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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file No. 1-14371
INFORMATION HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1518007
(State of incorporation) (IRS Employer Identification No.)
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)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $0.01 PER SHARE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed 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. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of
the registrant on March 15, 2002 was approximately $336,197,000, based upon the
March 15, 2002 closing sale price of the common stock of $27.89 as reported by
the New York Stock Exchange.
The number of outstanding shares of Common stock, par value $0.01 of the
registrant outstanding as of March 15, 2002 was 21,760,174 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12 and 13 of Part III are incorporated by reference to the
definitive proxy statement relating to the registrant's Annual Meeting of
Stockholders for fiscal 2001, which definitive proxy statement will be filed
within 120 days of the end of the registrant's fiscal year.
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TABLE OF CONTENTS
PART I
Page
Item 1. Business.................................................................................1
Item 2. Properties..............................................................................10
Item 3. Legal Proceedings.......................................................................10
Item 4. Submission of Matters to a Vote of Security Holders.....................................10
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters.........................................................11
Item 6. Selected Financial Data.................................................................12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........................................14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..............................21
Item 8. Financial Statements and Supplementary Data.............................................23
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................................................23
PART III
Item 10. Directors and Executive Officers of the Registrant......................................24
Item 11. Executive Compensation..................................................................24
Item 12. Security Ownership of Certain
Beneficial Owners and Management........................................................24
Item 13. Certain Relationships and Related Transactions..........................................24
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K......................................................25
Signatures.........................................................................................28
PART I
ITEM 1. BUSINESS
OVERVIEW
Information Holdings Inc. (IHI or the Company) is a leading provider of
information products, software and services to professional end-users in
intellectual property, scientific and information technology (IT) learning
markets. Since beginning operations in 1997, IHI has grown substantially, both
through acquisitions and internal growth. For the year ended December 31, 2001,
revenues were $105.3 million and net income was $7.8 million. EBITDA (earnings
before interest, taxes, depreciation and amortization) was $31.2 million in
fiscal 2001, an increase of 80% over EBITDA of $17.4 million in fiscal 2000.
The Company's Intellectual Property (IP) Group provides a broad array of
databases, information products, software and complementary services for IP and
regulatory professionals. The IP Group is comprised of three primary business
units: MicroPatent, Master Data Center (MDC) and Liquent-IDRAC. MicroPatent,
acquired in 1997, is a leading provider of patent and trademark information to
IP professionals in corporate and legal markets. MDC, acquired in 1999, provides
specialized services and software that enable customers to manage IP portfolios.
The Liquent-IDRAC unit was formed following the acquisitions of IDRAC in March
2001 and Liquent in December 2001. Liquent-IDRAC provides content assembly,
publishing and IP information solutions, primarily to regulatory professionals
in the life sciences industry. The IP Group provided approximately 40% of IHI's
consolidated revenues in fiscal 2001. Based on the acquisition of Liquent-IDRAC,
the Company believes that this percentage will increase in fiscal 2002.
The Company's scientific and technology information segment is comprised of CRC
Press and its subsidiaries. CRC Press, acquired in 1997, provides information
products to professionals in the scientific, technical and medical (STM)
markets. CRC Press, with a 99-year history, has established leading positions in
several niche markets. CRC Press has acquired several businesses and product
lines and currently provides reference products under imprints including CRC
Press, Parthenon Press, Chapman & Hall/CRC, Lewis Publishers, Food Chemical
News, Auerbach and St. Lucie Press. CRC Press has significant proprietary
content, including a library of over 5,000 previously published titles, which
generates substantial recurring demand. The scientific and technology
information businesses provided 40% of IHI's consolidated revenues in fiscal
2001. The Company believes that this percentage will decrease in fiscal 2002.
In November 2000, the Company entered the IT learning market with the
acquisition of the assets of Transcender Corporation (Transcender). Transcender
provides IT certification test-preparation products, including exam simulations
for certifications from major hardware and software providers. Transcender is a
leading online provider of test-preparation products for IT professionals,
corporations, learning centers and universities. IT learning revenues provided
20% of the Company's consolidated revenues in fiscal 2001. The Company believes
that this percentage will decrease in fiscal 2002.
See Note 13 of the Notes to Consolidated Financial Statements for additional
business segment information.
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MARKETS
INTELLECTUAL PROPERTY
The Company provides products and services in several areas within the IP
market, including patent and trademark information, patent and trademark
management services and regulatory and IP information solutions for drugs and
biologics. These markets are difficult to quantify with precision because of a
lack of third party market information, free services from governmental
authorities and the level of services performed "in-house" by corporations and
law firms.
The Company estimates that current annual revenue in the market for search and
retrieval of patent information is $300-500 million. This market includes
primary information, which is the actual full text and images of patent
documents, and secondary information, which consists of abstracts and indexes of
patent information. While the market for secondary information is the larger
component of the patent information market, the Company believes it is growing
at a slower rate than the market for primary information. Historically, patent
information was researched using secondary information providers due to the
complexity of finding and reviewing lengthy and complicated patent documents
from diverse sources. In recent years, however, the primary information market
has experienced strong growth based on development of technologies that enable
storage, searching and viewing of actual patent text and images. Management
believes that the Company is the largest commercial provider of primary patent
information on a worldwide basis.
The Company estimates that current annual revenue in the market for outsourced
patent and trademark management services is $100-200 million. The market
includes license revenues for IP portfolio management software and revenues
associated with annuity payment services. Consistent market growth has been
fueled by factors including the increasing number of active patents and
trademarks, increasing complexity associated with managing IP portfolios,
greater interest in maintaining and enforcing IP rights and increasing levels of
outsourcing to firms with industry expertise, such as MDC. The Company believes
that MDC is the leading provider of patent management services in the United
States (U.S.) market.
The Company has not attempted to quantify the overall market size for content
assembly, publishing and regulatory and IP information solutions in the life
science industry because of the Company's recent entry into the field, the lack
of third party market estimates and the inability to determine revenues from
private companies in the market. The Company believes that Liquent-IDRAC is the
largest worldwide provider of such solutions, both with respect to content
assembly and publishing software and regulatory databases. The Company believes
that the following factors will lead to strong growth in the primary market for
Liquent-IDRAC's products:
- Significant levels of research and development spending by companies in
the life sciences industry;
- Regulatory initiatives that will require electronic submissions of
document-intensive filings, such as new drug applications;
- Changes in global regulations that will require new product development;
- Technological advancements enabling higher levels of electronic document
management and integration with other systems; and
- Life science company needs for products that increase efficiency of technical
documentation, enable re-use of information throughout an enterprise and reduce
"time-to-market" for new products.
The Company believes that Liquent-IDRAC's solutions have applicability outside
its core pharmaceutical customer base within industries that must fulfill
regulatory requirements via complex documentation, including biotechnology,
medical devices, generic pharmaceuticals,
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governmental agencies and food and cosmetics. In addition, any
document-intensive industry could potentially have the need for Liquent-IDRAC
technology for assembly and publishing of items such as technical manuals, bids,
proposals and marketing materials, as well as archival and storage of
intellectual property through XML solutions.
SCIENTIFIC AND TECHNOLOGY INFORMATION
The Company provides information products in selected niches of the professional
information market. These products generally fall into the STM areas, a market
that exceeded $7 billion in fiscal 2000, according to the annual Veronis Suhler
Communications Industry Forecast. The market, which is global in nature, has
achieved relatively consistent growth over the past decade based on factors such
as:
- Constantly increasing complexity within scientific research;
- Increasing globalization of STM markets;
- Technological advancements that enable greater distribution of content; and
- Impact of the Internet, such as e-books, downloading and site licensing.
The professional information market has hundreds of niche information areas and
individual titles are generally unique. As a result, there is often little
competition for specific titles. The Company targets end-users, mostly
professionals, with high-end specialized information products. These information
products are focused in areas with significant numbers of end-users, such as
chemists, engineers, mathematicians, physicians, technology professionals and
environmental scientists. The end-users are generally not price sensitive due to
the critical nature of the information.
IT LEARNING
The Company sells products within a component of the IT
certification/test-preparation market. The industry research firm IDC estimates
that this market currently exceeds $2.5 billion in annual revenue. This market
includes both a test certification segment and a test-preparation segment. The
Company competes in the latter segment, a market currently estimated by IDC to
have annual revenues of approximately $1.0 billion. Within this segment, there
is a further segmentation between instructor-led training (ILT), video training
products, print-based test preparation materials and electronic exam simulations
similar to those offered by Transcender. The Company believes that Transcender
is the worldwide market leader in its niche.
The IT certification market experienced significant growth in the past several
years. An IDC research report indicates that annual IT certification tests
delivered to end-users reached approximately 3.5 million in 2000, up from less
than 1 million just five years earlier. IDC estimated that there were over 2
million certified IT professionals by the end of 2000. The largest sponsors of
IT certifications are Microsoft, CompTIA, Novell and Cisco.
IT markets in general have been negatively impacted in the past year by overall
economic conditions and reduced corporate spending levels. While the Company
believes this has had the most impact on the ILT segment of the market, the
Company's niche is experiencing growth constraints in the near term. Longer
term, the Company continues to anticipate significant growth in the IT
certification market based on several factors, including:
- Continual advances in technology;
- Growth in IT employment levels;
- Increases in technology-based corporate training;
- Growth in the number of certifications, re-certifications and multiple
certifications; and
- Insufficient college-level training.
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PRODUCTS
IP PRODUCTS AND SERVICES
PATENT AND TRADEMARK INFORMATION SERVICES
The Company believes it offers the most comprehensive primary patent information
service in the world for both document images and searchable full text. The
information assets are supported by sophisticated search software and tools that
facilitate research and management of patent information. The patent collection
includes exact images of all patents ever issued by the United States Patent and
Trademark Office (USPTO) and the European Patent Office (EPO), as well as patent
documents from the World Intellectual Property Organization and Japanese Patent
Office. In addition, the Company also provides access to a special collection of
patents covering over 50 additional countries. Searching patent information can
be done using bibliographic data or, for a substantial portion of the
collection, the full text of the patent documents. The primary product offerings
in this area are Internet-based searching and downloading products, sold on
either a subscription or pay-per-use basis. There are also customized database
and technology applications for major corporations.
Patent documents and patent file histories are also sold in paper and electronic
formats. The Company also provides a trademark search service that enables users
to search U.S. federal, U.S. state, common law and selected foreign trademarks
over the Internet. Selected IP data is also sold to Reed Elsevier, a major
information and publishing company, with such information being made available
to its online customers in the legal market. Patent and trademark information
services provided 23% of the Company's consolidated revenues in 2001.
IP MANAGEMENT SERVICES
The Company provides a service that organizes and assists owners of IP,
including corporate and legal clients, with the payments of patent annuities on
a worldwide basis. Due to the fact that the rules for filing and maintaining
patents are fairly complex and vary among the various regulatory authorities
around the world, owners of IP in domestic and foreign markets, including many
major corporations and law firms, use service providers to track filing and
payment requirements and to make these payments on their behalf. The service is
priced on a per payment basis, with cash received from customers in advance of
applicable payment dates. The Company currently processes approximately 300,000
annual payments on behalf of its clients. The service is supported by a
proprietary database that includes the current rules for filing and maintenance
of patents in every major patent jurisdiction in the world. In addition, the
Company licenses complementary software in the corporate and legal markets that
enable customers to manage, track and report intellectual property. IP
management services provided 11% of the Company's consolidated revenues in 2001.
CONTENT ASSEMBLY, REGULATORY AND IP INFORMATION SOLUTIONS
The Company's products in this area generally fall into two categories: software
solutions and related services that enable users throughout an enterprise to
collaborate in the authoring, compilation, distribution, publishing and reuse of
information; and database services that provide related information on
regulatory guidelines in major pharmaceutical markets worldwide. The Company's
products are used in the life sciences industry and, most predominantly, in
large pharmaceutical and biotechnology companies, as well as contract research
organizations.
The most typical application of the Company's services is related to the process
for preparing and filing new drug applications and biologics licensing
applications. These regulatory dossiers are
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large complex documents, typically running in excess of 200,000 pages. The
process for registering a new therapeutic is also highly complex and varies
between jurisdictions worldwide.
The Company's primary software product, Liquent CoreDossier, is designed to meet
the pre-market approval and compliance needs of life science organizations,
taking mission-critical information to an electronic environment. CoreDossier
assembles and publishes information from over 150 different native formats
including legacy documents, word processing, spreadsheets, charts, photos,
graphs, audio and video files and more.
The product improves publication and submission quality with varied output
options to regulatory authorities, contract research organizations, vendors and
other stakeholders. CoreDossier publishes active and archived documents to
standard formats such as paper, web portals, PDF, TIFF and industry-specific
standards. A product released in 2001, Liquent Xtent, is content middleware that
will convert over 150 different native formats into XML. The Company offers
additional software products that facilitate less complex publishing needs,
provide web access to documents and create various reports. Software products
are typically licensed to customers, with paid maintenance provided as an annual
subscription.
The Company also offers a full suite of consulting and outsourcing resources for
its life science customers. Its services include implementation consulting and
customization of its software solutions, education and end-user training,
technical support and comprehensive services to prepare and publish large
compound documents on an outsourced basis. Consulting services are generally
priced on a time and materials basis, with certain outsourcing services priced
on a fixed fee basis.
The Company's IDRAC database service provides the rules and regulations for
registering new drugs in 27 jurisdictions worldwide. The product is sold on an
annual subscription basis, most commonly accessed via the Internet.
Content assembly and related products provided 6% of the Company's consolidated
revenues in 2001. The Company believes that this percentage will increase
substantially in 2002, based on the timing of the acquisitions of IDRAC and
Liquent.
SCIENTIFIC AND TECHNOLOGY INFORMATION
REFERENCE PRODUCTS - BOOK PUBLISHING
The majority of revenues in the scientific and technology information segment
are derived from book publishing. The Company has an extensive backlist of over
5,000 titles, which generates substantial recurring demand. During fiscal 2001,
approximately 67% of book sales were derived from backlist sales. In addition,
the Company produced approximately 320 new frontlist titles in fiscal 2001. The
Company expects to produce approximately 375-400 new titles in 2002. CRC Press
publishes primarily in the following areas:
- Life sciences (biology, neurology, pathology, forensics,
food science, marine science);
- Hard sciences (chemistry, physics, mathematics, statistics, engineering);
- Clinical medicine;
- Environmental sciences; and
- Information technology and business.
Life sciences and hard sciences combined provide approximately three-fourths of
active titles being sold. The Company has strong market positions in chemistry,
mathematics, statistics, engineering and environmental science. Revenues from
book publishing provided approximately 29% of consolidated revenues in fiscal
2001.
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Books are generally technical in nature with a practitioner-oriented approach.
By targeting professional end-users with high-end information products, the
Company is able to achieve premium pricing for its products. The average
retail-selling price for a CRC Press book is approximately $80. Sales tend to be
weighted toward the first two years following release and a typical book sells
over a 4-5 year period in total. There are titles that sell for much longer
periods, as well as titles that have annual editions.
SUBSCRIPTION SERVICES
CRC Press also offers numerous subscription-based products. Its Food Chemical
News division serves the food and chemical industries with newsletters and food
science guides, available in print and electronic formats. These products
command premium pricing and have aggregate renewal rates of approximately 70%.
CRC Press publishes journals under both the CRC Press and Parthenon Press
imprints, including primary journals of original research and secondary journals
that summarize professional literature in selected scientific areas. Aggregate
renewal rates for journals approximate 85%. Under its Auerbach imprint, CRC
Press provides high-level information products for the information technology
market in print and electronic formats. CRC Press also offers numerous
electronic databases on a site license basis or on CD-ROM. Database products are
focused in areas where CRC Press has significant proprietary content such as
chemistry and engineering. Revenues from CRC Press' subscription services
provided approximately 10% of consolidated revenues in fiscal 2001.
MEDICAL COMMUNICATIONS
CRC Press' Parthenon Press unit provides a medical communications service that
assists pharmaceutical companies in marketing and communications efforts. Such
services include organizing symposiums and meetings, private label publishing
and custom publishing. While currently a small percentage of the Company's
consolidated revenues, the Company believes medical communications has strong
growth potential.
IT LEARNING
The Company provides IT professionals with certification test-preparation
software, available over the Internet or on CD-ROM. The product is sold with a
standard license for a single user and with network and multi-user licenses also
available. The Company's primary product, TRANSCENDERCERT, covers certifications
from organizations including Microsoft, Cisco, Novell, Oracle and CompTIA.
Individual products are sold for $90-180, with "bundled packages" and corporate
site licenses also available.
The products use sophisticated software and technology to provide realistic exam
simulations. Each product includes questions in multiple formats, answer
explanations and documentation references (using both text and video
demonstration), score reports and computer adaptive testing, custom and random
exams and case studies. Products were historically sold primarily to individual
IT professionals, with an increasing focus on corporate and organizational
sales.
Transcender is currently developing a series of video IT training products that
will expand its product offerings beyond pure certification training tools. IT
learning products provided approximately 20% of the Company's consolidated
revenues in fiscal 2001.
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CUSTOMERS
INTELLECTUAL PROPERTY
The Company's IP products and services are sold primarily to major corporations
and law firms in the IP market. The Company has long-standing relationships with
a significant number of customers and its subscription-based IP products have
renewal rates of 90-100%. Customers include corporations in all major
industries, with a particular concentration in the chemical, pharmaceutical,
technology, manufacturing and packaged goods areas. In addition to the corporate
customer base, customers include the majority of the major intellectual property
law firms in the U.S. There are more than 100 IP customers contributing over
$50,000 in revenue per annum in the aggregate, although no individual customer
provides a significant percentage of revenue. Significant customers within the
Company's IP group include Philips Electronics, Novartis, Procter and Gamble,
Pfizer, Exxon/Mobil, Eli Lilly, DuPont, 3M, Ford, Motorola, GlaxoSmithKline,
Hewlett Packard, Dow Chemical, Johnson & Johnson and General Motors. The
Company's newly acquired Liquent-IDRAC unit provides products to mid-sized and
large-sized companies, primarily in the pharmaceutical and biotechnology
industries. Its customers include Bristol-Myers Squibb, Abbott Laboratories,
Aventis, AstraZeneca, Schering Plough, Novartis and Wyeth-Ayerst. Liquent-IDRAC
also licenses products to resellers that distribute the product outside of its
core life sciences market.
SCIENTIFIC AND TECHNOLOGY INFORMATION
Customers in this area are primarily professional end-users, including chemists,
mathematicians, engineers, biologists and information technology professionals.
These customers are primarily based in corporations, with additional sales being
made to individuals in academic settings, such as research institutions. The
Company maintains extensive in-house lists of professionals and academics in the
fields and niches in which it publishes. In addition to individuals, products
are also sold to major distributors that serve the Company's areas of focus,
such as Ingram, J.A. Majors and Baker & Taylor. Products are also sold to
broad-based retailers and Internet distributors, including Barnes & Noble and
Amazon.com. No individual customer provides a significant percentage of
revenues.
IT LEARNING
Transcender's products are sold to IT professionals in self-study programs,
instructor-led training courses, colleges and universities, and in corporations
with large IT staffing levels. In addition to individuals, customers for the
Company's products include training companies, universities and large
corporations. The majority of customers today are individuals, although there is
an increasing percentage of organizational and corporate sales. No individual
customer provides a significant percentage of revenues.
SALES, MARKETING AND DISTRIBUTION
IP products and services are sold primarily through an in-house sales force with
offices in the U.S. and Europe. The Company has dedicated sales personnel for
patent and trademark products, patent and trademark management services and
regulatory and IP information solutions. Prospects are identified through
referrals from existing customers, referrals from patent and trademark offices,
leads from trade shows and information requests from sources such as the
Internet. Additional international sales are made through a network of
distributors in Japan and elsewhere. The Company also sells information products
and licenses software products to distributors in the U.S. that resell its
products outside of its core markets, on both a private label and branded basis.
At December 31, 2001, the IP Group had a total of 59 employees in sales and
marketing, including 38 in the U.S. and 21 in Europe.
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Scientific and technical products are sold primarily through direct response
marketing. The Company has an in-house creative services and direct marketing
group which designs, manages, and produces direct mail campaigns and other
promotional support programs. There is also a small, highly experienced sales
force for professional book sales to academic and specialty bookstores,
wholesalers, catalogers and associations, as well as sales of site licenses to
corporations and academic institutions. Our scientific and technical information
sales and marketing group has 63 employees, including 60 in the U.S. and 3 in
Europe.
The Company sells IT learning products primarily through direct response
marketing, advertising in trade publications, Internet promotions and customer
referrals. The Company also has a small in-house sales force for sales to
organizations and corporations. The Company has a total of 22 employees in sales
and marketing in this segment, all based in the U.S.
COMPETITION
PATENT AND TRADEMARK INFORMATION MARKET
Management believes that the Company is the largest commercial provider of
primary patent information. Competition in this area comes primarily from patent
and trademark offices, particularly the USPTO and the EPO. Both offer useful,
low-end patent services, primarily geared toward academic users. Patent office
products tend to be most useful for those trying to obtain a specific patent,
but are generally less useful for research and high-end corporate and legal
applications. In addition, Delphion Inc. offers a patent service over the
Internet.
Traditional secondary information providers include Derwent Information, a unit
of the Thomson Corporation, and the Chemical Abstract Service of the American
Chemical Society. These companies have significant revenues in abstracting and
indexing services, but are not major factors in the primary information sector.
The major provider of full-search trademark market services is Thomson &
Thomson, a unit of Thomson Corporation.
IP MANAGEMENT SERVICES
The Company believes it is the largest provider of patent annuity and trademark
renewal payment services in the U.S. Computer Packages, Inc. is the only
significant competitor in the U.S. C.P.A. is the leading provider of annuity
payments in Europe, followed by Dennemeyer. The Company also believes it is the
leading provider of intellectual property management software in the U.S. This
market is relatively small and fragmented.
CONTENT ASSEMBLY, REGULATORY AND IP SOLUTIONS
Software solutions in this area face competition from systems developed in-house
by large pharmaceutical companies. There is also direct competition from
software vendors, including CDC Solutions in Europe, and indirect competition
from third-party system integrators that have formed partnerships with competing
software vendors. Information solutions in this area face competition primarily
from government web sites, including the site maintained by the U.S. Food and
Drug Administration.
SCIENTIFIC AND TECHNOLOGY INFORMATION
This market is very large with numerous competitors. While there is competition
for sales in a given area or niche, products are generally unique titles sold on
an individual basis. The Company also competes for the signing of significant
authors. Primary competitors in this area include John Wiley, McGraw-Hill and
Academic Press, a unit of Reed Elsevier. These competitors are larger and have
greater resources than the Company.
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IT LEARNING
Direct competitors in the IT certification test-preparation market include Self
Test Software and Measure Up, businesses smaller than Transcender that provide
Internet and CD-ROM certification training materials. Indirect competitors
include ILT organizations, print-based test preparation companies, such as
Coriolis and broad-based IT training businesses such as SmartForce, NetG,
DigitalThink and Element K. Many of these businesses are larger than
Transcender, but are not primarily focused on certification test-preparation.
While ILT organizations provide a form of indirect competition, several are
customers of the Company that supplement instructor training with Transcender
products. The industry overall is large and fragmented.
FOREIGN OPERATIONS AND EXPORT SALES
Outside of the U.S., the Company has operations based in the United Kingdom
(U.K.) and France. The IP Group has offices in the U.K., primarily related to
sales and marketing functions, in addition to the European headquarters of
Liquent-IDRAC in Paris. The Parthenon Press unit of CRC Press is based in the
U.K. and CRC Press maintains an office in the London area that includes both
sales staff and certain editorial employees. Export sales, based on customer
location, represented approximately 25% of consolidated revenues for the year
ended December 31, 2001, which includes an estimate of IP and IT information
delivered over the Internet to recipients outside the U.S.
INTELLECTUAL PROPERTY
The Company regards its trademarks, copyrights, domain names, trade secrets and
similar intellectual property as valuable assets and relies upon trademark and
copyright laws, as well as confidentiality agreements with employees and others,
to protect its rights. The Company pursues the registration of material
trademarks and copyrights in the U.S. and, depending upon use, in some other
countries. The Company believes it owns or licenses all intellectual property
rights necessary to conduct its business. To the best of the management's
knowledge, there are no threatened or pending legal proceedings or claims
related to intellectual property that are likely to have, individually or in the
aggregate, a material adverse effect on the Company's business, financial
condition or results of operations.
ENVIRONMENTAL MATTERS
The Company believes its operations are in compliance with all applicable
foreign, federal, state and local environmental laws, as well as all laws and
regulations relating to worker health and safety.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 2001, the Company had approximately 732 employees, consisting
of 607 employees in the U.S. and 125 employees based in England and France. No
employees are covered by collective bargaining agreements with labor unions. The
Company believes that relations with its employees are good.
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ITEM 2. PROPERTIES
The Company leases its corporate headquarters, which is located in Stamford,
Connecticut, and leases additional office space for its primary domestic
operating units in East Haven, Connecticut; Boca Raton, Florida; New York, New
York; Southfield, Michigan; Nashville, Tennessee; and in Fort Washington,
Pennsylvania. The Company also leases office space in several locations related
to its European operations in England, including London, Bagshot and Putney, as
well as office space in Paris, France. The Company leases warehouse space in
Nashville, Tennessee for use by its Transcender unit and Lancaster, England for
use by its CRC Press unit. The Company also contracts with third parties for
warehousing and distribution services in Linn, Missouri and Andover, England for
use by its CRC Press unit. The Company does not own any real property. The
Company believes that its properties, taken as a whole, are in good operating
condition and are suitable and adequate for current business operations, and
that suitable additional or alternative space will be available at commercially
reasonable terms for future expansion.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to certain lawsuits and administrative
proceedings that arise in the conduct of its business. While the outcome of
these lawsuits and proceedings cannot be predicted with certainty, management
believes that, if adversely determined, the lawsuits and proceedings, either
singularly or in the aggregate, would not have a material adverse effect on the
financial condition, results of operations, or net cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2001.
- 10 -
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is listed on the New York Stock Exchange (NYSE) under
the symbol "IHI." As of March 15, 2002, there were approximately 2,621 holders
of the Company's common stock comprised of 21 record holders and approximately
2,600 beneficial holders. The following table reflects the high and low closing
sales prices of the Company's common stock as reported by the NYSE, for the
periods indicated.
2001 2000
-------------------- --------------------
COMMON STOCK HIGH LOW HIGH LOW
------- ------ ------- ------
First Quarter $ 27.25 $ 19.20 $ 45.44 $ 23.75
Second Quarter 32.30 19.85 37.13 21.50
Third Quarter 33.75 17.65 37.00 30.25
Fourth Quarter 29.83 18.30 35.38 15.88
DIVIDEND POLICY
The Company has never paid a dividend on its common stock and does not
anticipate paying any dividends on its common stock in the foreseeable future.
The current policy of the Company's Board of Directors is to retain earnings to
finance the operations and expansion of the Company's business. In addition, the
Company's Credit Facility, as defined in Item 7 of this Annual Report,
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations", restricts the ability of the Company to pay dividends.
CHANGES IN SECURITIES AND USE OF PROCEEDS
The following report relates to the Company's secondary public stock offering:
Commission file number of registration statement: 333-30202
Effective Date: March 14, 2000
Expenses incurred through December 31, 2001:
Underwriting discounts $ 8,595,000
Other expenses $ 522,000
Total expenses $ 9,117,000
Application of proceeds through December 31, 2001:
Acquisitions of businesses, titles and equity interests $ 130,586,000
Temporary investments $ 24,414,000
(Commercial paper and money market funds)
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ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data of the Company as of and for each of the
five years in the period ended December 31, 2001 have been derived from their
respective audited financial statements. All acquisitions by the Company were
accounted for using the purchase method of accounting. The Company acquired St.
Lucie Press on January 14, 1997, Auerbach on June 5, 1997, MicroPatent on July
2, 1997, Chapman & Hall on August 19, 1998, Optipat on January 7, 1999, Faxpat
on July 19, 1999, Master Data Center on August 12, 1999, Corporate Intelligence
on September 1, 1999, Transcender on November 6, 2000, IDRAC on March 29, 2001,
Parthenon on May 15, 2001 and Liquent on December 20, 2001. The results of
operations of these businesses are included in the Company's results from their
respective dates of acquisition. The selected historical financial data should
be read in conjunction with, and is qualified by reference to, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this Form 10-K.
THE COMPANY
------------------------------------------------------------
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(1) (1)
OPERATING DATA:
Revenues (2).......................... $ 34,869 $ 46,651 $ 58,778 $ 73,289 $ 105,336
Cost of sales ........................ 11,492 11,707 15,742 19,720 26,676
Operating expenses (3)................ 28,040 31,234 34,104 48,231 69,000
Operating income (loss)............... (4,663) 3,710 8,932 5,338 9,660
Interest (expense) income, net ....... (130) 1,117 1,330 7,005 3,505
Income (loss) before taxes............ (4,908) 4,827 10,244 12,345 13,149
Net income (loss) (4)................. (4,911) 4,785 6,017 7,092 7,838
Net income per common share:
Basic earnings...................... $0.36 $0.34 $0.36
Diluted earnings.................... $0.35 $0.34 $0.36
Shares used in computing net income per share:
Basic .............................. 16,945 20,583 21,686
Diluted............................. 17,128 20,822 21,826
Pro forma basic and diluted earnings
(loss) per common share (5).............. $ (0.29) $ 0.28 - - -
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents............. $ 10,280 $ 57,270 $7,551 $96,375 $38,612
Total assets.......................... 50,219 104,791 138,658 310,996 346,557
Total debt............................ 5,188 2,955 2,694 2,415 2,449
Total equity.......................... 28,556 84,793 90,935 256,274 266,950
(FOOTNOTES ON FOLLOWING PAGE)
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(FOOTNOTES FROM PRECEDING PAGE)
-----------
(1) In conjunction with the acquisition and reorganization of CRC Press and
other businesses and certain compensation issues, the Company recorded
significant adjustments in 1997 and 1998, which are not expected to
continue in the future. These adjustments (the Adjustments) reduced
revenues by $4,017 and increased expenses by $4,013, and therefore
reduced net income by $8,030, for the year ended December 31, 1997. The
Adjustments reduced revenue by $54 and increased pre-tax expenses by
$1,069, resulting in reduced net income of $674 for the year ended
December 31, 1998. The Adjustments affecting revenues were required by
purchase accounting in connection with the acquisitions of CRC Press
and MicroPatent and reflect the revaluation of acquired deferred
subscription revenues based on the cost to fulfill subscriptions. This
revaluation is a non-cash adjustment, which reduces revenues in the
twelve months following acquisition. The Adjustments affecting expenses
relate to: severance and reorganization costs from the consolidation of
certain functions and reductions in workforce; special bonuses granted
to an officer; contingent compensation paid to an officer of a
subsidiary; and certain additional purchase accounting-related
adjustments.
(2) Revenues for the year ended December 31, 1997 include an initial
stocking order by an international distributor aggregating $3,307. In
fiscal 2001, in conjunction with the acquisition of IDRAC, the Company
was required by purchase accounting to reflect the revaluation of
acquired deferred revenues based on the cost to fulfill. This
revaluation is a non-cash adjustment, which reduced revenue in the nine
months following acquisition. The adjustment reduced revenues by $1,000
and therefore reduced net income by $1,000 for the year ended December
31, 2001.
(3) During 2000 the Company formed an alliance with Intellectual Property
Technology Exchange, Inc. (Techex) to jointly develop and market
products to address the online needs of the technology licensing
industry. Operating expenses for the years ended December 31, 2000 and
2001 include an impairment in the value of the Company's investment in
Techex of $1,500 and $400, respectively.
(4) Prior to the Company's initial public offering, in August 1998, the
Company was a limited liability company and, accordingly, was not
subject to U.S. federal or certain state income taxes. Subsequent to
the initial public offering, the Company incurred a nominal income tax
provision due to the full reversal of deferred tax valuation allowances
deemed as no longer required. For the years ended December 31, 2001,
2000 and 1999, the Company was fully taxable.
(5) No historical earnings per share or share data are presented for years
prior to fiscal 1999, as the Company does not consider such historical
data meaningful. The pro forma earnings (loss) per share for the years
ended December 31, 1997 and 1998 were computed using 16,943,189 shares
outstanding, which reflects all shares outstanding following the
initial public offering, as if such shares were outstanding since
January 1, 1997.
- 13 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO AND THE OTHER FINANCIAL INFORMATION
APPEARING ELSEWHERE IN THIS FORM 10-K. UNLESS OTHERWISE STATED IN THIS FORM
10-K, REFERENCES TO THE FISCAL YEARS 2001, 2000, AND 1999 RELATE TO THE FISCAL
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999, RESPECTIVELY.
IMPACT OF ACQUISITIONS AND OUTLOOK
A key component of the Company's growth strategy is to pursue acquisitions
in attractive niche markets where opportunities exist to internally grow the
acquired companies' revenues and increase profitability through operating
efficiencies. Since beginning operations in January 1997, the Company has
completed thirteen strategic acquisitions, including seven in the intellectual
property area, five in scientific and technology information and one in the
information technology learning market, as well as some minor acquisitions that
are not otherwise disclosed herein. The Company continues to actively seek
acquisitions that will further the Company's growth and operating strategies. 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 some respects. Historical information for companies subsequent to
their acquisition may include integration and other costs that are not expected
to continue in the future.
RESULTS OF OPERATIONS
FISCAL YEAR 2001 VS. 2000
REVENUES. Revenues increased $32.0 million, or 43.7%, to $105.3 million from
$73.3 million. The increase in revenues is due primarily to strong results
associated with IT learning products, as a result of the acquisition of
Transcender in November 2000. Revenues at Transcender increased $17.3 million,
reflective of a full year's revenue for the period ended December 31, 2001.
Revenues increased by $11.2 million in the Company's intellectual property
group, including $4.6 million from continued strong internal growth in sales of
patent information and patent annuity payment services and $6.1 million as a
result of the acquisitions of IDRAC and Liquent in fiscal 2001. Revenues also
increased $3.5 million in the Company's scientific and technology information
group resulting from the acquisition of Parthenon in May 2001, as well as from
strong results in international book sales, offsetting lower domestic book
sales.
COST OF SALES. Cost of sales increased $7.0 million or 35.3% to $26.7 million
from $19.7 million. Cost of sales, expressed as a percentage of revenues,
decreased to 25.3% for fiscal 2001 from 26.9% for fiscal 2000. The improvement
in gross profit margins over the prior year levels is primarily attributable to
the inclusion of Transcender for a full year, as well as IDRAC for 2001,
businesses that have higher gross margins than the other existing units. These
improvements were offset by higher costs at CRC Press primarily related to
Parthenon Press which has lower gross margins than other IHI units and lower
margins in book publishing operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A). SG&A expenses increased
$12.8 million or 34.7%, to $49.8 million from $37.0 million. Increased SG&A
expenses relate primarily to $12.5 million of operating expenses of businesses
acquired in 2001 and a full year of operating expenses at Transcender, which was
acquired in November 2000. In addition, CRC Press experienced an increase of
$0.7 million in costs associated with the disposal of certain direct mail
marketing materials. SG&A expenses for other existing operations remained
constant or decreased based on cost cutting measures taken to streamline costs.
SG&A expenses as a percentage of revenues
- 14 -
decreased to 47.3% for fiscal 2001 compared with 50.5% for fiscal 2000. The
improvement in margins is primarily a result of a reduction in development
spending in the LPS group from prior year levels.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization including
amortization of goodwill, intangible assets, capitalized software and
prepublication costs, increased $9.0 million, or 92.6%, to $18.7 million from
$9.7 million, primarily as a result of the amortization of intangible assets and
depreciation of purchased equipment related to the acquisitions of Transcender
in November 2000 and IDRAC in March 2001, and increased depreciation related to
capital expenditures in fiscal 2001. Starting in fiscal 2002, the Company will
no longer amortize goodwill or intangible assets with indefinite lives in
accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS.
IMPAIRMENT OF LONG-LIVED ASSETS. In the fourth quarter of 2001, based on the
Company's evaluation of the recoverability of its investment in Techex and the
decrease in its proportionate share of Techex's net equity, the Company recorded
an additional charge of $0.4 million. The Company had recorded a charge of $1.5
million in the prior year to reduce the carrying amount of the investment to
estimated fair value.
INTEREST INCOME (EXPENSE). Net interest income (expense) decreased to $3.5
million from $7.0 million due primarily to lower interest earned, resulting from
cash used from the secondary public stock offering to acquire businesses over
the past five quarters (See Note 3 of the Notes to Consolidated Financial
Statements). Additionally, the average interest rate decreased significantly
during the last six months of fiscal 2001 to 3.06% from 6.33% in the comparable
period in fiscal 2000.
INCOME TAXES. The provision for income taxes as a percentage of pre-tax income
for the year ended December 31, 2001 is 40.4%, which differed from the statutory
rate primarily as a result of state and local income taxes and non-deductible
amortization of the excess of the purchase price over net assets acquired. This
compares with an effective tax rate of 42.6% in the prior year. In the last nine
months of fiscal 2001, the Company was also subject to foreign taxes, which were
immaterial in the period.
FISCAL YEAR 2000 VS. 1999
REVENUES. Revenues increased $14.5 million, or 24.7%, to $73.3 million from
$58.8 million. The increase in revenues is primarily due to an increase in
Internet-based sales of patent information of approximately $3.4 million at
MicroPatent and an increase of $2.4 million in sales of patent file histories at
Optipat and Faxpat, businesses acquired in fiscal 1999. Revenues at Master Data
Center, which was acquired in August 1999, increased $6.6 million, reflective of
a full year's revenue for the period ended December 31, 2000. Revenues
associated with IT learning products increased $4.1 million as a result of the
acquisition of Transcender in November 2000. These increases were partially
offset by a decline of $2.0 million in international book sales at CRC Press.
The Company previously terminated an international distribution agreement in
January 2000, and was contractually restricted from selling many of its
scientific information products internationally for a 45-day period.
International book sales in each quarter of fiscal 2000 improved over the
previous quarter.
COST OF SALES. Cost of sales increased $4.0 million or 25.3% to $19.7 million
from $15.7 million. As a percentage of revenues, cost of sales remained
relatively constant over prior year levels, primarily as a result of the
inclusion of MDC for a full year, which has lower gross margins than the
Company's other existing units, offset by the inclusion of Transcender, which
has higher gross margins than the Company's other existing units, and improved
gross margins in the intellectual property businesses as a result of the
successful integration of acquired businesses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A). SG&A expenses increased
$8.9 million or 31.4%, to $37.0 million from $28.1 million. Increased SG&A
expenses relate primarily to operating
- 15 -
expenses of businesses acquired in 1999 and in 2000 and development expenses of
the Company's intellectual property Internet portal. SG&A expenses as a
percentage of revenues increased to 50.5% for fiscal 2000, compared with 47.9%
for fiscal 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $3.7
million, or 63.4%, to $9.7 million from $6.0 million, primarily as a result of
the amortization of intangible assets of businesses acquired in the last half of
fiscal 1999 and the acquisition of Transcender in November 2000 (See Note 3 of
the Notes to Consolidated Financial Statements).
IMPAIRMENT OF LONG-LIVED ASSETS. In the fourth quarter of 2000, the Company
determined that the value of its investment in Techex was impaired due to the
inability of Techex to generate significant revenues. The evaluation of the
recoverability of long-lived assets to be held and used is based on comparing
the asset's carrying amount to its fair value. Based on fair market value
estimates, the Company recorded a charge of $1,500,000 to reduce the carrying
amount of the investment to estimated fair value.
INTEREST INCOME (EXPENSE). Interest income (expense) increased to $7.0 million
from $1.3 million due primarily to interest earned on the proceeds from the
secondary public stock offering completed in March 2000.
INCOME TAXES. The provision for income taxes as a percentage of pre-tax income
for the year ended December 31, 2000 is 42.6%, which differs from the statutory
rate primarily as a result of state and local income taxes and non-deductible
amortization of the excess of the purchase price over net assets acquired. This
compares with an effective tax rate of 41.3% in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 2000, the Company sold 4,500,000 shares of its common
stock in a public offering and received approximately $155 million of net
proceeds. As of December 31, 2001, proceeds of approximately $131 million have
been used from this offering to fund acquisitions in the Company's information
and publishing businesses (See Note 3 of the Notes to Consolidated Financial
Statements). The remaining net proceeds will be used to finance future
acquisitions and for general corporate purposes. The Company currently does not
have any agreements, arrangements or understandings with respect to any
prospective material acquisitions. Pending such uses, the proceeds will be
invested in short-term, investment grade securities.
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 sub-limit 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 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 and
for the periods ended December 31, 2001 and 2000, 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
- 16 -
covenants. As of December 31, 2001, 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 equivalents, including short-term investments, totaled $56.4 million at
December 31, 2001 compared to $108.1 million at December 31, 2000. Excluding
cash, cash equivalents and short-term investments, the Company had a working
capital deficit of $(6.6) million at December 31, 2001 compared to working
capital deficit of $(0.7) million at December 31, 2000. Since the Company
receives patent annuity 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
December 31, 2001, are obligations related to patent annuity payments and
deferred revenue of approximately $36.0 million.
Cash generated from operating activities was $23.6 million for the fiscal year
ended December 31, 2001, derived from net income of $7.8 million plus non-cash
charges of $20.1 million less an increase in operating assets, net of
liabilities of $4.3 million. The increase in net operating assets is primarily
the result of increased customer receivables as a result of the businesses
acquired in fiscal 2001 and the payment of income tax liabilities, offset by an
increase in deferred revenue, most notably at IDRAC, a business acquired in the
first quarter of 2001.
Cash used in investing activities was $83.1 million for the fiscal year ended
December 31, 2001, due to acquisition costs for businesses, titles and equity
interests of $68.6 million and capital expenditures, including pre-publication
costs and internally developed software of $8.5 million. Excluding acquisitions
of businesses, the Company's existing operations are not capital intensive.
Capital expenditures for fiscal 2001 include approximately $1.4 million of
purchases of new computer equipment necessary to facilitate the Company's
increased Internet capacity. Additionally, the Company invested $6.0 million in
short-term investments in commercial paper, which are scheduled to mature in the
first quarter of fiscal 2002.
Cash generated from financing activities was $1.7 million for the fiscal year
ended December 31, 2001, primarily due to net cash proceeds received from the
issuance of common stock from stock option exercises. The Company has no
outstanding debt obligations as of December 31, 2001 related to the Credit
Facility.
The Company believes that funds generated from operations, together with cash on
hand and borrowings available under its 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. The Company may choose to obtain additional capital or financing
to consummate future acquisitions. Future operating requirements and capital
needs may be subject to economic conditions and other factors, many of which are
beyond the Company's control.
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 publication schedules and other factors. In 2001, 28% of the
Company's revenues were generated during the fourth quarter with the first,
second, and third quarters accounting for 23%, 24% and 25% of revenues,
respectively. In 2000, revenues for the first through fourth quarters were 22%,
22%, 25% and 31%, respectively. In addition, the Company may experience
fluctuations in revenues from period to
- 17 -
period based on the timing of acquisitions and new product launches.
- 18 -
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, BUSINESS COMBINATIONS and SFAS No.142, GOODWILL AND OTHER INTANGIBLE
ASSETS. SFAS No. 141 prohibits the use of the pooling-of-interest method of
business combinations initiated after June 30, 2001 and also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets. SFAS No. 141 applies to all business combinations
completed after June 30, 2001. The adoption of this statement did not
materially impact results of operations for the year ended December 31, 2001.
SFAS No. 142 requires the use of a non-amortization approach to account for
purchased goodwill and intangible assets with indefinite lives. Under a
non-amortization approach, goodwill and certain intangibles will not be
amortized, but instead will be reviewed for impairment at least annually. The
Company is required to adopt SFAS No. 142 for acquisitions initiated prior to
June 30, 2001 on January 1, 2002. The Company does not expect that the
adoption of SFAS No. 142 will result in an impairment charge. The adoption of
these standards will reduce the amortization of goodwill and intangible
assets commencing January 1, 2002. The amount of goodwill amortization
recognized was $5,002,000, $1,302,000 and $308,000 for fiscal 2001, 2000 and
1999, respectively.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting provisions
of APB No. 30, REPORTING THE RESULTS OF OPERATIONS FOR A DISPOSAL OF A SEGMENT
OF A BUSINESS. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The Company will adopt SFAS No. 144 as of January 1, 2002 and
does not expect that the adoption of the Statement will have a significant
impact on the Company's financial position or results of operations.
EFFECTS OF INFLATION
The Company believes that inflation has not had a material impact on the results
of operations presented herein.
CRITICAL ACCOUNTING POLICIES
The Company has identified the policies below as critical to its business
operations and to the understanding of its results of operations. The impact and
any associated risks on the Company's results of operations related to these
policies are discussed throughout Management's Discussion and Analysis of
Financial Conditions and Results of Operations. For a detailed discussion on the
application of these and other accounting policies, see Note 2 "Summary of
Significant Accounting Policies" to the consolidated financial statements.
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. These estimates include, but are not limited to revenue
recognition, bad debt and sales return allowances, inventory obsolescence
reserves, and the valuation of goodwill and other identified intangible assets.
Actual results could differ from those estimates.
- 19 -
REVENUE RECOGNITION
The Company derives its revenues from the following sources:
ANNUITY TAX PAYMENT SERVICES - Revenue from annuity tax payment services is
recognized in the period when the related annuity tax payments are made to
various regulatory agencies.
SOFTWARE LICENSES REVENUE - The Company recognizes revenue from software
licenses when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable and collectibility is probable. The
Company recognizes the revenue allocable to software licenses upon obtaining a
signed license agreement and delivery of the software product unless the fee is
not fixed and determinable or collectibility is not probable. The Company's
current standard practice is not to provide customer acceptance terms in
connection with licenses of its software. However, certain agreements provide
standard customer acceptance terms. These customer acceptance terms, which the
Company considers to be perfunctory, lapse after a short period (generally 30 to
90 days) if the customer has not formally rejected the software. Arrangements
that include acceptance terms beyond the Company's standard terms are not
recognized until acceptance has occurred.
In general, the Company's sales of software licenses include an initial period
of post-contract customer support. In addition, the Company occasionally enters
into service agreements related to software licenses. In software arrangements
that include rights to multiple software products, post-contract support and
other services, the Company allocates the total arrangement fee among each
deliverable based on the relative fair value of each of the deliverables. The
fair value of the software license is determined based on vendor-specific
objective evidence of the undelivered post-contract customer support and service
elements in accordance with the provisions of SOP 98-9.
Revenue from software licenses to parties other than end-users, including
reseller, third-party integrator and OEM arrangements with after-sale support
requirements, is recorded only when software has been placed with an end-user
and no further obligations exist.
PUBLICATION REVENUE - The Company recognizes sales revenue when the risks of
ownership have been transferred to the buyer, which is generally when shipped.
Sales made on a returnable basis are recorded net of provisions for estimated
returns and allowances.
SUBSCRIPTION REVENUE - Revenue from subscriptions to the Company's print
publications and information services is recognized in income as earned over the
subscription period. Costs in connection with the procurement of subscriptions
are charged to expense as incurred.
CERTIFICATION TEST PREPARATION SOFTWARE REVENUE - Revenue associated with the
sale of certification test preparation software for IT professionals can be
deployed through CD-ROM or over the Internet. For CD-ROM sales, revenue is
recognized upon shipment; for web-based sale, revenue is recognized upon
delivery of access code to customers.
SUPPORT SERVICES REVENUE - Revenue is derived from (i) maintenance and
post-support contracts, (ii) training services and, (iii) consulting services.
Post contract customer support includes telephone support, bug fixes and rights
to upgrades on a when-and-if available basis. Revenue from maintenance and
post-support contracts is recognized primarily over the term of the service
contract. Revenue from training services is recognized upon completion of
services. Consulting revenue includes implementation services performed
primarily on a time-and-materials basis under separate service arrangements
related to the installation of Liquent software. Management does not consider
the installation services essential because the services are routine in nature
and include implementation planning, training of customer personnel, building
simple interfaces and running
- 20 -
test data. Also, customers have access to third parties who can provide such
services. The remainder of consulting revenues is derived primarily from project
management for publishing new drug applications and general information
technology consulting. Revenue is recognized for these services on a
time-and-materials basis as services are performed. In some circumstances,
services are provided under fixed-price arrangements, in which case revenue is
recognized on the percentage-of-completion method. Revisions in estimates of
costs to complete are reflected in operations in the period in which facts
requiring those revisions become known.
DEFERRED REVENUE - Deferred revenue includes (i) payments received for products
not yet delivered, (ii) advance payments on contract revenues, (iii) payments
received from subscriptions, and (iv) that portion of separately sold software
support agreements that has not yet been recognized as revenue. In connection
with the acquisition of companies, the Company records deferred revenue at the
cost to fulfill plus an applicable gross profit margin, rather than based on the
subscription and advanced payments received.
The recognition of revenue in conformity with accounting principles generally
accepted in the United States requires the Company to make estimates and
assumptions that affect the reported amounts of revenue. Estimates related to
the recognition of revenue include future product returns which may occur based
upon actual historical return rates and reduce the Company's revenue by these
estimated future returns. As additional information becomes available, or actual
amounts are determinable, the recorded estimates are revised. Consequently,
operating results can be affected by revisions to prior accounting estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
Management estimates accounts receivable risks and provides allowances for
doubtful accounts based on historical analysis and a review of outstanding
balances and for sales returns based on the historical rate of return and
current market conditions. Management believes that credit risk for accounts
receivable is limited because of the large number of customers and because the
Company's customers are dispersed across different businesses and geographic
areas.
INVENTORY
Inventory is stated at the lower of cost or market. The vast majority of
inventories are books, which are reviewed monthly on a title-by-title basis for
salability. Obsolete, damaged, and unmarketable books historically have been
insignificant and the cost of inventory determined to be impaired has been
charged to income in the period of determination. Assessing the ultimate
realization of inventories requires judgment about future demand and market
conditions, and management evaluates the adequacy of the allowance for obsolete
inventory on a quarterly basis. Management makes adjustments to the reserve if
the evaluation of reserve requirements differs from the actual aggregate
reserve. This evaluation is inherently subjective because estimates may be
revised as more information becomes available.
GOODWILL
Goodwill consists of the excess of cost over the value of identifiable net
assets of businesses acquired under the purchase method of accounting. Goodwill
acquired prior to June 30, 2001 is amortized on a straight-line basis over the
estimated useful lives of 10-20 years. The Company assesses the recoverability
of this intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows compared to the carrying value of goodwill. The Company reviews the
carrying value of goodwill for impairment on periodic basis and whenever events
or circumstances indicate that the carrying amount may not be recoverable.
- 21 -
Beginning in January 2002, the Company will not amortize goodwill in accordance
with SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
IDENTIFIED INTANGIBLE ASSETS
Identified intangible assets represent the portion of purchase price paid in a
business acquisition which has been allocated, based on independent appraisals
or management's estimates, to the value of publication agreements, subscriber
lists, databases, trademarks and acquired customer relationships, the value of
dedicated workforce or similar assets. Costs allocated to these assets are
amortized on a straight-line basis over their estimated useful lives ranging
from 2-20 years. The Company reviews the carrying value of these intangible
assets for impairment by measuring the carrying amount of the assets against the
estimated undiscounted future cashflows associated with them on a periodic basis
and whenever events or circumstances indicate that the carrying amounts may not
be recoverable. If the Company determines that the carrying amount is impaired,
the assets will be written down to fair value. Fair value is determined based on
discounted cash flows or management's estimates, depending on the nature of the
assets. Beginning in January 2002, the Company will not amortize intangible
assets with indefinite lives in accordance with SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS.
PREPUBLICATION COSTS
Prepublication costs, 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 period. It is the
Company's policy to evaluate the remaining lives and recoverability of such
costs on a periodic basis and whenever event or circumstances indicate that the
carrying amounts may not be recoverable.
Management believes that there is no impairment to goodwill and other identified
intangible assets or prepublication costs as of December 31, 2001 and that no
impairment to these assets will exist upon the adoption of SFAS No. 142 on
January 1, 2002. However, future events and circumstances, some of which are
described below, may result in an impairment charge: significant negative
economic or industry trends; changes in business strategy that alter the
expected usage of the related assets; and future economic results that are below
management expectations used in the current assessments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK - The Company may be subject to market risks arising from
changes in interest rates. Interest rate exposure results from changes in the
Eurodollar or the prime rate, which are used to determine the interest rate
applicable to borrowings under the Credit Facility. As of December 31, 2001, the
Company had no outstanding borrowings under the Credit Facility.
FOREIGN CURRENCY EXCHANGE RATE RISK - The financial statements of the Company's
foreign subsidiaries are translated from the local currency into U.S. dollars.
Assets and liabilities are translated using current exchange rates, except
certain accounts of subsidiaries whose functional currency is the U.S. dollar,
and translation adjustments are accumulated in a separate component of
stockholders' equity. Revenue and expenses are translated at average monthly
exchange rates, and translation adjustments are charged and credited to income.
As such, the Company's operating results are affected by fluctuations in the
value of the U.S. dollar compared to the British pound and the Euro. Foreign
exchange translation gains or losses were not material in any of the periods
presented.
- 22 -
A subsidiary of the Company routinely enters into forward contracts to acquire
various international currencies in an effort to hedge foreign currency
transaction exposures of its operations. Such forward contracts have been
designated as hedges for future annual patent payments to related international
regulatory agencies. At December 31, 2001, the subsidiary of the Company had
entered into forward contracts to acquire various international currencies, all
having maturities of less than six months, aggregating approximately
$16,000,000. Realized gains and losses relating to the forward contracts were
immaterial for the year ended December 31, 2001.
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes.
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements so long as those statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected in such statements. In connection with certain
forward-looking statements contained in this Form 10-K and those that may be
made in the future by or on behalf of the Company, the Company notes that there
are various factors that could cause actual results to differ materially from
those set forth in any such forward-looking statements. The forward-looking
statements contained in this Form 10-K were prepared by management and are
qualified by, and subject to, significant business, economic, competitive,
regulatory and other uncertainties and contingencies, all of which are difficult
or impossible to predict and many of which are beyond the control of the
Company. Factors which could cause or contribute to such differences include,
but are not limited to: (1) the ability of the Company to consummate
acquisitions, integrate such acquisitions into existing operations, manage
expansion, achieve operating efficiencies and control costs in its operations;
(2) the Company's success in retaining key employees, including its CEO and CFO
and the senior management teams of its primary operating units; (3) pressures
from competitors with greater resources than those of the Company, as well as
competitive pressures arising from changes in technology and customer
requirements; (4) the availability of raw intellectual property information from
alternative sources for little or no cost; (5) the concentration of ownership
among the founding stockholders of the Company, who have the ability to direct
the affairs and operations of the business; (6) changes in Internet usage; (7)
changes in customer and distributor relationships; (8) changes in U.S. or
foreign government regulations; and (9) general economic conditions which may
impact expenditures on the Company's products and services.
Accordingly, there can be no assurance that the forward-looking statements
contained in this Form 10-K will be realized or that actual results will not be
significantly higher or lower. The statements have not been audited by, examined
by, compiled by or subjected to agreed-upon procedures by independent
accountants, and no third-party has independently verified or reviewed such
statements. Readers of this Form 10-K should consider these facts in evaluating
the information contained herein. In addition, the business and operations of
the Company are subject to substantial risks, which increase the uncertainty
inherent in the forward-looking statements contained in this Form 10-K. The
inclusion of the forward-looking statements contained in this Form 10-K should
not be regarded as a representation by the Company or any other person that the
forward-looking statements contained in this Form 10-K will be achieved. In
light of the foregoing, readers of this Form 10-K are cautioned not to place
undue reliance on the forward-looking statements contained herein. These risks
and others that are detailed in this Form 10-K and other documents that the
Company files from time to time with the Securities and Exchange Commission,
including quarterly reports on Form 10-Q and any current reports on Form 8-K,
must be considered by any investor or potential investor of the Company.
- 23 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the report thereon, the notes
thereto, and supplementary data commencing at page F-1 of this Annual Report on
Form 10-K which financial statements, report, notes, and data are incorporated
herein by reference.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2001 and 2000, respectively (in thousands, except per share
data):
QUARTER ENDED
------------------------------------------------------------------
2001 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
Revenues $ 24,244 $ 25,314 $ 26,427 $ 29,351 $ 105,336
Gross profit 18,670 19,346 19,429 21,215 78,660
Net income 3,004 1,904 1,468 1,462 7,838
Net income per common share:
Basic earnings $ 0.14 $ 0.09 $ 0.07 $ 0.07 $ 0.36
Diluted earnings $ 0.14 $ 0.09 $ 0.07 $ 0.07 $ 0.36
QUARTER ENDED
------------------------------------------------------------------
2000 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
Revenues $ 16,090 $ 16,180 $ 18,151 $ 22,868 $ 73,289
Gross profit 11,520 11,599 13,078 17,372 53,569
Net income 1,555 2,171 1,966 1,400 7,092
Net income per common share:
Basic earnings $ 0.09 $ 0.10 $ 0.09 $ 0.06 $ 0.34
Diluted earnings $ 0.09 $ 0.10 $ 0.09 $ 0.06 $ 0.34
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
- 24 -
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the identification, business experience and
directorships of each director and nominee for director of IHI and the
information relating to the identification and business experience of IHI's
executive officers, required by Item 401 and 405 of Regulation S-K, will be
presented in the sections entitled "Election of Directors" and "Executive
Officers" of IHI's definitive proxy statement for the Annual Meeting of
Stockholders for fiscal 2001, and is hereby incorporated by reference. If the
definitive proxy statement for the 2001 annual meeting is not filed with the
Securities and Exchange Commission within 120 days of the end of IHI's 2001
fiscal year, IHI will amend this Annual Report and include such information in
the amendment.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to the cash compensation of directors and officers
required by Item 402 of Regulation S-K will be presented in the sections
entitled "The Board and Its Committees - Compensation of Directors", "Executive
Officers - Employment Agreements" and "Summary Compensation Table" of IHI's
definitive proxy statement for the Annual Meeting of Stockholders for fiscal
2001 and is hereby incorporated by reference. If the definitive proxy statement
for the 2001 annual meeting is not filed with the Securities and Exchange
Commission within 120 days of the end of IHI's 2001 fiscal year, IHI will amend
this Annual Report and include such information in the amendment.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership required by Item 403 of
Regulation S-K will be presented in the section entitled "Security Ownership of
Certain Beneficial Owners and Management" of IHI's definitive proxy statement
for the Annual Meeting of Stockholders for fiscal 2001 and is hereby
incorporated by reference. If the definitive proxy statement for the 2001 annual
meeting is not filed with the Securities and Exchange Commission within 120 days
of the end of IHI's 2001 fiscal year, IHI will amend this Annual Report and
include such information in the amendment.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and transactions required by
Item 404 of Regulation S-K will be presented in the section "Certain
Relationships and Related Transactions" of IHI's definitive proxy statement for
the Annual Meeting of Stockholders for fiscal 2001 and is hereby incorporated by
reference. If the definitive proxy statement for the 2001 annual meeting is not
filed with the Securities and Exchange Commission within 120 days of the end of
IHI's 2001 fiscal year, IHI will amend this Annual Report and include such
information in the amendment.
- 25 -
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
Page
Report of Independent Auditors F-1
Consolidated Balance Sheets,
December 31, 2001 and 2000 F-2
Consolidated Statements of Operations,
Years Ended December 31, 2001, 2000 and 1999 F-3
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Cash Flows,
Years Ended December 31, 2001, 2000 and 1999 F-5
Notes to Consolidated Financial Statements F-6 to F-22
All schedules of the Company for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable, or have been
disclosed in the Notes to Consolidated Financial Statements and, therefore, have
been omitted.
(b) Reports on Form 8-K.
On December 28, 2001, the Company filed a Current Report on Form
8-K reporting the merger of Fluid Acquisition Corp. (Fluid), a
wholly owned subsidiary of the Company, with and into Liquent
became effective on December 27, 2001. As a result of the
merger, Liquent became a wholly owned subsidiary of the Company.
On January 10, 2002, the Company filed a Current Report on Form
8-K (the Form 8-K) reporting the Agreement and Plan of Merger
between the Company, Fluid and Liquent. On March 12, 2002, the
Company filed an amendment to the Form 8-K containing the
required financial statements of Liquent and pro forma condensed
consolidated financial statements of the Company.
(c) Exhibits
- 26 -
EXHIBITS
NO. DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of November 13, 2001, by
and among Liquent, Information Holdings Inc. and Fluid (1)
3.1 Certificate of Incorporation*
3.2 Amended and Restated Bylaws**
4.1 Specimen Common Stock Certificate*
4.2 Registration Rights Agreement among the Company, Warburg, Pincus
Ventures, L.P., and Mason P. Slaine***
10.1 Employment Agreement, dated as of March 15, 2000, between
Information Holdings Inc. and Mason P. Slaine++
10.2 Employment Agreement, dated as of January 19, 1998, between
Information Ventures LLC and Vincent A. Chippari*
10.3 Employment Agreement, dated as of April 10, 2000, between
Information Ventures LLC and Jay Nadler**
10.4 Employment Agreement, dated as of November 6, 2000, between
Transcender LLC and Aneel M. Pandey**
10.5 Noncompetition Agreement, dated November 6, 2000, between
Transcender LLC and Aneel M. Pandey**
10.6 Employment Agreement, between Liquent (formerly ESPS, Inc.) and
R. Richard Dool, dated November 27, 2000, as amended February 8,
2001 and October 3, 2001
10.7 1998 Stock Option Plan of the Company (Amended and Restated as
of March 26, 2002)
10.8 Asset Purchase Agreement, dated as of November 6, 2000, among
Information Ventures LLC, Transcender LLC and Transcender
Corporation****
10.9 Credit Agreement, dated as of September 24, 1999, among the
Company, Warburg, Pincus Information Ventures, Inc., Information
Ventures L.L.C., and the lenders named herein, Bank of America,
N.A., as Documentation Agent, Bankers Trust Company, as
Administrative Agent+
10.10 First Amendment to Credit Agreement, dated as of October 7,
1999, among the Company, Warburg Pincus Information Ventures,
Inc., Information Ventures L.L.C., the lenders named therein,
Bank of America, N.A., as Documentation Agent and Bankers Trust
Company, as Administrative Agent
10.11 Second Consent and Amendment to Credit Agreement, dated as of
July 12, 2001, among the Company, Information Ventures L.L.C.,
the lenders named therein, Bank of America, N.A., as
Documentation Agent and Bankers Trust Company as Administrative
Agent
- 27 -
10.12 Form of Pledge Agreement, dated as of September 24, 1999,
entered into by the Company and its subsidiaries and Bankers
Trust Company, as Collateral Agent+
10.13 Form of Security Agreement dated as of September 24, 1999, among
the Company, Warburg, Pincus Information Ventures, Inc.,
Information Ventures L.L.C., certain of its subsidiaries and
Bankers Trust Company, as Collateral Agent+
10.14 Form of Subsidiaries Guaranty, dated as of September 24, 1999+
10.15 Amendment to Employment Agreement, dated as of November 6, 2000,
between Transcender LLC and Aneel M. Pandey
21.1 List of subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
----------
* Incorporated herein by reference to the Company's Registration Statement
on Form S-1, Registration No. 333-56665.
** Incorporated herein by reference to the Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.
*** Incorporated herein by reference to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
**** Incorporated herein by reference to the Current Report on Form 8-K, filed
on November 21, 2000.
+ Incorporated herein by reference to the Quarterly Report on Form 10-Q,
filed on November 12, 1999.
++ Incorporated herein by reference to the Quarterly Report on Form 10-Q,
filed on August 11, 2000.
(1) Incorporated herein by reference to the Exhibit to the Schedule 13D
relating to the Shares, filed by the Company and Fluid on November 21,
2001.
- 28 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Vincent A. Chippari
-----------------------
Vincent A. Chippari, Executive Vice President
and Chief Financial Officer
Date: March 29, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Mason P. Slaine /s/ Vincent A. Chippari
--------------------------------- ------------------------------
Mason P. Slaine Vincent A. Chippari
President, Chief Executive Officer and Executive Vice President and
Director Chief Financial Officer
(Principal Executive Officer) (Principal Financial and
March 29, 2002 Accounting Officer)
March 29, 2002
/s/ Michael E. Danziger /s/ David R. Haas
--------------------------------- ------------------------------
Michael E. Danziger David R. Haas
Director Director
March 29, 2002 March 29, 2002
/s/ Sidney Lapidus /s/ David E. Libowitz
--------------------------------- ------------------------------
Sidney Lapidus David E. Libowitz
Director Director
March 29, 2002 March 29, 2002
/s/ John R. Purcell
---------------------------------
John R. Purcell
Director
March 29, 2002
- 29 -
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Information Holdings Inc.
We have audited the accompanying consolidated balance sheets of Information
Holdings Inc. and subsidiaries as of December 31, 2001 and 2000 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Information Holdings Inc. and subsidiaries at December 31, 2001 and 2000, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
New York, New York
February 21, 2002 ERNST & YOUNG LLP
F-1
INFORMATION HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31,
2001 2000
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 38,612 $ 96,375
Short-term investments 17,762 11,731
Accounts receivable (NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS AND
SALES RETURNS OF $3,273 AND $3,575, RESPECTIVELY) 35,130 23,378
Inventories 7,323 6,472
Prepaid expenses and other current assets 7,268 4,141
Deferred income taxes 3,423 2,489
------------- -------------
Total current assets 109,518 144,586
Property and equipment, net 9,868 5,802
Pre-publication costs (NET OF ACCUMULATED AMORTIZATION OF $5,758 AND
$5,234 RESPECTIVELY) 4,750 4,188
Identified intangible assets, net 111,463 91,342
Goodwill (NET OF ACCUMULATED AMORTIZATION OF $6,624 AND $1,622, RESPECTIVELY) 102,666 61,272
Other assets 8,292 3,806
------------- -------------
TOTAL $ 346,557 $ 310,996
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capitalized lease obligations $ 490 $ 308
Accounts payable 21,598 20,156
Accrued expenses 17,793 5,089
Royalties payable 1,625 1,204
Deferred revenue 18,293 10,429
------------- -------------
Total current liabilities 59,799 37,186
Capital leases 1,959 2,107
Deferred income taxes 16,826 14,057
Other long-term liabilities 1,023 1,372
------------- -------------
Total liabilities 79,607 54,722
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued $ - $ -
Common stock, $.01 par value; 50,000,000 shares
authorized; issued and outstanding 21,758,052 shares at
December 31, 2001 and 21,611,970 at December 31, 2000 218 216
Additional paid-in capital 245,911 243,075
Retained earnings 20,821 12,983
------------- -------------
Total stockholders' equity 266,950 256,274
------------- -------------
TOTAL $ 346,557 $ 310,996
============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
INFORMATION HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2001 2000 1999
Revenues $ 105,336 $ 73,289 $ 58,778
Cost of sales 26,676 19,720 15,742
------------- ------------ ------------
Gross profit 78,660 53,569 43,036
------------- ------------ ------------
Operating expenses:
Selling, general and administrative 49,831 36,987 28,142
Depreciation and amortization 18,769 9,744 5,962
Impairment of long-lived assets 400 1,500 -
------------- ------------ ------------
Total operating expenses 69,000 48,231 34,104
------------- ------------ ------------
Income from operations 9,660 5,338 8,932
------------- ------------ ------------
Other income (expense):
Interest income 4,046 7,575 1,687
Interest expense (541) (570) (357)
Other income (expense) (16) 2 (18)
------------- ------------ ------------
Income before income taxes 13,149 12,345 10,244
Provision for income taxes 5,311 5,253 4,227
------------- ------------ ------------
Net income $ 7,838 $ 7,092 $ 6,017
============= ============ ============
Basic earnings per common share $ 0.36 $ 0.34 $ 0.36
============= ============ ============
Average number of basic common shares outstanding 21,686,149 20,583,190 16,945,210
============= ============ ============
Diluted earnings per common share $ 0.36 $ 0.34 $ 0.35
============= ============ ============
Average number of diluted common shares outstanding 21,826,359 20,821,921 17,128,277
============= ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
INFORMATION HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
------------------------- ADDITIONAL RETAINED
NUMBER OF PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
Balance at December 31, 1998 16,943,189 $ 169 $ 84,750 $ (126) $ 84,793
Common stock issued to employees
from stock option exercises 10,361 1 124 125
Net income 6,017 6,017
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 16,953,550 170 84,874 5,891 90,935
Issuance of common stock, net 4,500,000 45 155,088 155,133
Common stock issued to employees
from stock option exercises 158,420 1 1,918 1,919
Income tax benefit from
stock option exercises 1,195 1,195
Net income 7,092 7,092
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 21,611,970 216 243,075 12,983 256,274
Common stock issued to employees
from stock option exercises 146,082 2 2,003 2,005
Income tax benefit from
stock option exercises 833 833
Net income 7,838 7,838
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2001 21,758,052 $ 218 $ 245,911 $ 20,821 $ 266,950
========== ========== ========== ========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
INFORMATION HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(IN THOUSANDS)
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,838 $ 7,092 $ 6,017
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 3,417 2,210 1,592
Amortization of goodwill and other intangibles 15,352 7,534 4,370
Amortization of pre-publication costs 2,814 2,297 2,469
Change in non-current deferred income tax liabilities (2,028) (1,862) (1,988)
Impairment of long-lived assets 400 1,500 -
Other 154 139 54
Changes in operating assets and liabilities, net of effect
of acquisitions:
Increase in accounts receivable, net (3,170) (5,112) (3,598)
Increase in inventories (54) (1,166) (299)
(Increase)decrease in prepaid and other current assets 196 (1,371) (116)
Increase(decrease) in accounts payable and accrued expenses (1,889) 5,019 (456)
Income tax benefit from stock options exercised 1,166 1,195 -
Net change in income taxes (receivable)payable (2,592) (2,611) 1,442
Increase(decrease) in deferred revenue 2,708 585 (325)
Net change in other assets and liabilities (630) (477) 179
---------- ---------- ----------
Net Cash Provided by Operating Activities 23,682 14,972 9,341
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, titles, and equity interests (68,636) (64,862) (53,430)
Purchases of property and equipment (3,950) (2,800) (1,397)
Investment in pre-publication costs (3,064) (3,020) (2,267)
Purchases of short-term investments (6,031) (11,731) -
Capitalized internal-use software (1,488) (522) (841)
Proceeds from disposal of property and equipment 27 14 11
---------- ---------- ----------
Net Cash Used in Investing Activities (83,142) (82,921) (57,924)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock in public offering, net - 155,133 -
Common stock issued from stock options exercised 2,005 1,919 125
Principal payments on capital leases (308) (279) (261)
Financing costs for new credit facility - - (1,000)
---------- ---------- ----------
Net Cash Provided by (Used in) Financing Activities 1,697 156,773 (1,136)
---------- ---------- ----------
NET (DECREASE) INCREASE IN
CASH AND EQUIVALENTS (57,763) 88,824 (49,719)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 96,375 7,551 57,270
---------- ---------- ----------
CASH AND EQUIVALENTS, END OF YEAR $ 38,612 $ 96,375 $ 7,551
========== ========== ==========
SUPPLEMENTAL DISCLOSURE:
Income taxes paid $ 8,755 $ 8,531 $ 4,824
========== ========== ==========
Interest paid $ 402 $ 571 $ 372
========== ========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
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
wholly owned subsidiaries - CRC Press LLC (CRC Press), MicroPatent LLC
(MicroPatent), Master Data Center, Inc. (MDC), Transcender LLC (Transcender),
Liquent, Inc. (Liquent) and IDRAC SAS (IDRAC), provides information products and
services to professional end-users in intellectual property, scientific and
technical information and information technology (IT) learning markets. The
Company's intellectual property businesses, which include MicroPatent, MDC,
Liquent and IDRAC, provide a broad array of databases, information products and
complementary services for intellectual property and regulatory professionals.
The scientific and technology information business is CRC Press, which publishes
professional and academic books, journals, newsletters and electronic databases
covering areas such as life sciences, environmental sciences, engineering,
mathematics, physical sciences and business. Transcender is a leading online
provider of IT certification test-preparation products. Its products include
exam simulations for certifications from major hardware and software providers.
IHI, together with IV and its subsidiaries are referred to as (the Company).
Products are distributed on a worldwide basis, and IV has operating offices in
the United States and in Europe.
On August 12, 1998, the members of IV contributed all of their direct and
indirect equity interests to IHI, then 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.
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 $51,200,000 were used primarily during fiscal 1999 to
fund four strategic acquisitions in the intellectual property market
(See Note 3).
On March 14, 2000, the Securities and Exchange Commission declared effective the
Company's registration statement on Form S-3, pursuant to which the Company
completed a public offering on March 20, 2000 of 4,500,000 shares of its common
stock at a price of $36.50 per share. The net proceeds to the Company, after
deducting underwriting discounts, commissions and offering expenses was
approximately $155,000,000. As of December 31, 2001, the Company used
approximately $131,000,000 of the proceeds from the offering to fund
acquisitions in each of the operating segments (See Note 3). The remaining net
proceeds will be used to finance future acquisitions and for general corporate
purposes.
The consolidated financial statements presented as of and for the three years
ended December 31, 2001 include the accounts of IHI and subsidiaries and the
Company's share of earnings or losses of an affiliated company under the equity
method of accounting. All significant intercompany 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.
F-6
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS - The Company considers all highly liquid investments with
maturities of three months or less at the time of purchase to be cash
equivalents. The cost of these investments is equal to fair market value.
SHORT-TERM INVESTMENTS - At December 31, 2001 and 2000, the Company held
short-term investments in commercial paper, which were classified as
held-to-maturity. The investments have a maturity date within one year and are
stated at their amortized cost.
ACCOUNTS RECEIVABLE - The changes in the allowance for doubtful accounts
receivable and sales returns consist of the following (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
Allowance, beginning of year $ 3,575 $ 2,621 $ 3,406
Provision for uncollectible accounts
and returns 283 1,116 332
Write-off of uncollectible accounts
and deductions from reserves (585) (162) (1,117)
---------- ---------- ----------
Allowance, end of year $ 3,273 $ 3,575 $ 2,621
========== ========== ==========
INVENTORIES - Inventories, consisting primarily of finished goods, are stated at
the lower of cost (first-in, first-out method) or market. Shipping costs, which
consist of transportation costs associated with the delivery of the Company's
product to customers, and handling costs are included in Cost of sales. The vast
majority of inventories are books, which are reviewed monthly 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.
ADVERTISING COSTS - The cost of advertising is expensed as incurred. The
majority of these costs relate to direct response marketing and is expensed upon
mailing. The Company incurred approximately $8,430,000, $6,565,000, and
$6,446,000 in advertising costs during fiscal 2001, 2000 and 1999, respectively.
Advertising related costs, primarily consisting of direct mail costs, of
approximately $540,000 and $1,147,000 were included in Prepaid expenses and
other current assets at December 31, 2001 and 2000, respectively.
PROPERTY AND EQUIPMENT - Depreciation is provided using the straight-line method
over the following estimated useful lives:
Furniture and equipment 3 - 7 years
Computer equipment 3 - 5 years
Leasehold improvements Shorter of useful life or lease term
Property under capital leases Life of lease
Gains or losses arising from dispositions are reported as income or expense.
Maintenance and repair costs are charged to expense as incurred, and renewals
and improvements that extend the useful lives of assets are capitalized.
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 2001 and 2000, the Company removed from its Balance
Sheets fully amortized Pre-publication costs of approximately $2,895,000 and
$3,554,000, respectively.
F-7
IDENTIFIED INTANGIBLE ASSETS - Identified intangible assets are amortized using
the straight-line method over the following estimated useful lives:
Trademarks and tradenames 6 - 20 years
Publishing rights 7 - 20 years
Customer lists and relationships 10 - 20 years
Databases and content 5 - 20 years
Other identified intangibles 2 - 20 years
Beginning in January 2002, the Company will not amortize intangible assets with
indefinite lives in accordance with Statement of Financial Accounting Standards
(SFAS) No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. See Impact of Recently
Issued Accounting Standards for further details.
GOODWILL - Goodwill consists of the excess of cost over the value of
identifiable net assets of businesses acquired and is being amortized on a
straight-line basis over their estimated useful lives of 10-20 years. Beginning
in January 2002, the Company will not amortize goodwill in accordance with
Statement of Financial Accounting Standards (SFAS) No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. See Impact of Recently Issued Accounting Standards for
further details.
INTERNAL-USE SOFTWARE - According to the provisions of the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1,
ACCOUNTING FOR THE COSTS OF SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE and
Emerging Issues Task Force 00-2, ACCOUNTING FOR WEB SITE DEVELOPMENT COSTS,
certain costs incurred in the planning and development stage of internal use
computer software projects and web sites have been expensed, while costs
incurred during the application development stage have been capitalized.
Capitalized software costs are amortized over estimated useful lives of three to
five years. Total net capitalized costs as of December 31, 2001 and 2000 were
$2,623,000 and $1,555,000, respectively, and are included in Other assets.
INVESTMENT IN UNCONSOLIDATED AFFILIATE - The investment in an unconsolidated
affiliate in which the Company has the ability to exercise significant influence
over operating and financial policies, is accounted for by the equity method.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company periodically evaluates the
recoverability of long-lived assets not held for sale by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. The Company also reviews long-lived assets and the related
intangible assets for impairment whenever events or changes in circumstances
indicated the carrying amounts of such assets may not be recoverable. If the
Company determines, based on such measures, that the carrying amount is
impaired, the assets will be written down to fair value. Fair value is
determined based on discounted cash flows or management's estimates, depending
on the nature of the assets. There were no adjustments to the carrying value of
long-lived assets in fiscal 1999. During 2000 the Company formed an alliance
with Intellectual Property Technology Exchange, Inc. (Techex) to jointly develop
and market products to address the online needs of the technology licensing
industry. In the fourth quarter of 2000, the Company determined that the value
of its investment in Techex was impaired due to the inability of Techex to
generate significant revenues. As a result, the Company recorded a charge of
$1,500,000 to reduce the carrying amount of the investment to estimated fair
value. An additional impairment charge of $400,000 was recorded in the fourth
quarter of 2001.
F-8
COMPREHENSIVE INCOME - Comprehensive income includes net earnings and other
comprehensive income. Other comprehensive income includes accumulated
translation adjustments and accumulated net gains or losses on derivative
instruments designated and qualifying as cash flows instruments.
FOREIGN CURRENCY TRANSLATION - The financial statements of the Company's
foreign subsidiaries are translated from the local currency into United
States (U.S.) dollars. Assets and liabilities are translated using current
exchange rates, except certain accounts of subsidiaries whose functional
currency is the U.S. dollar, and translation adjustments are accumulated in a
separate component of stockholders' equity. Revenue and expenses are
translated at average monthly exchange rates, and translation adjustments are
charged and credited to income. Foreign exchange translation gains or losses
were not material in any of the periods presented.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are charged
to operations when incurred and are included in Selling, general and
administrative expenses. The amounts incurred in 2001 and 2000 were
approximately $4,000,000 and $1,395,000, respectively. Amounts for 1999 were
not material.
REVENUE RECOGNITION - The Company recognizes revenues principally upon
shipment of products to the customer or when services are rendered. For
products sold with the right of return, revenue is recognized net of a
provision for estimated future returns. Subscription revenues are generally
collected in advance and are deferred and recognized as revenue in the period
in which the product is shipped. Service contracts record revenue as earned.
Revenue from annuity tax payment services is recognized in the period when
the related annuity tax payments are made to various regulatory agencies.
Revenue from maintenance contracts is recognized primarily over the term of
the service contract.
The Company recognizes revenue from software license agreements in accordance
with the provisions of the AICPA SOP 97-2, SOFTWARE REVENUE RECOGNITION as
amended by SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF A PROVISION OF SOP
97-2, SOFTWARE REVENUE RECOGNITION and SOP 98-9, MODIFICATION OF SOP 97-2,
SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. Revenue
is recognized from software license agreements when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable
and collectibility is probable.
In software arrangements that include rights to multiple software products,
post-contract support and other services, the Company allocates the total
arrangement fee among each deliverable based on the relative fair value of each
of the deliverables. The fair value of the software license is determined based
on vendor-specific objective evidence of the undelivered post-contract customer
support and service elements in accordance with the provisions of SOP 98-9.
DEFERRED REVENUE - Deferred revenue includes (i) payments received for
products not yet delivered, (ii) advance payments on contract revenues, (iii)
payments received from subscriptions, and (iv) that portion of separately
sold software support agreements that has not yet been recognized as revenue.
In connection with the acquisition of companies, the Company records deferred
revenue at the cost to fulfill plus an applicable gross profit margin, rather
than based on the subscription and advanced payments received.
INCOME TAXES - Income taxes are calculated in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. SFAS 109 requires the asset and liability method of
accounting for income taxes. Deferred tax assets and liabilities are determined
based upon differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
Recognition of deferred tax assets is limited to amounts considered by
management to be more likely than not of realization in future periods.
F-9
STOCK-BASED COMPENSATION - The Company grants stock options for a fixed number
of shares to employees with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for its stock option grants
under the provisions of Accounting Principles Board (APB) Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and the disclosure-only provisions of
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Since stock options are
granted by the Company with exercise prices equal to the market price of the
underlying stock at the date of grant, no compensation expense is recognized.
FORWARD CONTRACTS - A subsidiary of the Company uses forward exchange
contracts to hedge foreign currency transaction exposures of its operations.
Generally, this subsidiary purchases forward contracts over periods not to
exceed six months. The forward contracts are designated as fair value hedges
and deferred gains and losses are recognized in earnings when the underlying
transactions are settled. As a matter of policy, the Company does not
speculate in financial markets and, therefore, the Company does not hold
financial instruments for trading purposes. The Company has established
strict counterparty credit guidelines and enters into transactions only with
financial institutions of investment grade or better. In addition, the
Company routinely monitors counterparty exposures and reviews any downgrade
in credit rating immediately.
COMPUTATION OF EARNINGS PER COMMON SHARE - Basic earnings per common share is
computed based on the weighted average outstanding common shares during the
respective period. Diluted earnings per common share is computed based on the
weighted average outstanding common shares and the effect of all dilutive
potential common shares, such as stock options.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In June 2001, the Financial
Accounting Standards Board (FASB) issued SFAS No. 141, BUSINESS COMBINATIONS
and SFAS No.142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 prohibits
the use of the pooling-of-interest method of business combinations initiated
after June 30, 2001 and also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets. SFAS No. 141 applies to
all business combinations completed after June 30, 2001. The adoption of this
statement did not materially impact the Company's results of operations for
the year ended December 31, 2001. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and intangible
assets with indefinite lives. Under a non-amortization approach, goodwill and
certain intangibles will not be amortized, but instead will be reviewed for
impairment at least annually. The Company is required to adopt SFAS No. 142
for acquisitions initiated prior to June 30, 2001 on January 1, 2002. The
Company does not expect that the adoption of SFAS No. 142 will result in an
impairment charge. The adoption of these standards will reduce the
amortization of goodwill and intangible assets commencing January 1, 2002.
The amount of goodwill amortization recognized was $5,002,000, $1,302,000 and
$308,000 for fiscal 2001, 2000 and 1999, respectively.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting provisions
of APB No. 30, REPORTING THE RESULTS OF OPERATIONS FOR A DISPOSAL OF A SEGMENT
OF A BUSINESS. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The Company will adopt SFAS No. 144 as of January 1, 2002 and
does not expect that the adoption of the Statement will have a significant
impact on the Company's financial position or results of operations.
F-10
USE OF ESTIMATES - The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Management bases its estimates on historical
experience and on various assumptions, which are believed to be reasonable under
the circumstances. Actual results could differ from those estimates.
RECLASSIFICATION - Certain prior year amounts have been reclassified for
comparability purposes.
3. ACQUISITIONS
On December 20, 2001, the Company completed a tender offer and acquired all
of the outstanding common shares of Liquent, Inc. (Liquent) for cash
consideration equal to $2.27 per share, or approximately $41,100,000. Liquent
is a leading provider of software and service solutions that aid in content
assembly and publishing for the life sciences industry. The purchase price
was preliminarily allocated to net tangible assets of $6,349,000, identified
intangible assets of $6,750,000 and non-deductible goodwill of $25,592,000.
The Company has obtained an independent appraisal of the fair value of the
identified intangible assets and their remaining useful lives. The Company
also recorded a deferred income tax asset as a result of Liquent's net
operating loss carryforwards of $5,010,000, offset by a deferred income tax
liability as a result of the gross up of acquired intangible assets in the
amount of $2,565,000.
On May 15, 2001, the Company acquired the stock of Parthenon Publishing Group
(Parthenon), for cash consideration of approximately $8,300,000. Parthenon,
based in the United Kingdom, is a leading provider of medical and environmental
reference products, including books, journals and medical communications
services. The purchase price was allocated to net tangible assets of $78,000,
identified intangible assets of $5,599,000 and goodwill of $4,226,000. The
Company also recorded a deferred income tax liability as a result of the gross
up of acquired intangible assets in the amount of $1,559,000. The goodwill is
being amortized using the straight-line method over 15 years.
On March 29, 2001, the Company acquired the IDRAC business of IMS Health and
entered into multiple perpetual agreements with IMS Health and certain
affiliates, for aggregate cash consideration of approximately $20,400,000.
IDRAC, based in France, is a leading provider to pharmaceutical companies
worldwide of regulatory and intellectual property information related to
pharmaceutical product registrations. The purchase price was allocated to net
liabilities assumed of $2,974,000, identified intangible assets of $15,000,000
and goodwill of $13,609,000. The Company also recorded a deferred income tax
liability as a result of the gross up of acquired intangible assets in the
amount of $5,256,000. The Company has obtained an independent appraisal of the
fair value of the identified intangible assets and their remaining useful lives.
The goodwill is being amortized using the straight-line method over 10-15 years.
On November 6, 2000, the Company acquired all of the assets of Transcender
Corporation (Transcender) for cash consideration of approximately $60,000,000.
Transcender is a leading provider of on-line IT certification products.
Transcender develops content and related software distributed over the Internet
and in other electronic media to information technology professionals seeking
certification in numerous product areas and programming languages. The purchase
price was allocated to net liabilities assumed of $1,654,000, identified
intangible assets of $15,300,000 and goodwill of $46,354,000. Assets acquired
and liabilities assumed have been recorded at their estimated fair values and
useful lives. The Company has obtained an independent appraisal of the fair
values of the identified intangible assets and their remaining useful lives.
Goodwill is being amortized using the straight-line method over 15 years.
On January 7, 1999, effective as of January 1, 1999, the Company acquired the
stock of Optipat, Inc. (Optipat), for cash consideration of approximately
$3,200,000, net of cash acquired. Optipat
F-11
provides patent information in printed format and over the Internet to the
corporate and legal markets. The purchase price was allocated to identified
intangible assets of $2,900,000 and net tangible assets of $300,000.
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 allocated to net tangible assets of $600,000 and
identified intangible assets of $8,700,000.
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 $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 as
finalized in 2000 was allocated to net liabilities assumed of $8,700,000, and
identified intangible assets of $41,700,000. Assets acquired and liabilities
assumed have been recorded at their estimated fair values and useful lives. 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
$16,249,000. This goodwill is being amortized using the straight-line method
over 20 years.
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 whole
purchase price was allocated to identified intangible assets.
All acquisitions have 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. In
accordance with SFAS 142, no goodwill amortization was recorded for acquisitions
after June 30, 2001, which include Liquent.
The following unaudited pro forma information presents the results of operations
of the Company, as if the 2001 acquisitions of IDRAC and Liquent and the prior
acquisitions of Transcender, MDC and Faxpat had taken place as of January 1,
2000 and 1999, respectively are as follows (in thousands, except per share
data):
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2001 2000 1999
Revenues $ 128,610 $ 120,613 $ 81,768
=========== =========== ===========
Net loss $ (3,056) $ (7,312) $ (760)
=========== =========== ===========
Basic loss per common share $ (0.14) $ (0.36) $ (0.04)
=========== =========== ===========
Diluted loss per common share $ (0.14) $ (0.36) $ (0.04)
=========== =========== ===========
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the operating results that
would have occurred had the acquisitions been consummated as of the above date,
nor are they necessarily indicative of future operating results.
F-12
4. PROPERTY AND EQUIPMENT
Property and equipment (at cost) consisted of the following (in thousands):
DECEMBER 31, DECEMBER 31,
2001 2000
Buildings $ 2,344 $ 2,344
Furniture and equipment 2,713 1,904
Computer equipment 11,581 6,207
Leasehold improvements 1,645 801
----------- -----------
18,283 11,256
Less accumulated depreciation 8,415 5,454
----------- -----------
$ 9,868 $ 5,802
=========== ===========
5. IDENTIFIED INTANGIBLE ASSETS
Identified intangible assets consisted of the following (in thousands):
DECEMBER 31, DECEMBER 31,
2001 2000
Trademarks and tradenames $ 21,129 $ 17,950
Publishing rights 23,572 19,380
Customer lists and relationships 46,548 33,848
Database and content 27,400 24,500
Other identified intangibles 20,531 13,131
----------- -----------
139,180 108,809
Less accumulated amortization 27,717 17,467
----------- -----------
$ 111,463 $ 91,342
=========== ===========
6. INVESTMENT IN UNCONSOLIDATED AFFILIATE
On May 3, 2001, the Company completed the acquisition of a 49% interest in GSI
Office Management GmbH (GSI) for cash consideration of approximately $3,400,000,
with an option to acquire the remaining 51% interest after three years. GSI,
based in Germany, is a leading provider of intellectual property management
software. At December 31, 2001, the investment in GSI was included in Other
assets. The Company's share of GSI's net loss was immaterial for the year ended
December 31, 2001.
7. 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 sub-limit 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 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 and
for the periods ended December 31, 2001 and 2000, the Company had no outstanding
borrowings
F-13
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 December 31, 2001, 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.
8. INCOME TAXES
A summary of the source of income before taxes is as follows (in thousands):
YEAR ENDED
DECEMBER 31,
----------------
2001
Domestic $ 13,223
Foreign (74)
----------------
$ 13,149
================
The provision for income taxes consisted of the following (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
Current:
Federal $ 6,245 $ 6,133 $ 5,441
State 960 922 830
Foreign 974 - -
Deferred:
Federal (1,858) (1,626) (1,874)
State (196) (176) (170)
Foreign (814) - -
---------- ---------- ----------
$ 5,311 $ 5,253 $ 4,227
========== ========== ==========
The following represents a reconciliation between the actual income tax
provision and income taxes computed by applying the statutory Federal income tax
rate (35%) to income before income taxes:
YEARS ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
Federal statutory rate $ 4,601 $ 4,321 $ 3,585
State and local taxes, net of Federal tax benefits 360 508 429
Goodwill amortization not deductible for tax purposes 394 393 212
Non-deductible permanent items 91 31 19
Change in valuation allowance (32) - -
Other, net (103) - (18)
---------- ---------- ----------
$ 5,311 $ 5,253 $ 4,227
========== ========== ==========
F-14
Deferred income tax (liabilities) assets result from reporting income and
expenses in different periods for tax and financial reporting purposes.
Significant components of the Company's deferred tax liabilities and assets are
as follows (in thousands):
DECEMBER 31, DECEMBER 31,
2001 2000
Current deferred tax assets:
Allowance for accounts receivable $ 1,282 $ 1,413
Inventory 1,195 563
Other, net 946 513
------------ ------------
Net current deferred tax assets $ 3,423 $ 2,489
============ ============
Non-current deferred tax assets:
Investment write-down $ 727 $ 574
Lease obligation 806 924
Net operating loss carryforwards 5,890 -
Other 1,144 -
------------ ------------
8,567 1,498
Less valuation allowance 2,252 -
------------ ------------
6,315 1,498
------------ ------------
Non-current deferred tax liabilities:
Property and equipment - (132)
Intangible assets (21,548) (14,709)
Capitalized software (817) (692)
Other (776) (22)
------------ ------------
(23,141) (15,555)
------------ ------------
Total long-term net deferred tax liabilities $ (16,826) $ (14,057)
============ ============
Net deferred tax liabilities $ (13,403) $ (11,568)
============ ============
The increase in the non-current deferred tax asset for net operating loss
carryforwards was due to the acquisition of Liquent in December of 2001, which
had net operating losses. At December 31, 2001, the Company had net operating
loss carryforwards of approximately $11,885,000 which were available to offset
future Federal taxable income, if any, through 2020.
The valuation allowance at acquisition of Liquent was approximately $2,220,000.
The change in the valuation allowance for the year ended December 31, 2001 was
approximately $32,000. A valuation allowance has been provided on certain of the
Company's deferred tax assets due to the uncertainty regarding their
realizability. Annually, management evaluates the recoverability of the deferred
tax assets and the level of the valuation allowance. At such time as it is
determined that it is more likely than not that deferred tax assets are
realizable the valuation allowance will be reduced.
At December 31, 2001, the Company, as a result of the acquisition of Liquent,
also has research credit carryforwards of approximately $768,000 and has
alternative minimum tax credit carryforwards in the amount of approximately
$95,000 for Federal income taxes purposes. The research credits will begin to
expire in 2012 and the alternative minimum tax credits are available over an
indefinite period.
The Company's income taxes payable for federal and state purposes have been
reduced by the tax benefits associated with the exercise of stock options. These
benefits were credited to stockholders' equity and goodwill, as it related to
Liquent, and amounted to $1,166,000 in 2001 and $1,136,000 in 2000,
respectively.
F-15
9. 1998 STOCK OPTION PLAN
The Company's 1998 Stock Option Plan (the Plan), provides for the granting of
nonqualified options to purchase not more than an aggregate of 2,466,886 shares
of the Company's common stock, as amended and subject to approval by the
stockholders of the Company. All directors and full-time employees of the
Company are eligible to participate in the Plan. Each option granted pursuant to
the Plan must provide for an exercise price per share that is at least equal to
the fair market value per share of the Company's common stock on the date of
grant. Options granted under the Plan are exercisable no earlier than one-year
and no later than ten years from the grant date and vest in 25% increments over
a four-year period from the date of grant. The exercise price of each option,
the period during which each option may be exercised and the other terms and
conditions of each option are determined by the Board of Directors. Options that
have been granted to the Company's independent directors and certain executive
officers have accelerated vesting schedules and exercisable lives.
A summary of stock option transactions under the Plan for the years ended
December 31, 1999, 2000 and 2001 is as follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 529,333 $ 12.02
-----------------------------------
Granted 115,563 18.51
Exercised (10,361) 12.00
Canceled or Lapsed (34,483) 12.09
-----------------------------------
Outstanding at December 31, 1999 600,052 13.26
-----------------------------------
Granted 501,408 32.67
Exercised (158,420) 12.11
Canceled or Lapsed (46,871) 16.75
-----------------------------------
Outstanding at December 31, 2000 896,169 24.14
-----------------------------------
Granted 596,395 23.14
Exercised (146,082) 13.72
Canceled or Lapsed (272,473) 33.74
-----------------------------------
Outstanding at December 31, 2001 1,074,009 $ 22.57
-----------------------------------------------------------------------------------------------------
Shares exercisable at December 31, 1999 314,245 $ 12.04
Shares exercisable at December 31, 2000 251,115 $ 12.82
Shares exercisable at December 31, 2001 276,185 $ 18.41
-----------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding and
options exercisable at December 31, 2001:
WEIGHTED
RANGE OF AVG. REMAINING WEIGHTED WEIGHTED
EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISABLE
-------------------------------------------------------------------------------------------------------------
$12.00-$16.25 187,822 5.3 years $ 12.07 166,854 $ 12.03
$18.13-$22.55 396,414 9.4 years 20.71 21,833 18.61
$23.90-$27.81 334,225 9.1 years 25.95 33,675 25.79
$29.59-$33.75 155,548 8.9 years 32.69 53,823 33.45
-------------------------------------------------------------------------------------------------------------
$12.00-$33.75 1,074,009 8.5 Years $ 22.57 276,185 $ 18.41
-------------------------------------------------------------------------------------------------------------
At December 31, 2001 and 2000, the total number of available shares eligible to
be granted under the Plan was 578,014 and 301,936, respectively.
F-16
The Company accounts for its stock option plan under the provisions of APB
Opinion No. 25 and related Interpretations, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, which utilizes the intrinsic value method. Accordingly, no
compensation cost has been recognized related to the Company's stock option
plan. Had compensation cost for the Company's stock option plan been determined
based on the fair value of the options 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 the pro
forma amounts indicated below (in thousands, except per share data):
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2001 2000 1999
Net income applicable to common shareholders:
As reported $ 7,838 $ 7,092 $ 6,017
Pro forma $ 6,113 $ 5,943 $ 5,697
Basic earnings per common share:
As reported $ 0.36 $ 0.34 $ 0.36
Pro forma $ 0.28 $ 0.29 $ 0.34
Diluted earnings per common share:
As reported $ 0.36 $ 0.34 $ 0.35
Pro forma $ 0.28 $ 0.29 $ 0.33
The effects on pro forma net income and earnings per share of expensing the
estimated fair value of stock options are not necessarily representative of the
effects on reported net income for future years due to such factors as the
vesting period of the stock options and the potential for issuance of additional
stock options in future years.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used:
YEARS ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
Risk free interest rate 4.7% 6.4% 6.0%
Expected life of option grants (years) 5 5 5
Expected volatility 66.40% 75.45% 67.62%
Expected dividend yield 0 0 0
F-17
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
common share for the period indicated.
YEARS ENDED DECEMBER 31,
----------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 1999
Basic:
Net income $ 7,838 $ 7,092 $ 6,017
Average common shares outstanding 21,686 20,583 16,945
----------- ----------- -----------
Basic EPS $ 0.36 $ 0.34 $ 0.36
=========== =========== ===========
Diluted:
Net income $ 7,838 $ 7,092 $ 6,017
=========== =========== ===========
Average common shares outstanding 21,686 20,583 16,945
Net effect of dilutive stock options -
based on the treasury stock method 140 239 183
----------- ----------- -----------
Total 21,826 20,822 17,128
=========== =========== ===========
Diluted EPS $ 0.36 $ 0.34 $ 0.35
=========== =========== ===========
In fiscal 2001 and 2000, 345,268 and 351,448 stock options, respectively were
excluded from the computation of diluted earnings per common share due to their
antidilutive effect.
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company primarily leases office and warehouse space,
office and computer equipment. The leases generally provide for the lessee to
pay taxes, maintenance, insurance and certain other operating costs of the
leased property, and certain leases include escalation clauses.
The future noncancelable minimum lease payments under operating leases and under
capital leases including estimated escalation amounts as of December 31, 2001
are as follows (in thousands):
OPERATING CAPITAL
LEASES LEASES
Year ending December 31,
2002 $ 3,694 $ 692
2003 3,389 709
2004 2,653 637
2005 2,378 591
2006 1,571 354
Thereafter 2,573 -
----------- -----------
Total minimum lease payments $ 16,258 2,983
=========== -----------
Less amount representing unamortized interest 534
-----------
Present value of net minimum lease payments 2,449
Less current maturities 490
-----------
Long-term obligation $ 1,959
===========
F-18
Assets recorded under capital leases and the related depreciation are included
in Property and equipment as follows (in thousands):
DECEMBER 31, DECEMBER 31,
2001 2000
Buildings $ 2,344 $ 2,344
Computer equipment 420 86
---------- ----------
2,764 2,430
Less accumulated depreciation 1,316 1,066
---------- ----------
$ 1,448 $ 1,364
========== ==========
Rental expense for property and equipment under noncancelable operating lease
agreements amounted to approximately $2,724,000, $1,706,000 and $1,323,000 for
each of the years ended December 31, 2001, 2000 and 1999, respectively.
LEGAL PROCEEDINGS - From time to time, the Company is a party to certain
lawsuits and administrative proceedings that arise in the conduct of its
business. While the outcome of these lawsuits and proceedings cannot be
predicted with certainty, management believes that, if adversely determined, the
lawsuits and proceedings, either singularly or in the aggregate, would not have
a material adverse effect on the financial condition, results of operations, or
net cash flows of the Company.
12. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution 401(k) savings plan (the 401(k)
Plan). Employees are eligible to participate in the 401(k) Plan upon the
attainment of age 21 and the completion of six months of employment with the
Company. Acquired businesses who previously offered a 401k plan to their
employees and qualify as an adopting employer will receive prior service credit
in determining eligibility and vesting in the 401(k) Plan. Participants may make
pre-tax contributions subject to Internal Revenue Service limitations. The
Company, via the subsidiaries, matches 50% of an employee's contribution up to a
maximum of 6% of eligible compensation. In addition, at its discretion, the
Company may make additional contributions to the 401(k) Plan; no such
contributions were made in fiscal years 2001, 2000 and 1999, respectively.
Participant contributions and earnings thereon vest immediately. Matching
contributions and earnings thereon vest in equal amounts over a three-year
period. Nonvested balances are forfeited and used to offset future employer
contributions.
The Company's contributions under these plans for each of the three years ended
December 31, 2001, 2000, and 1999 were approximately $478,000, $320,000 and
$211,000, respectively. The significant increases in fiscal 2001 and 2000 over
amounts contributed in the prior years reflects the addition of employees as a
result of acquisitions.
The Company also has separate foreign employee benefit plans. The amounts
involved are not material and are therefore not disclosed.
F-19
13. SEGMENT INFORMATION
Operating segments are defined as components of an enterprise for which separate
financial information is available and regularly reviewed by the Company's
senior management. The Company evaluates performance based on earnings before
interest, taxes, depreciation and amortization (EBITDA) of the respective
business units. The accounting policies of the operating segments are the same
as those described in the summary of significant accounting policies.
The Company has three reportable segments: intellectual property, scientific and
technology information and information technology learning. The intellectual
property segment, which includes MicroPatent, MDC, Liquent and IDRAC, provides a
broad array of databases, information products and complementary services for
intellectual property and regulatory professionals. The scientific and
technology information segment is CRC Press, which publishes professional and
academic books, journals, newsletters and electronic databases covering areas
such as life sciences, environmental sciences, engineering, mathematics,
physical sciences and business. The information technology-learning segment was
created in the fourth quarter of fiscal 2000 as a result of the Company's
strategic acquisition of Transcender. Transcender is a leading online provider
of IT certification test-preparation products. Other includes unallocated
corporate items. Corporate assets consist principally of cash and equivalents,
deferred income taxes and current income taxes receivable.
Foreign EBITDA from the Company's businesses was not material for the periods
presented. Transfers between geographic areas are recorded at agreed upon prices
and intercompany revenue and profits are eliminated.
The following tables set forth the information for the Company's reportable
segments based on the nature of the products and services offered for the
periods indicated (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
REVENUES FROM EXTERNAL CUSTOMERS:
Intellectual property $ 41,565 $ 30,228 $ 17,571
Scientific and technology information 42,424 38,984 41,207
Information technology learning 21,347 4,077 -
------------ ------------ ------------
$ 105,336 $ 73,289 $ 58,778
============ ============ ============
EBITDA:
Intellectual property $ 15,423 $ 7,839 $ 7,383
Scientific and technology information 8,527 10,262 11,695
Information technology learning 10,376 1,760 -
Other (3,099) (2,480) (1,733)
------------ ------------ ------------
$ 31,227 $ 17,381 $ 17,345
============ ============ ============
OPERATING INCOME:
Intellectual property $ 5,890 $ 1,072 $ 3,466
Scientific and technology information 3,071 5,967 7,205
Information technology learning 3,815 790 -
Other (3,116) (2,491) (1,739)
------------ ------------ ------------
$ 9,660 $ 5,338 $ 8,932
============ ============ ============
F-20
YEARS ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
SEGMENT ASSETS:
Intellectual property $ 197,053 $ 96,904 $ 88,477
Scientific and technology information 58,216 42,825 43,330
Information technology learning 57,334 66,147 -
Other 40,269 105,120 6,851
------------ ------------ ------------
$ 352,872 $ 310,996 $ 138,658
============ ============ ============
DEPRECIATION AND AMORTIZATION: (1)
Intellectual property $ 9,552 $ 6,769 $ 3,917
Scientific and technology information 5,456 4,290 4,508
Information technology learning 6,558 971 -
Other 17 11 6
------------ ------------ ------------
$ 21,583 $ 12,041 $ 8,431
============ ============ ============
CAPITAL EXPENDITURES: (2)
Intellectual property $ 2,290 $ 2,263 $ 821
Scientific and technology information 3,920 3,464 2,813
Information technology learning 793 64 -
Other 11 29 30
------------ ------------ ------------
$ 7,014 $ 5,820 $ 3,664
============ ============ ============
(1) Depreciation and amortization includes $2,814,000, $2,297,000, and
$2,469,000 of amortization of pre-publication costs, classified as Cost of
sales for each of the three years in the period ended December 31, 2001,
respectively.
(2) Includes purchases of property and equipment and investments in
pre-publication costs.
A reconciliation of combined EBITDA for the intellectual property, scientific
and technology information, and information technology learning segments to
consolidated income before income taxes is as follows (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
Total EBITDA for reportable segments $ 34,326 $ 19,861 $ 19,078
Corporate expenses (3,099) (2,480) (1,733)
Interest income, net 3,505 7,005 1,330
Depreciation and amortization (1) (21,583) (12,041) (8,431)
------------ ------------ -------------
Income before income taxes $ 13,149 $ 12,345 $ 10,244
============ ============ ============
The following table presents revenues by geographic location (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
United States $ 79,971 $ 59,461 $ 40,845
Europe 14,800 5,824 9,506
Rest of World 10,565 8,004 8,427
------------ ------------ ------------
$ 105,336 $ 73,289 $ 58,778
============ ============ ============
F-21
14. FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET RISK
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject
the Company to credit risks consists principally of trade accounts receivable
and short-term investments.
The Company had amounts receivable from five customers representing 15% of
accounts receivable and three customers representing 11% of accounts receivable
at December 31, 2001 and 2000, respectively. No other single customer accounted
for a material portion of trade receivables. Overall, the Company believes the
concentration of credit risk in its trade accounts receivables is substantially
mitigated by the Company's ongoing credit evaluation process and due to the
large number of customers comprising the Company's customer base. The Company
does not generally require collateral from customers. The Company evaluates the
need for an allowance for doubtful accounts based upon factors surrounding the
credit risk of specific customers, historical trends and other information.
The Company invests its excess cash in high quality short-term liquid money
market instruments and commercial paper. The Company has a policy of making
investments only with institutions that have at least an "A" credit rating from
a national rating agency. The investments generally mature within six months.
The Company has not incurred losses related to these investments.
The Company maintains its cash in demand deposit accounts, which at times may
exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. As of
December 31, 2001, the Company had approximately $26,685,000 of cash in excess
of FDIC insurance limits. The Company believes that the risk of any loss is
minimal based on the financial condition of the institutions in which the funds
are deposited.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and
equivalents, short-term investments, accounts receivable and accounts payable
reported in the Consolidated Balance Sheets approximates fair value because of
the short-term maturity of these instruments.
The carrying value of the Company's borrowings under its capitalized lease
obligations approximates fair value based on quoted market prices for the same
or similar instruments.
The fair value of the Company's forward contracts is estimated based on
quoted market prices of comparable contracts and was not material as of
December 31, 2001.
OFF BALANCE SHEET RISK - A subsidiary of the Company routinely enters into
forward contracts to acquire various international currencies in an effort to
hedge foreign currency transaction exposures of its operations. Such forward
contracts have been designated as hedges for future annual patent payments to
related international regulatory agencies. At December 31, 2001, the
subsidiary of the Company had entered into forward contracts to acquire
various international currencies, all having maturities of less than six
months, aggregating approximately $16,000,000. Realized gains and losses
relating to the forward contracts were immaterial for the year ended December
31, 2001.
F-22