UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-14371
INFORMATION HOLDINGS INC
(Exact name of registrant as specified in its charter)
Delaware 06-1518007
- ----------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
23 Old Kings Highway South, Darien, CT 06820
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(203) 662-4203
------------------------------------------
(Registrant's telephone number,
including area code)
Not Applicable
------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
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 periods that the registrant was
required to file such reports) and, (2) has been subject to such filing
requirements for the past 90 days. YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Outstanding as
Class of September 18, 1998
----- ---------------------
Common Stock, par value $.01 16,943,189
INFORMATION HOLDINGS INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Page
----
Consolidated Statements of Operations for the
three months and six months ended June 30, 1997 and June 30, 1998...............3
Consolidated Balance Sheets as of December 31, 1997 and June 30, 1998................4
Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and June 30, 1998................................5
Notes to Consolidated Financial Statements...........................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......................................13
Item 6. Exhibits and Reports on Form 8-K...............................................14
Signatures ...............................................................................15
2
Information Holdings Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
(in thousands, except per share data) 1997 1998 1997 1998
Revenues $ 7,145 $ 10,345 $ 15,843 $ 21,073
Costs and expenses:
Cost of sales 2,195 2,518 4,863 5,376
Selling, general and administrative expenses 5,248 6,347 10,853 12,319
Depreciation and amortization 322 1,293 581 2,571
--------- --------- --------- ---------
Total operating expenses 7,765 10,158 16,297 20,266
--------- --------- --------- ---------
Operating income (loss) (620) 187 (454) 807
Interest income (expense), net 34 31 (93) 68
Other expenses (142) 0 (142) 0
--------- --------- --------- ---------
Income (loss) before income taxes (728) 218 (689) 875
Provision for income taxes 0 36 0 92
--------- --------- --------- ---------
Net income (loss) $ (728) $ 182 $ (689) $ 783
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma income data:
Income (loss) before income taxes, as reported $ (728) $ 218 $ (689) $ 875
Pro forma income taxes 0 36 0 92
--------- --------- --------- ---------
Pro forma net income (loss) $ (728) $ 182 $ (689) $ 783
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma earnings (loss) per share $ (0.04) $ 0.01 $ (0.04) $ 0.05
--------- --------- --------- ---------
--------- --------- --------- ---------
See notes to consolidated financial statements.
3
Information Holdings Inc.
Consolidated Balance Sheets
(in thousands)
December 31, June 30, June 30,
1997 1998 1998
(unaudited) Pro forma
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 10,280 $ 9,373 $ 60,712
Accounts receivable, net 4,968 3,374 3,374
Inventories 3,803 3,979 3,979
Prepaid expenses and other current assets 1,466 2,529 2,529
-------- -------- --------
Total current assets 20,517 19,255 70,594
Property and equipment, net 4,041 3,791 3,791
Pre-publication costs 3,289 2,775 2,775
Other assets 826 1,148 1,148
Publishing rights and other intangible assets, net 21,519 19,698 19,698
Deferred tax asset 27 27 27
-------- -------- --------
Total assets $ 50,219 $ 46,694 $ 98,033
-------- -------- --------
-------- -------- --------
Liabilities and stockholders' equity
Current liabilities:
Current portion of capitalized lease obligations $ 233 $ 253 $ 253
Accounts payable 2,950 1,591 1,591
Accrued expenses 3,511 3,288 3,288
Royalties payable 1,749 1,716 1,716
Deferred subscription revenue 7,582 6,991 6,991
-------- -------- --------
Total current liabilities 16,025 13,839 13,839
Capital leases 2,955 2,822 2,822
Long-term debt 2,000 0 0
Other long-term liabilities 683 683 683
-------- -------- --------
Total liabilities 21,663 17,344 17,344
-------- -------- --------
Stockholders' equity:
Class A preferred 31,804 31,804 0
Class B preferred 1,663 1,674 0
Common stock 0 0 169
Paid in capital 0 0 84,648
Retained deficit (4,911) (4,128) (4,128)
-------- -------- --------
Total stockholders' equity 28,556 29,350 80,689
-------- -------- --------
Total liabilities and stockholders' equity $ 50,219 $ 46,694 $ 98,033
-------- -------- --------
-------- -------- --------
See notes to consolidated financial statements.
4
Information Holdings Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended June 30,
1997 1998
Cash flows from operating activities
Net income (loss) $ (689) $ 783
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 581 2,571
Amortization of pre-publication costs 1,186 1,108
Changes in assets and liabilities:
Accounts receivable (2,530) 1,594
Inventories 699 (176)
Prepaid expenses and other current assets (919) (1,063)
Accounts payable and accrued expenses 2,045 (1,582)
Royalties payable 271 (33)
Deferred subscription revenue 287 (591)
Other 710 (367)
---------- ----------
Net cash provided by operating activities 1,641 2,244
---------- ----------
Cash flows from investing activities
Purchase of property and equipment (278) (295)
Pre-publication costs (800) (594)
Acquisitions of businesses and titles (23,180) (160)
---------- ----------
Net cash used in investing activity (24,258) (1,049)
---------- ----------
Cash flows from financing activities
Repayments under line of credit 0 (2,000)
Capital contributions 24,967 11
Payments on capitalized lease obligations (86) (113)
---------- ----------
Net cash provided by (used in) financing activities 24,881 (2,102)
---------- ----------
Net increase (decrease) in cash and cash equivalents 2,264 (907)
Cash and cash equivalents at beginning of period 0 10,280
---------- ----------
Cash and cash equivalents at end of period $ 2,264 $ 9,373
---------- ----------
---------- ----------
See notes to consolidated financial statements.
5
Information Holdings Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 1998
1. Business Operations
Information Ventures LLC ("IV"), a wholly owned subsidiary of
Information Holdings Inc. ("IHI"), was formed on December 2, 1996 to create
and build an information and publishing business. IV functions as a holding
company and, through its subsidiaries, publishes information in print and
electronic media in the fields of science, technology, business,
environmental science, intellectual property, and certain related
disciplines. Products are distributed on a worldwide basis, and the business
has operating offices in the United States and Europe. Prior to IV's initial
acquisition, which occurred effective as of January 1, 1997, IV had no
operations or assets.
2. Initial Public Offering
On August 12, 1998, the members of IV contributed all of their direct
and indirect equity interests to IHI, a newly formed Delaware corporation, in
exchange for 12,200,000 shares of common stock of IHI representing 100 % of
the initial outstanding equity interests (the "Exchange").
Effective August 12, 1998, IHI sold 4,250,000 additional shares of
common stock in an initial public offering at $12.00 per share. Subsequently,
the underwriters exercised an option and purchased an additional 472,356
shares at $12.00 per share. Net proceeds, after deducting underwriting
discounts and expenses, of approximately $51.3 million are available for
general corporate purposes, including acquisitions. IHI, together with IV and
its subsidiaries are referred to as the "Company". In August 1998, the
Company used approximately $3.7 million of the proceeds to acquire two
product lines as described in Note 8.
3. Basis of Presentation
The consolidated financial statements presented herein include the
accounts of IV and subsidiaries; all of which are wholly owned. Because IHI
had no business operations prior to the Exchange, the balance sheet and
statement of operations for IHI are not included herein. All material
inter-company accounts and transactions have been eliminated in
consolidation. All acquisitions have been accounted for using the purchase
method of accounting, and operating results have been included from the
respective dates of acquisition.
The financial statements are unaudited but include all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of the financial position, operating
results and cash flows for such periods. The results of such periods are not
necessarily indicative of operating results to be expected for a full year.
6
4. Pro Forma Adjustments
The pro forma balance sheet as of June 30, 1998 reflects the proceeds
of the initial public offering of the Company's common stock completed in
August 1998 (the "Offering"). The pro forma adjustments reflect the proceeds
of the Offering, net of underwriting discounts and expenses, and the impact
of the Exchange, as if such transactions occurred on June 30, 1998.
No historical earnings per share data are presented, as the Company
does not consider such data meaningful. The pro forma earnings (loss) per
share data presented were computed using 16,943,185 shares outstanding, which
reflects all shares outstanding following the Offering, as if such shares
were outstanding since January 1, 1997.
5. 1998 Stock Option Plan
In conjunction with the Offering, the Board of Directors of the
Company adopted the Company's 1998 Stock Option Plan (the "Plan"). All
directors and full-time employees of the Company are eligible to participate
in the Plan. The aggregate number of shares of common stock as to which stock
options may be granted under the Plan may not exceed 866,886, subject to
adjustment as provided in the Plan.
Options to purchase an aggregate of 528,213 shares under the Plan were
granted on August 12, 1998. Such options are exercisable at a price of $12.00
per share and vest in four annual equal installments beginning on the first
anniversary of the date of grant, except that the options granted to the
Company's independent directors and certain executive officers have
accelerated vesting schedules.
6. Debt
As of June 30, 1998, a subsidiary of the Company maintained a
revolving line of credit (the "Credit Line") borrowing arrangement of
$5,000,000 with State Street Bank. There were no borrowings outstanding under
the Credit Line on June 30, 1998. In July 1998 the Company terminated the
Credit Line.
7. Pro forma Income Taxes
As discussed in Note 2, in connection with the Offering, IV will
become a wholly owned subsidiary of IHI, which will be subject to federal
income taxes.
The pro forma provisions for income taxes do not differ significantly
from the historical amounts reported, because the Company has established
valuation allowances to fully reserve for the net deferred tax asset. The net
deferred tax asset has been fully reserved as the Company believes it is more
likely than not that the asset will not be realized.
7
8. Subsequent Events
In August 1998 the Company acquired two product lines for
consideration of approximately $3.7 million in cash: the Chapman & Hall list
of mathematics and statistics books; and Chapman & Hall's electronic
databases and books in the chemistry field. The majority of the purchase
price is expected to be allocated to publishing rights and other intangible
assets.
In September 1998 a subsidiary of the Company entered into a loan
agreement with an executive officer. Under the terms of the loan agreement,
the subsidiary provided a loan of $550,000 bearing interest at a rate of 5.5%
per annum; payable on demand.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Overview
The Company is an information publisher that provides print and
electronic information to end-users in the STM and professional markets and
electronic access to intellectual property databases for end-users in the
patent and trademark markets. The Company currently sells over 3,000
individual book titles and publishes approximately 300 new books each year.
The Company also offers multiple subscription products and services,
including journals, newsletters, annual handbooks and comprehensive
information guides that are available in print and electronic formats. The
Company offers its intellectual property databases on CD-ROM and through the
Internet.
The Company's principal sources of revenues are book publishing sales,
subscription service sales and sales of patent and trademark information.
Through CRC Press, the Company generates revenues from the sale of books and
subscription products (72% and 28%, respectively, of total CRC Press revenues
in the first six months of 1998). The Company believes that its book and
subscription titles generate significant recurring demand. For example, while
the Company published approximately 285 frontlist titles in 1997, it had a
backlist of nearly 3,000 titles which accounted for approximately 68% of the
Company's total book publishing revenues in 1997. Through MicroPatent, the
Company generates revenues from Internet-based services, CD-ROM subscriptions
and other products including database sales of historical and customized
patent information (38%, 38% and 24%, respectively, of total MicroPatent
revenues in the first six months of 1998). The Company expects that new
publishing media, such as the Internet, will grow in significance in the
future. Of the Company's total revenues of $21.1 million for the first six
months of 1998, 82% and 18% were derived from CRC Press and MicroPatent,
respectively.
Impact of Acquisitions and Outlook
The Company was organized in December 1996 by Mason Slaine and Warburg,
Pincus Ventures L.P. (the "Initial Stockholders") and, since its inception,
has grown principally through acquisitions. As the Company acquires
additional companies, its sales mix, market focus, cost structure and
operating leverage may change significantly. Consequently, the Company's
historical and future results of operations reflect and will reflect the
impact of acquisitions, and period-to-period comparisons may not be
meaningful in certain respects. Historical information for companies
subsequent to their acquisition may include integration and other costs that
are not expected to continue in the future.
In 1997 and early 1998, the Company recorded certain adjustments (the
"Adjustments") in conjunction with the acquisition and reorganization of CRC
Press and other businesses, as well as certain compensation matters. The
Adjustments reduced revenues and operating loss of $7.1 million and ($.6)
million for the three months ended June 30, 1997 by approximately $.7 million
and $1.1 million, respectively. The Adjustments reduced revenues and
operating loss of $15.8 million and ($.5) million for the six months ended
June 30, 1997 by approximately $1.4 million and $3.8 million, respectively.
Management does not expect these items to continue in the future, although
other issues may arise from future acquisitions.
9
Results of Operations
Three Months ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Revenues. Revenues increased by $3.2 million, or 44.8%, from $7.1
million to $10.3 million due to: an increase of $2.3 million related to
Auerbach and MicroPatent, businesses acquired in June 1997 and July 1997,
respectively; an increase of $.6 million in domestic book sales; and an
increase of $.7 million related to the Adjustments. These increases were
partially offset by a decrease in international book sales of $.7 million.
Cost of Sales. Cost of sales increased by $.3 million, or 14.7%, from
$2.2 million to $2.5 million due to an increase of $.4 million related to
Auerbach and MicroPatent. As a percentage of revenue, cost of sales declined
from 30.7% to 24.3% based on improved gross margins at CRC Press and the
higher gross margins of acquired businesses.
Selling, general and administrative expenses (SG&A). SG&A increased by
$1.1 million, or 20.9%, from $5.2 million to $6.3 million, due to operating
expenses at MicroPatent and at CRC to support the integration of Auerbach.
All other expenses were relatively constant in the aggregate.
Depreciation and Amortization. Depreciation and amortization increased
by $1.0, million or 301%, from $.3 million to $1.3 million. Amortization of
intangible assets related to the MicroPatent acquisition was $.8 million, and
MicroPatent depreciation was $.1 million in the second quarter of 1998.
Net Income. Net income increased by $.9 million to $.2 million from a
loss of $.7 million due to the factors described above.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenues. Revenues increased by $5.2 million, or 33.0%, from $15.9
million to $21.1 million due to: an increase of $5.4 million related to
Auerbach and MicroPatent; an increase of $2.6 million in domestic book sales;
and an increase of $1.4 million related to the Adjustments. These increases
were offset by a decline of $4.5 million in international book sales due
primarily to a one-time stocking order received from a new international
distributor in early 1997.
Cost of Sales. Cost of sales increased by $.5 million, or 10.5%, from
$4.9 million to $5.4 million due to an increase of $1.3 million related to
Auerbach and MicroPatent, partly offset by a decrease of $.8 million due to
the decline in international book sales. As a percentage of revenue, cost of
sales declined from 30.7% to 25.5% based on improved gross margins at CRC
Press and the higher gross margins of acquired businesses.
Selling, General and Administrative Expenses (SG&A). SG&A increased by
$1.5 million, or 13.5%, from $10.8 million to $12.3 million due to: an
increase of $2.5 million related to Auerbach and MicroPatent; an increase of
$1.1 million in other expenses, including higher direct mail marketing costs;
and a decrease of $2.1 million related to the Adjustments.
10
Depreciation and Amortization. Depreciation and amortization increased
by $2.0 million, or 343%, from $.6 million to $2.6 million. Amortization of
intangible assets related to the MicroPatent acquisition was $1.6 million,
and MicroPatent depreciation was $.2 million in the six months ended June 30,
1998.
Net Income. Net income increased by $1.5 million to $.8 million compared to
a loss of $.7 million due to the factors described above.
Liquidity and Capital Resources
Historically, the financing requirements of the Company have been funded
through cash generated by operating activities and capital contributions from
the Initial Stockholders.
Cash and cash equivalents totaled $9.4 million at June 30, 1998 and
$10.3 million at December 31, 1997. Excluding cash, the Company had a working
capital deficit of $4.0 million at June 30, 1998 due primarily to the
inclusion of $7.0 million of deferred subscription revenues, a non-cash
obligation. Since the Company receives subscription payments in advance, the
Company's existing operations are expected to maintain very low or negative
working capital balances, excluding cash. On a pro forma basis, the Company
had approximately $60.7 million in cash at June 30, 1998, which includes the
proceeds of the Offering, net of underwriting discounts and expenses.
Cash generated by operating activities was $2.2 million for the six
months ended June 30, 1998 derived from net income of $.8 million plus
non-cash charges of $3.7 million less an increase in operating assets, net of
liabilities of $2.2 million. This increase in operating assets and
liabilities was primarily due to payments associated with the Adjustments.
Cash used by investing activities was $1.0 million for the six months
ended June 30, 1998 due to capital expenditures, including pre-publication
costs, of $.9 million and acquisition costs of $.1 million. The Company's
existing operations are not capital intensive.
Cash used for financing activities was $2.1 million for the six months
ended June 30, 1998 representing payment of debt. The Company has no debt
obligations as of June 30, 1998, other than approximately $3.1 million in
capitalized lease obligations. The Company currently does not maintain a
working capital facility but believes that, if needed, one would be available
at market rates.
The Company believes that net cash provided by operations, together with
cash on hand and other available sources of funds, will be sufficient to fund
the cash requirements of its existing operations. Excluding acquisition
activity, the Company does not expect to use the proceeds of the Offering to
fund operations. The Company currently has no commitments for material
capital expenditures. However, future operating requirements and capital
needs will be subject to economic conditions and other factors, many of which
are beyond the Company's control.
The Company will use net proceeds from the Offering for general
corporate purposes including acquisitions. Other than the acquisition of
product lines described in Note 8, the Company does not have any agreements,
arrangements or understandings with respect to any prospective material
acquisitions. Pending such uses, the net proceeds will be invested in
short-term, investment grade securities.
11
Seasonality
The Company's business is mildly seasonal, with revenues typically
reaching slightly higher levels during the third and fourth quarters of each
calendar year, based on historical publication schedules. In 1997, on a pro
forma basis, 24% of the Company's revenues were generated during the fourth
quarter with the first, second and third quarters accounting for 29%, 23% and
24% of revenues, respectively. The first quarter of 1997 was
uncharacteristically high due to an initial stocking order from a new
international distributor. Excluding this order, first through fourth quarter
revenues were 22%, 25%, 27% and 26%, respectively. In addition, the Company
may experience fluctuations in revenues from period to period based on the
timing of acquisitions and new product launches.
Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued SFAS No. 132,
Employers' Disclosure About Pensions and Other Post-Retirement Benefits, and
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 132 contains no change in the Company's disclosure requirements, and
SFAS No. 133 has no impact on the Company's financial position or results of
operations.
Year 2000 Issue
The Company has developed a plan to modify its information technology to
be ready for the year 2000 and has begun converting critical data processing
systems. The Company expects the projects to be completed by mid-1999 at a
cost of approximately $.2 million. The estimate includes internal costs, but
excludes the costs to upgrade and replace systems in the normal course of
business. The Company does not expect these projects to have a significant
effect on operations. As of June 30, 1998, there have been no significant
expenses incurred.
The Company is in the process of communicating with its customers and
suppliers in an effort to assess the status of their year 2000 issues. The
Company has not yet formed an opinion as to whether its customers or
suppliers will be able to resolve their year 2000 issues in a satisfactory
and timely manner, or the magnitude of the adverse impact it would have on
the Company's operations, if they fail to do so.
12
INFORMATION HOLDINGS INC.
PART II. OTHER INFORMATION
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
Offering date: August 6, 1998
Offering terminated? Yes, prior to the sale of all securities
registered (over-allotment exercised only
in part).
Managing underwriters: Merrill Lynch, Pierce, Fenner & Smith
Incorporated and BT Alex. Brown
Incorporated.
Class of securities: Common stock, par value $.01
Amount registered: 4,887,500 shares (for account of the
Company only)
Aggregate price of amount registered (high end of
pricing range): $68,425,000
Amount sold: 4,722,356 shares
Aggregate price of amount sold: $56,589,240
Expenses incurred through August 31, 1998:
Underwriting discounts $3,887,747
Other expenses (estimated) $1,400,000
Total expenses (estimated) $5,287,747
Amount of expenses paid to directors, officers,
associates thereof, 10% holders or affiliates: None
Net offering proceeds: $51,301,493
Application of proceeds through August 31, 1998:
Acquisition of product lines $3,644,325
Temporary investments (U.S. treasury bills) $47,657,168
Amount of proceeds paid to directors, officers,
associates thereof, 10% holders or affiliates: None
13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation*
3.2 Bylaws*
4.1 Specimen Stock Certificate*
27.1 Financial Data Schedule
*Incorporated by reference to the identically numbered exhibit to the
Company's Registration Statement on Form S-1, file no. 333-56665.
(b) Reports on Form 8-K
None
14
SIGNATURES
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.
Date: September 21, 1998
INFORMATION HOLDINGS INC.
(Registrant)
By: /s/ Mason Slaine
----------------------------------------
Mason Slaine, President and
Chief Executive Officer
By: /s/ Vincent Chippari
----------------------------------------
Vincent Chippari, Executive Vice President
and Chief Financial Officer
15