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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1999
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Commission File Number: 1-14371
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INFORMATION HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1518007
(State of incorporation) (IRS Employer Identification Number)
2777 SUMMER STREET, SUITE 209
STAMFORD, CONNECTICUT 06905
(Address of principal executive offices) (Zip Code)
(203) 961-9106
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
As of September 30, 1999, there were 16,948,071 shares of the Company's
common stock, par value $0.01 per share, outstanding.
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INFORMATION HOLDINGS INC.
INDEX
PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 1
As of September 30, 1999 (Unaudited) and December 31, 1998
Consolidated Statements of Operations (Unaudited) for the 2
Three Months Ended September 30, 1999 and 1998 and
Nine Months Ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows (Unaudited) for the 3
Nine Months Ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
INFORMATION HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1999 1998
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,890 $ 57,270
Accounts receivable (NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS AND
SALES RETURNS OF $2,824 AND $911, RESPECTIVELY) 17,936 9,286
Inventories 5,240 4,832
Prepaid expenses and other current assets 2,886 1,945
Deferred income taxes 870 777
-------- ---------
Total current assets 29,822 74,110
Property and equipment, net 4,439 4,173
Pre-publication costs (NET OF ACCUMULATED AMORTIZATION OF $2,650 AND
$2,350, RESPECTIVELY) 3,087 3,474
Publishing rights and other intangible assets, net 78,818 21,265
Goodwill, net 15,688 336
Other assets 2,945 1,433
-------- ---------
TOTAL $134,799 $ 104,791
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capitalized lease obligations $ 275 $ 261
Accounts payable 18,120 4,074
Accrued expenses 1,901 1,821
Royalties payable 981 1,935
Deferred subscription revenue 6,365 8,530
-------- ---------
Total current liabilities 27,642 16,621
Capital leases 2,484 2,694
Deferred income taxes 15,517 --
Other long-term liabilities 799 683
-------- ---------
Total liabilities 46,442 19,998
-------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued $ -- $ --
Common stock, $.01 par value; 50,000,000 shares
authorized; 16,948,071 issued and outstanding 169 169
Additional paid-in capital 84,808 84,750
Retained earnings(deficit) 3,380 (126)
-------- ---------
Total stockholders' equity 88,357 84,793
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TOTAL $134,799 $ 104,791
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SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
-1-
INFORMATION HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenues $ 14,833 $ 11,511 $ 39,865 $ 32,584
Cost of sales 3,847 2,752 10,590 8,128
-------- -------- -------- --------
Gross profit 10,986 8,759 29,275 24,456
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative 7,208 5,881 20,890 18,200
Depreciation and amortization 1,683 1,356 3,741 3,927
Severance and special bonuses -- 1,050 -- 1,050
-------- -------- -------- --------
Total operating expenses 8,891 8,287 24,631 23,177
-------- -------- -------- --------
Income from operations 2,095 472 4,644 1,279
-------- -------- -------- --------
Other income (expense):
Interest income 288 466 1,539 691
Interest expense (66) (71) (210) (228)
Other expense -- -- (18) --
-------- -------- -------- --------
Income before income taxes 2,317 867 5,955 1,742
Provision for income taxes 1,030 43 2,449 135
-------- -------- -------- --------
Net income $ 1,287 $ 824 $ 3,506 $ 1,607
======== ======== ======== ========
Net income per common share amounts:
Basic earnings $ 0.08 $ 0.21
======== ========
Diluted earnings $ 0.08 $ 0.20
======== ========
Pro forma income data:
Income before income taxes, as reported $ 867 $ 1,742
Pro forma income taxes 43 135
-------- --------
Pro forma net income $ 824 $ 1,607
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Pro forma earnings per share $ 0.05 $ 0.09
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SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
-2-
INFORMATION HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,506 $ 1,607
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,155 875
Amortization of goodwill and other intangibles 2,586 3,052
Amortization of pre-publication costs 1,821 1,634
Deferred taxes (105) --
Loss on disposal of property and equipment 18 --
Changes in operating assets and liabilities:
Accounts receivable, net (4,537) (328)
Inventories (443) (464)
Prepaid expenses and other current assets (829) (1,290)
Accounts payable and accrued expenses 2,889 364
Royalties payable (954) (476)
Deferred subscription revenue (2,330) (1,639)
Other, net (464) (641)
-------- --------
Net Cash Provided by Operating Activities 2,313 2,694
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 11 --
Purchases of property and equipment (1,020) (757)
Pre-publication costs (1,246) (1,167)
Increase in short-term investments -- (30,148)
Acquisitions of businesses and titles (53,425) (4,268)
-------- --------
Net Cash Used in Investing Activities (55,680) (36,340)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under revolving credit facility -- (2,000)
Financing costs for new credit facility (875) --
Net repayments under capital leases (196) (171)
Issuance of common stock 58 51,441
Capital contributions -- 11
-------- --------
Net Cash (Used in) Provided by Financing Activities (1,013) 49,281
-------- --------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (54,380) 15,635
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 57,270 10,280
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,890 $ 25,915
======== ========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
-3-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
A. BASIS OF PRESENTATION
The consolidated balance sheet of Information Holdings Inc. (IHI , or
the Company) at December 31, 1998 has been derived from IHI's Annual
Report on Form 10-K for the year then ended. All other consolidated
financial statements contained herein have been prepared by IHI and are
unaudited. The financial statements should be read in conjunction with
the financial statements for the year ended December 31, 1998 and the
notes thereto contained in IHI's Annual Report on Form 10-K for the
year then ended.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Article 10 of Regulation S-X for interim
financial statements required to be filed with the Securities and
Exchange Commission and do not include all information and footnotes
required by generally accepted accounting principles for complete
financial statements. However, in the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments, necessary
to present fairly the consolidated financial position of IHI as of
September 30, 1999, and the consolidated results of its operations and
its cash flows for the periods presented herein. Results for the three
and nine months ended September 30, 1999 are not necessarily indicative
of the results to be expected for the full fiscal year.
B. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market. Inventories at September 30, 1999 and December 31,
1998 consist solely of finished goods. The vast majority of inventories
are books, which are reviewed periodically on a title-by-title basis
for salability. The cost of inventory determined to be impaired is
charged to income in the period of determination.
C. PRE-PUBLICATION COSTS
Certain expenses related to books, primarily comprised of design and
other pre-production costs, are deferred and charged to expense over
the estimated product life. These costs are primarily amortized over a
four-year period following release of the applicable book, using an
accelerated amortization method. During 1999, the Company removed from
its Balance Sheet fully amortized pre-publication costs of
approximately $1,645,000.
D. RECLASSIFICATIONS
Certain amounts in the fiscal 1998 financial statements have been
reclassified to conform to the 1999 financial statement presentation.
-4-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
E. EARNINGS PER SHARE DATA
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated.
THREE MONTHS NINE MONTHS
ENDED ENDED
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(IN THOUSANDS, EXCEPT PER SHARE DATA) SEPTEMBER 30, SEPTEMBER 30,
1999 1999
Basic:
Net income $ 1,287 $ 3,506
Average shares outstanding 16,946 16,944
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Basic EPS $ 0.08 $ 0.21
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Diluted:
Net income $ 1,287 $ 3,506
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Average shares outstanding 16,946 16,944
Net effect of dilutive stock options -
based on the treasury stock method 182 176
------------ ------------
Total 17,128 17,120
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Diluted EPS $ 0.08 $ 0.20
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During the third quarter of 1999, employees exercised stock options to
acquire 4,882 shares at an exercise price of $12 per share.
No historical earnings per share data are presented for the three
months and nine months ended September 30, 1998, as the Company does
not consider such data meaningful. The pro forma earnings per share
data presented were computed using 16,943,189 shares outstanding, which
reflects all shares outstanding following the Company's initial public
offering in August 1998, as if such shares were outstanding since
January 1, 1998.
F. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133.
The Statement defers for one year the effective date of FASB Statement
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for
derivative instruments and for hedging activities. The rule will now
apply to all fiscal quarters of all fiscal years beginning after June
15, 2000. In the opinion of the Company's management, adoption of this
new accounting standard will not have any impact on the Company's
consolidated financial position or results of operations.
-5-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
G. ACQUISITIONS
On September 1, 1999, the Company acquired the assets of the Corporate
Intelligence (CI) business of Innovator Corporation for cash
consideration of approximately $8,000,000. CI provides intellectual
property information and related software and searching tools,
primarily through the Internet. The purchase price was
preliminarily allocated to publishing rights and other intangible
assets of $7,900,000 and non-compete agreements of $100,000.
On August 12, 1999, the Company acquired all of the outstanding capital
stock of Master Data Center, Inc. (MDC), a Michigan corporation, for
cash consideration of approximately $33,000,000. MDC provides patent
annuity tax payment services for owners of intellectual property in
domestic and foreign markets and complementary software products for
managing patent and trademark portfolios. The purchase price was
preliminarily allocated to net liabilities assumed of $7,150,000, and
publishing rights and other intangible assets of $40,150,000. The
Company also recorded goodwill and an offsetting deferred income tax
liability as a result of the gross up of acquired intangible assets in
the amount of $15,622,000. This goodwill is being amortized using the
straight-line method over 20 years. Amortization expense for the nine
months ended September 30, 1999 was $105,000.
On July 19, 1999, the Company acquired all of the assets of Faxpat,
Inc. (Faxpat) for cash consideration of approximately $9,300,000.
Faxpat is a leading provider of patent documents and file histories to
the legal and corporate markets. The purchase price was
preliminarily allocated to net tangible assets of $500,000, publishing
rights and other intangible assets of $8,700,000 and non-compete
agreements of $100,000.
The above acquisitions have all been accounted for using the purchase
method of accounting and, accordingly, the results of their operations
have been included in the Company's results of operations from their
respective dates of acquisition.
The pro forma unaudited results of operations for the nine months ended
September 30, 1999 and September 30, 1998, assuming consummation of the
MDC acquisition as of January 1, 1998 are as follows:
NINE MONTHS NINE MONTHS
ENDED ENDED
------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) SEPTEMBER 30, SEPTEMBER 30,
1999 1998
Revenues $ 44,797 $ 38,271
Net income 2,608 1,667
Per common share amounts:
Basic earnings $ 0.15 $ 0.10
============ ============
Diluted earnings $ 0.15 $ 0.10
============ ============
The pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the operating
results that would have occurred had the acquisition been consummated
as of the above date, nor are they necessarily indicative of future
operating results.
-6-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
H. REVOLVING CREDIT FACILITY
On September 24, 1999, the Company entered into a seven-year revolving
credit facility in an amount not to exceed $50,000,000 initially,
including a $10,000,000 sublimit for the issuance of standby letters of
credit (the Credit Facility). Total commitments under the Credit
Facility shall be permanently reduced to $45,000,000 at the end of the
third year, $37,500,000 at the end of the fourth year, $25,000,000 at
the end of the fifth year and $12,500,000 at the end of the sixth year.
The proceeds from the Credit Facility are intended to be used to fund
acquisitions, to meet short-term working capital needs and for general
corporate purposes.
Borrowings under the Credit Facility bear interest at either the higher
of the bank's prime rate and one-half of 1% in excess of the overnight
federal funds rate plus a margin of 0.50% to 1.25% or the Eurodollar
Rate plus a margin of 1.5% to 2.25% depending on the Company's ratio of
indebtedness to earnings before interest, taxes, depreciation and
amortization. The Company also pays a commitment fee of 0.375% on the
unused portion of the Credit Facility. As of September 30, 1999, the
Company had no outstanding borrowings under the Credit Facility.
Under the terms of the Credit Facility, the Company is required to
maintain certain financial ratios related to fixed charge coverage,
leverage and interest coverage, in addition to certain other covenants.
As of September 30, 1999, the Company was in compliance with all
covenants. The Credit Facility is secured by a first priority perfected
pledge of all notes and capital stock owned by the Company's
subsidiaries and a first priority perfected security interest in all
other assets of the Company and its subsidiaries, subject to certain
exceptions. Obligations under the Credit Facility will be guaranteed by
the Company and its subsidiaries. The Credit Facility also prohibits
the Company from incurring certain additional indebtedness, limits
certain investments, mergers or consolidations and restricts
substantial asset sales, and dividends.
I. SUBSEQUENT EVENT
LEGAL PROCEEDINGS
As previously disclosed, Mason P. Slaine, the Company's President and
Chief Executive Officer, and Michael E. Danziger, a director of the
Company, are shareholders, officers and directors of Rand Publishing
Company Inc. (Rand), a private holding company that has made
investments in the publishing industry, and are defendants in a lawsuit
alleging that Mr. Slaine breached his fiduciary duty to certain other
investors and usurped corporate opportunities available to Rand by
investing in the Company and by participating in the acquisition by the
Company of various businesses.
On December 2, 1998, Rand and Mr. Slaine filed a motion to dismiss the
Rand investors' complaint against them. The court granted the motion on
November 3, 1999 on the grounds that the plaintiffs had not alleged
with particularity the efforts, if any, they had made to impel the
board of directors of Rand to initiate these derivative claims in the
first instance. The motion was granted with leave to plaintiffs to
serve an amended complaint setting forth in detail the reasons why such
demand on the Rand board would have been futile.
-7-
INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Three Months Ended September 30, 1999 Compared to
Three Months Ended September 30, 1998
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REVENUES. In the third quarter of 1999, the Company had revenues of
$14.8 million compared to revenues of $11.5 million in the third quarter of
1998, an increase of $3.3 million or 28.9%. The increase in revenues is
primarily due to revenues of $1.3 at Master Data Center, which was acquired in
August 1999; an increase of $1.1 million in sales of patents and file histories
at Optipat and Faxpat, businesses acquired in 1999; an increase of $0.9 in
Internet sales at MicroPatent; and an increase of $0.5 million in book sales at
CRC Press. These increases were partly offset by a decline of $0.6 million at
CRC's Auerbach unit, due in part to a transition to a web-based product line.
COST OF SALES. Cost of sales increased $1.1 million or 39.8% to $3.8
million in the third quarter of 1999 compared to $2.7 million in the
corresponding quarter in 1998. Cost of sales expressed as a percentage of
revenues in the third quarter of 1999 increased to 25.9% from 23.9% for the
corresponding quarter of 1998. The increase in the costs of sales percentage
over the comparable period in 1998 is primarily attributable to the acquisition
of MDC which has lower gross margins than the other IHI units; and the
acquisitions of Optipat and Faxpat which have higher cost structures than
MicroPatent. These increases were partially offset by slightly lower costs at
CRC Press primarily related to book publishing operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A). SG&A expenses
increased $1.3 million or 22.6% in the third quarter of 1999, to $7.2 million
from $5.9 million in the third quarter of 1998, principally as a result of
operating expenses of businesses acquired in 1999 and increased personnel costs
at CRC Press, due to business growth. SG&A expenses as a percentage of revenues
decreased to 48.6% in the third quarter of 1999, compared to 51.1% in the
corresponding 1998 quarter.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization in the
third quarter of 1999 increased $0.3 million, or 24.1%, to $1.7 million from
$1.4 million in the corresponding quarter in 1998, due primarily to increased
amortization of intangible assets as a result of acquisitions during fiscal
1999.
SEVERANCE AND SPECIAL BONUSES. Included in the third quarter of 1998 is
a charge of $1.0 million related to severance and special bonuses at a
subsidiary.
INTEREST INCOME. Interest income decreased to $0.3 million from $0.5
million due primarily to the use of the proceeds from the initial public
offering for acquisitions during the third quarter of 1999.
INCOME TAXES. The provision for income taxes as a percentage of pre-tax
income for the three months ended September 30, 1999 is 44.5%, which differs
from the statutory rate primarily as a result of non-deductible amortization in
excess of the purchase price over net assets acquired. This compares with an
effective tax rate of 5.0% in the prior year. The Company did not record a
provision for Federal income taxes in the prior year period due to the use of
net operating loss carry-forwards.
-8-
INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Nine Months Ended September 30, 1999 Compared to
Nine Months Ended September 30, 1998
- ------------------------------------------------
REVENUES. In the first nine months of 1999, the Company had revenues of
$39.9 million compared to revenues of $32.6 million in the first nine months of
1998, an increase of $7.3 million or 22.3%. The increase in revenues is
primarily due to an increase of $2.0 million in book sales at CRC Press; an
increase of $1.9 million in Internet sales at MicroPatent; an increase of $1.5
million in CRC Press electronic product sales; an increase of $2.1 million in
sales of patents and file histories at Optipat and Faxpat; and revenues of $1.3
million at MDC. These increases were partly offset by a decline of $1.2 million
at CRC's Auerbach unit, due in part to a transition to a web-based product line.
COST OF SALES. Cost of sales increased $2.5 million or 30.3% to $10.6
million in the first nine months of 1999 compared to $8.1 million in the
corresponding period in 1998. Cost of sales expressed as a percentage of
revenues in the first nine months of 1999 increased to 26.6% from 24.9% for the
corresponding period of 1998. The increase in the costs of sales percentage over
the comparable period in 1998 is primarily attributable to the inclusion of
recently acquired businesses, which have lower gross margins than the existing
businesses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A). SG&A expenses
increased $2.7 million or 14.8% in the first nine months of 1999, to $20.9
million from $18.2 million for the first nine months of 1998, principally as a
result of operating expenses of businesses acquired in 1999 and increased
personnel costs at CRC Press, due to business growth. SG&A expenses as a
percentage of revenues decreased to 52.4% in the first nine months of 1999,
compared with 55.9% in the corresponding 1998 period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
first nine months of 1999 decreased $0.2 million, or 4.7%, to $3.7 million from
$3.9 million in the corresponding period in 1998, due primarily to decreased
amortization of intangible assets.
SEVERANCE AND SPECIAL BONUSES. Included in the first nine months of
1998 is a charge of $1.0 million related to severance and special bonuses at a
subsidiary.
INTEREST INCOME. Interest income increased to $1.5 million from $0.7
million due primarily to interest earned on the proceeds from the initial public
offering.
INCOME TAXES. The provision for income taxes as a percentage of pre-tax
income for the nine months ended September 30, 1999 is 41.1%, which differs from
the statutory rate primarily as a result of non-deductible amortization in
excess of the purchase price over net assets acquired. This compares with an
effective tax rate of 7.7% in the prior year. The Company did not record a
provision for Federal income taxes in the prior year period due to the use of
net operating loss carry-forwards.
-9-
INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION:
Prior to August 1998, the financing requirements of the Company have been funded
through cash generated by operating activities and capital contributions from
the founding stockholders. In August 1998, the Company completed an initial
public offering of its common stock to raise funds. On September 24, 1999, the
Company entered into a seven-year revolving credit facility in an amount not to
exceed $50,000,000 initially, including a $10,000,000 sublimit for the issuance
of standby letters of credit (the Credit Facility). Total commitments under the
Credit Facility shall be permanently reduced to $45,000,000 at the end of the
third year, $37,500,000 at the end of the fourth year, $25,000,000 at the end of
the fifth year and $12,500,000 at the end of the sixth year. The proceeds from
the Credit Facility are intended to be used to fund acquisitions, to meet
short-term working capital needs and for general corporate purposes.
Borrowings under the Credit Facility bear interest at either the higher of the
bank's prime rate and one-half of 1% in excess of the overnight federal funds
rate plus a margin of 0.50% to 1.25% or the Eurodollar Rate plus a margin of
1.5% to 2.25% depending on the Company's ratio of indebtedness to earnings
before interest, taxes, depreciation and amortization. The Company also pays a
commitment fee of 0.375% on the unused portion of the Credit Facility. As of
September 30, 1999, the Company had no outstanding borrowings under the Credit
Facility.
Under the terms of the Credit Facility, the Company is required to maintain
certain financial ratios related to fixed charge coverage, leverage and interest
coverage, in addition to certain other covenants. As of September 30, 1999, the
Company was in compliance with all covenants. The Credit Facility is secured by
a first priority perfected pledge of all notes and capital stock owned by the
Company's subsidiaries and a first priority perfected security interest in all
other assets of the Company and its subsidiaries, subject to certain exceptions.
Obligations under the Credit Facility will be guaranteed by the Company and its
subsidiaries. The Credit Facility also prohibits the Company from incurring
certain additional indebtedness, limits certain investments, mergers or
consolidations and restricts substantial asset sales, and dividends.
Cash and cash equivalents totaled $2.9 million at September 30, 1999 compared to
$57.3 million at December 31, 1998. Excluding cash and cash equivalents, the
Company had working capital of $(0.7) million at September 30, 1999 compared to
working capital of $0.2 million at December 31, 1998. Since the Company receives
patent annuity tax payments and subscription payments in advance, the Company's
existing operations are expected to maintain very low or negative working
capital balances, excluding cash. Included in current liabilities at September
30, 1999 are obligations related to annuity payments and deferred revenue of
approximately $19.7 million.
-10-
INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION (CONTINUED):
Cash generated from operating activities was $2.3 million for the nine months
ended September 30, 1999, derived from net income of $3.5 million plus non-cash
charges of $5.5 million less an increase in operating assets, net of liabilities
of $6.7 million. The increase in net operating assets is primarily the result of
increased customer receivables as a result of the businesses acquired in fiscal
1999, offset by payment of royalties and other expenses related to book
publishing operations.
Cash used in investing activities was $55.7 million for the nine months ended
September 30, 1999 due to acquisition costs of $53.4 million and capital
expenditures, including pre-publication costs, of $2.3 million. Excluding
acquisitions of businesses and titles, the Company's existing operations are not
capital intensive.
Cash used in financing activities was $1.0 million for the nine months ended
September 30, 1999, primarily related to payments of $0.2 million on
approximately $2.8 million of capitalized lease obligations and $0.9 of fees
associated with the new Credit Facility. The Company has no outstanding debt
obligations at September 30, 1999 related to the new Credit Facility.
The Company believes that funds generated by operations, together with cash on
hand and borrowings available under its current credit facility will be
sufficient to fund the cash requirements of its existing operations for the
foreseeable future. The Company currently has no commitments for material
capital expenditures or agreements with respect to any prospective material
acquisitions. The Company may require or choose to obtain additional capital or
financing to consummate future acquisitions.
SEASONALITY
The Company's business is somewhat seasonal, with revenues typically reaching
slightly higher levels during the third and fourth quarters of each calendar
year, based on historical publication schedules. In 1998, 30% of the Company's
revenues were generated during the fourth quarter with the first, second and
third quarters accounting for 23%, 22% and 25% of revenues, respectively. In
addition, the Company may experience fluctuation in revenues from period to
period based on the timing of acquisitions and new product launches.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer systems that use two digits rather
than four to define the applicable year, which may prevent such systems from
accurately processing dates ending in the Year 2000 and after. This could result
in system failures or in miscalculations causing disruption of operations,
including, but not limited to, an inability to process transactions, to send and
receive electronic data, or to engage in routine business activities and
operations.
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INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
YEAR 2000 COMPLIANCE (CONTINUED):
The Company has completed its assessment of all currently used computer systems
and is in the final stages of completing a plan of action to correct those areas
that will be affected by the Year 2000 issue. Conversion of all critical data
processing systems is virtually complete. The Company anticipates that the
conversion of the remaining critical systems and all non-critical systems will
be completed by the end of November 1999. Presently, the Company has completed
the conversion of all environmental equipment, telephones, personal computer
hardware and software outside of the Company's information systems.
The Company expects the cost for all upgrades to be approximately $110,000; the
cost incurred to date is $70,000. The estimate includes internal costs, but
excludes the costs to upgrade and replace systems in the normal course of
business. The Company's goal is to complete any upgrade requirements by the end
of fiscal 1999, but does not expect that the cost for subsequent upgrades will
be material to the Company's consolidated financial statements.
Management's assessment of the risks associated with the Year 2000 project and
the status of the Company's contingency plans are unchanged from that described
in the 1998 Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
The information above contains forward-looking statements, including, without
limitation, statements relating to the Company's plans, strategies, objectives,
expectations, and intentions that are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. Readers are
cautioned that forward-looking statements contained in this Form 10-Q should be
read in conjunction with the Company's disclosures under the heading IMPORTANT
FACTORS RELATING TO FORWARD-LOOKING STATEMENTS contained in the Company's 1998
Annual Report on Form 10-K.
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INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed, Mason P. Slaine, the Company's President and
Chief Executive Officer, and Michael E. Danziger, a director of the
Company, are shareholders, officers and directors of Rand Publishing
Company Inc. (Rand), a private holding company that has made
investments in the publishing industry, and are defendants in a lawsuit
alleging that Mr. Slaine breached his fiduciary duty to certain other
investors and usurped corporate opportunities available to Rand by
investing in the Company and by participating in the acquisition by the
Company of various businesses.
On December 2, 1998, Rand and Mr. Slaine filed a motion to dismiss the
Rand investors' complaint against them. The court granted the motion on
November 3, 1999 on the grounds that the plaintiffs had not alleged
with particularity the efforts, if any, they had made to impel the
board of directors of Rand to initiate these derivative claims in the
first instance. The motion was granted with leave to plaintiffs to
serve an amended complaint setting forth in detail the reasons why such
demand on the Rand board would have been futile.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The following report relates to the Company's initial public offering:
Commission file number of registration statement: 333-56665
Effective Date: August 6, 1998
Expenses incurred through September 30, 1999:
Underwriting discounts $ 3,887,747
Other expenses $ 1,589,413
Total expenses $ 5,477,160
Application of proceeds through September 30, 1999:
Acquisition of business and titles $ 51,112,080
Temporary investments (US Treasury Bills) $ --
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1 Credit Agreement among IHI, Warburg, Pincus Information
Ventures, Inc., Information Ventures L.L.C., various lenders,
Bank of America, N.A., as Documentation Agent, and Bankers
Trust Company, as Administrative Agent, dated as of September
24, 1999.
10.2 Form of Pledge Agreement entered into by IHI and its
subsidiaries and Bankers Trust Company, as collateral Agent,
dated as of September 24, 1999.
10.3 Form of Security Agreement among IHI, Warburg, Pincus
Information Ventures, Inc., Information Ventures L.L.C.,
certain of its subsidiaries and Bankers Trust Company, as
Collateral Agent, dated as of September 24, 1999.
10.4 Form of Subsidiaries Guaranty, dated as of September 24, 1999.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
1 Current Report on Form 8-K dated August 20, 1999, Item 2 was
reported. The registrant announced that it had completed its
acquisition of all of the outstanding capital stock of Master
Data Center, Inc., a Michigan corporation, for cash
consideration of approximately $33,000,000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INFORMATION HOLDINGS INC.
Date: November 12, 1999 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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