**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

----

** **

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly periodended:    June 30, 2003**

** **

**Commission FileNumber:    1-14371**

 

| **INFORMATION  HOLDINGS INC.**                             |
|------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)     |
|                                                       |   |   |
| **DELAWARE**                                               |   | **06-1518007** |
| (State of incorporation)                                   |   | (IRS Employer Identification Number) |
|                                                       |   |   |
| **2777 Summer Street, Suite 209  Stamford, Connecticut**   |   | **06905** |
| **(Address of principal executive  offices)**              |   | **(Zip Code)** |
|                                                       |   |   |
| **(203) 961-9106**                                         |
| (Registrant’s telephone number, including  area code) |

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.     o Yes ý No

 

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

ý Yes o No

 

As of August 14, 2003, there were20,872,237 shares of the Company’s common stock, par value $0.01 per shareoutstanding.

 

 

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INFORMATION HOLDINGS INC.

 

INDEX

 
| PART I.   | FINANCIAL INFORMATION                                                                                                                              |
|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|      |                                                                                                                                               |
| Item 1.   | Financial Statements:                                                                                                                              |
|      |                                                                                                                                               |
|      | Consolidated Balance Sheets  As of June 30, 2003 (Unaudited) and December 31, 2002                                                                 |
|      |                                                                                                                                               |
|      | Consolidated Statements of Operations  (Unaudited) for the  Three Months Ended June 30, 2003 and 2002 and  Six Months Ended June 30, 2003 and 2002 |
|      |                                                                                                                                               |
|      | Consolidated Statements of Cash Flows  (Unaudited) for the  Six Months Ended June 30, 2003 and 2002                                                |
|      |                                                                                                                                               |
|      | 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 2.   | Changes in Securities and Use of Proceeds                                                                                                          |
|      |                                                                                                                                               |
| Item 4.   | Submission of Matters to a Vote of Security Holders                                                                                                |
|      |                                                                                                                                               |
| Item 5.   | Other Events                                                                                                                                       |
|      |                                                                                                                                               |
| Item 6.   | Exhibits  and Reports on Form 8-K                                                                                                                  |
|      |                                                                                                                                               |
|      | Signature                                                                                                                                          |

 

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**INFORMATIONHOLDINGS INC.**

###### *CONSOLIDATED BALANCE SHEETS*

*(In thousands, except share data)*

 
|                                                                                                                                                                             |   | **June 30,  2003** |    | **December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
|                                                                                                                                                                             |   | **(Unaudited)**    |    |                   |   |
| ***ASSETS***                                                                                                                                                                     |   |               |    |                   |   |
|                                                                                                                                                                             |   |               |    |                   |   |
| *CURRENT ASSETS:*                                                                                                                                                                |   |               |    |                   |   |
| Cash and equivalents                                                                                                                                                             |   | $                  | 109,836 |                   | $      | 53,910 |   |
| Short-term investments                                                                                                                                                           |   | 36,698             |    | 13,056                 |   |
| Restricted cash                                                                                                                                                                  |   | 3,000              |    | —                 |   |
| Accounts receivable *(net of allowance for doubtful accounts and  sales returns of $585 and $503, respectively)*                                                                 |   | 26,024             |    | 29,375                 |   |
| Prepaid expenses and other current assets                                                                                                                                        |   | 2,796              |    | 3,940                  |   |
| Deferred income taxes                                                                                                                                                            |   | 4,067              |    | 4,589                  |   |
| Total assets of discontinued operations                                                                                                                                          |   | —             |    | 59,653                 |   |
| Total  current assets                                                                                                                                                            |   | 182,421            |    | 164,523                |   |
| Investments                                                                                                                                                                      |   | 6,742              |    | —                 |   |
| Property and equipment, net                                                                                                                                                      |   | 4,831              |    | 5,837                  |   |
| Identified intangible assets, net                                                                                                                                                |   | 68,311             |    | 72,309                 |   |
| Goodwill                                                                                                                                                                         |   | 83,140             |    | 83,099                 |   |
| Other assets                                                                                                                                                                     |   | 3,254              |    | 3,233                  |   |
|                                                                                                                                                                             |   |               |    |                   |   |
| TOTAL                                                                                                                                                                            |   | $                  | 348,699 |                   | $      | 329,001 |   |
|                                                                                                                                                                             |   |               |    |                   |   |
| ***LIABILITIES  AND STOCKHOLDERS’ EQUITY***                                                                                                                                 |   |               |    |                   |   |
|                                                                                                                                                                             |   |               |    |                   |   |
| *CURRENT LIABILITIES:*                                                                                                                                                           |   |               |    |                   |   |
| Accounts payable                                                                                                                                                                 |   | $                  | 27,046  |                   | $      | 26,224 |   |
| Accrued expenses                                                                                                                                                                 |   | 12,444             |    | 11,098                 |   |
| Accrued income taxes                                                                                                                                                             |   | 16,493             |    | 2,794                  |   |
| Deferred subscription revenue                                                                                                                                                    |   | 20,262             |    | 21,129                 |   |
| Total liabilities of discontinued  operations                                                                                                                                    |   | —             |    | 17,891                 |   |
| Total  current liabilities                                                                                                                                                       |   | 76,245             |    | 79,136                 |   |
|                                                                                                                                                                             |   |               |    |                   |   |
| Other long-term liabilities                                                                                                                                                      |   | 12                 |    | 125                    |   |
| Total liabilities                                                                                                                                                                |   | 76,257             |    | 79,261                 |   |
|                                                                                                                                                                             |   |               |    |                   |   |
| *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 21,869,130 and 21,815,677  shares, respectively; outstanding 20,861,930 and 21,433,777 shares,  respectively |   | 219                |    | 218                    |   |
| Additional paid-in capital                                                                                                                                                       |   | 247,766            |    | 247,026                |   |
| Retained  earnings                                                                                                                                                               |   | 38,963             |    | 7,097                  |   |
| Treasury stock, at cost, 1,007,200 and  381,900 shares, respectively                                                                                                             |   | (14,723            | )       | (5,227                 | )      |
| Accumulated other comprehensive income                                                                                                                                           |   | 217                |    | 626                    |   |
| Total stockholders’ equity                                                                                                                                                  |   | 272,442            |    | 249,740                |   |
|                                                                                                                                                                             |   |               |    |                   |   |
| TOTAL                                                                                                                                                                            |   | $                  | 348,699 |                   | $      | 329,001 |   |

 

*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  June 30,** |   | **Six Months Ended  June 30,** |   |
|-----------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                      |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| Revenues                                                  |   | $                                | 21,926 |                           | $      | 22,781 |   | $ | 44,134 |   | $ | 45,013 |   |
| Cost of sales                                             |   | 6,562                            |   | 6,111                          |   | 13,123 |   | 11,767 |   |
| Gross profit                                              |   | 15,364                           |   | 16,670                         |   | 31,011 |   | 33,246 |   |
| Operating expenses:                                       |   |                             |   |                           |   |   |   |   |   |
| Selling, general and administrative                       |   | 10,945                           |   | 10,246                         |   | 21,605 |   | 20,189 |   |
| Depreciation and amortization                             |   | 3,023                            |   | 3,603                          |   | 6,115 |   | 7,049 |   |
| Total operating expenses                                  |   | 13,968                           |   | 13,849                         |   | 27,720 |   | 27,238 |   |
| Income from operations                                    |   | 1,396                            |   | 2,821                          |   | 3,291 |   | 6,008 |   |
| Other income (expense):                                   |   |                             |   |                           |   |   |   |   |   |
| Interest income                                           |   | 679                              |   | 262                            |   | 867 |   | 518 |   |
| Interest expense                                          |   | (3                               | )      | (89                            | )      | (59 | ) | (177 | ) |
| Early termination of credit agreement                     |   | —                           |   | —                         |   | (575 | ) | — |   |
| Other expense                                             |   | —                           |   | (3                             | )      | — |   | (3 | ) |
| Income from continuing operations before  income taxes    |   | 2,072                            |   | 2,991                          |   | 3,524 |   | 6,346 |   |
| Provision for income taxes                                |   | 779                              |   | 1,120                          |   | 1,241 |   | 2,320 |   |
| Net income from continuing operations                     |   | 1,293                            |   | 1,871                          |   | 2,283 |   | 4,026 |   |
| Income from discontinued operations, net of  income taxes |   | 29,479                           |   | 1,197                          |   | 29,583 |   | 1,856 |   |
| Net income                                                |   | $                                | 30,772 |                           | $      | 3,068 |   | $ | 31,866 |   | $ | 5,882 |   |
| Net income per basic common share:                        |   |                             |   |                           |   |   |   |   |   |
| Continuing operations                                     |   | $                                | 0.06   |                           | $      | 0.09 |   | $ | 0.11 |   | $ | 0.18 |   |
| Discontinued operations                                   |   | 1.39                             |   | 0.05                           |   | 1.39 |   | 0.09 |   |
| Net income                                                |   | $                                | 1.45   |                           | $      | 0.14 |   | $ | 1.50 |   | $ | 0.27 |   |
| Net income per diluted common share:                      |   |                             |   |                           |   |   |   |   |   |
| Continuing operations                                     |   | $                                | 0.06   |                           | $      | 0.09 |   | $ | 0.11 |   | $ | 0.18 |   |
| Discontinued operations                                   |   | 1.39                             |   | 0.05                           |   | 1.39 |   | 0.08 |   |
| Net income                                                |   | $                                | 1.45   |                           | $      | 0.14 |   | $ | 1.49 |   | $ | 0.27 |   |

 

*See notes to unaudited consolidated financial statements.*

 

2

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**INFORMATIONHOLDINGS INC.**

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

(Unaudited)

*(In thousands)*

 
|                                                                               |   | **Six Months Ended  June 30,** |    |
|------------------------------------------------------------------------------------|--------|--------------------------------|---------|
|                                                                               |   | **2003**                       |    | **2002** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |   |                           |    |   |   |
| Net income                                                                         |   | $                              | 31,866  |   | $ | 5,882 |   |
| Gain on sale of assets of discontinued  operations                                 |   | (30,332                        | )       | — |   |
| Loss (income) from discontinued operations                                         |   | 749                            |    | (1,856 | ) |
| Net income from continuing operations                                              |   | 2,283                          |    | 4,026 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                           |    |   |   |
| Depreciation                                                                       |   | 2,116                          |    | 2,292 |   |
| Amortization of other intangible assets                                            |   | 3,999                          |    | 4,757 |   |
| Change in non-current deferred income tax  liabilities                             |   | (773                           | )       | (774 | ) |
| Termination of credit facility                                                     |   | 494                            |    | — |   |
| Other                                                                              |   | 174                            |    | 87 |   |
| Changes in operating assets and  liabilities, net of effect of acquisitions:       |   |                           |    |   |   |
| Decrease (increase) in accounts receivable,  net                                   |   | 3,351                          |    | (108 | ) |
| Decrease in prepaid and other current  assets                                      |   | 1,458                          |    | 1,551 |   |
| Decrease in accounts payable and accrued  expenses                                 |   | (1,431                         | )       | (6,285 | ) |
| Income tax benefit from stock options  exercised                                   |   | 99                             |    | 321 |   |
| Net change in income taxes (receivable)  payable                                   |   | (2,427                         | )       | 2,490 |   |
| (Decrease) increase in deferred revenue                                            |   | (867                           | )       | 1,124 |   |
| Net change in other assets and liabilities                                         |   | (527                           | )       | (351 | ) |
| Net Cash Provided by Continuing Operations                                         |   | 7,949                          |    | 9,130 |   |
| Net Cash Provided by Discontinued  Operations                                      |   | 907                            |    | 4,518 |   |
| Net Cash Provided by Operating Activities                                          |   | 8,856                          |    | 13,648 |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |   |                           |    |   |   |
| Net proceeds from sale of discontinued  operations                                 |   | 91,969                         |    | — |   |
| Acquisitions of businesses                                                         |   | —                         |    | (14,043 | ) |
| Purchases of property and equipment                                                |   | (886                           | )       | (1,407 | ) |
| (Purchase) sales of short-term investments                                         |   | (23,642                        | )       | 3,207 |   |
| Purchase of other investments held to  maturity                                    |   | (6,742                         | )       | — |   |
| Amounts deposited in escrow fund                                                   |   | (3,000                         | )       | — |   |
| Capitalized software development cost                                              |   | (493                           | )       | (353 | ) |
| Capitalized internal-use software                                                  |   | (304                           | )       | (119 | ) |
| Proceeds from disposal of property and  equipment                                  |   | —                         |    | 33 |   |
| Net Cash Provided by (Used in) Continuing  Operations                              |   | 56,902                         |    | (12,682 | ) |
| Net Cash Used in Discontinued Operations                                           |   | (801                           | )       | (2,299 | ) |
| Net Cash Provided by (Used in) Investing  Activities                               |   | 56,101                         |    | (14,981 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |   |                           |    |   |   |
| Common stock issued from stock options  exercised                                  |   | 642                            |    | 758 |   |
| Purchase of treasury stock                                                         |   | (9,496                         | )       | — |   |
| Principal payments on capital leases                                               |   | (71                            | )       | (66 | ) |
| Net Cash (Used in) Provided by Continuing  Operations                              |   | (8,925                         | )       | 692 |   |
| Net Cash Used in Discontinued Operations                                           |   | (106                           | )       | (174 | ) |
| Net Cash (Used in) Provided by Financing  Activities                               |   | (9,031                         | )       | 518 |   |
| NET INCREASE (DECREASE) IN CASH AND  EQUIVALENTS                                   |   | 55,926                         |    | (815 | ) |
| CASH AND EQUIVALENTS AT BEGINNING OF PERIOD                                        |   | 53,910                         |    | 38,612 |   |
| CASH AND EQUIVALENTS AT END OF PERIOD                                              |   | $                              | 109,836 |   | $ | 37,797 |   |

 

*See notes to unaudited consolidated financial statements.*

 

3

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**INFORMATION HOLDINGSINC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

# **A.**                                    BASIS OF PRESENTATION

 

The consolidated balance sheet ofInformation Holdings Inc. (IHI, or the Company) at December 31, 2002 has beenderived from IHI’s Annual Report on Form 10-K for the year then ended asadjusted to reflect the disposition of CRC (as defined in Note C).  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, 2002 and the notes thereto contained in IHI’sAnnual Report on Form 10-K.

 

The accompanying unauditedconsolidated financial statements have been prepared in accordance with theinstructions to Form 10-Q and Article 10 of Regulation S-X, and do not includeall information and footnotes required by accounting principles generallyaccepted in the United States for complete financial statements.  However, in the opinion of management, theaccompanying unaudited consolidated financial statements contain alladjustments, consisting of normal recurring adjustments, necessary to presentfairly the consolidated financial position of IHI as of June 30, 2003, and theconsolidated results of operations and cash flows for the periods presentedherein.  Operating results for the threeand six months ended June 30, 2003 are not necessarily indicative of theresults that may be expected for the year ended December 31, 2003.

 

On April 8, 2003, the Company soldsubstantially all of the assets and liabilities of its wholly owned subsidiaryCRC (See Note C - *Discontinued Operations*).  Accordingly, for financial statementpurposes, the assets, liabilities, results of operations and cash flows of thiscomponent have been segregated from those of continuing operations and arepresented in the Company’s financial statements as discontinued operations forall periods presented herein.

 

Certain reclassifications have been made to the financial statements ofthe prior period to conform to the June 30, 2003 presentation.

 

**B**.                                    **INVESTMENTS**

 

Investments consist of debtsecurities acquired with cash not immediately needed in operations.  Such amounts have original maturitiesexceeding one year and are stated at market value, which approximates amortizedcost.  As of June 30, 2003, investmentsconsisted of corporate bonds with a market value of $6,742,000 and maturitiesof between 12 and 18 months.  Unrealizedgains and losses on investments are immaterial for the three and six monthsended June 30, 2003.

** **

**C.**                                 DISCONTINUED OPERATIONS

 

On February 27, 2003, the Company entered into a definitive purchase agreement(the Purchase Agreement) to sell substantially all of the assets and certainliabilities of its wholly owned subsidiaries CRC Press LLC (CRC Press), CRCPress (U.K.) LLC and Parthenon Publishing Group, Inc. (together, CRC), to CRCPress I LLC and Routledge No. 2 Limited, both wholly owned subsidiaries ofTaylor & Francis Group plc (together, the Buyer).

 

4

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CRC comprised the entirety of the Company’s scientific and technologyinformation (STI) segment.  Subsequentto the date of sale, the Company will no longer have operations in the STIsegment.  In accordance with SFAS 144 – *Accounting for the Impairment or Disposal ofLong-Lived Assets*(SFAS 144), all assets, liabilities, results ofoperations and cash flows of this component have been segregated from those ofcontinuing operations and are presented in the Company’s June 30, 2003financial statements as discontinued operations.  Additionally, the Company’s financial statements have beenreclassified to reflect the STI segment as a discontinued operation for allperiods presented (See Note G - *SegmentInformation*).

 

The transaction was completed onApril 8, 2003.  During the secondquarter the Company received net proceeds of approximately $92 million,representing the cash consideration for the assets sold less deal relatedexpenses paid through June 30, 2003. The sale price remains subject to a post-closing adjustment based on theclosing date balance sheet of CRC. Approximately $3 million of the proceeds is being held in escrow relatedto representations and warranties contained in the Purchase Agreement.  These proceeds will become available to theCompany in April 2004 unless the Buyer asserts claims under the PurchaseAgreement prior to then.  All proceedsheld in escrow will remain classified as Restricted cash on the ConsolidatedBalance Sheet until made available to the Company.

 

The Company recognized a gain of$30.3 million, net of income taxes associated with the transaction of $15.9million, all of which was recorded as part of discontinued operations duringthe second quarter of 2003.

 

Summary operating results for thediscontinued STI operations follow:

 
|                                                       |   | **Three Months Ended  June 30,  (Unaudited)** |       | **Six Months Ended  June 30,**** (Unaudited)** |       |
|------------------------------------------------------------|--------|-----------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                                         |   | *** 2003**                                    | ** ** | **2002**                                            | ** ** | *** 2003** | ** ** | **2002** | ** ** |
|                                                       |   |                                          |       |                                                |       |   |   |   |   |
| Revenues                                                   |   | $                                             | 171        |                                                | $          | 12,864 |   | $ | 10,976 |   | $ | 23,920 |   |
|                                                       |   |                                          |       |                                                |       |   |   |   |   |
| Pre-tax  (loss) income from discontinued operations        |   | (1,333                                        | )          | 1,821                                               |       | (1,126 | ) | 2,853 |   |
| Benefit  from (provision for) income taxes                 |   | 480                                           |       | (624                                                | )          | 377 |   | (997 | ) |
| Net  (loss) income from discontinued operations            |   | (853                                          | )          | 1,197                                               |       | (749 | ) | 1,856 |   |
| Gain  on disposal of discontinued operations, net of taxes |   | 30,332                                        |       | —                                              |       | 30,332 |   | — |   |
| Income  from discontinued operations                       |   | $                                             | 29,479     |                                                | $          | 1,197 |   | $ | 29,583 |   | $ | 1,856 |   |

 

----

* Reflects results throughdisposal on April 8, 2003.

 

5

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Summarizedunaudited balance sheet information for the discontinued STI operations asincluded within the accompanying Consolidated Balance Sheet at December 31,2002 consists of the following:

 

| **(In thousands)**                            |   |   |   |
|-----------------------------------------------|--------|--------|--------|
|                                          |   |   |   |
| Assets:                                       |   |   |   |
| Current assets                                |   | $      | 21,348 |   |
| Property and equipment, net                   |   | 2,109  |   |
| Identified intangible assets, net             |   | 28,130 |   |
| Goodwill, net                                 |   | 5,868  |   |
| Other long-term assets                        |   | 2,198  |   |
| Total assets of discontinued operations       |   | $      | 59,653 |   |
|                                          |   |   |   |
| Liabilities:                                  |   |   |   |
| Current liabilities                           |   | $      | 14,529 |   |
| Long-term liabilities                         |   | 3,362  |   |
| Total liabilities of discontinued  operations |   | $      | 17,891 |   |

 

6

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

 

The Company grants stock optionsfor a fixed number of shares to employees with an exercise price equal to thefair value of the shares at the date of grant. The Company accounts for its stock option grants under the provisions ofAccounting Principles Board (APB) Opinion No. 25 - *Accounting for Stock Issued to Employees,*which utilizes theintrinsic value method.  Since stockoptions are granted by the Company with exercise prices equal to the marketprice of the underlying stock at the date of grant, no compensation expense hasbeen recognized.

 

Had compensation cost for theCompany’s stock option plan been determined based on the fair value of theoptions at the dates of grant consistent with the requirements of SFAS No. 123- *Accounting for Stock-Based Compensation*,the Company’s net income and earnings per share would have been reduced to thepro forma amounts indicated below:

 
|                                                                                                                             |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **(In thousands, except per share data):**                                                                                       |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                                                                                                             |   |                             |   |                           |   |   |   |   |   |
| Net income as reported                                                                                                           |   | $                                | 30,772 |                           | $      | 3,068 |   | $ | 31,866 |   | $ | 5,882 |   |
| Deduct: Total stock-based employee expense  determined under fair value based method for all awards, net of related tax  effects |   | (969                             | )      | (956                           | )      | (1,924 | ) | (1,775 | ) |
| Pro forma                                                                                                                        |   | $                                | 29,803 |                           | $      | 2,112 |   | $ | 29,942 |   | $ | 4,107 |   |
|                                                                                                                             |   |                             |   |                           |   |   |   |   |   |
| Basic earnings per common share:                                                                                                 |   |                             |   |                           |   |   |   |   |   |
| As reported                                                                                                                      |   | $                                | 1.45   |                           | $      | 0.14 |   | $ | 1.50 |   | $ | 0.27 |   |
| Pro forma                                                                                                                        |   | $                                | 1.41   |                           | $      | 0.10 |   | $ | 1.41 |   | $ | 0.19 |   |
|                                                                                                                             |   |                             |   |                           |   |   |   |   |   |
| Diluted earnings per common share:                                                                                               |   |                             |   |                           |   |   |   |   |   |
| As reported                                                                                                                      |   | $                                | 1.45   |                           | $      | 0.14 |   | $ | 1.49 |   | $ | 0.27 |   |
| Pro forma                                                                                                                        |   | $                                | 1.41   |                           | $      | 0.10 |   | $ | 1.40 |   | $ | 0.19 |   |

### *** ***

The effects on pro forma net incomeand earnings per share of expensing the estimated fair value of stock optionsare not necessarily representative of the effects on reported net income forfuture years due to such factors as the vesting period of the stock options andthe potential for issuance of additional stock options in future years.

 

7

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**E.****                                      EARNINGSPER SHARE DATA**

 

The following table sets forth the computation of basic and dilutedearnings per common share for the periods indicated:

 
|                                                                            |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|---------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **(In thousands, except per share data)**                                       |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                                                            |   |                             |   |                           |   |   |   |   |   |
| Net  income:                                                                    |   |                             |   |                           |   |   |   |   |   |
| Continuing  operations                                                          |   | $                                | 1,293  |                           | $      | 1,871 |   | $ | 2,283 |   | $ | 4,026 |   |
| Discontinued  operations                                                        |   | 29,479                           |   | 1,197                          |   | 29,583 |   | 1,856 |   |
| Total                                                                           |   | $                                | 30,772 |                           | $      | 3,068 |   | $ | 31,866 |   | $ | 5,882 |   |
|                                                                            |   |                             |   |                           |   |   |   |   |   |
| Weighted  average common shares outstanding:                                    |   |                             |   |                           |   |   |   |   |   |
| Basic                                                                           |   | 21,167                           |   | 21,807                         |   | 21,302 |   | 21,784 |   |
| Net  effect of dilutive stock options – based on the treasury stock method |   | 31                               |   | 197                            |   | 28 |   | 186 |   |
| Diluted                                                                         |   | 21,198                           |   | 22,004                         |   | 21,330 |   | 21,970 |   |
|                                                                            |   |                             |   |                           |   |   |   |   |   |
| Earnings  per basic common share:                                               |   |                             |   |                           |   |   |   |   |   |
| Income  from continuing operations                                              |   | $                                | 0.06   |                           | $      | 0.09 |   | $ | 0.11 |   | $ | 0.18 |   |
| Income  from discontinued operations                                            |   | 1.39                             |   | 0.05                           |   | 1.39 |   | 0.09 |   |
| Basic  earnings per share                                                       |   | $                                | 1.45   |                           | $      | 0.14 |   | $ | 1.50 |   | $ | 0.27 |   |
|                                                                            |   |                             |   |                           |   |   |   |   |   |
| Earnings  per diluted common share:                                             |   |                             |   |                           |   |   |   |   |   |
| Income  from continuing operations                                              |   | $                                | 0.06   |                           | $      | 0.09 |   | $ | 0.11 |   | $ | 0.18 |   |
| Income  from discontinued operations                                            |   | 1.39                             |   | 0.05                           |   | 1.39 |   | 0.08 |   |
| Diluted  earnings per share                                                     |   | $                                | 1.45   |                           | $      | 0.14 |   | $ | 1.49 |   | $ | 0.27 |   |

 

During the first half of 2003,employees exercised stock options to acquire 53,453 shares at an exercise priceof $12.00 per share.  For the three andsix months ended June 30, 2003, 998,239 and 1,011,239 stock options, respectively,were excluded from the computation of diluted earnings per common share due totheir antidilutive effect.  For thethree and six months ended June 30, 2002, 372,248 and 462,773 stock options,respectively, were excluded from the computation of diluted earnings per commonshare due to their antidilutive effect.

 

8

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**F.**                                      ACQUISITIONS

 

On May 9,2002, the Company acquired substantially all of the assets of Aurigin Systems,Inc. (Aurigin) for cash consideration of approximately $14,043,000 includingthe assumption of certain liabilities. Aurigin provides intellectual property management systems used primarilyby corporations to search, analyze, annotate and group patent information, aswell as proprietary corporate data.  Thepurchase price was allocated to net tangible liabilities of $1,553,000, identified intangible assets of $1,600,000 and tax-deductible goodwill of $13,996,000.  The Company has obtained an independentappraisal of the fair value of the identified intangible assets and theirremaining useful lives (six years).

 

The Aurigin acquisition has beenaccounted for using the purchase method of accounting and, accordingly, theresults of its operations have been included in the Company’s results ofoperations from its date of acquisition.

 

The following unaudited pro formainformation presents the results of continuing operations of the Company, as ifthe 2002 acquisition of Aurigin had taken place as of January 1, 2002:

 
|                                      |   | **Three Months  Ended  June 30,** |       | **Six Months  Ended  June 30,** |       |
|-------------------------------------------|--------|-----------------------------------|------------|---------------------------------|------------|
| **(In thousands, except per share data)** |   | **2002**                          | ** ** | **2002**                        | ** ** |
|                                      |   |                              |       |                            |       |
| Revenues                                  |   | $                                 | 23,335     |                            | $          | 47,093 |   |
| Net  income                               |   | $                                 | 2,980      |                            | $          | 5,739 |   |
| Basic  earnings per common share          |   | $                                 | 0.14       |                            | $          | 0.26 |   |
| Diluted  earnings per common share        |   | $                                 | 0.14       |                            | $          | 0.26 |   |

 

These pro forma results ofoperations have been prepared for comparative purposes only and do not purportto be indicative of the operating results that would have occurred had theacquisitions been consummated as of the above date, nor are they necessarilyindicative of future operating results.

 

9

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**G.****                                   ****SEGMENT INFORMATION**

 

As of June 30, 2003, the Company has two reportable segmentscontributing to its results from continuing operations: intellectual property(IP) and information technology learning (ITL).  The intellectual property segment, which includes MicroPatent,Master Data Center and Liquent, provides a broad array of databases,information products and complementary services for intellectual property andregulatory professionals.  Theinformation technology learning segment is Transcender, which is a leadingonline provider of IT certification test preparation products.

 

As ofDecember 31, 2002, the date of the Company’s most recently filed Annual Reporton Form 10-K, the Company had included a third segment: scientific andtechnology information (STI), comprised solely of its wholly owned subsidiaryCRC.  In February 2003, the Companydetermined to exit the STI segment and, on February 27, 2003, the Companyentered into an Asset Purchase Agreement to sell substantially all of theassets and certain liabilities of CRC to CRC Press I LLC and Routledge No. 2Limited, both wholly owned subsidiaries of Taylor & Francis Group plc (SeeNote C - *Discontinued Operations*).  Based on these events, the Company’sfinancial statements have been reclassified to reflect the STI segment as adiscontinued operation for all periods presented.  The transaction was completed on April 8, 2003.

 

The following tables set forth theinformation for the Company’s reportable segments of continuing operationsbased on the nature of the products and services offered for the periodsindicated:

 
|                               |   | **Three  Months Ended  June 30, 2003** |   | **Three  Months Ended  June 30, 2002** |   |
|------------------------------------|--------|----------------------------------------|--------|----------------------------------------|--------|
|                               |   | **Segment**                            |   | **Segment**                            |   |
| **(In thousands)**                 |   | **IP**                                 |   | **ITL**                                |   | **IP** |   | **ITL** |   |
|                               |   |                                   |   |                                   |   |   |   |   |   |
| Revenues  from external customers  |   | $                                      | 19,755 |                                   | $      | 2,171 |   | $ | 19,455 |   | $ | 3,326 |   |
| EBITDA                             |   | 5,561                                  |   | 267                                    |   | 6,204 |   | 1,187 |   |
| Income  (loss) from operations     |   | 2,872                                  |   | (144                                   | )      | 3,435 |   | 361 |   |
| Segment  assets excluding goodwill |   | 124,563                                |   | 3,929                                  |   | 136,068 |   | 12,157 |   |
| Goodwill                           |   | 70,340                                 |   | 12,800                                 |   | 69,479 |   | 43,600 |   |
|                                    |        |                                        |        |                                        |        |  |  |  |  |  |  |  |  |

 
|                               |   | **Six Months Ended  June 30, 2002** |   | **Six Months Ended  June 30, 2003** |   |
|------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|
|                               |   | **Segment**                         |   | **Segment**                         |   |
| **(In thousands)**                 |   | **IP**                              |   | **ITL**                             |   | **IP** |   | **ITL** |   |
|                               |   |                                |   |                                |   |   |   |   |   |
| Revenues  from external customers  |   | $                                   | 39,412 |                                | $      | 4,722 |   | $ | 38,374 |   | $ | 6,639 |   |
| EBITDA                             |   | 11,296                              |   | 855                                 |   | 12,970 |   | 2,066 |   |
| Income  from operations            |   | 5,868                               |   | 28                                  |   | 7,588 |   | 412 |   |
| Segment  assets excluding goodwill |   | 124,563                             |   | 3,929                               |   | 136,068 |   | 12,157 |   |
| Goodwill                           |   | 70,340                              |   | 12,800                              |   | 69,479 |   | 43,600 |   |
|                                    |        |                                     |        |                                     |        |  |  |  |  |  |  |  |  |

 

10

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During the fourth quarter of 2002,the Company recorded a pre-tax impairment charge of approximately $36.2 millionrelated to the carrying value of goodwill and other intangible assets in itsTranscender business.  Operating profitsand cash flows at Transcender have been adversely impacted by difficult marketconditions in the overall IT market and unfavorable product release cycles inthe IT certification market.

 

The Company evaluates theperformance of its segments based primarily on revenues and EBITDA.  The Company believes that EBITDA is the mostuseful measure of segment earnings because it more closely approximates thecash generating ability of the segments compared to income fromoperations.  Income from operationsincludes charges for depreciation and amortization, the majority of whichrelate to amortization of intangibleassets.  The Company generally does notincur capital expenditures to replace intangible assets within existingoperations.  A reconciliation of EBITDAto income from operations for each segment follows:

*** ***
|                                  |   | **Three Months Ended  June 30,** |   | **Six Months Ended   June 30,** |   |
|---------------------------------------|--------|----------------------------------|--------|---------------------------------|--------|
| **(In thousands)**                    |   | **2003**                         |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                  |   |                             |   |                            |   |   |   |   |   |
| *Intellectual  property*              |   |                             |   |                            |   |   |   |   |   |
| EBITDA                                |   | $                                | 5,561  |                            | $      | 6,204 |   | $ | 11,296 |   | $ | 12,970 |   |
| Amortization of capitalized software  |   | (49                              | )      | —                          |   | (85 | ) | — |   |
| Depreciation and amortization         |   | (2,640                           | )      | (2,772                          | )      | (5,343 | ) | (5,385 | ) |
| Other expense                         |   | —                           |   | 3                               |   | — |   | 3 |   |
| Income from operations                |   | $                                | 2,872  |                            | $      | 3,435 |   | $ | 5,868 |   | $ | 7,588 |   |
|                                  |   |                             |   |                            |   |   |   |   |   |
| *Information  technology learning*    |   |                             |   |                            |   |   |   |   |   |
| EBITDA                                |   | $                                | 267    |                            | $      | 1,187 |   | $ | 855 |   | $ | 2,066 |   |
| Amortization of capitalized software  |   | (33                              | )      | —                          |   | (66 | ) | — |   |
| Depreciation and amortization         |   | (378                             | )      | (826                            | )      | (761 | ) | (1,654 | ) |
| (Loss) income from operations         |   | $                                | (144   | )                               | $      | 361 |   | $ | 28 |   | $ | 412 |   |
|                                  |   |                             |   |                            |   |   |   |   |   |
| *Other*                               |   |                             |   |                            |   |   |   |   |   |
| EBITDA                                |   | $                                | (1,327 | )                               | $      | (970 | ) | $ | (3,169 | ) | $ | (1,982 | ) |
| Depreciation and amortization         |   | (5                               | )      | (5                              | )      | (11 | ) | (10 | ) |
| Early termination of credit agreement |   | —                           |   | —                          |   | 575 |   | — |   |
| Loss from operations                  |   | $                                | (1,332 | )                               | $      | (975 | ) | $ | (2,605 | ) | $ | (1,992 | ) |

 

11

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**H.**                                    COMPREHENSIVE INCOME

 

The following table is areconciliation of the Company’s net income to comprehensive income:

 
|                                    |   | **Three Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-----------------------------------------|--------|----------------------------------|--------|---------------------------------|--------|
| **(In thousands)**                      |   | **2003**                         |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                    |   |                             |   |                            |   |   |   |   |   |
| Net income                              |   | $                                | 30,772 |                            | $      | 3,068 |   | $ | 31,866 |   | $ | 5,882 |   |
| Other comprehensive loss:               |   |                             |   |                            |   |   |   |   |   |
| Foreign currency translation adjustment |   | (223                             | )      | (74                             | )      | (409 | ) | (81 | ) |
| Comprehensive income                    |   | $                                | 30,549 |                            | $      | 2,994 |   | $ | 31,457 |   | $ | 5,801 |   |

 

**I.*****                                        *TREASURY STOCK**

 

On October 28, 2002, the Companyannounced that its Board of Directors authorized the Company to repurchase upto $30,000,000 of its common stock. Subsequently, on July 9, 2003, it was announced that the Company’s Boardof Directors had approved an increase in the previously authorized sharebuyback program from $30,000,000 to $50,000,000.

 

The purchases may be made from timeto time on the open market or in negotiated transactions in compliance withRule 10b-18 of the Securities Exchange Act of 1934, as amended.  The authorization to repurchase theCompany’s common stock will remain in effect until the Company’s ChiefExecutive Officer deems it appropriate to terminate the repurchaseprogram.  Treasury stock purchases areaccounted for under the cost method whereby the entire cost of the acquiredstock is recorded as treasury stock.  Asof June 30, 2003, the Company repurchased a total of 1,007,200 shares of commonstock pursuant to the repurchase authorization at a total cost of $14,723,000.

 

12

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**INFORMATIONHOLDINGS INC.**

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

**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 and sixmonths ended June 30, 2003 and 2002. This review should be read in conjunction with the consolidatedfinancial statements and notes presented herein as well as Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontained in the Company’s 2002 Annual Report on Form 10-K.*

 

**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 beginning operationsin January 1997, the Company has completed 14 substantial acquisitions,including eight in the intellectual property segment (IP), five in scientificand technology information segment (STI) and one in the information technologylearning segment (ITL), as well as some minor acquisitions that are nototherwise disclosed herein.

 

On April 8, 2003, the Company completed the sale of CRC Press and itssubsidiaries (together, CRC), comprising the entirety of its STI segment.  For the periods presented herein, resultsfor this segment have been recorded as discontinued operations.

 

The Company may complete additional acquisitions that will further theCompany’s growth and operating strategies. If the Company acquires additional businesses, its sales mix, marketfocus, cost structure 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.

 

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

 

# ***ThreeMonths Ended June 30, 2003 Compared to Three Months Ended June 30, 2002***

 

*Summary*

 

Revenues decreased $0.9 million, or 4%, to $21.9 million from $22.8million.  Revenues decreased by $1.2million, or 35%, in the ITL segment, partially offset by an increase of $0.3million, or 2%, in the IP segment. Gross profits decreased by $1.3 million, or 8%, with gross profitmargins declining to 70.1% from 73.2%. The decrease in gross margins is due primarily to lower software licenserevenues in the Company’s Liquent unit, based on the significant profitcontribution of incremental license revenues. Selling, general and administrative expenses (SG&A) increased by$0.7 million, or 7%, due primarily to costs related to Aurigin Systems, whichwas acquired in May 2002.  SG&Adecreased in the ITL segment based on cost containment initiatives.  Depreciation and amortization decreased by$0.6 million, or 16%, due primarily to decreased amortization of intangibleassets in the ITL segment following an impairment charge recorded in the fourthquarter of fiscal 2002.  Based on thefactors above, income from operations decreased by $1.4 million, or 51%, to$1.4 million from $2.8 million.

 

13

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Net interest income increased $0.5 million to $0.7 million from $0.2million due primarily to increased depository interest income earned on cashproceeds received from the sale of CRC, coupled with decreased expense due to acessation of finance cost amortization resulting from the terminationof the Company’s Credit Facility in March 2003.

 

The provision for income taxes as a percentage of pre-tax income wasapproximately 38% in the second quarter of 2003, compared to approximately 37%in the second quarter of 2002.  Theeffective tax rate differs from statutory rates primarily as a result of state,local and foreign income taxes, and amortization of intangible assets that isnot tax deductible.

 

Net income from continuing operations approximated $1.3 million, or$0.06 per diluted common share, in the second quarter of 2003, compared to $1.9million, or $0.09 per diluted common share, in the prior year quarter.

 

Income from discontinued operations approximated $29.5 million, or$1.39 per diluted common share, in the second quarter of 2003, compared to $1.2million, or $0.05 per diluted common share, in the second quarter of 2002.  Income from discontinued operationsincreased primarily as the result of a recorded gain on sale of CRC.  The gain totaled $30.3 million, net ofincome taxes associated with the transaction of $15.9 million.

 

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 segment earnings because it moreclosely approximates the cash generating ability of the segments compared toincome from operations.  Income fromoperations includes charges for depreciation and amortization, the majority ofwhich relate to amortization of intangible assets.  The Company generally does not incur capital expenditures toreplace intangible assets within existing operations.

 

**SegmentReview**

 

*IP Group*

 

Revenues increased $0.3 million, or 2%, to $19.8 million from $19.5million.  The strongest areas of revenuegrowth included:  revenues from patentinformation subscriptions at MicroPatent, both as a result of the acquisitionof Aurigin in May 2002 and strong growth in core subscriptions; IP managementservices at MDC; and database and maintenance subscriptions at Liquent.  These revenue increases were partiallyoffset by a decline in software license sales and service revenues at Liquent.

 

Income from operations decreased $0.6 million, or 16%, to $2.9 millionfrom $3.4 million.  Income fromoperations decreased at Liquent, due primarily to the revenue decreases notedabove and relatively stable operating expenses.  Income from operations decreased slightly at MicroPatent dueprimarily to costs associated with Aurigin. Income from operations increased at MDC, due to strong revenue growthand relatively stable operating expenses. EBITDA decreased $0.6 million, or 10%, to $5.6 million from $6.2million.  EBITDA margins approximated28% in the second quarter of 2003, compared to 32% in the second quarter of2002.  The most significant factor inthe decrease was the decline in software license revenues at Liquent.

 

14

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*ITL*

 

Revenues decreased $1.2 million, or35%, to $2.2 million from $3.3 million. Revenues in this segment have been adversely impacted by difficultmarket conditions in the IT market overall and unfavorable product releasecycles in the IT certification area in particular.

 

Income from operations in this segment decreased $0.5 million to a lossof $(0.1) million in the second quarter of 2003 compared to income of $0.4million in the second quarter of 2002. The decrease is due primarily to decreased profit contribution fromlower revenues, partially offset by lower amortization of intangibleassets.  In addition, operating expenseswere reduced by approximately $0.1 million. EBITDA in this segment decreased $0.9 million, or 78%, to $0.3 millionfrom $1.2 million.  EBITDA marginsapproximated 12% in the second quarter of 2003, compared to 36% in the secondquarter of 2002.

 

# ***SixMonths Ended June 30, 2003 Compared to Six Months Ended June 30, 2002***

 

*Summary*

 

Revenues decreased $0.9 million, or 2%, to $44.1 million from $45.0million.  Revenues decreased by $1.9million, or 29%, in the ITL segment, partially offset by an increase of $1.0million, or 3%, in the IP segment. Gross profits decreased by $2.2 million, or 7%, with gross profitmargins declining to 70.3% from 73.9%. The decrease in gross margins is due primarily to lower software licenserevenues in the Company’s Liquent unit, based on the significant profitcontribution of incremental license revenues. Selling, general and administrative expenses (SG&A) increased by$1.4 million, or 7%, due primarily to costs related to Aurigin Systems, whichwas acquired in May 2002.  SG&Adecreased in the ITL segment based on cost containment initiatives.  Depreciation and amortization decreased by$0.9 million, or 13%, due primarily to decreased amortization of intangibleassets in the ITL segment following an impairment charge recorded in the fourthquarter of fiscal 2002.

 

Based on the factors above, income from operations decreased by $2.7million, or 45%, to $3.3 million from $6.0 million.  During the first six months of 2003, the Company incurred costsof approximately $0.6 million associated with the early termination of a creditagreement.  There were no outstandingborrowings under the credit agreement. The credit agreement was terminated to facilitate the sale of CRC.  Under the terms of the credit facility, theassets of CRC and other IHI subsidiaries had been pledged as security.  The early termination costs includeapproximately $0.5 million for the write-off of unamortized fees, representinga non-cash charge.

 

Net interest income increased $0.5 million to $0.8 million from $0.3million due primarily to increased depository interest income earned on cashproceeds received from the sale of CRC, coupled with decreased expense due to acessation of finance cost amortization resulting from the terminationof the Company’s Credit Facility in March 2003.

 

The provision for income taxes as a percentage of pre-tax income wasapproximately 35% in the first six months of 2003, compared to approximately37% in the first six months of 2002. The effective tax rate differs from statutory rates primarily as aresult of state, local and foreign income taxes, and amortization of intangibleassets, which is not tax deductible. The decrease in the tax rate is due to the impact of book-tax differencesthat were consistent in dollar amount, while pre-tax income decreased.

 

15

----

 

Net income from continuing operations approximated $2.3 million, or$0.11 per diluted common share, in the first six months of 2003, compared to$4.0 million, or $0.18 per diluted common share, in the first six months of2002.

 

Income from discontinued operations approximated $29.6 million, or$1.39 per diluted common share, in the first six months of 2003, compared to$1.9 million, or $0.08 per diluted common share, in the first six months of2002.  Income from discontinuedoperations increased primarily as the result of a recorded gain on sale ofCRC.  The gain totaled $30.3 million,net of income taxes associated with the transaction of $15.9 million.

 

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 segment earnings because it moreclosely approximates the cash generating ability of the segments compared toincome from operations.  Income fromoperations includes charges for depreciation and amortization, the majority ofwhich relate to amortization of intangible assets.  The Company generally does not incur capital expenditures toreplace intangible assets within existing operations.

 

**SegmentReview**

 

*IP Group*

 

Revenues increased $1.0 million, or 3%, to $39.4 million from $38.4million.  The strongest areas of revenuegrowth included:  revenues from patentinformation subscriptions at MicroPatent, both as a result of the acquisitionof Aurigin in May 2002 and strong growth in core subscriptions; IP managementservices at MDC; and database and maintenance subscriptions at Liquent.  These revenue increases were partiallyoffset by a decline in software license sales and service revenues at Liquent.

 

Income from operations decreased $1.7 million, or 23%, to $5.9 millionfrom $7.6 million.  Income fromoperations decreased at Liquent, due primarily to the revenue decreases notedabove and relatively stable operating expenses.  Income from operations decreased slightly at MicroPatent dueprimarily to costs associated with Aurigin. Income from operations increased at MDC, due to strong revenue growthand relatively stable operating expenses. EBITDA decreased $1.7 million, or 13%, to $11.3 million from $13.0million.  EBITDA margins approximated29% in the first six months of 2003, compared to 34% in the first six months of2002.  The most significant factor inthe decrease was the decline in software license revenues at Liquent.

 

16

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*ITL*

 

Revenues decreased $1.9 million, or29%, to $4.7 million from $6.6 million. Revenues in this segment have been adversely impacted by difficultmarket conditions in the IT market overall and unfavorable product releasecycles in the IT certification area in particular.

 

Income from operations in this segment decreased $0.4 million tobreak-even.  The decrease is dueprimarily to decreased profit contribution from lower revenues, partiallyoffset by lower amortization of intangible assets.  In addition, operating expenses were reduced by approximately$0.6 million.  EBITDA in this segmentdecreased $1.2 million, or 59%, to $0.9 million from $2.1 million.  EBITDA margins approximated 18% in the firstsix months of 2003, compared to 31% in the first six months of 2002.

 

*Reconciliation ofSegment EBITDA to Income from Operations*

 

A reconciliation of EBITDA toincome from operations for each segment follows:

 
|                                  |   | **Three Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|---------------------------------------|--------|----------------------------------|--------|---------------------------------|--------|
| **(In thousands)**                    |   | **2003**                         |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                  |   |                             |   |                            |   |   |   |   |   |
| *Intellectual  property*              |   |                             |   |                            |   |   |   |   |   |
| EBITDA                                |   | $                                | 5,561  |                            | $      | 6,204 |   | $ | 11,296 |   | $ | 12,970 |   |
| Amortization of capitalized software  |   | (49                              | )      | —                          |   | (85 | ) | — |   |
| Depreciation and amortization         |   | (2,640                           | )      | (2,772                          | )      | (5,343 | ) | (5,385 | ) |
| Other expense                         |   | —                           |   | 3                               |   | — |   | 3 |   |
| Income from operations                |   | $                                | 2,872  |                            | $      | 3,435 |   | $ | 5,868 |   | $ | 7,588 |   |
|                                  |   |                             |   |                            |   |   |   |   |   |
| *Information  technology learning*    |   |                             |   |                            |   |   |   |   |   |
| EBITDA                                |   | $                                | 267    |                            | $      | 1,187 |   | $ | 855 |   | $ | 2,066 |   |
| Amortization of capitalized software  |   | (33                              | )      | —                          |   | (66 | ) | — |   |
| Depreciation and amortization         |   | (378                             | )      | (826                            | )      | (761 | ) | (1,654 | ) |
| (Loss) income from operations         |   | $                                | (144   | )                               | $      | 361 |   | $ | 28 |   | $ | 412 |   |
|                                  |   |                             |   |                            |   |   |   |   |   |
| *Other*                               |   |                             |   |                            |   |   |   |   |   |
| EBITDA                                |   | $                                | (1,327 | )                               | $      | (970 | ) | $ | (3,169 | ) | $ | (1,982 | ) |
| Depreciation and amortization         |   | (5                               | )      | (5                              | )      | (11 | ) | (10 | ) |
| Early termination of credit agreement |   | —                           |   | —                          |   | 575 |   | — |   |
| Loss from operations                  |   | $                                | (1,332 | )                               | $      | (975 | ) | $ | (2,605 | ) | $ | (1,992 | ) |

 

17

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**Liquidityand Capital Resources**

** **

On February 27, 2003, the Companyannounced it had reached a definitive agreement to sell its STI segment,comprised of CRC Press and its subsidiaries (together, CRC). The transaction wascompleted on April 8, 2003.  During thesecond quarter the Company received net proceeds of approximately $92 million,representing the cash consideration for the assets sold less deal relatedexpenses paid through June 30, 2003. The sale price remains subject to a post-closing adjustment based on theclosing date balance sheet of CRC.  TheCompany estimates that approximately $3 million in deal related costs,including post-closing purchase price adjustments, will be paid prior toDecember 31, 2003.  The Company has alsoprovided a current income tax liability of approximately $16.1 millionassociated with the sale of CRC.

 

Approximately$3 million of the proceeds are being held in escrow related to representationsand warranties contained in the asset sale agreement.  These proceeds will become available to the Company in April 2004unless the buyers assert claims under the purchase agreement prior tothen.  All proceeds held in escrow willremain classified as restricted cash until made available to the Company.  The proceeds from the sale of the STIsegment, net of income taxes associated with the transaction, will be used tofinance future acquisitions and for general corporate purposes.  The Company currently does not have anyagreements, arrangements or understandings with respect to any prospectivematerial acquisitions.  Pending suchuses, the proceeds will be invested in investment grade securities.

 

In March 2000, the Company sold approximately 4.5 million shares of itscommon stock and received approximately $155 million of net proceeds.  As of June 30, 2003, proceeds ofapproximately $148 million have been used from this offering to fundacquisitions in the Company’s information and publishing businesses.  The remaining net proceeds will be used tofinance future acquisitions and for general corporate purposes.  Pending such uses, the proceeds will beinvested in investment grade securities.

 

The Company’s Boardof Directors authorized a share repurchase program in October 2002, enablingthe Company to repurchase up to $30 million of its common stock.  In July 2003, the Company’s Board ofDirectors approved an increase in the previously authorized share buybackprogram from $30 million to $50 million. Through August 14, 2003, the Company had purchased approximately $14.7million of its common stock.  TheCompany may use up to an additional $35.3 million of cash and short-terminvestments in the future to purchase additional shares of its common stock.

 

Cash and equivalents, includingshort-term investments, totaled $146.5 million at June 30, 2003 compared to$67.0 million at December 31, 2002.  TheCompany has additional investments of $6.7 million, comprised of investmentgrade bonds, with maturities of 12 to 18 months.  Excluding cash, cash equivalents and short-term investments, theCompany’s continuing operations had a working capital deficit of $(40.4)million at June 30, 2003 compared to a working capital deficit of $(23.3)million at December 31, 2002.  Since theCompany receives patent annuity payments and subscription payments in advance,the Company’s existing operations are expected to maintain very low or negativeworking capital balances, excluding cash and investments.  Included in current liabilities at June 30,2003, are obligations related to patent annuity payments of approximately $22.4million and deferred revenue of approximately $20.3 million.  In the second quarter of 2003, the Companyrealized net cash proceeds of approximately $92 million from the disposition ofits STI segment.  While the Companyexpects to make income tax payments of $16 to $17 million associated with thegain on sale of its STI segment over the next six months, it currently has over$156 million in cash and investments.

 

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Cash generated from operating activities of continuing operations was$7.9 million for the six months ended June 30, 2003, derived from net income of$2.3 million plus non-cash charges of $6.0 million and a decrease in netoperating liabilities of $0.4 million during the period.  The decrease in net operating liabilities isprimarily the result of payments for federal income taxes payable, and thetiming of the recognition of subscription revenue.  These decreases in cash were partially offset by decreasedaccounts receivable, primarily related to the timing of and the increase in thenumber of patent annuity payments at MDC.

 

Cash generated from investing activities from continuing operations was$56.9 million for the six months ended June 30, 2003, due primarily to the netproceeds from the sale of CRC of $92.0 million (see Note C - *Discontinued Operations*), partially offsetby the purchase of investments from the net proceeds of the sale of $30.4million.  Capital expenditures,including capitalized software costs, approximated $1.7 million in the firsthalf of 2003.  Excluding acquisitions ofbusinesses, the Company’s existing operations are not capital intensive.

 

Cash used in financing activities from continuing operations was $8.9million for the six months ended June 30, 2003.  During the second quarter, the Company repurchased shares of itscommon stock at a cost of $9.5 million, which was partially offset by net cashproceeds received from the issuance of common stock from stock option exercisesof $0.6 million.  The Company had noborrowing or repayment activity under the Credit Facility prior to itstermination in March 2003.

 

Total cash provided by discontinued operations was immaterial in theperiod ended June 30, 2003.  Total cashfrom operating activities was $0.9 million, offset by capital spending ofapproximately $0.8 million, including purchases of equipment and capitalizedpre-publication costs and $0.1 million in payments on capital leases.

 

The Company believes that cash on hand and funds generated fromoperations will be sufficient to fund the cash requirements of its existingoperations for the foreseeable future. The Company currently has no commitments for material capital expendituresor agreements with respect to any prospective material acquisitions.  The Company may choose to obtain additionalcapital or financing to consummate future acquisitions.  During the third quarter of 2003, the Companyexpects to incur severance charges equal to approximately $0.03 per dilutedcommon share.  Future operatingrequirements and capital needs may be subject to economic conditions and otherfactors, many of which are beyond the Company’s control.

 

 

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**Seasonality**

 

The Company does not believe itsbusinesses have significant seasonality. The Company may experience fluctuations in revenues from period toperiod based on the timing of acquisitions, new product launches and the timingof license sales.

 

**Effectsof Inflation**

 

TheCompany believes that inflation has not had a material impact on the results ofoperations presented herein.

 

**CriticalAccounting Policies**

 

The Company’s accounting policiesare disclosed in the Company’s 2002 Annual Report on Form 10-K.  There have been no material changes to thesepolicies during the first six months of 2003.

 

**Forward-LookingStatements**

 

Certain statements in this reportcontain forward-looking statements, including, without limitation, statementsrelating to the Company’s plans, strategies, objectives, expectations, andintentions that are made pursuant to the “safe harbor” provisions of thePrivate Securities Litigation Reform Act of 1995.  Readers are cautioned that forward-looking statements containedin this Form 10-Q should be read in conjunction with the Company’s disclosuresunder the heading*Important Factors Relating to Forward-Looking Statements*containedin the Company’s 2002 Annual Report on Form 10-K.

 

 

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

 

*Interest RateRisk*  - Prior to thetermination of the Credit Facility in March 2003, the Company was subject to market risks arising fromchanges in interest rates.  Interestrate exposure resulted from changes in the Eurodollar or the prime rate, whichwere used to determine the interest rate applicable to borrowings under theCredit Facility.  The Company had nooutstanding borrowings under the Credit Facility at any time since itsinception.

 

*ForeignCurrency Exchange Rate Risk*-**The financial statementsof the Company’s foreign subsidiaries are translated from the local currencyinto U.S. dollars.  Assets andliabilities are translated using current exchange rates, except certainaccounts of subsidiaries whose functional currency is the U.S. dollar, andtranslation 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, the Company’s operating results areaffected by fluctuations in the value of the U.S. dollar compared to theBritish pound and the Euro.  During the three and six months ended June 30, 2003,the Company’s operating results include a foreign exchange gain of $72,000 anda foreign exchange loss of $6,000, respectively.

 

Asubsidiary of the Company routinely enters into forward contracts to acquirevarious 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 June 30, 2003, the subsidiary of theCompany had entered into forward contracts to acquire various internationalcurrencies, all having maturities of less than seven months, aggregatingapproximately $23,450,000.  Realizedgains and losses relating to the forward contracts were immaterial for thethree and six months ended June30, 2003.

 

The Company has only limited involvement withderivative financial instruments and does not use them for trading purposes.

 

**Item4.    Controlsand Procedures**

 

As of June 30, 2003, an evaluation was performed under the supervisionand with the participation of the Company's management, including the ChiefExecutive Officer (CEO) and Chief Financial Officer (CFO), of the effectivenessof the design and operation of the Company's disclosure controls and procedurespursuant to Rules 13a-14(c) and 15d-14(c) under the Exchange Act.  Based on that evaluation, the Company'smangement, including the CEO and CFO, concluded that the Company's currentdisclosure controls and procedures were effective as of June 30, 2003.  There have been no significant changes inthe Company's internal controls over financial reporting during the most recentquarter that have materially affected, or are reasonably likely to materiallyaffect, the Company's internal controls over financial reporting.

 

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**INFORMATIONHOLDINGS INC.**

**PART II**. OTHER INFORMATION

## ** **

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

 

Therehave been no material developments in the legal proceedings reported in theCompany’s Annual Report of Form 10-K for the year ended December 31, 2002.

 

**Item 2.****           Changes in Securities and Use ofProceeds**

 

The following report relates to the Company’s secondary public stockoffering:

 
| Commission file number of registration  statement:       |   | 333-30202      |        |
|----------------------------------------------------------|--------|----------------|-------------|
| Effective Date:                                          |   | March 14, 2000 |        |
|                                                     |   |           |        |
| Expenses incurred through June 30, 2003:                 |   |           |        |
| Underwriting discounts                                   |   | $              | 8,595,000   |   |
| Other expenses                                           |   | $              | 522,000     |   |
| Total expenses                                           |   | $              | 9,117,000   |   |
|                                                     |   |           |        |
| Application of proceeds through June 30,  2003:          |   |           |        |
| Acquisitions of businesses, titles and  equity interests |   | $              | 147,828,000 |   |
| Temporary investments                                    |   | $              | 7,172,000   |   |
| (Commercial  paper and money market funds)               |   |           |        |

 

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**Item 4****.****           Submissionof Matters to a Vote of Security Holders**

 

At the Company’s Annual Meeting of Stockholders on April 29, 2003 a totalof 18,529,992 shares, or 86% of outstanding shares, were represented andentitled to vote.

 

(a)                                  The following memberswere elected to the Board of Directors:

 
|                |   | **Total Vote  For  Each Director** |   | **Total Vote  Withheld  From Each Director** |   |
|---------------------|--------|------------------------------------|--------|----------------------------------------------|--------|
| Michael E. Danziger |   | 18,384,243                         |   | 145,749                                      |   |
| David R. Haas       |   | 18,387,928                         |   | 142,064                                      |   |
| Keith B. Jarrett    |   | 18,387,928                         |   | 142,064                                      |   |
| Sidney Lapidus      |   | 18,318,186                         |   | 211,806                                      |   |
| Martin D. Payson    |   | 18,387,928                         |   | 142,064                                      |   |
| Mason P. Slaine     |   | 15,690,660                         |   | 2,839,332                                    |   |
| John L. Vogelstein  |   | 17,879,525                         |   | 650,467                                      |   |

 

(b)                                 The following proposalwas approved:

 

Ratification of Ernst & Young LLP as the independent publicaccountants for the Company for the 2003 fiscal year.

 
| Affirmative Votes |   | 18,409,011 |   |
|-------------------|--------|------------|--------|
| Negative Votes    |   | 120,937    |   |
| Abstain           |   | 44         |   |

 

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

 

On July 9, 2003, the Company announced that Jay Nadler has beenappointed President and CEO of its Liquent, Inc. subsidiary.  Mr. Nadler replaced Rick Dool, who has sinceleft the Company.  Mr. Nadler wasPresident of the Company’s MicroPatent and Master Data Center units prior tothis appointment and previously served as President of the Company’sIntellectual Property Group.

 

Also, on July 9, 2003, the Company announced that Daniel Videtto hadbeen named to replace Mr. Nadler as President of MicroPatent and Master DataCenter.  Mr. Videtto previously heldsenior management positions with The Thomson Corporation, including Presidentof Thomson Financial’s Corporate Client Group and CEO and Managing Director ofThomson Financial Japan.  Prior to that,he held senior management positions with Baring Securities and SalomonBrothers.

 

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

 

(a)                                  Exhibits

 

10.21       Employee Agreement, dated as of June 23,2003, between MicroPatent LLC and Daniel Videtto

 

31.1                         Certification by Chief Executive Officerpursuant to Rule 13a-14(a)

 

31.2                           Certification by Chief Financial Officerpursuant to Rule 13a-14(a)

 

32.1                           Certification by Chief Executive Officer andChief Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

 

(b)                                Reports on Form 8-K

 

OnApril 22, 2003, the Company filed a Current Report on Form 8-K (the Form 8-K)reporting the April 8, 2003 sale, pursuant to an Asset Purchase Agreement datedFebruary 27, 2003, of substantially all of the assets and certain liabilitiesof its wholly owned subsidiaries CRC Press LLC (CRC Press LLC), CRC Press(U.K.) LLC and Parthenon Publishing Group, Inc. (together, CRC), to CRC Press ILLC and Routledge No. 2 Limited, both wholly owned subsidiaries of Taylor &Francis Group plc (together, the Buyer), for approximately $95,000,000 in cash,subject to a post closing adjustment. On May 7, 2003, the Company filed an amendment to the Form 8-Kcontaining the required pro forma condensed consolidated financial statementsof the Company.

 

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**SIGNATURE**

 

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

 
|   |            |   | INFORMATION HOLDINGS INC.                                                              |
|--------|-----------------|--------|----------------------------------------------------------------------------------------|
|   |            |   |                                                                                   |   |
|   |            |   |                                                                                   |   |
| Date:  | August 14, 2003 |   | 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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