net  Balance** |   |
| Goodwill |   | $                          | 26,923 |   | $ | — |   | $ | 26,923 |   |
|          |        |                            |        |  |  |  |  |  |  |  |

 

Annual pretaxamortization for identified intangible assets over the next five years isestimated to be as follows (in thousands):

 
| **Year ending September 30,** |   |   |   |
|-------------------------------|--------|--------|--------|
|                          |   |   |   |
| 2003                          |   | $      | 11,380 |   |
| 2004                          |   | $      | 11,049 |   |
| 2005                          |   | $      | 10,661 |   |
| 2006                          |   | $      | 9,378  |   |
| 2007                          |   | $      | 8,862  |   |

 

Thefollowing table sumarizes the change in the carrying amount of goodwill for theperiods indicated (in thousands):

 
|                                         |   | ***Nine MonthsEnded  September 30,*** |    | ***Twelve MonthsEnded  December 31,*** |         |
|----------------------------------------------|--------|---------------------------------------|---------|----------------------------------------|--------------|
| ***(In thousands, except per share data)***  |   | ***2002***                            |    | ***2001***                             | *** *** |
|                                         |   |                                  |    |                                   |         |
| Beginning balance                            |   | $                                     | 102,666 |                                   | $            | 61,272 |   |
| Net change from acquisitions                 |   | 14,487                                |    | 46,729                                 |         |
| Amortization expense                         |   | —                                |    | (5,002                                 | )            |
| Reclassification of assembled workforce, net |   | 1,834                                 |    | —                                 |         |
| Other                                        |   | (40                                   | )       | (333                                   | )            |
| Total                                        |   | $                                     | 118,947 |                                   | $            | 102,666 |   |

 

9

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**G.****                                    SEGMENTINFORMATION**

 

The Companyhas three reportable segments: intellectual property (IP), scientific andtechnology information (STI) and information technology learning (ITL).  The intellectual property segment, whichincludes MicroPatent, Master Data Center, Liquent and IDRAC, provides a broad arrayof databases, information products and complementary services for intellectualproperty and regulatory professionals. The scientific and technology information segment is CRC Press, whichpublishes professional and academic books, journals, newsletters and electronicdatabases covering areas such as life sciences, environmental sciences,engineering, mathematics, physical sciences and business.  The information technology learning segmentis Transcender, which is a leading online provider of IT certificationtest-preparation products.

 

Transfers between geographic areasare recorded at agreed upon prices and intercompany revenue and profits areeliminated.

 

The followingtables set forth the information for the Company’s reportable segments based onthe nature of the products and services offered for the periods indicated:

 
|                              |   | ***Three Months Ended  September 30, 2002*** |       | ***Three Months Ended  September 30, 2001*** |       |
|-----------------------------------|--------|----------------------------------------------|------------|----------------------------------------------|------------|
|                              |   | **Segment**                                  | ** ** | **Segment**                                  |       |
|                              |   | **IP**                                       |       | **STI**                                      | ** ** | **ITL** | ** ** | **IP** | ** ** | **STI** | ** ** | **ITL** |   |
| *(In thousands)*                  |   |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
|                              |   |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Revenues from external customers  |   | $                                            | 18,868     |                                         | $          | 12,922 |   | $ | 2,795 |   | $ | 10,619 |   | $ | 10,994 |   | $ | 4,814 |   |
| EBITDA                            |   | 2,083                                        |       | 3,074                                        |       | 697 |   | 3,962 |   | 2,384 |   | 2,002 |   |
| Operating (loss) income           |   | (672                                         | )          | 1,444                                        |       | (165 | ) | 1,482 |   | 925 |   | 355 |   |
| Segment assets excluding goodwill |   | 139,052                                      |       | 53,396                                       |       | 10,967 |   | 104,592 |   | 54,581 |   | 15,328 |   |
| Goodwill, net                     |   | 69,479                                       |       | 5,868                                        |       | 43,600 |   | 28,337 |   | 1,108 |   | 43,838 |   |
|                                   |        |                                              |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                              |   | ***Nine Months Ended  September 30, 2002*** |   | ***Nine Months Ended  September 30, 2001*** |   |
|-----------------------------------|--------|---------------------------------------------|--------|---------------------------------------------|--------|
|                              |   | **Segment**                                 |   | **Segment**                                 |   |
|                              |   | **IP**                                      |   | **STI**                                     |   | **ITL** |   | **IP** |   | **STI** |   | **ITL** |   |
| *(In thousands)*                  |   |                                        |   |                                        |   |   |   |   |   |   |   |   |   |
|                              |   |                                        |   |                                        |   |   |   |   |   |   |   |   |   |
| Revenues from external customers  |   | $                                           | 57,242 |                                        | $      | 36,842 |   | $ | 9,434 |   | $ | 29,293 |   | $ | 29,581 |   | $ | 17,111 |   |
| EBITDA                            |   | 15,053                                      |   | 9,147                                       |   | 2,763 |   | 10,657 |   | 6,588 |   | 8,502 |   |
| Operating income                  |   | 6,916                                       |   | 4,378                                       |   | 247 |   | 3,948 |   | 2,739 |   | 3,584 |   |
| Segment assets excluding goodwill |   | 139,052                                     |   | 53,396                                      |   | 10,967 |   | 104,592 |   | 54,581 |   | 15,328 |   |
| Goodwill, net                     |   | 69,479                                      |   | 5,868                                       |   | 43,600 |   | 28,337 |   | 1,108 |   | 43,838 |   |
|                                   |        |                                             |        |                                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

10

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Areconciliation of combined EBITDA for the intellectual property, scientific andtechnology information, and information technology learning segments toconsolidated income before income taxes is as follows:

 
|                                  |   | ***Three Months Ended  September 30,*** |         | ***Nine Months Ended  September 30,*** |         |
|---------------------------------------|--------|-----------------------------------------|--------------|----------------------------------------|--------------|
| ***(In thousands)***                  |   | ***2002***                              | *** *** | ***2001***                             | *** *** | ***2002*** | *** *** | ***2001*** |   |
|                                  |   |                                    |         |                                   |         |   |   |   | *** *** |
|                                  |   |                                    |         |                                   |         |   |   |   |   |
| Total EBITDA for reportable segments  |   | $                                       | 5,854        |                                   | $            | 8,348 |   | $ | 26,963 |   | $ | 25,747 |   |
| Corporate expenses                    |   | (963                                    | )            | (850                                   | )            | (2,945 | ) | (2,488 | ) |
| Interest income, net                  |   | 104                                     |         | 678                                    |         | 364 |   | 3,108 |   |
| Depreciation and amortization (1) (2) |   | (5,241                                  | )            | (5,588                                 | )            | (15,429 | ) | (15,490 | ) |
| (Loss) income before income taxes     |   | $                                       | (246         | )                                      | $            | 2,588 |   | $ | 8,953 |   | $ | 10,877 |   |

 

----

(1)               Depreciationand amortization includes $919,000 and $820,000 of amortization ofpre-publication costs and capitalized software development costs, included inoperations in cost of sales for each of the three month periods ended September30, 2002 and 2001, respectively.

 

(2)               Depreciationand amortization includes $2,556,000 and $2,124,000 of amortization ofpre-publication costs and capitalized software development costs, included inoperations in cost of sales for each of the nine month periods ended September30, 2002 and 2001, respectively.

 

**H.            COMPREHENSIVE INCOME**

 

The followingtable is a reconciliation of the Company’s net (loss) income to comprehensiveincome:

 
|                                    |   | ***Three Months  Ended  September 30,*** |   | ***Nine Months  Ended  September 30,*** |   |
|-----------------------------------------|--------|------------------------------------------|--------|-----------------------------------------|--------|
| *(In thousands)*                        |   | ***2002***                               |   | ***2001***                              |   | ***2002*** |   | ***2001*** | *** *** |
|                                    |   |                                     |   |                                    |   |   |   |   |   |
| Net (loss) income                       |   | $                                        | (67    | )                                       | $      | 1,468 |   | $ | 5,815 |   | $ | 6,376 |   |
| Other comprehensive income, net of tax: |   |                                     |   |                                    |   |   |   |   |   |
| Foreign currency translation adjustment |   | 145                                      |   | 77                                      |   | 64 |   | 7 |   |
|                                    |   |                                     |   |                                    |   |   |   |   |   |
| Comprehensive income                    |   | $                                        | 78     |                                    | $      | 1,545 |   | $ | 5,879 |   | $ | 6,383 |   |

 

11

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**I.              SUBSEQUENT EVENT**

 

On October 28,2002, the Company announced that its Board of Directors authorized the Companyto repurchase up to $30,000,000 of its common stock.  The purchases may be made from time to time on the open market orin negotiated transactions in compliance with Rule 10b-18 of the Securities andExchange Commission.  The authorizationto repurchase the Company’s common stock will remain in effect until theCompany’s Chief Executive Officer deems it appropriate to terminate the repurchaseprogram.  As of November 14, 2002, theCompany repurchased a total of 381,900 shares of common stock pursuant to therepurchase authorization at a total cost of $5,208,250.  All such repurchased shares are being heldas treasury stock.

 

12

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**INFORMATION HOLDINGSINC.**

MANAGEMENT’S DISCUSSION ANDANALYSIS OF

FINANCIAL CONDITION AND RESULTSOF OPERATIONS

 

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

 

*The following discussion and analysis presents a review of the Companyfor the three and nine months ended September 30, 2002 and 2001.  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 2001 Annual Report on Form 10-K.*

 

**Overview**

 

Impact of Acquisitions andOutlook

 

A component of the Company’sgrowth strategy is to pursue acquisitions in attractive niche markets whereopportunities exist to internally grow the acquired companies’ revenues andincrease profitability through operating efficiencies.  Since beginning operations in January 1997,the Company has completed fourteen strategic acquisitions, including eight inthe intellectual property area, five in scientific and technology informationand one in the information technology learning market, as well as some minoracquisitions.  The Company may activelyseek acquisitions that will further the Company’s growth and operatingstrategies*.*  As the Company acquires additionalcompanies, its sales mix, market focus, cost structure and operating leveragemay change significantly.  Consequently,the Company’s historical and future results of operations reflect and willreflect the impact of acquisitions from the date of acquisition, andperiod-to-period comparisons may not be meaningful in some respects.  Historical information for companies subsequentto their acquisition may include integration and other costs that are notexpected to continue in the future.

 

### ***Consolidated Results of Operations***

 

*Three Months Ended September 30, 2002 Compared to Three Months EndedSeptember 30, 2001*

 

The Company reported a net lossof ($0.1) million, or $0.00 per diluted common share, for the third quarter of2002 compared with net income of $1.5 million, or $0.07 per diluted commonshare, in the third quarter of 2001. Results for the third quarter of 2001 include amortization of goodwilland certain other acquired intangible assets of approximately $0.9 million, netof tax.  Upon adoption of Statement ofFinancial Accounting Standard (SFAS) No. 142, *Goodwill and Other Intangible Assets*,the Company ceased amortizing goodwill as well as certain other acquiredintangible assets.  Excludingamortization of these items, net income for the three months ended September30, 2001 would have been $2.4 million, or $0.11 per diluted common share,compared with net loss of ($0.1) million, or $0.00 per diluted common share,for the third quarter of 2002.  Duringthe third quarter of 2002, the Company recorded a pre-tax impairment charge ofapproximately $3.1 million related to its investment in GSI Office ManagementGmbH (the GSI Charge).  This chargereduced net income by approximately $1.9 million, or $0.09 per commonshare.  See Note C — *Impairmentof Long-Lived Assets.*

 

The overall decrease in thirdquarter 2002 earnings from the prior year was due primarily to the GSI Charge,decreased earnings in the Company’s ITL segment, increased depreciation relatedto capital expenditures, increased amortization of acquired intangible assetsand lower interest income.  Thesefactors were partially offset by increased gross profits in the Company’s IPand STI segments, including both a positive impact from businesses acquired in2001 and growth in core businesses and the impact of the accounting changepursuant to SFAS No. 142.

 

13

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Net interest income (expense)decreased to $0.1 million from $0.7 million due primarily to the use of cashfrom the secondary public stock offering to acquire businesses during 2001 and2002.  See Note E - *Acquisitions*.  Additionally, the average interest ratedecreased to 1.8% in the third quarter of 2002 from 3.6% in the comparableprior year period.

 

The benefit (provision) forincome taxes as a percentage of pre-tax (loss) income for the three monthsended September 30, 2002 was 72.8%, compared to (43.3%) for the third quarterof 2001, due primarily to the adoption of SFAS No. 142, which eliminatesgoodwill amortization, a significant amount of which was nottax-deductible.  Additionally, theCompany was also subject to foreign taxes during the third quarter of 2002 and2001, which were immaterial in both periods.

 

**SegmentReview**

 

*IntellectualProperty (IP)*

 

IP revenue for the thirdquarter of 2002 increased 77.7%, or $8.3 million, to $18.9 million compared to$10.6 million in the comparable period in 2001.  The increase in revenues includes $1.3 million of revenues fromAurigin products acquired in 2002 and an increase of $7.2 million in revenue atLiquent-IDRAC, primarily as a result of the acquisition of Liquent in fiscal2001.  Other IP revenues declined slightlyin the period, with increases in IP management revenues offset by decreasedrevenue in variable demand revenues, such as patent downloads.  Operating income decreased 145.3%, or $2.2million, to a loss of ($0.7) million for 2002, compared to $1.5 million ofoperating income in the prior year quarter. The decrease includes the GSI Charge, partially offset by an increase of$0.9 million at Liquent-IDRAC.  IP costof sales, expressed as a percentage of revenues, increased from 29.3% to 31.0%,due primarily to the inclusion of Liquent in fiscal 2002 results.  Selling, general and administrative(S,G&A) expenses increased $4.4 million or 123.1%, due primarily to theexpenses of Liquent and Aurigin, businesses acquired in December 2001 and inMay 2002, respectively.  IP depreciationand amortization increased $0.2 million, or 9.2%, primarily as a result of theamortization of intangible assets and depreciation of purchased equipmentrelated to the above acquisitions, partially offset by the impact of theaccounting change pursuant to SFAS No. 142.

 

*Scientific andTechnology Information (STI)*

 

STI revenue for the thirdquarter of 2002 increased 17.5%, or $1.9 million, to $12.9 million from $11.0million in the comparable period in 2001. The revenue increase includes an increase of $0.9 million in worldwidereference product sales at CRC Press and an increase of $1.1 million atParthenon Press, including an increase of approximately $0.7 million in itsmedical communications division. Operating income increased 56.1%, or $0.5 million, to $1.4 million for2002, compared to $0.9 million in the prior year quarter, due primarily tocontributions from increased revenues. STI cost of sales, expressed as a percentage of revenues, increased from32.7% to 35.7%, due primarily to increased contributions from Parthenon Press,which has lower gross margins than CRC Press. S,G&A expenses increased $0.2 million, or 4.2%, while depreciationand amortization increased $0.2 million, or 23.5%, primarily as result ofdepreciation on capitalized software.

 

14

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*InformationTechnology Learning (ITL)*

 

ITL revenue for the thirdquarter of 2002 decreased 41.9%, or $2.0 million, to $2.8 million compared to$4.8 million in the comparable period in 2001. The revenue decline is a result of continued difficult overall marketconditions in information technology and a lack of significant newcertifications by major software companies in recent months.  Cost of sales, expressed as a percentage ofrevenues, increased from 6.1% to 7.7%.  S,G&A expenses decreased by $0.6 million, or 23.7% to $1.9million from $2.5 million as a result of cost reduction initiatives implementedbased on current market conditions.  Thesignificant drop in revenue resulted in an operating loss of ($0.2) million inthe third quarter of 2002 compared to operating income of $0.3 million for thecomparable 2001 period, a decrease of $0.5 million or 146.5%.

 

*Nine Months Ended September 30, 2002 Compared to Nine Months EndedSeptember 30, 2001*

 

The Company reported net incomeof $5.8 million, or $0.27 per diluted common share, for the first nine monthsof 2002 compared with $6.4 million, or $0.29 per diluted common share, in thefirst nine months of 2001.  Results forthe first nine months of 2001 include amortization of goodwill and certainother acquired intangible assets of approximately $2.7 million, net oftax.  Upon adoption of SFAS No. 142, theCompany ceased amortizing goodwill as well as certain other acquired intangibleassets.  Excluding amortization of theseitems net income for the nine months ended September 30, 2001 would have been$9.1 million, or $0.41 per diluted common share, compared with $5.8 million, or$0.27 per diluted common share, for the first nine months of 2002.

 

The overall decrease in earningsin the first nine months of 2002 as compared to the prior year period was dueprimarily to the GSI Charge, a lower profit contribution in the Company’s ITLsegment and lower interest income. These factors were partially offset by increased gross profits in theCompany’s IP and STI segments, including both a positive impact from businessesacquired in 2001 and 2002 and growth in core businesses, coupled with adecrease in the Company’s effective income tax rate.  S,G&A expenses expressed as a percentage of revenues wererelatively constant in the periods. Depreciation and amortization was lower in the period with increases indepreciation related to capital expenditures and amortization of acquiredintangible assets, offset by the effect of the adoption of SFAS No. 142.

 

Net interest income (expense)decreased to $0.4 million for the nine months ended September 30, 2002 from$3.1 million for the corresponding 2001 period, a decrease of $2.7 million or88.3%, due primarily to the use of cash from the secondary public stockoffering to acquire businesses during 2001 and 2002.  See Note E - *Acquisitions*.  Additionally, the average interest rate decreased to 1.9% in thefirst nine months of 2002 from 4.6% in the comparable prior year period.

 

The provision for income taxesas a percentage of pre-tax income for the nine months ended September 30, 2002was 35.0%, compared to 41.4% for the first nine months of 2001, due primarilyto the adoption of SFAS No. 142, which eliminates goodwill amortization, asignificant amount of which was not tax-deductible.  Additionally, the Company was also subject to foreign taxesduring the first nine months of 2002 and 2001, which were immaterial in bothperiods.

 

15

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**SegmentReview**

 

*IntellectualProperty (IP)*

 

IP revenue for the first nine months of 2002increased 95.4%, or $27.9 million, to $57.2 million compared to $29.3 millionin the comparable period in 2001.  Theincrease in revenues includes $1.5 million from internal growth in existing IPinformation and IP management businesses, $2.2 million of revenues from Auriginproducts acquired in 2002 and an increase of $24.2 million in revenue atLiquent-IDRAC, primarily as a result of the acquisition of Liquent in thefourth quarter of fiscal 2001. Operating income increased 75.2%, or $3.0 million, to $6.9 million for2002, compared to $3.9 million of operating income in the prior yearperiod.  The increase in operatingincome includes an increase of $3.7 million at Liquent-IDRAC and a decrease inoperating expenses of $0.8 million at LPS Group.  Operating income decreased by $1.6 million in core IP informationand IP management businesses as a result of the GSI Charge, partially offset bygrowth in operating income in core product areas.  IP cost of sales, expressed as a percentage of revenues,increased from 28.7% to 30.1%, due primarily to the inclusion of Liquent infiscal 2002 results, a business with lower gross margins than the existing IPbusinesses.  S,G&A expenses increased$11.7 million, or 115%, due primarily to an increase of $11.2 million atLiquent-IDRAC.  Expenses also increasedas a result of the acquisition of Aurigin offset by decreased spending levelsin the LPS Group.  IP depreciation andamortization increased $1.4 million, or 20.6%, primarily as a result of theamortization of intangible assets and depreciation of purchased equipmentrelated to acquisitions, partially offset by the impact of the accountingchange pursuant to SFAS No. 142.

 

*Scientific and Technology Information (STI)*

 

STI revenue for the first ninemonths of 2002 increased 24.5%, or $7.2 million, to $36.8 million from $29.6million in the comparable period in 2001. The revenue increase includes an increase of $1.9 million in referenceproduct sales at CRC Press and an increase of $5.1 million at Parthenon Press,which was acquired in May 2001. Operating income increased 59.8%, or $1.7 million, to $4.4 million for2002, compared to $2.7 million in the prior year period, due primarily tocontributions from increased revenues. STI cost of sales, expressed as apercentage of revenues, increased from 30.8% to 34.5%, due primarily toincreased contributions from Parthenon Press, which has lower gross marginsthan CRC Press.  S,G&A expensesincreased $1.5 million, or 9.1%, to $17.5 million from $16.0 million dueprimarily to the acquisition of Parthenon Press.  STI depreciation and amortization increased $0.6 million, or32.8%, primarily as result of amortization of Parthenon Press intangible assetsand depreciation on capitalized software.

 

*Information Technology Learning (ITL)*

 

ITL revenue for the first ninemonths of 2002 decreased 44.9%, or $7.7 million, to $9.4 million compared to$17.1 million in the comparable period in 2001.  The revenue decline is a result of continued difficult overallmarket conditions in information technology and a lack of significant newcertifications by major software companies in recent months.  Cost of sales, expressed as a percentage ofrevenues, increased from 5.8% to 6.6%. S,G&A expenses decreased by $1.5 million, or 20.1% to $6.1 millionfrom $7.6 million, as a result of cost reduction initiatives, includingreductions in marketing costs and compensation.  ITL depreciation and amortization decreased $2.4 million, or 49.7%,due to the impact of the accounting change pursuant to SFAS No. 142.  Based on these factors, operating income inthe first nine months of 2002 decreased by 93.1%, or $3.3 million, to $0.3million compared to $3.6 million for the prior year period.

 

16

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**Liquidityand Capital Resources**

 

In the first quarter of 2000,the Company sold 4,500,000 shares of its common stock in a public offering andreceived approximately $155 million of net proceeds.  As of September 30, 2002, proceeds of approximately $147 millionhave been used from this offering to fund acquisitions in the Company’sinformation and publishing businesses. See Note E — *Acquisitions* for details on fiscal 2002and 2001 acquisitions.  The remainingnet proceeds will be used for general corporate purposes including potentialfuture acquisitions.  The Companyrecently announced that its Board of Directors authorized the Company topurchase up to $30 million of its common stock.  See Note I — *Subsequent Event*.  The Company currently does not have anyagreements, arrangements or understandings with respect to any prospectivematerial acquisitions.  Pending suchuses, the proceeds will be invested in short-term, investment grade securities.

 

On September 24, 1999, theCompany entered into a seven-year revolving credit facility in an amount not toexceed $50,000,000, including a $10,000,000 sub-limit for the issuance ofstandby letters of credit (the Credit Facility).  Under the terms of the Credit Facility, total commitments werepermanently reduced to $45,000,000 at the end of the third year.  Total commitments shall be reduced furtherto $37,500,000 at the end of the fourth year, $25,000,000 at the end of the fifthyear and finally $12,500,000 at the end of the sixth year.  The proceeds from the Credit Facility are tobe used to fund acquisitions, to meet short-term working capital needs and forgeneral corporate purposes.

 

Borrowings under the CreditFacility bear interest at either the higher of the bank’s prime rate andone-half of 1% in excess of the overnight federal funds rate plus a margin of0.50% to 1.25% or the Eurodollar Rate plus a margin of 1.5% to 2.25%, dependingon the Company’s ratio of indebtedness to earnings before interest, taxes, depreciationand amortization.  The Company also paysa commitment fee of 0.375% on the unused portion of the Credit Facility.  As of and for the quarter ended September30, 2002, the Company had no outstanding borrowings under the Credit Facility.

 

Under the terms of the CreditFacility, the Company is required to maintain certain financial ratios relatedto fixed charge coverage, leverage and interest coverage, in addition tocertain other covenants.  As ofSeptember 30, 2002, the Company was in compliance with all covenants.  The Credit Facility is secured by a firstpriority perfected pledge of all notes and capital stock owned by the Company’ssubsidiaries and a first priority perfected security interest in all otherassets of the Company and its subsidiaries, subject to certain exceptions.  Obligations under the Credit Facility willbe guaranteed by the Company and its subsidiaries.  The Credit Facility also prohibits the Company from incurringcertain additional indebtedness, limits certain investments, mergers orconsolidations and restricts substantial asset sales, and dividends.

 

Cash and equivalents, includingshort-term investments, totaled $58.4 million at September 30, 2002, comparedto $56.4 million at December 31, 2001. Excluding cash, cash equivalents and short-term investments, the Companyhad a working capital deficit of ($8.3) million at September 30, 2002 comparedto a working capital deficit of ($6.6) million at December 31, 2001.  The Company receives patent annuity paymentsand subscription payments in advance and is, therefore, expected to maintainvery low or negative working capital balances, excluding cash.  Included in current liabilities at September30, 2002 are obligations related to patent annuity payments and deferredrevenue of approximately $46.4 million.

 

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Cash generated from operatingactivities was $22.1 million for the nine months ended September 30, 2002,derived from net income of $5.8 million plus non-cash charges of $17.3 millionless an increase in operating assets and liabilities of $1.0 million.  The overall increase in operating assets andliabilities is primarily due to the timing of and the increase in the number ofpatent annuity billings and payments, and a decrease in income tax liabilities,offset by a decrease in accrued expenses related to acquisition costs forLiquent and Aurigin.

 

Cash used in investingactivities was $12.5 million for the nine months ended September 30, 2002primarily due to acquisition costs for Aurigin of approximately $14.0million.  See Note E — *Acquisitions*.  Spending related to capital expenditures,including pre-publication costs and capitalized software, was $6.5 million inthe first nine months of 2002. Excluding acquisitions of businesses, the Company’s existing operationsare not capital intensive.

 

Cash generated from financingactivities was $0.4 million for the nine months ended September 30, 2002,primarily due to net cash proceeds received from the issuance of common stockfrom stock option exercises*.* The Company has no outstanding debt obligations as of September 30, 2002related to the Credit Facility.

 

The Company believes that fundsgenerated from operations, together with cash on hand and borrowings availableunder its Credit Facility will be sufficient to fund the cash requirements ofits existing operations for the foreseeable future.  The Company currently has no commitments for material capitalexpenditures or agreements with respect to any prospective material acquisitions.  The Company may choose to obtain additionalcapital or financing to consummate future acquisitions.  Future operating requirements and capitalneeds may be subject to economic conditions and other factors, many of whichare beyond the Company’s control.

 

**Seasonality**

 

The Company’s business issomewhat seasonal, with revenues typically reaching slightly higher levelsduring the third and fourth quarters of each calendar year, based onpublication schedules and other factors. In 2001, 28% of the Company’s revenues were generated during the fourthquarter with the first, second and third quarters accounting for 23%, 24% and25% of revenues, respectively.  Inaddition, the Company may experience fluctuations in revenues from period toperiod based on the timing of acquisitions and new product launches.

 

**Effectsof Inflation**

 

The Company believes thatinflation has not had a material impact on the results of operations presentedherein.

 

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**CriticalAccounting Policies**

 

The Company’s accountingpolicies are disclosed in the Company’s 2001 Annual Report on Form 10-K.  There have been no material changes to thesepolicies during the first nine months of fiscal 2002.

 

**Forward-LookingStatements**

 

Certain statements in thisreport contain forward-looking statements, including, without limitation,statements relating to the Company’s plans, strategies, objectives,expectations, and intentions that are made pursuant to the “safe harbor”provisions of the Private Securities Litigation Reform Act of 1995. Readers arecautioned that forward-looking statements contained in this Form 10-Q should beread in conjunction with the Company’s disclosures under the heading*ImportantFactors Relating to Forward-Looking Statements*contained in theCompany’s 2001 Annual Report on Form 10-K.

 

**Item 3.    Quantitativeand Qualitative Disclosure About Market Risk**

 

*Interest Rate Risk* - The Company may be subjectto market risks arising from changes in interest rates.  Interest rate exposure results from changesin the Eurodollar or the prime rate, which are used to determine the interestrate applicable to borrowings under the Credit Facility.  As of September 30, 2002, the Company had nooutstanding borrowings under the Credit Facility.

 

*Foreign Currency ExchangeRate Risk*-**The financial statements of the Company’sforeign subsidiaries are translated from the local currency into U.S.dollars.  Assets and liabilities aretranslated using current exchange rates, except certain accounts of subsidiarieswhose functional 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.  Foreign exchange translation lossesfor the three and nine months ended September 30, 2002 were $63,000 and$197,000, 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.  AtSeptember 30, 2002, the subsidiary of the Company had entered into forwardcontracts to acquire various international currencies, all having maturities ofless than seven months, aggregating approximately $19,861,000.  Realized gains and losses relating to theforward contracts were immaterial for the quarter ended September 30, 2002.

 

The Company does not usederivative financial instruments for trading purposes.

 

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**Item 4.    Controland Procedures**

As of September 30, 2002, anevaluation was performed under the supervision and with the participation ofthe Company’s management, including the CEO and CFO, of the effectiveness ofthe design and operation of the Company’s disclosure controls andprocedures.  Based on that evaluation,the Company’s management, including the CEO and CFO, concluded that theCompany’s disclosure controls and procedures were effective as of September 30,2002.  There have been no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect internal controls subsequent to September 30, 2002.

 

**PARTII. OTHER INFORMATION**

 

**Item 2.****        Changes in Securities andUse of Proceeds.**

 

The following report relates tothe Company’s secondary public stock offering:

 
| Commission  file number of registration statement:       |   | 333-30202      |        |
|----------------------------------------------------------|--------|----------------|-------------|
| Effective  Date:                                         |   | March 14, 2000 |        |
|                                                     |   |           |        |
| Expenses incurred  through September 30, 2002:           |   |           |        |
| Underwriting  discounts                                  |   | $              | 8,595,000   |   |
| Other  expenses                                          |   | $              | 522,000     |   |
| Total  expenses                                          |   | $              | 9,117,000   |   |
|                                                     |   |           |        |
| Application  of proceeds through September 30, 2002:     |   |           |        |
| Acquisitions  of businesses, titles and equity interests |   | $              | 147,476,000 |   |
| Temporary  investments                                   |   | $              | 7,524,000   |   |
| (Commercial paper and money  market funds)               |   |           |        |

 

**Item 5.****           Other Events.**

 

On April 30, 2002, David E.Libowitz resigned from the Company’s Board of Directors, including his positionon the compensation committee.  John L.Vogelstein, a partner of Warburg Pincus & Co., the general partner ofWarburg, Pincus Ventures, L.P., the Company’s largest stockholder, was electedto the Company’s Board of Directors.

 

On October 8, 2002, StevenWolfson resigned as President of the Company’s MicroPatent unit.  Jay Nadler, President of the Company’sIntellectual Property Group, assumed Mr. Wolfson’s responsibilities.

 

On October 23, 2002, John R.Purcell, one of the Company’s independent directors, resigned from the Company’sBoard of Directors, including his position on the audit committee.  Mr. Purcell’s resignation was not the resultof any disagreement on matters relating to the Company’s operations, policiesor practices, including the policies and practices of the audit committee.

 

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

 

(a)                                  Exhibits

 

99.1   Certification by CEO pursuantto 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002

99.2   Certification by CFO pursuantto 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002

 

(b)                                 Reports on Form 8-K:

On October 8,2002, the Company filed a Current Report on Form 8-K reporting that, on May 9,2002, the Company had completed an acquisition of substantially all of theassets of Aurigin Systems, Inc. (Aurigin) for cash consideration ofapproximately $14,000,000, including the assumption of certainliabilities.  The Company also noted itwas unable to comply with its undertaking to file the required auditedfinancial statements of Aurigin and pro forma condensed consolidated financialstatements of the Company.  No auditedfinancial statements for Aurigin for the year ended December 31, 2001 are available,and IHI does not believe it has the ability to obtain them.

 

On October 29,2002, the Company filed a Current Report on Form 8-K reporting that theCompany’s Board of Directors authorized the Company to repurchase up to ThirtyMillion dollars ($30,000,000) of its common stock.

 

**SIGNATURE**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|   |              |   | INFORMATION HOLDINGS INC.                                                              |
|--------|-------------------|--------|----------------------------------------------------------------------------------------|
|   |              |   |                                                                                   |
|   |              |   |                                                                                   |
|   |              |   |                                                                                   |
| Date:  | November 14, 2002 |   | By:                                                                                    |    /s/ Vincent A. Chippari |   |
|   |              |   | Vincent A. Chippari                                                                    |
|   |              |   | Executive Vice President and Chief  Financial Officer                                  |
|   |              |   |                                                                                   |
|   |              |   | Signing on behalf of the registrant and  as principal financial and accounting officer |
|        |                   |        |                                                                                        |  |  |  |

 

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**INFORMATION HOLDINGS INC.**

**QUARTERLY CERTIFICATION BY CHIEF EXECUTIVEOFFICER**

 

I, Mason P. Slaine,certify that:

 

1.             I have reviewedthis quarterly report on Form 10-Q of Information Holdings Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                    designed such disclosure controls and procedures to ensurethat material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

b)             evaluated the effectiveness of the registrant’s disclosurecontrols and procedures as of a date within 90 days prior to the filing date ofthis quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                    allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                   anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: November 14, 2002 |                                  |
|-------------------------|---------------------------------------|
|                    | /s/ Mason P. Slaine                   |   |
|                    | Mason P. Slaine                       |
|                    | President and Chief Executive Officer |

 

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**INFORMATION HOLDINGS INC.**

**QUARTERLY CERTIFICATION BY CHIEF FINANCIALOFFICER**

 

I, Vincent A. Chippari, certifythat:

 

1.             I have reviewedthis quarterly report on Form 10-Q of Information Holdings Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presentedin this quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                    allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                   anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: November 14, 2002 |                                                  |
|-------------------------|-------------------------------------------------------|
|                    | /s/ Vincent A. Chippari                               |   |
|                    | Vincent A. Chippari                                   |
|                    | Executive Vice President and  Chief Financial Officer |

 

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