**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C.  20549**

 

----

 

**FORM 10-Q**

 

**(Mark One)**

 

| ý                                                                                                          |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|-----------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|
|                                                                                                            |   |                                                                                                |
| **For the Quarterly Period Ended  March 31, 2004**                                                         |
|                                                                                                            |   |                                                                                                |
| **OR**                                                                                                          |
|                                                                                                            |   |                                                                                                |
| o                                                                                                               |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                            |   |                                                                                                |
| **For the transition period from        to      .** |
|                                                                                                            |
| **Commission File No.  1-14371**                                                                           |
|                                                                                                            |
| **INFORMATION  HOLDINGS INC.**                                                                                  |
| (Exact name of Registrant as specified in  its charter)                                                         |

 

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

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.                                                                            ý Yes o No

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act) ý Yes o No

 

As of May 4, 2004, there were 20,895,692shares of the Company’s common stock, par value $0.01 per share, outstanding.

 

 

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**INFORMATIONHOLDINGS INC.**

Form 10-Q for the Quarter EndedMarch 31, 2004

 

Table of Contents

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

 

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**INFORMATIONHOLDINGS INC.**

 

###### *CONSOLIDATEDBALANCE SHEETS*

*(In thousands, except share data)*

 
|                                                                                                                                                                            |   | **March 31,  2004** |    | **December 31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                                                                                                                                                                            |   | **(Unaudited**           | **)**   |                        |   |
| ***ASSETS***                                                                                                                                                                    |   |                     |    |                        |   |
|                                                                                                                                                                            |   |                     |    |                        |   |
| *CURRENT ASSETS:*                                                                                                                                                               |   |                     |    |                        |   |
| Cash and cash equivalents                                                                                                                                                       |   | $                        | 52,959  |                        | $      | 39,693 |   |
| Short-term investments                                                                                                                                                          |   | 7,027                    |    | 12,271                      |   |
| Restricted cash                                                                                                                                                                 |   | 3,000                    |    | 3,000                       |   |
| Accounts receivable *(net of allowance for doubtful  accounts of $694 and $693, respectively)*                                                                                  |   | 38,878                   |    | 37,650                      |   |
| Prepaid expenses and other current assets                                                                                                                                       |   | 4,049                    |    | 5,669                       |   |
| Income taxes receivable                                                                                                                                                         |   | —                   |    | 11,899                      |   |
| Deferred income taxes                                                                                                                                                           |   | 2,001                    |    | 2,001                       |   |
| Total current assets                                                                                                                                                            |   | 107,914                  |    | 112,183                     |   |
| Investments                                                                                                                                                                     |   | 88,843                   |    | 83,207                      |   |
| Property and equipment, net                                                                                                                                                     |   | 4,100                    |    | 4,281                       |   |
| Identified  intangible assets, net                                                                                                                                              |   | 69,224                   |    | 70,248                      |   |
| Goodwill                                                                                                                                                                        |   | 99,808                   |    | 100,871                     |   |
| Other  assets                                                                                                                                                                   |   | 4,546                    |    | 3,880                       |   |
|                                                                                                                                                                            |   |                     |    |                        |   |
| TOTAL                                                                                                                                                                           |   | $                        | 374,435 |                        | $      | 374,670 |   |
|                                                                                                                                                                            |   |                     |    |                        |   |
| ***LIABILITIES  AND STOCKHOLDERS’ EQUITY***                                                                                                                                |   |                     |    |                        |   |
|                                                                                                                                                                            |   |                     |    |                        |   |
| *CURRENT  LIABILITIES:*                                                                                                                                                         |   |                     |    |                        |   |
| Accounts payable                                                                                                                                                                |   | $                        | 33,083  |                        | $      | 32,073 |   |
| Accrued expenses                                                                                                                                                                |   | 12,651                   |    | 18,124                      |   |
| Deferred revenue                                                                                                                                                                |   | 26,930                   |    | 25,753                      |   |
| Total current liabilities                                                                                                                                                       |   | 72,664                   |    | 75,950                      |   |
|                                                                                                                                                                            |   |                     |    |                        |   |
| Long-term deferred income taxes                                                                                                                                                 |   | 16,114                   |    | 16,307                      |   |
| Total liabilities                                                                                                                                                               |   | 88,778                   |    | 92,257                      |   |
|                                                                                                                                                                            |   |                     |    |                        |   |
| *STOCKHOLDERS’  EQUITY:*                                                                                                                                                   |   |                     |    |                        |   |
| Preferred stock, $.01 par value; 1,000,000  shares authorized; none issued                                                                                                      |   | $                        | —  |                        | $      | — |   |
| Common stock, $.01 par value; authorized  50,000,000 shares; issued 21,894,079 and 21,882,604 shares, respectively;  outstanding 20,886,879 and 20,875,404 shares, respectively |   | 219                      |    | 219                         |   |
| Additional paid-in capital                                                                                                                                                      |   | 248,208                  |    | 247,964                     |   |
| Retained earnings                                                                                                                                                               |   | 41,535                   |    | 38,304                      |   |
| Treasury stock, at cost, 1,007,200 shares,  in both periods                                                                                                                     |   | (14,723                  | )       | (14,723                     | )      |
| Accumulated other comprehensive income                                                                                                                                          |   | 10,418                   |    | 10,649                      |   |
| Total stockholders’ equity                                                                                                                                                 |   | 285,657                  |    | 282,413                     |   |
|                                                                                                                                                                            |   |                     |    |                        |   |
| TOTAL                                                                                                                                                                           |   | $                        | 374,435 |                        | $      | 374,670 |   |

 

*See notes tounaudited consolidated financial statements.*

 

1

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**INFORMATIONHOLDINGS INC.**

 

*CONSOLIDATED STATEMENTS OF OPERATIONS*

(Unaudited)

*(In thousands, except per share data)*

 
|                                                                        |   | **Three  Months Ended  March 31,** |   |
|-----------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                        |   | **2004**                                |   | **2003** |   |
|                                                                        |   |                                    |   |   |   |
| Revenues                                                                    |   | $                                       | 24,600 |   | $ | 19,657 |   |
|                                                                        |   |                                    |   |   |   |
| Cost of sales                                                               |   | 6,511                                   |   | 6,368 |   |
|                                                                        |   |                                    |   |   |   |
| Gross profit                                                                |   | 18,089                                  |   | 13,289 |   |
|                                                                        |   |                                    |   |   |   |
| Operating expenses:                                                         |   |                                    |   |   |   |
|                                                                        |   |                                    |   |   |   |
| Selling, general and administrative                                         |   | 11,040                                  |   | 8,857 |   |
|                                                                        |   |                                    |   |   |   |
| Depreciation and amortization                                               |   | 3,037                                   |   | 2,709 |   |
|                                                                        |   |                                    |   |   |   |
| Total operating expenses                                                    |   | 14,077                                  |   | 11,566 |   |
|                                                                        |   |                                    |   |   |   |
| Income from operations                                                      |   | 4,012                                   |   | 1,723 |   |
|                                                                        |   |                                    |   |   |   |
| Other income (expense):                                                     |   |                                    |   |   |   |
|                                                                        |   |                                    |   |   |   |
| Interest income                                                             |   | 841                                     |   | 188 |   |
|                                                                        |   |                                    |   |   |   |
| Interest expense                                                            |   | (1                                      | )      | (56 | ) |
|                                                                        |   |                                    |   |   |   |
| Early termination of credit agreement                                       |   | —                                  |   | (575 | ) |
|                                                                        |   |                                    |   |   |   |
| Other income, net                                                           |   | 303                                     |   | — |   |
|                                                                        |   |                                    |   |   |   |
| Income from continuing operations before  income taxes                      |   | 5,155                                   |   | 1,280 |   |
|                                                                        |   |                                    |   |   |   |
| Provision for income taxes                                                  |   | 1,819                                   |   | 397 |   |
|                                                                        |   |                                    |   |   |   |
| Income from continuing operations                                           |   | 3,336                                   |   | 883 |   |
|                                                                        |   |                                    |   |   |   |
| (Loss) income from operations of  discontinued segment, net of income taxes |   | (105                                    | )      | 211 |   |
|                                                                        |   |                                    |   |   |   |
| Net income                                                                  |   | $                                       | 3,231  |   | $ | 1,094 |   |
|                                                                        |   |                                    |   |   |   |
| Net income (loss) per basic and diluted  common share:                      |   |                                    |   |   |   |
|                                                                        |   |                                    |   |   |   |
| Continuing operations                                                       |   | $                                       | 0.16   |   | $ | 0.04 |   |
| Discontinued operations                                                     |   | (0.01                                   | )      | 0.01 |   |
| Net income                                                                  |   | $                                       | 0.15   |   | $ | 0.05 |   |
|                                                                        |   |                                    |   |   |   |
| Weighted average number of common shares  outstanding                       |   |                                    |   |   |   |
|                                                                        |   |                                    |   |   |   |
| Basic                                                                       |   | 20,885                                  |   | 21,437 |   |
| Diluted                                                                     |   | 20,991                                  |   | 21,471 |   |

 

*See notes tounaudited consolidated financial statements*.

 

2

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**INFORMATIONHOLDINGS INC.**

 

##### *CONSOLIDATED STATEMENTS OF CASH FLOWS*

(Unaudited)

*(In thousands)*

 
|                                                                               |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                               |   | **2004**                                |   | **2003** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |   |                                    |   |   |   |
| Net income                                                                         |   | $                                       | 3,231  |   | $ | 1,094 |   |
| Loss (income) from discontinued operations                                         |   | 105                                     |   | (211 | ) |
|                                                                               |   |                                    |   |   |   |
| Income from continuing operations                                                  |   | 3,336                                   |   | 883 |   |
|                                                                               |   |                                    |   |   |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                    |   |   |   |
| Depreciation                                                                       |   | 994                                     |   | 1,008 |   |
| Amortization of other intangible assets                                            |   | 2,043                                   |   | 1,701 |   |
| Gain on sale of assets                                                             |   | (426                                    | )      | — |   |
| Change in deferred income taxes                                                    |   | (339                                    | )      | (387 | ) |
| Termination of credit facility                                                     |   | —                                  |   | 494 |   |
| Net amortization of premiums on investments  available for sale                    |   | 599                                     |   | — |   |
| Other                                                                              |   | 334                                     |   | 59 |   |
| Changes in operating assets and liabilities:                                       |   |                                    |   |   |   |
| Increase in accounts receivable, net                                               |   | (1,380                                  | )      | (1,831 | ) |
| Decrease in prepaid and other current  assets                                      |   | 467                                     |   | 128 |   |
| (Decrease) increase in accounts payable and  accrued expenses                      |   | (3,509                                  | )      | 88 |   |
| Income tax benefit from stock options  exercised                                   |   | 10                                      |   | 21 |   |
| Net change in income taxes (receivable)  payable                                   |   | 12,382                                  |   | (1,713 | ) |
| Increase in deferred revenue                                                       |   | 987                                     |   | 2,366 |   |
| Net change in other assets and liabilities                                         |   | (35                                     | )      | 9 |   |
| Net Cash Provided by Continuing Operations                                         |   | 15,463                                  |   | 2,826 |   |
| Net Cash Provided by Discontinued  Operations                                      |   | —                                  |   | 1,648 |   |
|                                                                               |   |                                    |   |   |   |
| Net Cash Provided by Operating Activities                                          |   | 15,463                                  |   | 4,474 |   |
|                                                                               |   |                                    |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |   |                                    |   |   |   |
| Purchases of property and equipment                                                |   | (484                                    | )      | (428 | ) |
| Proceeds from maturities of investments  held to maturity                          |   | —                                  |   | 4,795 |   |
| Purchases of investments available for sale                                        |   | (43,403                                 | )      | — |   |
| Proceeds from sales and maturities of  investments available for sale              |   | 42,412                                  |   | — |   |
| Net proceeds on sale of assets                                                     |   | 480                                     |   | — |   |
| Transaction costs, net of proceeds from  sale of discontinued operations           |   | (220                                    | )      | — |   |
| Capitalized software development cost                                              |   | (808                                    | )      | (89 | ) |
| Capitalized internal-use software                                                  |   | (117                                    | )      | (159 | ) |
| Net Cash (Used in) Provided by Continuing  Operations                              |   | (2,140                                  | )      | 4,119 |   |
| Net Cash Used in Discontinued Operations                                           |   | —                                  |   | (818 | ) |
|                                                                               |   |                                    |   |   |   |
| Net Cash (Used in) Provided by Investing  Activities                               |   | (2,140                                  | )      | 3,301 |   |
|                                                                               |   |                                    |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |   |                                    |   |   |   |
| Common stock issued from stock options  exercised                                  |   | 234                                     |   | 157 |   |
| Principal payments on capital leases                                               |   | (37                                     | )      | (35 | ) |
| Net Cash Provided by Continuing Operations                                         |   | 197                                     |   | 122 |   |
| Net Cash Used in Discontinued Operations                                           |   | —                                  |   | (97 | ) |
|                                                                               |   |                                    |   |   |   |
| Net Cash Provided by Financing Activities                                          |   | 197                                     |   | 25 |   |
|                                                                               |   |                                    |   |   |   |
| EFFECT OF EXCHANGE RATES ON CASH                                                   |   | (254                                    | )      | 264 |   |
|                                                                               |   |                                    |   |   |   |
| NET INCREASE IN CASH AND EQUIVALENTS                                               |   | 13,266                                  |   | 8,064 |   |
|                                                                               |   |                                    |   |   |   |
| CASH AND EQUIVALENTS, BEGINNING OF PERIOD                                          |   | 39,693                                  |   | 53,910 |   |
|                                                                               |   |                                    |   |   |   |
| CASH AND EQUIVALENTS, END OF PERIOD                                                |   | $                                       | 52,959 |   | $ | 61,974 |   |

 

*See notes to unaudited consolidated financial statements.*

 

3

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**INFORMATIONHOLDINGS INC.**

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

 

# **A.**                                    BASIS OF PRESENTATION

# ** **

The consolidated balance sheet of Information HoldingsInc. (IHI, or the Company) at December 31, 2003 has been derived fromIHI’s Annual Report on Form 10-K for the year then ended.  All other consolidated financial statementscontained herein have been prepared by IHI and are unaudited.  These consolidated financial statementsshould be read in conjunction with the consolidated financial statements forthe year ended December 31, 2003 and the notes thereto contained in IHI’sAnnual Report on Form 10-K.

 

The accompanying unaudited consolidated financial statements have beenprepared in accordance with the instructions to Form 10-Q and Article 10of Regulation 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 ofMarch 31, 2004, and the consolidated results of operations and cash flowsfor the periods presented herein. Operating results for the three months ended March 31, 2004 are notnecessarily indicative of the results that may be expected for the year endedDecember 31, 2004.

 

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

 

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

 

4

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# **B.**                                    ACCOUNTING FOR STOCK-BASED COMPENSATION

# ** **

The Company grants stock options for a fixed number ofshares to employees and non-employee directors with an exercise price equal tothe fair value of the shares at the date of grant.  The Company accounts for its stock option grants under theprovisions of Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees,*whichutilizes the intrinsic value method. Since stock options are granted by the Company with exercise pricesequal to the market price of the underlying stock at the date of grant, nocompensation expense has been recognized in the Company’s ConsolidatedStatements of Operations.

 

Had compensation cost for the Company’s stock optionplan been recognized based upon the estimated fair value of the options at thedates of grant consistent with the requirements of Statement of FinancialAccounting Standards (SFAS) No. 123, *Accountingfor Stock-Based Compensation*, as amended by SFAS No. 148, *Accounting for Stock-Based Compensation – Transitionand Disclosure*, the Company’s net income and earnings per sharewould have been the pro forma amounts indicated below:

 
|                                                                                                                             |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
| **(In thousands, except per share  data):**                                                                                      |   | **2004**                                |   | **2003** |   |
|                                                                                                                             |   |                                    |   |   |   |
| Net income as reported                                                                                                           |   | $                                       | 3,231  |   | $ | 1,094 |   |
| Deduct: Total stock-based employee expense  determined under fair value based method for all awards, net of related tax  effects |   | 620                                     |   | 888 |   |
| Pro forma net income                                                                                                             |   | $                                       | 2,611  |   | $ | 206 |   |
|                                                                                                                             |   |                                    |   |   |   |
| Earnings per common share:                                                                                                       |   |                                    |   |   |   |
| Basic – as reported                                                                                                         |   | $                                       | 0.15   |   | $ | 0.05 |   |
| Basic – pro forma                                                                                                           |   | $                                       | 0.13   |   | $ | 0.01 |   |
| Diluted – as reported                                                                                                       |   | $                                       | 0.15   |   | $ | 0.05 |   |
| Diluted – pro forma                                                                                                         |   | $                                       | 0.12   |   | $ | 0.01 |   |

 

The effects on pro forma net income and earnings pershare of expensing the estimated fair value of stock options are not necessarilyrepresentative of the effects on reported net income for future years due tosuch factors as the vesting period of the stock options and the potential forissuance of additional stock options in future years.  For purposes of pro forma disclosure, the estimated fair value ofoptions granted is amortized to expense over the option vesting period.

 

The Company estimates the fair value of each optiongrant on the date of grant using the Black-Scholes option-pricing model (theBlack-Scholes Model) using certain assumptions.  These assumptions are evaluated and revised, as necessary, toreflect market conditions and the Company’s experience.  The Black-Scholes Model was developed foruse in estimating the value of traded options that have no vesting restrictionsand are fully transferable.  Because theCompany’s employee stock options have characteristics significantly differentfrom those of traded options, and because changes in the subjective inputassumptions can materially affect the estimate, in management’s opinion, theexisting Black-Scholes Model does not provide a reliable measure of the fairvalue of the Company’s employee stock options.

 

5

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**C.****                                    ACQUISITIONS**

 

On December 1, 2003, the Company acquired theissued share capital (the Shares) of CDC Solutions Limited (CDC), a privatecompany based in the United Kingdom for cash consideration of approximately$26,287,000 (Cash Consideration).  CDCis a leading provider of life science regulatory intelligence and publishingsolutions.  The Cash Considerationincludes approximately $22,126,000 of initial consideration, approximately$3,836,000 currently held in escrow for estimated guaranteed earnouts asdefined and calculated in accordance with the underlying Share PurchaseAgreement (SPA), and approximately $325,000 of closing costs associated withthe transaction.

 

In the first quarter of 2004 the Company received avaluation of the fair value of the identified intangible assets and theirestimated useful lives which range from four to ten years.  The purchase price of CDC was accordinglyadjusted to reflect acquired identified intangible assets of $4,810,000, andthe related deferred tax liability recorded as a result of the gross up ofacquired intangible assets was adjusted to $1,443,000 based on thevaluation.  In addition, during thequarter certain other adjustments to the purchase price were recorded to reducenet tangible liabilities acquired to $8,000. Accordingly, non-deductible goodwill was adjusted to $22,928,000.

 

Concurrent with the acquisition, the Companydocumented a plan to integrate the CDC business with its Liquent business.  The integration plan included theelimination of certain duplicate positions within the acquired operation and theabandonment of certain property no longer needed.  Approximately $765,000 of costs related to severance andremaining lease costs at CDC were accrued for in purchase accounting as of theacquisition date, including an adjustment recorded in the first quarter ofapproximately $96,000 due to increased severance at CDC.  As of March 31, 2004, the Company paid$406,000 of severance and $57,000 of lease costs against the liability.  For the year ended December 31, 2003,severance and integration costs of $749,000 had been charged to expense atLiquent related to the CDC integration. The remaining liability at December 31, 2003 related to these costswas $606,000.  During the first quarterof 2004, Liquent charged additional severance costs related to the CDC integrationof approximately $108,000 to Selling, general and administrative expense.  The Company paid $198,000 of severance costsand $124,000 of lease costs during the first quarter of 2004.  The balance of the severance costs areexpected to be paid by the third quarter of 2004 and the lease costs over thelife of the lease, which terminates October 2005.

 

Pursuant to the SPA, the sellers are also entitled tofuture consideration potential dependent on the future operating results ofLiquent and CDC on a combined basis through December 31, 2006.  Based on calculations outlined in the SPA,the Company has recorded additional further consideration costs related to thecombined business as of December 31, 2003 of approximately $1,200,000,which are expected to be paid during the second quarter of 2004.

 

Earnout Consideration (as defined in the SPA) is to becalculated by March 31, 2007 based on formulas related to revenues andEBITDA (earnings before interest, taxes, depreciation and amortization) of thecombined Liquent-CDC business for the three-year period endingDecember 31, 2006 (the Earnout Period). Amounts due for the Earnout Consideration, if any, will be paid duringthe second quarter of 2007, unless the provisions related to a change incontrol discussed below come into effect. Earnout Consideration will become due if the combined business hasgreater than 10% annual compound revenue growth during the Earnout Period, orif EBITDA exceeds $15,000,000 for either the year ending December 31, 2006or on average for the three years of the Earnout Period.  The Earnout Consideration is subject to amaximum of ₤10,000,000 and 

 

6

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could be as low as zero.  The Company currently believes that Earnout Consideration couldreasonably range from $6 million to $10 million.

 

In the event of a sale of all or substantially all ofthe share capital of the Company or the combined Liquent-CDC business duringthe Earnout Period, the sellers have the right, but not an obligation, to electa payout of the Earnout Consideration. The payout of the Earnout Consideration in the event of a sale variesdepending on the year of such sale and the operating performance of thecombined business through the date of sale. The range of payout is zero to ₤5,000,000 if a sale occurs in 2004, zeroto ₤7,500,000 if a sale occurs in 2005 and zero to ₤10,000,000 if a sale occurs in 2006.

 

The CDC acquisition has been accounted for using thepurchase method of accounting and, accordingly, the results of its operationshave been included in the Company’s results of operations from its date ofacquisition.

 

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

 
| **(In thousands, except per share  data)** |   | **Three  Months  Ended  March 31,  2003** |   |
|--------------------------------------------|--------|------------------------------------------------|--------|
|                                       |   |                                           |   |
| Revenues                                   |   | $                                              | 22,364 |   |
| Net loss                                   |   | $                                              | (3     | ) |
| Basic loss per common share                |   | $                                              | (0.00  | ) |
| Diluted loss per common share              |   | $                                              | (0.00  | ) |

 

These pro forma results of operations have been prepared forcomparative purposes only and do not purport to be indicative of the operatingresults that would have occurred had the acquisition been consummated as of theabove date, nor are they necessarily indicative of future operating results.

 

**D.****                                   ****DISCONTINUED OPERATIONS**

 

On December 22, 2003, the Company entered into anAsset Purchase Agreement (the APA) to sell substantially all of the assets andcertain liabilities of Transcender LLC (Transcender) to Self Test Software,Inc., a subsidiary of Kaplan, Inc. (the Transcender Buyer).  The transaction was completed onDecember 31, 2003.  The Companyreceived net proceeds of $9.7 million, representing the cash consideration forthe assets sold of $10.3 million including an adjustment made in the first quarterof 2004 based on the closing balance sheet of Transcender in accordance withthe APA less deal related expenses. During the first quarter of 2004, the Company recorded a loss on sale of$0.1 million, net of income tax benefits, within discontinued operationsprimarily related to severance costs for employees terminated on March 31,2004.  Prior to sale, Transcender wasincluded as part of the software segment (See Note F – *Segment Information*).

 

Pursuant to an Interim Transition Services Agreement (the TSA) betweenthe Company and the Transcender Buyer, the Company has agreed to act as aservice provider to the Transcender Buyer for the period from December 31,2003 to May 31, 2004 (the Transition Period). The TSA requires the Company to retain all employees of Transcenderthrough March 31, 2004 and certain employees through May 31, 2004.  The Transcender Buyer is reimbursing theCompany in full for all employee costs and incidental expenses during the TransitionPeriod.  The Company is responsible topay severance costs to any employee that is not offered employment

 

7

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or does not accept employment with the Transcender Buyer.  As of March 31, 2004, the Company hasaccrued severance and related costs of approximately $0.3 million, includingapproximately $0.1 million, net of income taxes, charged to discontinuedoperations in the first quarter of 2004. The Company estimates that it will incur nominal additional severanceand related costs in the second quarter of 2004.  The Transcender Buyer reimbursed the Company in full for all realestate costs through March 31, 2004 and is reimbursing the Company for aportion of real estate costs from April 1, 2004 through May 31, 2004.  Future rental payments under the Transcenderleases approximate $2.7 million. The Company is actively seeking to sublet theTranscender real estate and may generate sublease income in the future tooffset a portion of the lease commitment. During the second quarter of 2004, the Company expects to record acharge in discontinued operations related to the remaining lease commitmentsless estimated sublease income.

 

On February 27, 2003, the Company entered into adefinitive purchase agreement (the Purchase Agreement) to sell substantiallyall of the assets and certain liabilities of its wholly owned subsidiaries CRCPress LLC (CRC Press), CRC Press (U.K.) LLC and Parthenon Publishing Group,Inc. (together, CRC), to CRC Press I LLCand Routledge No. 2 Limited, both wholly owned subsidiaries of Taylor &Francis Group plc.  The transaction wascompleted on April 8, 2003.  TheCompany received net proceeds of approximately $90 million, representing the cashconsideration for the assets sold less deal related expenses and an adjustmentmade based on the closing balance sheet of CRC in accordance with the PurchaseAgreement.  On April 8, 2004 theCompany received $3.0 million of proceeds previously held in escrow related torepresentations and warranties contained in the Purchase Agreement.  CRC comprised the entirety of the Company’sformer scientific and technology information (STI) segment.  Subsequent to the date of sale, the Companyno longer has operations in the STI segment (See Note F – *Segment Information*).

 

Summary operating results forthe discontinuedoperations follow:

 
|                                                             |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------------------------|--------|-----------------------------------------|--------|
| **(In thousands)**                                               |   | **2004**                                |   | **2003** |   |
|                                                             |   |                                    |   |   |   |
| Revenues                                                         |   | $                                       | — |   | $ | 13,356 |   |
|                                                             |   |                                    |   |   |   |
| Income from discontinued operations before  income taxes         |   | —                                  |   | 379 |   |
| Provision for income taxes on discontinued operations            |   | —                                  |   | 168 |   |
| Loss on sale of discontinued operations,  net of income taxes    |   | (105                                    | )      | — |   |
| (Loss) income from discontinued operations,  net of income taxes |   | $                                       | (105   | ) | $ | 211 |   |

 

8

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

 

The following table sets forth the denominators usedin computing basic and diluted earnings (loss) per common share for the periodsindicated:

 
|                                                                            |   | **Three  Month Ended  March 31,** |   |
|---------------------------------------------------------------------------------|--------|----------------------------------------|--------|
| **(In thousands)**                                                              |   | **2004**                               |   | **2003** |   |
|                                                                            |   |                                   |   |   |   |
| Weighted average common shares outstanding:                                     |   |                                   |   |   |   |
| Basic                                                                           |   | 20,885                                 |   | 21,437 |   |
| Net effect of dilutive stock options –  based on the treasury stock method |   | 106                                    |   | 34 |   |
| Diluted                                                                         |   | 20,991                                 |   | 21,471 |   |

 

For the three months ended March 31, 2004 and2003, 474,703 and 1,129,225 stock options, respectively, were excluded from thecomputation of diluted earnings per common share due to their antidilutiveeffect.

 

**F.****                                     ****SEGMENT INFORMATION**

 

Operating segments are defined as components of anenterprise for which separate financial information is available and regularlyreviewed by the Company’s senior management. The Company evaluates performance based on EBITDA of the respectivebusiness units.

 

The Company has two reportable segments contributingto its results from continuing operations: data and software.  The data segment, which includesMicroPatent, Master Data Center (MDC) and IDRAC, provides a broad array ofdatabases, information products and complementary services for intellectualproperty and regulatory professionals. The software segment is comprised solely of Liquent, a leading providerof life science regulatory intelligence and publishing solutions.  The CDC operations are being integrated withthe Company’s Liquent unit and are included in the software segment forreporting purposes.  Other includesunallocated corporate items.  Corporateassets consist principally of cash and cash equivalents and investments.

 

9

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The following tables set forth the information for theCompany’s reportable segments of continuing operations for the periodsindicated (in thousands):

 
|                              |   | **Three  Months Ended  March 31,** |   |
|-----------------------------------|--------|-----------------------------------------|--------|
|                              |   | **2004**                                |   | **2003** |   |
| REVENUES FROM EXTERNAL CUSTOMERS: |   |                                    |   |   |   |
| Data                              |   | $                                       | 15,552 |   | $ | 13,815 |   |
| Software (1)                      |   | 9,048                                   |   | 5,842 |   |
|                              |   | $                                       | 24,600 |   | $ | 19,657 |   |
|                              |   |                                    |   |   |   |
| EBITDA:                           |   |                                    |   |   |   |
| Data                              |   | $                                       | 6,779  |   | $ | 5,551 |   |
| Software (1)                      |   | 2,087                                   |   | 341 |   |
| Other                             |   | (1,439                                  | )      | (1,999 | ) |
|                              |   | $                                       | 7,427  |   | $ | 3,893 |   |
|                              |   |                                    |   |   |   |
| INCOME (LOSS) FROM OPERATIONS:    |   |                                    |   |   |   |
| Data                              |   | $                                       | 4,077  |   | $ | 3,469 |   |
| Software (1)                      |   | 1,257                                   |   | (302 | ) |
| Other                             |   | (1,322                                  | )      | (1,444 | ) |
|                              |   | $                                       | 4,012  |   | $ | 1,723 |   |

 

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(1)                      Results include operations of CDC fromthe date of the acquisition December 1, 2003 only (See Note C - *Acquisitions*).

 

The Company evaluates the performance of its segmentsbased primarily on revenues and EBITDA. The Company believes that EBITDA is themost useful measure of business unit earnings because it more closelyapproximates the cash generating ability of each business compared to income(loss) from operations.  Income (loss)from operations includes charges for depreciation and amortization, themajority of which relate to amortization of intangible assets.  The Company generally does not incur capitalexpenditures to replace intangible assets within existing operations.

 

A reconciliation of EBITDA to income from continuingoperations is as follows (in thousands):

 
|                                                  |   | **Three  Months Ended  March 31,** |   |
|-------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                  |   | **2004**                                |   | **2003** |   |
|                                                  |   |                                    |   |   |   |
| EBITDA                                                |   | $                                       | 7,427  |   | $ | 3,893 |   |
| Depreciation and amortization (1)                     |   | (3,112                                  | )      | (2,745 | ) |
| Interest income, net                                  |   | 840                                     |   | 132 |   |
| Income from continuing operations before income taxes |   | $                                       | 5,155  |   | $ | 1,280 |   |
| Provision for income taxes                            |   | 1,819                                   |   | 397 |   |
| Income from continuing operations                     |   | $                                       | 3,336  |   | $ | 883 |   |

 

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(1)                      Depreciation and amortization includes$75,000 and $36,000 of amortization of capitalized software, classified as Costof sales for the three months ended March 31, 2004 and 2003, respectively.

 

10

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**G.            COMPREHENSIVE INCOME**

 

Comprehensive income is comprised of net income andother comprehensive income.  Accumulatedother comprehensive income includes foreign currency translation adjustmentsand unrealized gains and losses, net of the related tax effect, onavailable-for-sale securities and on derivative instruments designated andqualifying as cash flow hedges.  Thefollowing table is a reconciliation of the Company’s net income tocomprehensive income (in thousands):

 
|                                                                         |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                         |   | **2004**                                |   | **2003** |   |
|                                                                         |   |                                    |   |   |   |
| Net income                                                                   |   | $                                       | 3,231  |   | $ | 1,094 |   |
| Other comprehensive income:                                                  |   |                                    |   |   |   |
| Change in net unrealized gains and losses  on available-for-sale investments |   | 418                                     |   | — |   |
| Change in net unrealized gains and losses  on cash flow hedges               |   | (378                                    | )      | — |   |
| Foreign currency translation adjustments                                     |   | (257                                    | )      | (186 | ) |
| Estimated tax provision                                                      |   | (14                                     | )      | — |   |
| Net change in other comprehensive income                                     |   | (231                                    | )      | (186 | ) |
|                                                                         |   |                                    |   |   |   |
| Comprehensive income                                                         |   | $                                       | 3,000  |   | $ | 908 |   |

 

**H.            SUBSEQUENT EVENT**

 

On December 5, 2002, Venturetek, L.P., Richard Elkin, AntoineBernheim, Stacy Bernheim and Genstar, Ltd., derivatively as shareholders ofRand Publishing Co., Inc. (Rand) and individually, on their own behalf (thePlaintiffs) filed a complaint in the Supreme Court of the State of New Yorkagainst IHI (the IHI Action) alleging that IHI’s predecessor fraudulentlyacquired assets or businesses that were corporate opportunities of Rand andthat such acquisitions constituted a “conversion”.   The Plaintiffs sought a constructive trustover all of IHI’s shares and options and damages of approximately $750 million.  Additionally, the Company’s President andChief Executive Officer, Mason P. Slaine, and Michael E. Danziger, a member ofthe Company’s board of directors, were named as defendants in a related actionentitled Venturetek, L.P., et al. v. Rand Publishing Co., Inc., et al.,filed in the Supreme Court of the State of New York (the RandAction).   Similar to the IHIAction, the Plaintiffs in the Rand Action alleged that certain acquisitions ofassets and businesses by IHI constituted corporate opportunities usurped from Randand that Messrs. Slaine and Danziger breached their fiduciary duties inconnection therewith.  The Plaintiffs inthe Rand action sought a constructive trust over Messrs. Slaine’s and Danziger’sshares of IHI and damages alleged to be in excess of $150 million.  In February 2003, IHI moved to dismissthe complaint in its entirety on the grounds that it failed to state a claim asa matter of law and that it was barred by the applicable statutes oflimitations.  In a written MemorandumDecision dated April 21, 2004, the Court granted IHI’s motion anddismissed the complaint in its entirety. The time for the Plaintiffs to appeal the Memorandum Decision has notyet expired.

 

11

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**Item 2***.**           **Management’sDiscussion and Analysis of Financial Condition and Results of Operations***

 

*The followingdiscussion and analysis presents a review of the Company for the three monthsended March 31, 2004 compared to the three months ended March 31,2003.  This review should be read inconjunction with the consolidated financial statements and notes presentedherein as well as Management’s Discussion and Analysis of Financial Conditionand Results of Operations contained in the Company’s 2003 Annual Report on Form10-K.*

 

*Certainstatements in this report contain forward-looking statements, including,without limitation, statements relating to the Company’s plans, strategies,objectives, expectations, and intentions that are made pursuant to the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995.  Actual results of the Company could differmaterially from those anticipated in these forward-looking statements as aresult of certain factors.  Readers arecautioned not to place undue reliance on the forward-looking statements andthat forward-looking statements contained in this Form 10-Q should be read inconjunction with the Company’s disclosures under the heading Item 1.  Business – Risk Factors contained in theCompany’s 2003 Annual Report on Form 10-K. The Company undertakes no obligation to publicly update or revise anyforward-looking statement, whether as a result of future events, newinformation or otherwise.*

 

**Overview**

 

*Impact of Acquisitions and Divestitures*

 

A key component of the Company’s historical growth has been to pursueacquisitions where opportunities exist to internally grow the acquiredcompanies’ revenues and increase profitability through operatingefficiencies.  Since beginningoperations in January 1997, the Company has completed 15 substantialacquisitions, including seven in the data segment, two in the software segmentand six in the former scientific and technology information and IT learningsegments, as well as some minor acquisitions that are not otherwise disclosedherein.

 

The Company has two reportable segments contributing to its resultsfrom continuing operations: data and software. The data segment, which includes MicroPatent, Master Data Center (MDC)and IDRAC, provides a broad array of databases, information products and complementaryservices for intellectual property and regulatory professionals.  The software segment is comprised solely ofLiquent, a leading provider of life science regulatory intelligence andpublishing solutions.  Other includesunallocated corporate items.  Corporateassets consist principally of cash and cash equivalents and investments.

 

On February 27, 2003, the Company entered into a definitivepurchase agreement (the Purchase Agreement) to sell substantially all of theassets and certain liabilities of CRC Press and its subsidiaries (CRC) to CRCPress I LLC and Routledge No. 2 Limited, both wholly owned subsidiaries ofTaylor & Francis Group plc.  Thetransaction was completed on April 8, 2003.

 

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

 

On December 22, 2003, the Companyannounced that it had sold Transcender LLC (Transcender) to a subsidiary ofKaplan, Inc. (Kaplan).  Under the termsof the Asset Purchase Agreement (APA), Kaplan acquired

 

12

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substantially all of the assets and assumedcertain operating liabilities.  Thetransaction had an effective date of December 31, 2003.

 

In accordance with Statement of FinancialAccounting Standards No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, allassets, liabilities, results of operations and cash flows of Transcender andCRC have been segregated from those of continuing operations and are presentedin the Company’s financial statements as discontinued operations.  Additionally, the Company’s financialstatements have been reclassified to reflect Transcender and CRC asdiscontinued operations for all prior periods presented herein.

 

The Company continually seeks opportunitieswhich may result in additional acquisitions that will further the Company’sgrowth and operating strategies.  If theCompany acquires additional businesses, its sales mix, market focus, coststructure and operating leverage may change significantly.  Consequently, the Company’s historical andfuture results of operations reflect and will reflect the impact ofacquisitions, and period-to-period comparisons may not be meaningful in somerespects.  Historical information forcompanies subsequent to their acquisition may include integration and othercosts that are not expected to continue in the future.

 

**CriticalAccounting Policies**

 

Thediscussion and analysis of the Company’s financial condition and results ofoperations are based on the Company’s consolidated financial statements.  The preparation of these financialstatements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period.  Theseestimates include, but are not limited to, revenue recognition, bad debtallowances, income taxes, and the valuation of goodwill and other identifiedintangible assets.  The Company basesits estimates on historical experience and on various other assumptions that itbelieves to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources.  Actual results may differ from these estimates under differentassumptions or conditions.

 

The Company’s critical accounting policies are disclosed in theCompany’s 2003 Annual Report on Form 10-K. There have been no material changes to these policies during the firstthree months of fiscal 2004.

 

### ***ConsolidatedResults of Operations***

### *** ***

*Three Months EndedMarch 31, 2004 Compared to Three Months Ended March 31, 2003*

 

*Summary*

 

Revenues increased $4.9 million, or 25%, to $24.6 million from $19.7million.  Revenues increased by $1.7million, or 13%, in the data segment and $3.2 million, or 55%, in the softwaresegment.  Gross profits increased by$4.8 million, or 36%, with gross profit margins increasing to 73.5% from67.6%.  The increase in gross margins isdue primarily to higher gross margins in the software segment, based onincreased revenues, cost reduction initiatives and the integration of theCompany’s Liquent and CDC business units. Selling, general and administrative expenses (SG&A) increased by$2.2 million, or 25%, due primarily to operating expenses related to CDC, whichwas acquired in December 2003. Depreciation and amortization increased by $0.3 million, or 12%, dueprimarily to amortization of

 

13

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intangible assets associated with the acquisition of CDC and the impactof foreign exchange fluctuations on amortization of intangible assets in theCompany’s IDRAC unit during the first quarter of 2004.  Based on the factors above, income fromoperations increased $2.3 million, or 133%, to $4.0 million from $1.7 million.

 

During the first quarter of 2004, the Company recorded $0.3 million ofnon-operating income due primarily to a gain on sale of patents at MicroPatent(the Patent Sale).  During the firstquarter of 2003, the Company incurred costs of approximately $0.6 millionassociated with the early termination of a credit agreement.  The early termination costs includedapproximately $0.5 million for the write-off of unamortized fees, representinga non-cash charge.

 

Net interest income increased $0.7 million to $0.8 million from $0.1million due primarily to increased interest income earned on invested cashproceeds received from the sales of CRC and Transcender, includingrealized gains on the sale of bonds equal to approximately $0.2 million in thefirst quarter of 2004.

 

Based on the factors above, income from continuing operations beforeincome taxes increased by $3.9 million to $5.2 million from $1.3 million.

 

The Company recorded a provision for income taxes of $1.8 million inthe first quarter of 2004, or 35.3% of income before taxes, compared to aprovision for income taxes of $0.4 million in the first quarter of 2003, or31.0% of income before taxes.  Theeffective tax rate differs from statutory rates primarily as a result of state,local and foreign income taxes and permanent items.  The increase in the tax rate is due to the impact of permanentbook-tax differences, which were relatively consistent in dollar amount, whilepre-tax income increased.

 

Based on the factors above, income from continuing operations increasedby $2.5 million to $3.3 million, or $0.16 per diluted common share, in thefirst quarter of 2004 from $0.9 million, or $0.4 per diluted common share, inthe first quarter of 2003.

 

(Loss) income from discontinued operations approximated $(0.1) million,or $(0.01) per diluted common share, in the first quarter of 2004, compared to$0.2 million, or $0.01 per diluted common share, in the first quarter of2003.  Loss from discontinued operationsin the first quarter of 2004 is primarily the result of an after-tax severancecharge associated with the termination of Transcender employees.  Income from discontinued operations in thefirst quarter of 2003 represents results of operations of the discontinuedTranscender and CRC business units.

 

The Company evaluates the performance of its segments based primarilyon revenues and EBITDA (earnings before interest, taxes, depreciation andamortization).  The Company believesthat EBITDA is the most useful measure of business unit earnings because itmore closely approximates the cash generating ability of each business comparedto income (loss) from operations. Income (loss) from operations includes charges for depreciation andamortization, the majority of which relate to amortization of intangibleassets.  The Company generally does notincur capital expenditures to replace intangible assets within existingoperations.  A reconciliation of segmentEBITDA to income from continuing operations before income taxes is presentedafter the discussion of operating results.

 

14

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*Segment Review*

 

*Data*

 

Revenues increased $1.7 million, or 13%, to $15.6 million from $13.8million.  The strongest areas of revenuegrowth included:  revenues from patentinformation subscriptions at MicroPatent, as a result of strong growth in coresubscriptions, and an increase in transactional revenues related to filehistories; intellectual property management services at MDC; and databasesubscriptions at IDRAC.  The primarygrowth driver in each area was increased volume, in addition to increasedaverage pricing at MDC. MicroPatent volume growth relates primarily to sales ofPatentWeb and Aureka products to new customers, as well as file history salesto both new and existing customers. MDC and IDRAC volume growth relatesprimarily to increased sales of existing products and services to newcustomers.

 

Income from operations increased $0.6 million, or 18%, to $4.1 millionfrom $3.5 million.  Income fromoperations increased at MicroPatent due primarily to the revenue increasesnoted above, partially offset by increased compensation in informationtechnology-related areas.  Income fromoperations at MDC remained relatively stable due to the revenue growth notedabove, offset by an increase in compensation for production and customerservice-related employees based on volume growth in intellectual property undermanagement.  Income from operationsincreased at IDRAC due primarily to the revenue increases noted above,partially offset by the impact of foreign exchange fluctuations on amortizationof intangible assets.   In the firstquarter of 2004, MicroPatent recorded a gain of $0.4 million, net of associateddeal costs of $0.2 million, related to the Patent Sale.  EBITDA increased $1.2 million, or 22%, to$6.8 million from $5.6 million.  EBITDAmargins approximated 44% in the first quarter of 2004, compared to 40% in thefirst quarter of 2003.  The mostsignificant factors in the increase were the growth in segment revenues and theimpact of the Patent Sale, partially offset by increased compensation expense.

 

*Software*

 

Revenues increased $3.2 million, or 55%, to $9.0 million from $5.8million.  All revenues in the segmentrelate to Liquent.  The increase ismainly attributable to increased volume in license and maintenance revenues,resulting both from the acquisition of CDC in December 2003 and improvedsoftware sales. The majority of license sales volume growth relates to sales ofcore software products to existing customers of Liquent and CDC. The Companyalso generated the first license sales of its new InSight product line in thefirst quarter of 2004, with three license sales of InSight Foundation.

 

Income (loss) from operations in this segment increased $1.6 million to$1.3 million from $(0.3) million. Income from operations increased at Liquent due primarily to the revenueincreases noted above, partially offset by a full quarter of costs associatedwith CDC in the first quarter of 2004. EBITDA in this segment increased $1.7 million to $2.1 million from $0.3million.  EBITDA margins approximated23% in the first quarter of 2004, compared to 6% in the first quarter of2003.  The most significant factors inthe increase were increased revenues and cost efficiencies resulting from theintegration of CDC.

 

*Other*

 

Losses from other operations decreased by $0.1 million, to $1.3 millionin first quarter of 2004 from $1.4 million in first quarter of 2003, withcorporate expenses being relatively stable. Net interest income increased $0.7 million to $0.8 million from $0.1million due primarily to increased interest income earned on invested cashproceeds received from the sales of CRC and Transcender, includingrealized gains on the sale of bonds equal to approximately $0.2 million in thefirst quarter of 2004.  Otherexpense decreased $0.5 million primarily resulting from the impact of costsassociated with the early termination of a credit agreement in the firstquarter of 2003.

 

15

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A reconciliationof segment EBITDA to income (loss) from continuing operations before incometaxes follows:

 
|                                                          |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------------------------|--------|-----------------------------------------|--------|
| **(In thousands)**                                            |   | **2004**                                |   | **2003** |   |
|                                                          |   |                                    |   |   |   |
| *Data segment*                                                |   |                                    |   |   |   |
| EBITDA                                                        |   | $                                       | 6,779  |   | $ | 5,551 |   |
| Amortization of capitalized software                          |   | (1                                      | )      | (5 | ) |
| Depreciation and amortization                                 |   | (2,287                                  | )      | (2,086 | ) |
| Interest income, net                                          |   | 42                                      |   | 53 |   |
| Income from continuing operations before income  taxes        |   | $                                       | 4,533  |   | $ | 3,513 |   |
|                                                          |   |                                    |   |   |   |
| *Software segment*                                            |   |                                    |   |   |   |
| EBITDA                                                        |   | $                                       | 2,087  |   | $ | 341 |   |
| Amortization of capitalized software                          |   | (74                                     | )      | (31 | ) |
| Depreciation and amortization                                 |   | (744                                    | )      | (603 | ) |
| Interest income (expense), net                                |   | 5                                       |   | (4 | ) |
| Income (loss) from continuing operations  before income taxes |   | $                                       | 1,274  |   | $ | (297 | ) |
|                                                          |   |                                    |   |   |   |
| *Other*                                                       |   |                                    |   |   |   |
| EBITDA                                                        |   | $                                       | (1,439 | ) | $ | (1,999 | ) |
| Depreciation and amortization                                 |   | (6                                      | )      | (20 | ) |
| Interest income, net                                          |   | 793                                     |   | 83 |   |
| Loss from continuing operations before  income taxes          |   | $                                       | (652   | ) | $ | (1,936 | ) |
|                                                          |   |                                    |   |   |   |
| *Total*                                                       |   |                                    |   |   |   |
| EBITDA                                                        |   | $                                       | 7,427  |   | $ | 3,893 |   |
| Amortization of capitalized software                          |   | (75                                     | )      | (36 | ) |
| Depreciation and amortization                                 |   | (3,037                                  | )      | (2,709 | ) |
| Interest income, net                                          |   | 840                                     |   | 132 |   |
| Income from continuing operations before  income taxes        |   | $                                       | 5,155  |   | $ | 1,280 |   |

 

16

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**Liquidityand Capital Resources**

 

*TranscenderSale*

 

On December 31, 2003, the Company completed the sale of itsTranscender business unit.  The Companyreceived net proceeds of $9.7 million representing cash consideration for theassets sold of $10.3 million including an adjustment made in the first quarterof 2004 based on the closing balance sheet of Transcender in accordance withthe APA less deal related expenses.  TheCompany estimates that approximately $0.3 million in deal related costs will bepaid subsequent to March 31, 2004.

 

In connection with the sale of the assets of Transcender, the Companyentered into an Interim Transition Services Agreement (the TSA) with thepurchaser that required the Company to retain all employees of Transcenderthrough March 31, 2004 and certain employees through May 31, 2004.  The purchaser is reimbursing the Company infull for all employee costs and incidental expenses during the TSA period.  The Company is responsible to pay severancecosts to any employee that is not offered employment or does not acceptemployment with the purchaser.  As ofMarch 31, 2004, the Company has accrued severance and related costs ofapproximately $0.3 million.  The Companyestimates that it will incur nominal additional severance and related costs inthe second quarter of 2004.  Thepurchaser reimbursed the Company in full for all real estate costs throughMarch 31, 2004 and is reimbursing the Company for a portion of real estatecosts from April 1, 2004 through May 31, 2004.  Future rental payments under the Transcender leases approximate$2.7 million. The Company is actively seeking to sublet the Transcender realestate and may generate sublease income in the future to offset a portion ofthe lease commitment.  During the secondquarter of 2004, the Company expects to record a charge in discontinuedoperations related to the remaining lease commitment less estimated subleaseincome.

 

*CRCSale*

 

On April 8, 2003, the Company completed the sale of CRC andreceived net proceeds of approximately $90 million, representing the cashconsideration for the assets sold less deal related expenses and an adjustmentmade based on the closing balance sheet of CRC in accordance with the underlyingPurchase Agreement.  On April 8,2004, the Company received $3.0 million of proceeds previously held in escrowrelated to representations and warranties contained in the Purchase Agreement.  All proceeds previously held in escrow wereclassified as restricted cash as of March 31, 2004.  The Company estimates that approximately$0.4 million in deal related costs will be paid subsequent to March 31,2004.

 

*MicroPatent Patent Sale*

 

Under the terms of a Patent Purchase Agreement dated March 23,2004 (the Patent Agreement), the Company’s MicroPatent unit sold its right,title and interest in certain patents (the Patents) to Rose Blush Software LLC(the Patent Buyer) for cash consideration of $625,000.  Additionally, under the terms of the PatentAgreement, the Company sold all rights to collect royalties under the Patentsto the Patent Buyer.  Closing costsassociated with the transaction totaled approximately $199,000. The Companyrecognized a pre-tax gain on sale of $426,000 during the first quarter of 2004.

 

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The proceeds from the above noted sales, net of income taxes associatedwith the transactions, will be used to finance future acquisitions and forgeneral corporate purposes.  The Companycurrently does not have any agreements with respect to any prospective materialacquisitions.  Pending such uses, theproceeds will be invested in accordance with the Company’s taxable fixed incomeportfolio program (the Investment Program), which the Company entered into inAugust 2003 to increase investment returns on cash not immediately neededin operations.  The Investment Programportfolio consists of U.S. denominated taxable fixed income securities withmaximum effective maturities of three years.

 

# ***CDC Acquisition***

# ** **

On December 1, 2003, the Company acquired the issued share capital(the Shares) of CDC for cash consideration of approximately $26.3 million (CashConsideration), including approximately $3.8 million currently held in escrowfor estimated guaranteed earnouts as defined and calculated in accordance withthe underlying Share Purchase Agreement (SPA). The Company expects to pay additional closing costs associated with thetransaction of approximately $0.4 million subsequent to March 31, 2004.

 

Under the terms of the SPA, the sellers are entitled to potentialfuture consideration dependent on future operating results.  In addition to guaranteed futureconsideration of approximately $3.8 million, which has been paid into escrow,the Company has a liability based on revenues of the acquired business for theyear ended December 31, 2003 (the Further Consideration) and a potentialliability based on the combined future operating results of Liquent and CDC forthe three year period ending December 31, 2006 (the EarnoutConsideration).  The specific provisionsof each contingency are detailed in Note C - *Acquisitions*.  As of March 31, 2004, the Company hasaccrued for additional Further Consideration costs of approximately $1,200,000,which is expected to be paid during the second quarter of 2004.  The Company currently believes that theEarnout Consideration could reasonably range from $6 million to $10million.  Amounts due for EarnoutConsideration, if any, will be paid during the second quarter of 2007 unlessthe provisions related to a change in control as outlined in Note C – *Acquisitions* come into effect.

 

All payments associated with the transaction are expected to be paidwith cash flow generated by the working capital of the Company.

 

*QuarterEnded March 31, 2004 Cash Flows*

 

Cash and cash equivalents, including short-term investments, totaled$60.0 million at March 31, 2004 compared to $52.0 million atDecember 31, 2003.  InMarch 2004, the Company received a federal income tax refund ofapproximately $10.8 million, which is included in cash and cashequivalents.  On April 8, 2004 theCompany received $3.0 million for amounts previously held in escrow related tothe sale of CRC.  The funds weredeposited into the Company’s Investment Program.  At March 31, 2004, the Company’s Investment Program alsoincluded $88.8 million of long-term investments, comprised of U.S. governmentnotes, collateralized mortgage obligations, and corporate notes and bonds.  Maturities of the Company’s long-terminvestments range from one to three years. Excluding cash, cash equivalents and short-term investments, theCompany’s continuing operations had working capital deficits at March 31,2004 and at December 31, 2003.  TheCompany receives patent annuity payments and subscription payments in advanceand, therefore, the Company’s existing operations are expected to maintain verylow or negative working capital balances, excluding cash, cash equivalents andshort-term investments.  Included incurrent liabilities at March 31, 2004, are obligations related to patentannuity payments of approximately $31.5 million and deferred revenue ofapproximately $26.9 million.  TheCompany’s cash position remains strong with currently over $150 million incash, cash equivalents and investments, and no debt.  These funds will be used for general corporate purposes and tofinance future acquisitions.  TheCompany currently does not have any agreements, arrangements or understandings

 

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with respect to any prospective material acquisitions.  Pending such uses, the Company will continueto manage the funds in accordance with IHI’s Investment Program.

 

Cash generated from operating activities of continuing operations was$15.5 million for the quarter ended March 31, 2004, derived from income of$3.3 million plus non-cash charges of $3.2 million and a decrease in netoperating assets of $9.0 million during the period.  The decrease in net operating assets relates primarily to adecrease in income taxes receivable. During March 2004 the Company received a federal income tax refundof approximately $10.8 million. Estimated income tax payments made during 2003 were refunded to theCompany in 2004 as a result of tax losses realized from the sale of Transcenderin December 2003.  The decrease inincome tax receivable was partially offset by an increase in accountsreceivable.  The most significantreceivables increase was at Liquent, due to the timing of maintenance renewalsand first quarter 2004 license sales. In addition, accrued expenses decreased at Liquent based on the paymentof integration and deal related costs associated with the acquisition of CDC, abusiness acquired in December 2003.

 

Cash used in investing activities from continuing operations was $2.1million for the three months ended March 31, 2004 due primarily to anincrease in investment purchases, net of sales and maturities, of $1.0 millionand additional transaction costs of $0.5 million paid in the first quarter of2004 related to the dispositions of CRC and Transcender.  These uses of cash were partially offset bynet proceeds received by the Company of $0.5 million resulting from the PatentSale and $0.3 million of additional proceeds received on the sale ofTranscender as a result of a post-closing adjustment.  Capital expenditures, including capitalized software costs,approximated $1.4 million in the period. Excluding acquisitions of businesses, the Company’s existing operationsare not capital intensive.

 

Cash provided by financing activities from continuing operations was$0.2 million for the three months ended March 31, 2004, primarily theresult of net cash proceeds received from the issuance of common stock fromstock option exercises.

 

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

 

The Companybelieves that available cash and cash equivalents, together with fundsgenerated from operations and amounts included in its Investment Program willbe sufficient to fund the cash requirements of its existing operations for theforeseeable future including all contractual obligations as they becomedue.  The Company currently has nocommitments for material capital expenditures or agreements with respect to anyprospective 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.  Noassurance can be given as to the Company’s future acquisition or expansion opportunitiesand how such opportunities will be financed.

 

**Seasonality and Quarterly Results**

 

The Company doesnot believe its businesses have significant seasonality.  However, quarterly results may be affectedby the timing of acquisitions, new product launches and the timing of licensesales.  Accordingly, results for anyquarter are not necessarily indicative of the results that may be achieved forthe full year.

 

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# **Item 3**.           *Quantitative andQualitative Disclosure About Market Risk*

# ** **

*Interest Rate Risk* - The primary objective of the Company’sinvestment activities is to preserve the principal while at the same timemaximizing yields without significantly increasing the risk.  To achieve this objective, the Companymaintains its portfolio of cash equivalents and investments in a variety ofsecurities, including U.S. government notes, collateralized mortgageobligations, and corporate notes and bonds. As of March 31, 2004, approximately 7% of the Company’s portfoliomatures in one year or less, with the remainder maturing in less than threeyears.   The Company does not usederivative financial instruments in its investment portfolio.  Investments are placed with high creditquality issuers and, by policy, the Company limits the amount of creditexposure to any one issuer.  The Companydoes not hold securities for trading purposes.

 

At anytime, a sharp rise in interest rates could have a material adverse impact onthe fair value of the Company’s investment portfolio.  Conversely, declines in interest rates could have a materialfavorable impact on interest earnings from the Company’s investmentportfolio.  The Company does not currentlyhedge interest rate exposures.

 

*Foreign Currency Exchange Rate Risk*-**The financial statements of the Company’sforeign subsidiaries are translated from the local currency into U.S.dollars.  Assets and liabilities aretranslated using exchange rates in effect at the balance sheet date, exceptcertain accounts of subsidiaries whose functional currency is the U.S. dollar,and translation adjustments are accumulated in a separate component ofstockholders’ equity.  Revenue andexpenses are translated at average monthly exchange rates, and translationadjustments are charged and credited to income.  As such, theCompany’s operating results are affected by fluctuations in the value of theU.S. dollar compared to the British pound and the Euro.  During the quarters ended March 31, 2004 and2003, the Company’s operating results include foreign exchange losses of$91,000 and $77,000, respectively.

 

A subsidiary of the Company routinely enters into forward contracts toacquire various international currencies in an effort to hedge foreign currencytransaction exposures of its operations. Such forward contracts have been designated as hedges for future annualpatent payments to related international regulatory agencies.  At March 31, 2004, the subsidiary ofthe Company had entered into forward contracts to acquire various internationalcurrencies, all having maturities of less than seven months, aggregatingapproximately $29,147,000.  Realizedgains and losses relating to the forward contracts were immaterial for thequarters ended March 31, 2004 and 2003.

 

The Company has only limited involvement with derivative financialinstruments and does not use them for trading purposes.

 

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

# ** **

As ofMarch 31, 2004, an evaluation was performed under the supervision and withthe participation of the Company’s management, including the Chief ExecutiveOfficer (CEO) and Chief Financial Officer (CFO), of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedurespursuant to Rules 13a-14(e) and 15d-14(e) under the Securities Exchange Act of1934, as amended.  Based on thatevaluation, the Company’s management, including the CEO and CFO, concluded thatthe Company’s current disclosure controls and procedures were effective as ofMarch 31, 2004.  There have been nosignificant changes in the Company’s internal controls over financial reportingduring the most recent quarter that have materially affected, or are reasonablylikely to materially affect, the Company’s internal controls over financialreporting.

 

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**PARTII. OTHER INFORMATION**

** **

**Item 1.****          *****Legal Proceedings***

 

On April 21, 2004 The Supreme Court of the State of New Yorkdismissed a complaint brought by Venturetek, L.P. Richard Elkin, Antoine Bernheim,Stacy Bernheim and Genstar, Ltd., derivately as shareholders of Rand PublishingCo., Inc., and individually, on their own behalf against the Company.  SeeNote H – *Subsequent Event*.

 

In addition, from time to time the Company is a party to other legaland administrative proceedings, claims, and litigation arising in the ordinarycourse of its business. While the outcome of these matters is currently notdeterminable, management does not expect that the ultimate costs to resolvethese matters either singularly or in aggregate will have a material adverseeffect on the Company’s consolidated financial position, results of operationsor cash flows.

 

**Item 6.****                *Exhibitsand Reports on Form 8-K***

 

(a)                                  Exhibits

 
| **Exhibit****No.** |   | **Description**                                                                                                                                                                           |   |
|--------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|               |   |                                                                                                                                                                                      |   |
| 31.1               |   | Certification of  Principal Executive Officer pursuant to Rule 13a-14 of the Securities  Exchange Act of 1934, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |   |
|               |   |                                                                                                                                                                                      |   |
| 31.2               |   | Certification of  Principal Financial Officer pursuant to Rule 13a-14 of the Securities  Exchange Act of 1934, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |   |
|               |   |                                                                                                                                                                                      |   |
| 32.1               |   | Certification of  Principal Executive Officer pursuant to Rule 13a-14(b) and 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002     |   |
|               |   |                                                                                                                                                                                      |   |
| 32.2               |   | Certification of  Principal Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002     |   |

 

(b)                                      Reports on Form8-K

 

On February 27, 2004, the Company furnished a Current Report onForm 8-K announcing the preliminary financial results of the Company for thethree and twelve month periods ended December 31, 2003.  In accordance with Item 12 of Form 8-K, theForm 8-K and the press release attached as an exhibit thereto were furnishedand not “filed” with the SEC.

 

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**SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, asamended, the Registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 
|   |         | INFORMATION HOLDINGS INC. |
|--------|--------------|---------------------------|
|   |         |                      |   |
|   |         |                      |   |
| Date:  | May 10, 2004 | By:                       |  /s/ Vincent A. Chippari |   |
|   |         |                      | Vincent A. Chippari |
|   |         |                      | Executive Vice President and Chief Financial Officer |
|   |         |                      |   |
|   |         |                      | Signing on behalf of the registrant and  as principal financial and accounting officer |
|        |              |                           |  |  |  |

 

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