UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended Commission file number
September 29, 2001 1-3246
PROQUEST COMPANY
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-3580106
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
300 North Zeeb Road, Ann Arbor, Michigan 48103-1553
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (734) 761-4700
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
The number of shares of the Registrant's Common Stock, $.001 par value,
outstanding as of November 2, 2001 was 23,987,979.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
------ --------------------- ----
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations for
the Thirteen and Thirty-Nine Weeks Ended
September 29, 2001 and September 30, 2000 .................. 1
Consolidated Balance Sheets at September 29,
2001 and December 30, 2000 ................................. 2
Consolidated Statements of Cash Flows for
the Thirty-Nine Weeks Ended September 29,
2001 and September 30, 2000 ................................ 3
Notes to the Consolidated Financial
Statements ................................................. 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................................. 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ........................................... 19
PART II. OTHER INFORMATION
------- -----------------
Item 1. Legal Proceedings ............................................ 19
Item 6. Exhibits and Reports on Form 8-K ............................. 20
SIGNATURE PAGE .......................................................... 20
ProQuest Company and Subsidiaries
Consolidated Statements of Operations
(Dollars and shares in thousands, except per share data)
(Unaudited)
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
--------------------- --------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2001 2000 2001 2000
--------- --------- --------- ----------
Net sales .................................................................. $ 98,617 $ 91,671 $ 295,213 $ 274,555
Cost of sales .............................................................. (44,554) (46,534) (137,249) (141,693)
Research and development expense ........................................... (5,365) (4,943) (15,946) (13,453)
Selling and administrative expense ......................................... (32,951) (28,371) (95,548) (89,321)
Restructuring charges ...................................................... - (1,194) - (2,427)
Gain on sales of assets .................................................... - - - 2,751
--------- --------- --------- ---------
Earnings from continuing operations before interest, income taxes, equity in
loss of affiliate, and cumulative effect of a change in accounting
principle ................................................................. 15,747 10,629 46,470 30,412
Net interest expense:
Interest income ........................................................... 35 758 217 1,905
Interest expense .......................................................... (6,297) (8,036) (18,845) (23,919)
--------- --------- --------- ---------
Net interest expense ....................................................... (6,262) (7,278) (18,628) (22,014)
--------- --------- --------- ---------
Earnings from continuing operations before income
taxes, equity in loss of affiliate, and cumulative
effect of a change in accounting principle ................................ 9,485 3,351 27,842 8,398
Income tax expense ......................................................... (3,794) (1,340) (11,137) (3,359)
Equity in loss of affiliate ................................................ (1,802) (5,573) (13,374) (14,345)
--------- --------- --------- ---------
Earnings (loss) from continuing operations before
cumulative effect of a change in accounting principle ..................... 3,889 (3,562) 3,331 (9,306)
Discontinued Operations:
Earnings from discontinued operations, net (less
applicable income taxes of $534, $2,189,
$1,937, and $2,684 respectively) .......................................... 800 3,282 2,905 4,025
Gain (loss) on sales of discontinued operations, net (less
applicable income taxes (benefit) of $(23,458), $0,
$5,598, and $0 respectively) .............................................. (35,187) - 8,396 -
Cumulative effect of a change in accounting principle, net
(less applicable income taxes benefit of $38,500) ......................... - - - (65,302)
--------- --------- --------- ---------
Net earnings (loss) ........................................................ (30,498) (280) 14,632 (70,583)
========= ========= ========= =========
Net earnings (loss) per common share:
Basic:
Earnings (loss) from continuing operations before
cumulative effect of a change in accounting principle ..................... $ 0.16 $ (0.15) $ 0.14 $ (0.39)
Earnings from discontinued operations ...................................... 0.03 0.14 0.12 0.17
Gain (loss) on sales of discontinued operations ............................ (1.47) - 0.36 -
Cumulative effect of a change in accounting principle ...................... - - - (2.76)
--------- --------- --------- ---------
Net earnings (loss) per basic common share ................................. $ (1.28) $ (0.01) $ 0.62 $ (2.98)
========= ========= ========= =========
Diluted:
Earnings (loss) from continuing operations before
cumulative effect of a change in accounting principle ..................... $ 0.16 $ (0.15) $ 0.14 $ (0.39)
Earnings from discontinued operations ...................................... 0.03 0.14 0.12 0.17
Gain (loss) on sales of discontinued operations ............................ (1.45) - 0.35 -
Cumulative effect of a change in accounting principle ...................... - - - (2.76)
--------- --------- --------- ---------
Net earnings (loss) per diluted common share ............................... $ (1.26) $ (0.01) $ 0.61 $ (2.98)
========= ========= ========= =========
Average number of common shares and equivalents outstanding:
Basic ...................................................................... 23,865 23,671 23,735 23,685
Diluted .................................................................... 24,271 23,671 24,006 23,685
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements
1
ProQuest Company and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
Assets
Sept. 29, Dec. 30,
2001 2000
--------- ---------
Current assets:
Cash and cash equivalents ................................................... $ 118,143 $ 10,610
Accounts receivable, net .................................................... 105,246 76,302
Inventory ................................................................... 5,033 4,604
Other current assets ........................................................ 17,091 13,072
--------- ---------
Total current assets ........................................................ 245,513 104,588
Property, plant and equipment, at cost ...................................... 434,650 400,170
Accumulated depreciation .................................................... (288,507) (267,054)
--------- ---------
Net property, plant and equipment ........................................... 146,143 133,116
Long-term receivables ....................................................... 23,717 1,450
Goodwill and other intangible assets, net
of accumulated amortization ................................................ 221,750 222,271
Net assets of discontinued operations ....................................... - 261,155
Other assets ................................................................ 50,889 43,159
--------- ---------
Total assets ................................................................ $ 688,012 $ 765,739
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable ............................................................... $ 2,487 $ 15,568
Current maturities of long-term debt ........................................ 328 466
Accounts payable ............................................................ 37,361 43,134
Accrued expenses ............................................................ 49,449 35,594
Deferred income ............................................................. 138,753 137,606
--------- ---------
Total current liabilities ................................................... 228,378 232,368
Long-term liabilities:
Long-term debt, less current maturities ..................................... 374,246 501,821
Long-term deferred income ................................................... 61,041 63,923
Other liabilities ........................................................... 78,409 37,286
--------- ---------
Total long-term liabilities ................................................. 513,696 603,030
Shareholders' equity:
Common Stock, $.001 par value, 24,381 shares issued and 23,939 shares
outstanding at September 29, 2001 and 24,078 shares issued and 23,622 shares
outstanding at December 30, 2000 ........................................... 24 24
Capital surplus ............................................................. 163,515 156,708
Notes receivable from executives ............................................ (1,229) (1,180)
Retained earnings (accumulated deficit) ..................................... (198,983) (213,615)
Treasury stock .............................................................. (11,073) (11,493)
Other comprehensive income (loss):
Accumulated foreign currency translation
adjustment ............................................................... 952 (103)
SFAS 133 unrealized gain (loss) ........................................... (7,268) -
--------- ---------
Accumulated other comprehensive loss ........................................ (6,316) (103)
--------- ---------
Total shareholders' equity (deficit) ........................................ (54,062) (69,659)
--------- ---------
Total liabilities and shareholders' equity .................................. $ 688,012 $ 765,739
========= =========
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
2
ProQuest Company and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Thirty-Nine Weeks
--------------------------
Sept. 29, Sept. 30,
2001 2000
---------- ----------
Operating activities:
Earnings (loss) from continuing operations before
cumulative effect of a change in accounting principle ... $ 3,331 $ (9,306)
Adjustments to reconcile to cash used in operating
activities of continuing operations:
Depreciation and amortization ............................ 40,647 38,598
Equity in loss of affiliates ............................. 13,374 14,345
Gain on sales of assets .................................. - (2,751)
Changes in operating assets and liabilities:
Accounts receivable ...................................... (27,949) 9,407
Inventory ................................................ (39) 491
Other assets ............................................. (13,041) 924
Long-term receivables .................................... (517) (1,595)
Income taxes ............................................. 7,867 4,930
Accounts payable ......................................... (6,897) (5,041)
Accrued expenses ......................................... (11,551) 24
Deferred income and other long-term liabilities .......... (1,674) (42,811)
Other, net ............................................... (9,164) (10,074)
--------- ---------
Net cash used in continuing operations ................... (5,613) (2,859)
Investing activities:
Expenditures for property, plant and equipment ........... (37,326) (35,679)
Proceeds from asset sales ................................ - 2,551
Acquisitions, net of cash acquired........................ (17,805) (7,484)
Proceeds from sales of discontinued operations ........... 294,250 -
--------- ---------
Net cash provided by (used in) investing activities ...... 239,119 (40,612)
Financing activities:
Proceeds from short-term debt ............................ 4,658 12,600
Repayment of short-term debt ............................. (17,107) (18,819)
Proceeds from long-term debt ............................. 33,683 37,058
Repayment of long-term debt .............................. (161,396) (14,950)
Proceeds from issuance of Common Stock, net .............. 6,807 976
--------- ---------
Net cash (used in) provided by financing activities ...... (133,355) 16,865
Net cash provided by discontinued operations ............. 7,815 31,031
Effect of exchange rate changes on cash .................. (433) (1,715)
--------- ---------
Increase in cash and cash equivalents .................... 107,533 2,710
Cash and cash equivalents, beginning of period ........... 10,610 4,773
--------- ---------
Cash and cash equivalents, end of period ................. $ 118,143 $ 7,483
========= =========
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
3
ProQuest Company and Subsidiaries
Notes to the Consolidated Financial Statements
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
Note 1 - Basis of Presentation
These consolidated financial statements include the accounts of ProQuest
Company and its subsidiaries (collectively the "Company") and are unaudited.
As permitted under the Securities and Exchange Commission (SEC)
requirements for interim reporting, certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted.
Certain reclassifications to the 2000 consolidated financial statements have
been made to conform to the 2001 presentation. The Company believes that these
financial statements include all necessary and recurring adjustments for the
fair presentation of the interim period results. These financial statements
should be read in conjunction with the Consolidated Financial Statements and
related notes included in the Company's annual report for the fiscal year ended
December 30, 2000.
In the first quarter of fiscal 2000, the Company adopted a plan to
divest the Mail and Messaging Technologies and Imaging businesses and its
financing subsidiary. Accordingly, the operating results and net assets of these
businesses have been segregated from the Company's continuing operations. In the
third quarter of fiscal 2001, the Company substantially completed the
divestitures.
Note 2 - Significant Accounting Policies
Revenue Recognition. The Company derives revenues from licenses of
-------------------
database content, sales of microform subscriptions, service, software, and
equipment.
Information & Learning (I&L) provides its customers with access to
periodicals, newspapers, dissertations, out-of-print books and other scholarly
material in exchange for a fee that normally covers a period of twelve months.
Revenues from these subscription agreements are recognized ratably over the term
of the agreements using the straight-line method.
4
Publishing Services (PS) publishes parts catalogs for automotive
dealerships and also provides dealer management systems software for powersports
dealerships. Parts catalog products are generally sold under multiple-element
arrangements that include hardware and related operating systems software, an
electronic parts catalog (EPC) database and retrieval system, an agreement to
provide periodic updates to the EPC database over the term of the arrangement,
and specified services. The Company allocates the total revenue to be received
under these arrangements between two elements--the hardware and related
operating system software element and the remaining deliverables considered
together as a group--based on relative fair value.
The Company accounts for the hardware and related operating systems
software element as a sales-type lease, and recognizes sales revenue equal to
the normal selling price for such systems upon shipment, when all significant
contractual obligations are satisfied and collection of the resulting receivable
is reasonably assured. The remainder of the fee due under these arrangements is
recognized as revenue on a straight-line basis over the term of the agreement.
Revenue from powersports dealer management systems software is recognized
when evidence of an arrangement exists, delivery has occurred, the fee is fixed
or determinable, and collection is probable. Multiple element software license
fees are allocated based on the relative fair values of the elements and
recognized when accepted by the customer.
Inventory. Inventory costs include material, labor and overhead.
---------
Inventories are stated at the lower of cost (determined using the first-in,
first-out ("FIFO") method) or market.
The components of inventory are shown in the table below as of the dates
indicated:
Sept. 29, December 30,
2001 2000
--------- -----------
Finished products ................... $2,084 $1,932
Products in process and materials ... 2,949 2,672
------ ------
Total inventory ..................... $5,033 $4,604
====== ======
Property, Plant and Equipment. Property, plant and equipment includes I&L
-----------------------------
product masters in addition to land, buildings, and machinery and equipment.
Product masters are the electronic and microform master copies which are
subsequently used in the production process to create information based
products. The carrying value of the product masters at September 29, 2001 is
$99.9 million (net of $196.4 million of depreciation) and at December 30, 2000
is $88.3 (net of $178.0
5
million of depreciation).
Long-Term Deferred Income. Long-term deferred income represents amounts due
-------------------------
from customers in the future that have been monetized by the Company's finance
subsidiary (BHFS). As part of the sale of MMT (see Note 3), BHFS was sold and
the Company entered into certain contractual obligations and will continue to
monetize limited amounts due from customers through BHFS for the next three
years.
Derivative Financial Instruments and Hedging Activities. On December 31,
--------------------------------------------------------
2000, the Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an amendment of SFAS No. 133 and, SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 138
amends the accounting and reporting standards of SFAS No. 133 for certain
derivative instruments and certain hedging activities. SFAS No. 133 requires the
recognition of all derivative instruments as assets or liabilities in the
balance sheet and measures them at fair value. Adoption of SFAS No. 138 and SFAS
No. 133 did not have a material impact on the Company's financial position,
operating results or cash flows.
Interest Rate Risk
------------------
The Company's interest bearing loans and borrowings are subject to
interest rate risk. As part of the Company's risk management, $200 million of
notional amount US dollar interest rate swaps are currently designated as cash
flow hedges of the US dollar LIBOR interest rate debt issuances. The Company
dedesignated $150 million of notional amount swaps due to the sale of
discontinued operations (see Note 3).
All derivative contracts that are designated as cash flow hedges are
reported at fair value with the changes in fair value recorded in Other
Comprehensive Income (Loss). The Company recognizes the earnings impact of
interest rate swaps designated as cash flow hedges upon the payment of the
interest related to the underlying debt. The terms of the interest rate swaps
exactly match the terms of the underlying transaction, therefore, there is no
hedge ineffectiveness or corresponding earnings impact.
All derivative contracts that were dedesignated as cash flow hedges are
reported at fair value. The Company recognized an additional $6 million (net of
tax) expense as a result of the dedesignation of these cash flow hedges, and is
reporting it in the gain (loss) on sales of discontinued operations.
6
Foreign Exchange Risks
----------------------
A portion of revenues, earnings and net investment in foreign
affiliates is exposed to changes in foreign exchange rates. Substantially all
foreign exchange risks are managed through operational means. However, the
Company believes that foreign exchange risks related to certain transactions are
better managed by utilizing foreign currency forwards or option contracts. These
contracts are reported at fair value and any changes in fair value are
recognized currently in earnings. These contracts have not been designated for
hedging treatment under SFAS No. 138 and SFAS No. 133.
Accounting
----------
The impact the derivatives have on the financial statements are as
follows:
Other Liabilities
. Fair value of interest rate swaps
Accumulated Other Comprehensive Income
. Interest rate swaps designated as cash flow hedges
Interest Expense
. Interest rate swaps designated as cash flow hedges
Gain (loss) on sales of discontinued operations, net
. Interest rate swaps dedesignated as cash flow hedges
Approximately $9,579 of net derivative losses included in other
comprehensive income at September 29, 2001 will be reclassified into earnings
within twelve months from that date.
The following table summarizes the net activities in other comprehensive
income related to derivatives classified as cash flow hedges held by the Company
during the first nine months of fiscal 2001:
Cumulative effect of adopting SFAS No. 133 as of
December 31, 2000 .............................. $ (2,032)
(Gains)/losses reclassified into net earnings .... 6,516
Year-to-date net unrealized loss on derivatives .. (11,752)
---------
Total ............................................ $ (7,268)
=========
Net Earnings per Common Share. Basic net earnings per common share is
-----------------------------
computed by dividing net earnings by the weighted average number of common
shares outstanding during the period. Diluted net earnings per common share is
computed by dividing net
7
earnings by the weighted average number of common shares outstanding during the
period, and assumes the issuance of additional common shares for all dilutive
stock options outstanding during the period. A reconciliation of the weighted
average number of common shares and equivalents outstanding in the calculation
of basic and diluted earnings per share is shown in the table below for the
periods indicated:
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
------------------- --------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2001 2000 2001 2000
------- ------- ------- -------
Basic ................................. 23,865 23,671 23,735 23,685
Dilutive effect of stock options ...... 406 - 271 -
------- ------- ------- -------
Diluted ............................... 24,271 23,671 24,006 23,685
======= ======= ======= =======
Diluted Earnings (Loss) Per Common Share from Continuing Operations before
Equity in Loss of Affiliate and Cumulative Effect of a Change in Accounting
Principle:
----------------------------------------------------------------------------
Earnings from continuing operations before
equity in loss of affiliate and cumulative
effect of a change in accounting principle... $ 0.23 $ 0.08 $ 0.70 $ 0.21
Equity in loss of affiliate .................. (0.07) (0.23) (0.56) (0.60)
-------- -------- -------- -------
Loss from continuing operations before
cumulative effect of a change in accounting
principle.................................... $ 0.16 $ (0.15) $ 0.14 $ (0.39)
======== ======== ======== ========
Note 3 - Discontinued Operations
In the first quarter of fiscal 2000, the Company adopted a plan to divest
its Mail and Messaging Technologies (MMT) and Imaging businesses and its
financing subsidiary (BHFS). Accordingly, the operating results and net assets
of these businesses have been segregated from the Company's continuing
operations. The Consolidated Statements of Operations separately reflect the
earnings of these businesses, which include an allocation of the Company's
interest expense. The Consolidated Balance Sheets separately reflect the net
assets of these businesses as a non-current asset.
In October 2000, the Company announced an agreement to sell its Imaging
business to Eastman Kodak. The transaction was completed in February 2001 for
$135,000 with the scanner equipment business excluded due to regulatory issues.
In June 2001 the Company sold a majority of MMT's foreign operations to Pitney
Bowes for $51,000.
Furthermore, in September 2001, the Company sold its North American MMT
business, the scanner equipment business that was
8
excluded from the sale of the Imaging business, and BHFS to Glencoe Capital, a
private equity investment firm, for $145,000, including $21,750 in seller
financing. This note has an 8 1/2 year term, with an initial interest rate of
7.5%. Certain disincentives exist if the note is not paid off in 42 months,
including a substantial increase in the interest rate on the note and warrants
representing 3.5% of the new entity which detach at that time.
All remaining net assets of discontinued operations, approximately $5
million, which were excluded from the sale of the MMT business, have been fully
written off as of September 29, 2001.
Results for discontinued operations are shown in the tables below for the
periods indicated:
Thirteen Weeks Ended Sept. 29, 2001 Thirteen Weeks Ended Sept. 30, 2000
----------------------------------- -----------------------------------
MMT N.A. Total MMT N.A. MMT Total
& BHFS Imaging MMT Intl. Disc. Ops. & BHFS Imaging Intl. Disc. Ops.
------- ------- --------- --------- ------- ------- -------- ---------
Net sales ........ $ 83,719 $ - $ - $ 83,719 $ 90,464 $ 33,635 $ 19,715 $143,814
EBIT (1) before
restruct-
uring ........... $ 3,877 $ - $ - $ 3,877 $ 7,378 $ 3,064 $ 201 $ 10,643
Restructuring
charges ......... $ - $ - $ - $ - $ (1,704) $ ( 283) $ - $ (1,987)
------- ------- --------- -------- -------- -------- -------- --------
EBIT (1) ......... $ 3,877 $ - $ - $ 3,877 $ 5,674 $ 2,781 $ 201 $ 8,656
Interest
expense ......... (2,543) (3,185)
-------- --------
Earnings
before income
taxes ........... $ 1,334 $ 5,471
Income tax
expense ........ $ (534) $ (2,189)
-------- --------
Earnings
from discontinued
operations....... $ 800 $ 3,282
======== ========
(1) EBIT is defined as earnings from discontinued operations before interest and
income taxes.
9
Thirty-Nine Weeks Ended Sept. 29, 2001 Thirty-Nine Weeks Ended Sept. 30, 2000
-------------------------------------- -------------------------------------
MMT N.A. Total MMT N.A. MMT Total
& BHFS Imaging MMT Intl. Disc. Ops. & BHFS Imaging Intl. Disc.Ops.
------- ------- --------- --------- -------- ------- ------- ---------
Net sales ........ $ 258,311 $ 10,924 $ 29,542 $ 298,777 $254,304 $102,137 $ 56,817 $413,258
EBIT(1) before
restruct-
uring ........... $ 12,993 $ 1,133 $ (893) $ 13,233 $ 13,781 $ 10,204 $ (1,564) $ 22,421
Restructuring
charges ......... $ - $ - $ - $ - $ (1,859) $(2,347) $ (3,168) $ (7,374)
--------- -------- --------- --------- --------- -------- --------- ---------
EBIT (1) ......... $ 12,993 $ 1,133 $ (893) $ 13,233 $ 11,922 $ 7,857 $ (4,732) $ 15,047
Interest
expense ......... (8,391) (8,338)
--------- --------
Earnings
before income
taxes ........... $ 4,842 $ 6,709
Income tax
expense.......... $ (1,937) $ (2,684)
--------- --------
Earnings
from discontinued
operations ...... $ 2,905 $ 4,025
========= ========
(1) EBIT is defined as earnings (loss) from discontinued operations before
interest and income taxes.
Note 4 - Restructuring
In December 1999, the Company approved a plan to separate its Mail and
Messaging Technologies and Imaging businesses and its financial subsidiary from
its core information and publishing operations, and to restructure and
consolidate its corporate headquarters and certain activities of its continuing
operations. The plan was developed to enhance the Company's operational focus
and growth prospects and reduce its leverage.
At September 29, 2001, the restructuring plan has been
10
completed. The details of the restructuring charges are as follows:
Balance Thirteen Weeks Ended Sept. 29, 2001 Balance
-----------------------------------
June 30, Restruct. Utilized Sept. 29,
2001 Charge Cash Noncash(1) 2001
----------- -------- ------- -------- --------
Continuing Operations
---------------------
Severance ................ $ 94 $ - $ (94) $ - $ -
Obligations under various
noncancellable leases... 1,551 - (573) (88) 890
------- ------- -------- -------- --------
Continuing Operations .... $ 1,645 $ - $ (667) $ (88) $ 890
------- ------- -------- -------- --------
Discontinued Operations
-----------------------
Severance ................ $ - $ - $ - $ - $ -
Obligations under various
noncancellable leases... 344 - (70) (274) -
------- ------- -------- -------- --------
Discontinued Operations .. $ 344 $ - $ (70) $ (274) $ -
------- ------- -------- -------- --------
Total Company ........... $ 1,989 $ - $ (737) $ (362) $ 890
======= ======= ======== ======== ========
(1) Non-cash charge is to eliminate restructuring reserve at discontinued
operations which were sold during the thirteen weeks ended September 29,
2001 (MMT North America and Scanners).
Note 5 - Cumulative Effect of a Change in Accounting Principle
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). As a result of this pronouncement, the Company has modified its
accounting for revenue from new on-line subscriptions in I&L and from electronic
parts catalog (EPC) agreements in PS.
During the first nine months of fiscal 2001 and 2000, the Company
recognized revenue of approximately $16,683 and $33,284, respectively, that was
recognized as part of the 1999 cumulative effect of a change in accounting
principle related to the Company's prior revenue recognition methods.
Note 6 - Comprehensive Income
Comprehensive earnings or loss includes all changes in stockholders' equity
during the period except those resulting from investments by owners and
distributions to owners.
Comprehensive income is shown in the table below for the
11
periods indicated:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- ---------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2001 2000 2001 2000
-------- -------- --------- ---------
Net earnings (loss) .................... $(30,498) $ (280) $ 14,632 $(70,584)
Other comprehensive income (loss):
Unrealized gain (loss) on derivative
instruments, net of tax ............... (1,907) - (7,268) -
Foreign currency translation
adjustments ........................... 626 103 1,055 311
-------- -------- --------- ---------
Comprehensive income (loss)............. $(31,779) $ (177) $ 8,419 $(70,273)
======== ======== ========= =========
The foreign currency translation adjustments and net unrealized loss on
derivative instruments do not impact the Company's income tax expense.
Note 7 - Segment Reporting
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2001 2000 2001, 2000
--------- --------- --------- ---------
NET SALES
Information and Learning....... $ 57,408 $ 52,200 $ 172,821 $ 158,384
Publishing Services............ 41,209 39,471 122,392 116,171
--------- --------- --------- ---------
Total Net Sales $ 98,617 $ 91,671 $ 295,213 $ 274,555
========= ========= ========= =========
EBIT (1)
Information and Learning....... $ 8,526 $ 6,838 $ 27,051 $ 19,026
Publishing Services............ 10,113 8,802 28,620 22,650
Corporate/Other................ (2,892) (3,817) (9,201) (11,588)
--------- --------- --------- ---------
Total EBIT (1)................... $ 15,747 $ 11,823 $ 46,470 $ 30,088
========= ========= ========= =========
Sept. 29, 2001 Sept. 30, 2000
-------------- --------------
ASSETS
Information and Learning............................ $ 428,249 $ 359,576
Publishing Services................................. 109,309 104,893
Corporate/Other..................................... 150,454 40,115
--------- ---------
Total Assets.......................................... $ 688,012 $ 504,584
========= =========
(1) The Company uses earnings from continuing operations before interest, income
taxes, restructuring, gain on sales of assets, equity in loss of affiliate and
cumulative effect of a change in accounting principle (EBIT) as a measure of
segment operating performance. EBIT is generally viewed as providing useful
information regarding a company's operations, but it is not a measure of
financial performance under generally accepted accounting principles. EBIT
should not be considered in isolation from or as a substitute for net income as
a measure of the Company's profitability. Additionally, the Company's
calculations of EBIT may not be comparable to other similarly titled measures of
other companies. EBIT has been included because it provides useful information
about how management assesses the Company's operating performance.
12
Note 8 - Investments in Affiliates
The Company owns approximately 40% of bigchalk on a fully-diluted basis.
bigchalk develops and markets products and services for research, curriculum
integration, assessment, peer collaboration, professional development, online
community, and e-commerce for teachers, students, parents, librarians and school
administrators in the K-12 educational community. The Company accounts for its
investment in bigchalk on the equity method. The Company's equity in bigchalk's
loss equaled $13.4 million in the first nine months of 2001. The carrying value
of this investment was $0 at September 29, 2001.
Summarized financial information of bigchalk is as follows:
Condensed Statement of Operations:
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
------------------- --------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2001 2000 2001 2000
-------- --------- --------- ---------
Net sales ............................. $ 7,085 $ 8,268 $ 21,223 $ 25,731
Gross profit .......................... 4,762 5,262 14,196 16,562
Loss before income taxes .............. (6,555) (15,224) (27,908) (33,125)
Net loss .............................. (11,822) (15,474) (40,541) (32,472)
Condensed Statement of Financial Condition:
Sept. 29, Dec. 30,
2001 2000
--------- --------
Current assets ............... $ 35,873 $ 33,247
Non-current assets ........... 53,615 69,293
--------- --------
Total assets ................. $ 89,488 $102,540
-======== ========
Current liabilities .......... $ 21,969 $ 26,343
Non-current liabilities ...... 110,930 79,068
Stockholders' deficit ........ (43,411) (2,871)
--------- --------
Total liabilities
and stockholders' deficit.... $ 89,488 $102,540
========= ========
13
Item 2.
------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
This section should be read in conjunction with the Consolidated Financial
Statements of ProQuest Company and Subsidiaries (collectively the "Company") and
the notes thereto included in the annual report for the year ended December 30,
2000.
Except for the historical information and discussions contained herein,
statements contained in this release may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements involve a number of risks, uncertainties and other factors,
including, without limitation, the cost and availability of intellectual
property from third parties, decreases in the ability to attract and retain
employees, obtain capital, including interest rate risks, unexpected
merger-related effects, as well as business execution risk, risk of new
competitors, any necessary regulatory approvals, decreases in funding for
Internet access as well as overall acceptance and usage of the Internet in the
education and library markets, the availability of free or advertising-supported
research information on the Internet, rate of acceptance of electronic-based
mailings, including effects of a rate of acceptance of internet-based solutions,
including the automotive business, changes in the business services market,
changes in the automotive industry, and general economic conditions, all of
which could cause actual results to differ materially, and such other risks as
discussed in the Company's filing with the Securities and Exchange Commission.
Results of Operations
---------------------
In the first quarter of 2000, the Company adopted a plan to divest its Mail
and Messaging Technologies and Imaging business and its financing subsidiary. As
of September 29, 2001, the Company has completed the plan for the sale and
disposal of its discontinued operations.
Third Quarter 2001 Compared to Third Quarter 2000
-------------------------------------------------
The Company's net sales from continuing operations increased $6.9 million,
or 7.6%, to $98.6 million in the third quarter of 2001.
Net sales of the Information & Learning business increased $5.2 million, or
10.0%, to $57.4 million due to strong sales of electronic products, which grew
16.2%.
14
Net sales of Publishing Services business increased $1.7 million, or 4.4%
to $41.2 million in the third quarter of 2001. This increase is primarily due to
strong sales of the electronic parts catalogs, which grew 11.0%, partially
offset by a slight decline in sales of computer hardware and microfilm, which
are less strategic and more mature product lines.
The Company's cost of sales decreased $2.0 million, or 4.3% to $44.6
million in the third quarter of 2001, with the gross profit (net sales less cost
of sales) percentage of sales increasing 5.6%, primarily due to favorable
product mix and effective expense management.
Research and development expense increased $0.4 million, or 8.5%, to $5.4
million in the third quarter of 2001 as the Company continually seeks to take
advantage of new product/technology opportunities in each of its businesses.
Selling and administrative expense increased $4.6 million, or 16.1%, to
$33.0 million in the third quarter of 2001, reflecting additional
sales/marketing resources to capitalize on the sales growth opportunities.
The Company uses earnings from continuing operations before interest,
income taxes, restructuring, gains on sales of assets, equity in loss of
affiliate and cumulative effect of a change in accounting principle (EBIT) as a
measure of segment operating performance. The Company also uses EBITDA from
continuing operations (which is defined as EBIT plus depreciation and
amortization of other long-term assets, primarily intangibles of acquired
companies) as a measure in assessing both operating performance and cash flows.
Both EBIT and EBITDA are generally viewed as providing useful information
regarding a company's operation, but they are not measures of financial
performance under generally accepted accounting principles. EBIT and EBITDA from
continuing operations should not be considered in isolation from or as a
substitute for net income as a measure of the Company's profitability.
Additionally, the Company's calculations of EBIT and EBITDA from continuing
operations may not be comparable to other similarly titled measures of other
companies.
EBIT increased $3.9 million, or 33.2%, to $15.7 million in the third
quarter of 2001 resulting from increased sales and leveraged operating
costs/expenses. EBITDA increased $4.9 million, or 20.9%, to $28.5 million in the
third quarter of 2001.
Net interest expense decreased $1.0 million, or 14.0%, to $6.3 million in
the third quarter of 2001, primarily reflecting
15
decreased debt levels due to the Company utilizing the proceeds from the sales
of discontinued operations to pay down debt offset by expense related to
unfavorable cash flow hedges.
Income tax expense increased in the third quarter of 2001 as a result of
the higher level of pretax profit, with the income tax rate remaining constant
with the prior year.
Financial Condition and Liquidity
---------------------------------
The sale of the MMT businesses was finalized on September 29, 2001 (see
Note 3), proceeds received from the transaction on that date are reflected on
the balance sheet as part of cash and cash equivalents. The Company will utilize
the proceeds from the sale to reduce debt.
Debt (net of cash and cash equivalents) decreased by $112.3 million to
$258.9 million in the third quarter of 2001 primarily as a result of the
proceeds from the sales of discontinued operations.
Nine Months Year-to-Date 2001 Compared to Nine Months Year-to-Date 2000
-----------------------------------------------------------------------
The Company's net sales from continuing operations increased $20.7 million,
or 7.5%, to $295.2 million in the first nine months of 2001, resulting from
strong sales growth of I&L. Net sales of I&L increased $14.4 million, or 9.1%,
to $172.8 million due to strong sales of electronic products, which grew 14.9%,
partially offset by lower than expected international sales.
Net sales of PS increased $6.2 million, or 5.4% to $122.4 million in the
first nine months of 2001. This increase is primarily due to strong sales of the
electronic parts catalogs, which grew 11.5%, partially offset by a slight
decline in sales of computer hardware and microfilm, which are less strategic
and more mature product lines.
The Company's cost of sales decreased $4.4 million, or 3.1% to $137.2
million in the first nine months of 2001, with the gross profit (net sales less
cost of sales) percentage increasing 5.1% primarily as a result of favorable
product mix and effective expense management.
Research and development expense increased $2.5 million, or 18.5%, to $15.9
million in the first nine months of 2001 as the Company continually seeks to
take advantage of new product/technology opportunities in each of its
businesses. The Company's research and development expenditures include
investments in a variety of e-commerce initiatives, expenses for
16
database and software development, information delivery systems and other
electronic devices.
Selling and administrative expense increased $6.2 million, or 7.0%, to
$95.5 million in the first nine months of 2001, reflecting additional
sales/marketing resources to capitalize on the sales growth opportunities from
internet-based products.
The Company uses earnings from continuing operations before interest,
income taxes, restructuring, gains on sales of assets, equity in loss of
affiliate and cumulative effect of a change in accounting principle (EBIT) as a
measure of segment operating performance. The Company also uses EBITDA from
continuing operations (which is defined as EBIT plus depreciation and
amortization of other long-term assets, primarily intangibles of acquired
companies) as a measure in assessing both operating performance and cash flows.
Both EBIT and EBITDA are generally viewed as providing useful information
regarding a company's operation, but they are not measures of financial
performance under generally accepted accounting principles. EBIT and EBITDA from
continuing operations should not be considered in isolation from or as a
substitute for net income as a measure of the Company's profitability.
Additionally, the Company's calculations of EBIT and EBITDA from continuing
operations may not be comparable to other similarly titled measures of other
companies.
EBIT increased $16.4 million, or 54.4%, to $46.5 million in the first nine
months of 2001 resulting from increased sales and leveraged operating
costs/expenses. EBITDA increased $18.0 million, or 26.3%, to $86.4 million in
the first nine months of 2001.
Net interest expense decreased $3.4 million, or 15.4%, to $18.6 million in
the first nine months of 2001, primarily reflecting decreased debt levels due to
the Company utilizing the proceeds from the sales of discontinued operations to
pay down debt offset by expense related to unfavorable cash flow hedges.
Income tax expense increased in the first nine months of 2001 as a result
of the higher level of pretax profit, with the income tax rate remaining
constant with the prior year.
The Company's equity in bigchalk's loss equaled $13.4 million in the first
nine months of 2001.
Financial Condition and Liquidity
---------------------------------
The sale of the MMT businesses was finalized on September 29, 2001 (see
Note 3); proceeds received from the transaction on that date are reflected on
the balance sheet as part of cash and
17
cash equivalents. The Company will utilize the proceeds from the sale to reduce
debt.
Debt (net of cash and cash equivalents) decreased by $248.3 million to
$258.9 million in the first nine months of 2001 as a result of the proceeds from
the sales of discontinued operations, partially offset by cash used by
operations and capital expenditures.
The Company believes that current cash balances, cash generated from
operations, and availability under its line of credit will be adequate to fund
the growth in working capital and capital expenditures necessary to support
planned increases in sales for the foreseeable future.
Interest Rate Risk Management
The Company uses variable-rate long-term debt to finance its operations.
These debt obligations expose the Company to variability in interest payments
due to changes in interest rates. Management believes it is prudent to limit the
variability of most of its interest payments. It is the Company's objective to
hedge between 75 and 95 percent of its variable-rate longer term interest
payments. To meet this objective, management enters into interest rate swaps to
manage fluctuations in cash flows resulting from interest rate risk.
Recently Issued Financial Accounting Standards
In July 2001, the Financial Accounting Standards Boards (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141
addresses financial accounting and reporting for business combinations, and
eliminates the pooling of interest method as a valid method to account for a
business combination for all business combinations initiated after June 30,
2001. SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets as well as how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. SFAS No. 142 requires that goodwill no
longer be amortized to earnings, but instead be reviewed for impairment on an
annual basis. The amortization of goodwill ceases upon adoption of the
Statement, which for the Company will be December 30, 2001, the first day of the
Company's next fiscal year. While management is continuing to assess the impact
of these Statements on the Company's results of operations and financial
position, the Company's initial assessment of these new accounting rules is an
increase in net earnings of approximately $0.25 per share.
18
Item 3.
------
Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company, as a result of its global operating and financing activities,
is exposed to changes in foreign currency and interest rates, which may
adversely affect its results of operations and financial position. The Company
has entered into interest rate swaps having notional amounts totaling $350
million at September 29, 2001. In light of the completion of the sales of the
previously identified discontinued operations, the Company has dedesignated $150
million of these swaps and has terminated these swaps prior to this filing. The
potential impact on the Company's earnings from a 50 basis point increase or
decrease in quoted interest rates would be approximately $205 thousand expense
or benefit for the first nine months of 2001. The interest rate swaps have
expiration dates through September 2005.
The Company's practice is to hedge its significant operating balance sheet
exposures to foreign currency rate fluctuations via use of foreign currency
forward or option contracts. The Company does not utilize financial derivatives
for trading or other speculative purposes. The derivative contracts have
maturity dates extending through November 2, 2001, and are for an aggregate
amount of $65.8 million at September 29, 2001 (which approximates the fair value
based on quoted market prices). The Company is exposed to market risk in the
event of nonperformance by the other parties (major international banks) to
these contracts; however, such nonperformance is not anticipated. The potential
impact on the Company's earnings from a 10% adverse change in quoted foreign
currency rates would be insignificant.
Part II. Other Information
------- -----------------
Item 1. Legal Proceedings.
------ -----------------
The Company is involved in various legal proceedings incidental to its
business. Management believes that the outcome of such proceedings will not have
a material adverse effect upon the consolidated operations or financial
condition of the Company.
19
Item 6. Exhibits and Reports on Form 8-K.
------ --------------------------------
(a) Exhibits:
Index Number Description
------------ -----------
None
(b) Reports on Form 8-K.
The Company filed the following Form 8-K's during the thirteen weeks
ended September 29, 2001:
- On July 26, 2001, a Form 8-K/A regarding the sale of its Imaging
unit.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2001 PROQUEST COMPANY
/s/ James P. Roemer
-------------------
James P. Roemer
Chairman of the Board
of Directors, President and
Chief Executive Officer
/s/ Alan Aldworth
-----------------
Chief Financial Officer
and Director
20