Prepared by R.R. Donnelley Financial -- Annual Report for Period Ending 12/29/2001
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 29, 2001
Commission File Number: 1-3246
PROQUEST
COMPANY
(Exact Name of Registrant as Specified in its Charter)
| Delaware |
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36-3580106 |
| (State or Other Jurisdiction of Incorporation or
Organization) |
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(I.R.S. Employer Identification No.) |
| 300 North Zeeb Road, Ann Arbor, Michigan |
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48103-1553 |
| (Address of Principal Executive Offices) |
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(Zip Code) |
(734) 761-4700
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class
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Name of each exchange on which registered
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| common stock, $.001 par value per share |
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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 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 ¨
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 this
Form 10-K. ¨
The aggregate market value of the Registrant’s voting stock held by non-affiliates (based upon the per share closing price of $37.46 on March 15, 2002) was approximately $504 million.
The number of shares of the Registrant’s common stock, $.001 par value, outstanding as of March 15, 2002 was 24,126,187.
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the Riegistrant’s Proxy Statement related to the 2002 Annual Meeting of Stockholders, to be filed subsequent to the date hereof—Part III.
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Submission of Matters to a Vote of Security Holders |
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EXHIBITS
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ProQuest Company
ProQuest Company is a leading provider of information and content to the
education and transportation industries. Formerly known as Bell & Howell, ProQuest has a 97 year history with more than 50 years in information and content aggregation. Through our Information and Learning segment, which primarily serves the
academic and library markets, we aggregate and publish value-added content from a wide range of sources including newspapers, periodicals and books. Our Publishing Services segment provides electronic delivery of technical and schematic information
to the automotive and powersports (motorcycle, marine, and RV) markets. Our company has demonstrated strong, stable growth in both revenue and earnings in the last few years with 2001 revenue increasing to $401.6 million from $359.5 million in 1999
and 2001 operating income increasing to $68.7 million from $42.2 million in 1999.
Our predecessor company, Bell & Howell,
has been synonymous with creative and technology-based solutions since 1904. In 2001, we sold the legacy Imaging, Mail and Messaging Technologies and finance-related businesses and changed our name to ProQuest. We used the proceeds from the
divestitures to significantly reduce our debt.
Information and Learning (I&L). I&L
transforms information contained in periodicals, newspapers, dissertations, out-of-print books and other scholarly material into easily accessible electronic form, microfilm or print on demand. I&L aggregates information from a broad array of
newspapers and periodicals with which we have licensing arrangements, including the New York Times, The Wall Street Journal, and The Christian Science Monitor. We convert this information through our proprietary methods and add proprietary
abstracts to create an expansive microfilm and electronic information vault. I&L’s information vault includes information from over 21,000 periodical titles and 7,000 newspaper titles, as well as a unique content base consisting of over 1.5
million dissertations, 390,000 out-of-print books, 550 research collections, and over 15 million proprietary abstracts. The information vault covers all major categories of study—business, humanities, social science, medical / health, ethnic
and diversity studies, genealogy, psychology, biology and current events. This content is primarily English language-based, but also includes content in German, French and Spanish. The ability to provide our customers with full image content as it
was originally published distinguishes us from other information providers, which typically store and provide information in a text-only format, omitting essential charts, graphs, pictures and other images. Our products are present in virtually
every academic library in the U.S., and our library customers generally sign one year subscription contracts to access I&L’s proprietary database. Over the last three years we have enjoyed approximately 90% renewal rates. In 2001, I&L
represented approximately 59% of our total revenues.
Publishing Services (PS). PS is the
leader in the development and deployment of parts and service-oriented catalogs for the automotive and powersports industries worldwide. In 1985, we pioneered the automotive Electronic Parts Catalog (EPC). The system replaced paper and microfiche
parts catalogs to provide a powerful and flexible technical reference system using CD-ROM technology. Over 30,000 automobile dealerships now use our EPC worldwide. PS currently publishes electronic catalogs for GM, Ford, DaimlerChrysler, Honda,
Toyota, Volvo, Nissan, Porsche, Saturn, and Land Rover among others. In addition, PS is a leading provider of dealer management systems and EPCs to dealers in the powersports markets. PS customer contracts are usually three to five years in
duration, and we have enjoyed approximately 90% renewal rates over the last three years. In 2001, PS represented approximately 41% of our total revenues.
Product Overview—I&L
ProQuest Online. Introduced in 1995, ProQuest
Online allows users to search and find useful information from full-text articles of thousands of newspapers and periodicals dating back to 1986. Our service helps librarians build information bridges that will enable users to locate resources
appropriate to their needs. Our service combines easy-to-use search menus, current information, content in a variety of formats, and convenient delivery options and support. We provide the tools to efficiently create predefined searches, electronic
reserve rooms for multiple simultaneous users, create magazine racks, establish reading rooms, and generate table-of-content services (curriculum support). All online text is customizable and allows easy integration with our customers’ other
information holdings. ProQuest SiteBuilderTM helps librarians by
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providing easy-to-use templates, copy-and-paste technology, and step-by-step help. Librarians can link selected ProQuest content to their online catalogs, library web sites and other Web-based
resources. Durable Links™ ensures that subscribers will have continuous access to our content.
ProQuest Online allows users to search and find useful information from more than 7,000 periodicals, newspapers, and other resources
contained in our databases. Users can pinpoint information quickly using simple or advanced search techniques. Quality indexing ensures unparalleled accuracy and specificity. We couple databases, primary sources, web tools, and curriculum support
together to enhance and improve the research and education process for all of our users. We add approximately 37 million pages of current information to ProQuest Online each year.
Chadwyck-Healey. The Chadwyck-Healey brand, acquired in 1999, is recognized internationally as a leading source of high-quality publications in the
humanities. Chadwyck-Healey provides users with world-class databases in the arts, humanities and reference with particular strengths in language and literature, history, music, performing arts and film, biography, and news and reference on the
United Kingdom, European Union and Asia.
Publications range from databases of medieval texts in Latin and Greek to
up-to-the-minute reference resources such as KnowUK, an online reference service on the people, places and institutions that make up life in the United Kingdom.
Other humanities titles include flagship services such as Literature Online and History Online, both of which deliver a combination of primary works and extensive contextual support.
UMI. UMI sells microform newspaper and periodical subscriptions, microform newspaper and
periodical backfiles, dissertation copies, dissertation publishing, out-of-print books, phonefiche, and scholarly research collections. Today, the UMI microform vault constitutes the largest commercially available microform collection in the world
with over 6.5 billion pages.
Digital Vault Initiative. Based on our customers’ needs, we
have selected portions of our UMI microfilm collection to digitize and provide online access to important and difficult to find content from the 1980’s back to as early as the 1400’s. Customers include libraries and information centers,
colleges and universities, and public, corporate and government libraries. Core to our initiative is the intent to create specialized content targeted at niche subject areas that allow us to segment the market more distinctly as well as broaden our
selection of academic and research product offerings.
Digital Vault Initiative products include Early English Books Online
(EEBO), a digital compilation of nearly all of the books printed in the English language from 1400-1700, the Gerritsen Collection of women’s history and the American Periodical Series which features journal content from over 1,000 titles from
1741-1900. Historical Newspapers is an initiative to digitize the full run of several of the nation’s leading newspapers, including the New York Times, Wall Street Journal, Christian Science Monitor, and Washington Post. Once completed,
libraries and educational institutions will have electronic access to newspapers dating back to 1851. Digital Sanborn Maps provides electronic maps. These maps contain the detailed property and land-use records that depict such information as
building online, size and shape, construction materials, height, windows and doors, and house numbers, showing the grid of everyday life in more than 12,000 U.S. towns and cities from 1867-1970.
XanEdu. We recently launched XanEdu to further leverage our content through the development of supplemental curriculum materials for the college
classroom. XanEdu is the world’s largest source of premium online content targeted directly at students and faculty of higher education institutions. Driven by our vision to deliver core courseware content and to create tools for customizing
online course materials, XanEdu seeks to improve the way students learn and the way instructors teach. XanEdu has experienced strong market acceptance with over 1,000 education institutions and more than 7,500 professors utilizing the service as of
the end of 2001.
Our XanEdu service is comprised of two components—the customizable XanEdu™CoursePack products and textbook supplements. We employ subject-area specialists who have created a core portfolio of XanEdu
CoursePacks, which professors can use to create customizable, copyright-cleared CoursePacks that are
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comprehensive, current and relevant to students. We have also partnered with major publishers such as Wiley, Pearson, and McGraw Hill, to create on-line supplemental materials that expand and
enrich the publisher’s textbook.
Further strengthening XanEdu’s capability is XanEdu Publishing Services. With the
acquisition of Campus Custom Publishing, we now offer instructors a turnkey solution to building CoursePacks, with the ultimate choice of distribution either online, in print, or by a hybrid combination of the two. Also, our copyright clearance
services offer a streamlined solution for clearing content not currently found in XanEdu’s extensive collections.
Content Wholesale. I&L provides content to premier information companies such as Reed Elsevier and Dow Jones which in turn provide content to their corporate desktop users. Under these relationships, we
receive revenue based on the amount of ProQuest content accessed by these users.
I&L also provides content to
bigchalk.com,inc. (“bigchalk”). bigchalk develops and markets products and services for research, curriculum integration, assessment, professional development, online community, and e-commerce for teachers, students, parents, librarians
and school administrators in the kindergarten through twelfth grade (K-12) educational community. We have an approximate 38.0% ownership interest in bigchalk on a diluted basis.
Product Overview—PS
Global Automotive. For over 17
years, we have been developing customized market-leading EPC solutions for the franchised automotive dealer market. Our ability to consolidate and transform manufacturer parts data from disparate sources into cohesive, integrated and highly
customized systems is unmatched in the industry. This expertise has been recognized worldwide and is applied every day by 28 different manufacturers and over an estimated 250,000 users worldwide.
For our automotive customers, we create and market turnkey electronic parts catalog systems in 17 languages that allow automotive dealerships to electronically access
manufacturers’ proprietary technical documentation (such as parts catalogs, parts and service bulletins and other reference materials) and to interface with other important information systems (such as inventory management and billing) within
the dealership. These applications help dealers improve business processes by transforming complex technical and performance measurement data into easily accessed answers. These applications also improve the parts-selling operations of dealerships
and manufacturers, resulting in the sale of more Original Equipment Manufacturer (OEM) parts.
Performance Management
Information and Services. With the acquisition of Alison Associates in 1999, we began offering performance management information to the automotive industry. Alison collects, manages and publishes key decision support
information and provides tools that help automobile manufacturers and their networks measure and compare relative performance. Alison is a global company that services 29 brands in 24 key markets with 30,000 dealers worldwide.
Dealer Management Systems. The Powersports unit provides dealer management and cataloging systems for the
motorcycle, marine, and recreational vehicle (RV) industries. These systems include accounting, customer service, and inventory as well as electronic parts catalog modules that help manage every aspect of the dealer’s business.
Media Solutions. Media Solutions designs, develops and distributes software systems for the construction,
mining and heavy equipment industries that automate product, e-commerce and corporate support functions between manufacturers, dealers and their customers.
OEConnection (OEC). OEC is a joint venture among PS, Ford Motor Company, General Motors and DaimlerChrysler. OEC extends the established electronic parts cataloging business by providing
dealers and their wholesale customers a comprehensive, secure e-commerce portal. OEC has established and maintains this portal with the primary objective of facilitating the sale of original equipment automotive parts delivered through
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the franchised automotive dealership channel. OEC’s current product offerings include “CollisionLink”, which allows the dealer to extend sales to their wholesale customers,
primarily collision shops, and “D2Dlink” which is an advanced parts locator system.
Financial information for each of
our business segments and operations by geographic area is contained in Note 2 to the Consolidated Financial Statements.
Research and Development. We continually seek to take advantage of new product and technology opportunities and view product development to be essential to maintaining and growing our market position. Our
research and development expenditures include expenses primarily for database development and information delivery systems.
Sales & Marketing. I&L and PS employ separate sales forces. ProQuest Online, UMI, Chadwyck-Healey and Digital Vault products are sold directly to libraries. As of December 29, 2001, the ProQuest sales
force was comprised of both North American and international sales representatives. Within North America, we have dedicated sales representatives for each major product type: traditional (17 salespeople), electronic (44 salespeople), and XanEdu (13
salespeople). These representatives sell directly to libraries, educational institutions, and bookstores throughout the United States and Canada. Outside of the U.S. and Canada, we use a direct international sales force comprised of 33 sales
representatives who sell the full portfolio of products to markets across the globe. Third-party international distributors augment this direct sales force. We use a variety of approaches to market our products, including trade shows, direct
mailings, product brochures, and online product trials.
We sell Global Automotive, Alison, Powersports and Media Solutions
products both domestically and internationally through an internal sales force of 60 salespeople. We market our products and services to two groups: OEMs and individual dealership locations. To effectively reach the large OEMs, such as
DaimlerChrysler, Ford, General Motors, and Toyota, we have strategically deployed a team of business development professionals in the world’s principal automotive centers in the U.S., U.K., Germany and Japan. In the U.S. and Canada, products
and services are sold directly to individual automotive and powersports dealerships using an experienced sales force. Key technology providers such as Reynolds and Reynolds and Automatic Data Processing (ADP) are also utilized as distributors and
sales agents to supplement the efforts of our direct sales force. Through various strategic and tactical marketing efforts including trade shows, events and targeted direct response programs, our sales force is able to continue to build strong and
profitable customer relationships.
Proprietary Rights
We regard certain of our technologies and content as proprietary and rely primarily on a combination of patent, copyright, trademark and trade secret laws and employee non-disclosure statements to protect our rights.
There can be no assurance that the steps we have taken will be adequate to protect our rights. Although we do not believe that we have infringed on the proprietary rights of third parties, there is no assurance that a third party will not make a
contrary claim. The cost of responding to such an assertion may be material, whether or not the assertion is valid.
Seasonality
Our quarterly operating results fluctuate as a result of a number of factors including the sales cycle, the amount and timing of new products
and our spending patterns. In addition, our customers experience cyclical funding issues that can impact our revenue patterns. Historically, we have experienced our lowest earnings and cash flow in the first fiscal quarter with our highest earnings
in the fourth fiscal quarter. Due to this seasonal factor, the Company maintains a revolving credit facility to fund interim cash requirements.
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Competition
The markets in which we sell our products are highly competitive and, in certain instances, include competitors with substantially greater financial resources. In the I&L segment, our main competitors are Gale
Group, a division of Thomson Corporation and EBSCO Company. We also compete with universities such as Massachusetts Institute of Technology for distribution of doctoral dissertations. Newspaper and book publishers also compete with us in the
distribution of information either electronically or through another medium, such as print.
I&L competitors also range from
free Internet sites to traditional primary publishers and include software publishers that market educational curriculum products to schools and homes; online educational content and electronic commerce providers; and programs that enable remote
learning, or management of schools.
In the PS segment, we compete with Automated Data Processing Company, Electronic Data
Systems, UCS, Infomedia, and the proprietary electronic parts systems of many original equipment manufacturers such as DaimlerChrysler, Ford Motor Company, Harley-Davidson, Honda Motor Company, and Toyota Motor Company for the distribution of
electronic or other parts catalogs.
Many of our current and potential future competitors may have greater name recognition,
experience and larger existing customer bases than we do. Accordingly, our competitors may succeed in responding more quickly to new technologies; responding more quickly to changes in customer requirements; devoting greater resources to the
development and sale of their products; establishing stronger relationships with affiliates, advertisers, content providers, and vendors; and developing superior services and products.
Government Regulations
We are subject to various federal, state, local and foreign
environmental laws and regulations limiting the discharge, storage, handling and disposal of a variety of substances. Our operations are also governed by laws and regulations relating to equal employment opportunity, workplace safety and worker
health, including the Occupational Safety and Health Act and regulations thereunder. We believe that ProQuest is in compliance in all material respects with applicable laws and regulations, and that future compliance will not have a material adverse
effect upon our consolidated operations or financial condition.
Concentration Risk
We are not dependent upon any one customer or a few customers, the loss of which would have a material adverse effect on our businesses. In fiscal 2001, no single customer represented
more than 10.0% of the consolidated net sales of the Company. Our top five customers accounted for 11.0% of consolidated net sales in fiscal 2001.
Employees
Our future success is substantially dependent on the performance of our management team and our
ability to attract and retain qualified technical and managerial personnel. We consider our employee relations to be excellent. As of December 29, 2001, we had the following number of employees, broken out by segment:
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Employees
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| I&L |
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1,530 |
| PS |
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970 |
| Corporate |
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40 |
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| Total |
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2,540 |
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None of our employees are represented by collective bargaining agreements.
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Content and Data Licenses
We obtain most of the information and content used in our products from license agreements with third parties. These licenses are generally limited in scope and are nonexclusive.
Licenses for content used in our I&L business generally have automatic renewal terms and renew for like terms unless terminated by I&L or the publishers. Our licenses with automobile and powersports manufacturers that are used in the PS
business generally have a term of five years. Also, under these agreements the manufacturers have contracted to continue to provide content for the term remaining on the agreements in effect with our customers at the time of the termination. These
licenses generally provide for the use of the content in many media formats including electronic, microform or paper.
Risk Factors
You should carefully consider the following risk factors in addition to the other information contained and incorporated by reference in
this 10-K before purchasing our common stock.
Our sales and profitability depend on our ability to continue to develop new products that appeal
to consumers.
We intend to continue to commit substantial resources to product development. We must continue to invest in
technologies that help customers to use our products and services, develop new products, enhance the quality of images being transmitted to the customer, increase delivery of our products over the Internet and other electronic media, and reduce the
time in which such products are transmitted. The technological life cycles of our products are difficult to estimate as some of our market niches are mature and demand for our products and services in these niches has stabilized or begun to migrate
to other products such as the shift from microfilm-based products to electronic-based products, while some of our other market niches remain in their early stages of development. Our future success will depend upon our ability to continue to
introduce new products, to enhance our current products, and to develop and introduce delivery and search technologies that enhance the customer experience in order to offset declining revenue from any of our more mature products. Our focus on
product development may result in unanticipated expenditures and capital costs that may not be recovered. Our failure to develop and introduce new or enhanced services and products that achieve consumer acceptance in a timely and cost-effective
manner would significantly harm our business.
Our products currently depend on data access agreements with third parties, and the failure to maintain
these agreements or to maintain the pricing at which we obtain the data could harm our ability to manufacture existing and develop new products.
Our products are in part based on content and data supplied pursuant to data access agreements with third parties. We may not be able to maintain our current agreements at cost-effective prices. The content supplied
by many of our licensors, such as the New York Times, is unique and cannot be replaced. Even if we are able to substitute content providers, we may not be able to enter into new data access agreements with alternative content providers on
commercially reasonable terms, on a timely basis or at all. In addition, data used in our products might become unavailable or not be updated as required. The failure to obtain necessary third party data on reasonable terms or identify and implement
alternative data access approaches could hurt our business. If a significant number of our content providers decide to terminate or not to renew their relationships with us, we may:
—be at a competitive disadvantage with respect to our competitors;
—lose customers that rely on us as a single source of resources; and
—be unable to increase the amount of revenue generated from particular clients.
Any of these results could adversely impact our operating and financial condition.
Our
business will suffer if we do not anticipate changes in computer platforms and other evolving technologies.
We compete in
markets characterized by continual technological change, product introductions and enhancements, changes in customer demands and evolving industry standards. For example, we rely on databases from providers such as Oracle and other software
providers and we produce additional databases for production of our products and services. If our databases become incompatible with the databases on our customers’ computer networks or become outdated and cannot support our products, then our
products could become obsolete and our business will suffer. We must continue to expand our databases and invest in new technologies in anticipation of the needs of our customers.
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Similarly, we must manage our development efforts to anticipate and adapt to changes in
computer operating environments and other evolving technologies. To remain competitive, we must be able to make our products available in numerous and evolving operating environments. Also, we consistently update our software to enhance retrieval
speeds and ease of use. These changes must be made on a timely and cost effective basis which is difficult in our evolving technological landscape. Our business will suffer if we do not update our products and introduce new products that incorporate
current technologies and media and if such updating forces us to incur costs that are not recoverable in the sales of our products.
Our businesses
utilize the Internet to generate revenues. Uncertainty about the future of the Internet may have a negative impact on our ability to increase revenues.
Our businesses utilize “online” exchange of information and Internet commerce. We cannot predict whether the Internet will prove to be an effective vehicle for delivering our content or conducting our
electronic commerce. The Internet infrastructure may be unable to support future demand as the number of users and potential customers for our products, frequency of use and bandwidth requirements continue to increase. Our business may not succeed
without the continued development and maintenance of the Internet.
In addition, the Internet is rapidly changing, and we will
continually need to adapt our web sites to emerging Internet standards and practices, technological advances developed by our competition, and changing subscriber, user and sponsor preferences. Ongoing adaptation of our web sites will entail
significant expenditures in technology research and development and services to input the enhanced technology that may not improve our web sites markedly. If our attempted improvements of our web sites are delayed, result in systems interruptions or
do not gain market acceptance, then our future revenue growth may suffer.
Unless we maintain a strong brand identity, our business may not grow.
We believe that maintaining and enhancing the value of our ProQuest and ABI brands is critical to attracting customers. Our
success in growing brand awareness will depend on our ability to continually provide educational technology that students enjoy using and teachers and parents consider beneficial to the learning process. Some of our brand names are new and we may
not be successful in growing our brand equity.
We will not be able to grow our Internet businesses if the market for those businesses does not
continue to develop.
The success of our Internet businesses will depend in large part on the continued emergence and growth
of a market for Internet-based educational technology products. The market for educational technology is characterized by rapid technological change and product innovation, unpredictable product lifecycles and unpredictable preferences among
students, teachers and parents. It is difficult to estimate how and when growth or other changes in this market will occur.
The competition we face
is intense, and we may not be able to compete effectively or successfully attract and retain customers.
The market for our
products is fragmented and highly competitive. Increased competition may affect our ability to be successful in attracting and retaining customers that would cause revenues to decline. The information and learning markets are intensely competitive
and subject to increasing commercial attention. Barriers to entering Internet markets are relatively low, and we expect competition to intensify in the future. We also may be adversely affected by pricing and other operational decisions like the
recent decision of several of our competitors to offer free educational content services.
I&L’s competitors range from
free Internet sites to traditional primary publishers and include software publishers that market educational curriculum products to schools and homes, online educational content and electronic commerce providers, and programs that enable remote
learning, or management of schools. In addition, many of our content providers could decide to produce and distribute offerings that compete with ours.
In the PS segment, we compete with Automated Data Processing Company, Electronic Data Systems, UCS, Infomedia, and the proprietary electronic parts systems of many original equipment manufacturers such as
DaimlerChrysler, Ford Motor Company, Harley-Davidson, Honda Motor Company, and Toyota Motor Company for the distribution of electronic or other parts catalogs.
Many of our current and potential future competitors have substantially greater name recognition, experience and larger existing customer bases than we do. Accordingly, our competitors may succeed in responding more
quickly to new technologies; responding more quickly to changes in customer requirements; devoting greater resources to the development and sale of their products; establishing stronger relationships with affiliates, advertisers, content providers,
and vendors; and developing superior services and products.
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If we cannot attract, retain and motivate skilled personnel, our ability to compete will be impaired.
Our success depends on our ability to attract, retain and motivate highly qualified management and scientific personnel. We
face intense competition for qualified personnel. If we are unable to continue to employ our key personnel or to attract and retain qualified personnel in the future, our business will suffer.
Several members of our senior management team have joined us recently. If we are unable to effectively integrate them into our business or work together as a management team, then
our business will suffer. In addition, our employees, including members of our senior management team, may terminate their employment with us at any time. If any one of our key employees left or was otherwise unable to work, and we were unable to
find a qualified replacement, our business could be harmed. In addition, the industry in which we compete has a high level of employee mobility and aggressive recruiting of skilled personnel.
Our products currently depend on components licensed from third parties, and the failure to maintain these licenses could harm our ability to produce and enhance existing products and develop new
products.
Our products incorporate third party technologies. We do not generally have exclusive arrangements or long-term
contracts with these third parties. We have obtained licenses for some of these technologies and may be required to obtain licenses for others. We may not be able to obtain all of the necessary licenses for the third party technology used in our
products on commercially reasonable terms, on a timely basis or at all. In addition, technology used in our products might become unavailable or not be updated as required.
We may not be able to develop alternative approaches if third party technologies become unavailable to us on reasonable terms or obsolete. The failure to obtain necessary third party
technology or identify and implement alternative technology approaches could hurt our business.
Our intellectual property protection may be
inadequate, allowing others to use our technologies and thereby reduce our ability to compete.
We regard much of the
technology underlying our services and products as proprietary. The steps we take to protect our proprietary technology may be inadequate to prevent misappropriation of our technology, or third parties may develop similar technology independently.
We rely on a combination of patents, trademark, copyright and trade secret laws, employee and third-party non-disclosure agreements and other contracts to establish and protect our technology and other intellectual property rights. Existing trade
secrets, patent and copyright law afford us limited protection. The agreements and contracts may be breached or terminated, and we may not have adequate remedies for any breach. Furthermore, policing unauthorized use of our intellectual property is
difficult. A third party could copy or otherwise obtain and use our products or technology without authorization. Litigation may be necessary to protect our intellectual property rights, which could result in substantial cost to us and diversion of
our efforts. Any such litigation may not even be successful, in which case our business could be further adversely affected.
Our products could
infringe on the intellectual property of others, which may cause us to engage in costly litigation and, if we are not successful, could cause us to pay substantial damages and prohibit us from selling our products.
Third parties may assert infringement or other intellectual property claims against us based on their patents or other intellectual property claims. If
such claims are successful, we may have to pay substantial damages, possibly including treble damages, for past infringement.
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We might also be prohibited from selling our products without first obtaining a license from the third party, which, if available at all, may require us to pay substantial royalties. Even if
infringement claims against us are without merit, defending a lawsuit takes significant time, may be expensive and may divert management attention from other business concerns.
Our employees may be bound by confidentiality and other nondisclosure agreements regarding the trade secrets of their former employers. As a result, we could be subject to allegations of
trade secret violations and other similar violations if claims are made that any of our employees have breached these agreements. Such claims could also have an adverse effect on our business.
A key component of our growth strategy is to continue to expand our operations into international markets. We may not succeed with this strategy.
Doing business in international markets is subject to a number of risks, including, among others: acceptance by foreign educational systems of our approach to educational products;
expenses associated with customizing products for foreign countries; lack of existing customer base; longer accounts receivable collection periods and greater difficulty in collection; unexpected changes in regulatory requirements; potentially
adverse tax consequences; tariffs and other trade barriers; difficulties in staffing and managing foreign operations; changing economic conditions; exposure to different legal standards (particularly with respect to intellectual property); burdens
of complying with a variety of foreign laws; and fluctuations in currency exchange rates. If any of these risks were to materialize, our business, financial condition, and results of operations could be adversely affected.
We have entered into strategic alliances and into acquisitions and may pursue others that may disrupt our operations or fail to result in the benefits that we anticipated.
We have entered into and may make strategic acquisitions of companies, products or technologies or enter into strategic
alliances as necessary in order to implement our business strategy. If we are unable to fully integrate acquired businesses, products or technologies with our existing operations, we may not receive the intended benefits of such acquisitions. A
future strategic acquisition or joint venture may require us to incur debt or issue equity securities, which could dilute our existing stockholders. The success of our existing and future joint venture and strategic alliances depends in part on the
ability of the other parties to these transactions to fulfill their obligations thereunder. In addition, the acquisitions or joint ventures may subject us to unanticipated risks or liabilities or disrupt our operations and divert management's
attention from day-to-day operations.
Changes in funding for public school systems and libraries could reduce our revenues and impede the growth of
our company.
We derive a portion of our revenues from public school and library funding, which is heavily dependent on
support from federal, state and local governments. Government budget deficits may adversely affect the availability of this funding. In addition, the government appropriations process is often slow, unpredictable and subject to factors outside of
our control. Curtailments, delays or reductions in the funding of schools, colleges or libraries, for example, a reduction of funds allocated to schools under Title I of the Elementary and Secondary Education Act of 1965, could delay or reduce our
revenues, in part because schools may not have sufficient capital to purchase our products or services.Funding difficulties experienced by schools, colleges or libraries could also cause those institutions to be more resistant to price increases in
our product, compared to other business that might better be able to pass on price increases to their customers. The growth of our business depends on continued investment by public school systems and libraries in educational technology and
products. Changes to funding of public school systems and libraries could slow this kind of investment.
The loss of a few of our larger clients would
adversely affect our results of operations.
While we are not dependent upon any one customer or a few customers, the loss
of a few of our larger customers would adversely affect our results of operations. In fiscal 2001, no single customer represented more than 10.0% of our consolidated net sales. Our top five customers accounted for 11.0% of consolidated net sales in
fiscal 2001. The loss of these customers would adversely affect us.
Our operating results continue to fluctuate and a revenue or earnings shortfall
in a particular quarter could have a negative impact on the price of our common stock.
Variations in our operating results
occur from time to time as a result of many factors, such as timing of customers’ capital expenditures, the mix of distribution channels through which our products are distributed, annual budgetary considerations of customers, new product
introductions, and general economic conditions.
Certain customers’ buying patterns and funding availability cause our
sales and cash flow to be generally higher in the fourth quarter of the year. Due to this seasonal factor, we require and expect to have a seasonal working capital credit line to fund cash requirements primarily during our second and third quarters.
Because a high percentage of our expenses are relatively fixed, a variation in the timing of customer orders can cause
variations in operating results from quarter to quarter. Our sales cycles are relatively long and depend on factors such as the size of customer orders and the terms of subscription agreements. As a result of the difficulty in forecasting our
quarterly revenues, our operating results in any given quarter may fall below securities analysts’ expectations, which may cause the price of our common stock to fall abruptly and significantly.
In addition, a deterioration in economic conditions generally may adversely affect the market for our products and thereby cause our operating results
to fall below expectations.
We could experience system failures, software errors, or capacity constraints, any of which would cause interruptions in
the electronic content we provide to our customers and ultimately cause us to lose customers.
Any delays or failures in the
systems or errors in the software that we use to deliver our electronic content to our customers would harm our business. We have occasionally suffered failures of the computer and telecommunication systems that we use to deliver our electronic
content to customers. These failures have caused interruptions in the functioning of our electronic content for our customers. The growth of our customer base, as well as the number of sites we provide, may strain our systems in the future.
The systems we currently use to deliver our services to our customers (except for external telecommunications systems) are
located in our facilities in Michigan and Ohio. Although we maintain property insurance, claims for any system failure could exceed the coverage obtained.
Any delays, failures or problems with our systems or software could result in loss of or delay in market acceptance and sales, diversion of development resources, injury to our reputation, or increased service and
support costs.
11
Our systems face security risks and our customers have concerns about their privacy.
We have taken security precautions with respect to our systems and sites. Still, they may be vulnerable to unauthorized access and use by hackers,
computer viruses and other disruptive problems. Any security breaches or problems could lead to misappropriation of our customers’ information, misappropriation of our sites, misappropriation of our intellectual property and other rights, as
well as disruption and interruption in the use of our systems and sites. Unauthorized access to and theft of customer information as well as denial of various Internet and online services have occurred in the past, and will likely occur again in the
future. In order to maintain our security precautions or to correct problems caused by security breaches, we may need to spend significant capital or other resources. We intend to continue to put industry–standard security measures in place for
our systems and sites. Nevertheless, those measures may be circumvented and in order to monitor continually and maintain these measures, we may cause disruption to and interruption in our customers’ use of our systems and sites. These
disruptions and interruptions could harm our business.
In general, users of the Internet and online services are very concerned
about the security and privacy of their communications and data transmitted. These concerns may inhibit the growth of the Internet and other online services generally, and our sites in particular. Any security breach related to our sites could hurt
our reputation and expose us to damages and litigation. These kinds of breaches could harm our business.
We have had limited
attempts by users to gain access to certain areas of the systems that are generally not available to such users. Such attempts are constantly monitored. Upon detection a notice is investigated and an appropriate level of action is taken.
The occurrence of a fire, flood or other form of natural disaster at certain of our locations would adversely impact our business.
Copies of our microfilm collections are stored at various of our properties. If a fire, flood or similar event were to occur at one or more
of these locations and destroy those collections, our operations could be materially and adversely affected.
We may be subject to government
regulation and legal liabilities that may be costly and may interfere with our ability to conduct business.
We are not
currently subject to direct regulation by any United States or state government agency other than the laws and regulations applicable to businesses generally. Also, there are few laws or regulations directly applicable to access to or commerce on
the Internet. Because of the increasing popularity and use of the Internet, federal and state governments may adopt laws or regulations in the future with respect to commercial online services and the Internet, with respect to user privacy;
copyrights and other intellectual property rights and infringement; domain names; pricing; content regulation; defamation; and taxation.
Laws and regulations directly applicable to online commerce or Internet communications are becoming more prevalent and could expose us to substantial liability. For example, recently enacted United States laws, such as the federal Digital
Millennium Copyright Act and various federal laws aimed at protecting children, their privacy, and the content made available to them could expose us to substantial liability. Furthermore, various proposals at the federal, state and local level
could impose additional taxes on Internet sales. These laws, regulations and proposals could decrease Internet commerce and other Internet uses, and adversely affect our opportunity to derive financial benefit from our activities.
Further, governments of foreign countries might try to regulate our Internet transmissions or prosecute us for violations of their laws
covering a variety of topics, many of which are the same as those described above for United States laws and regulations. For example, Germany has taken actions to restrict the free flow of material deemed to be objectionable on the Internet. The
European Union has adopted privacy, copyright, and database directives that may impose additional burdens and costs on us. We may incur substantial costs in responding to charges of violations of local laws by foreign governments.
Our stock price may be volatile and your investment in our stock could decline in value.
Our common stock price has fluctuated significantly in the recent past. In addition, market prices for securities of companies in our industries have been highly volatile and may
continue to be highly volatile in the future. Often this volatility is unrelated to our operating performance.
12
As of December 29, 2001, we had $251.0 million of total indebtedness, net of cash and cash equivalents, which could
hurt our ability to borrow and utilize cash flow as necessary.
The degree to which we are leveraged could have important
consequences, including the following: (i) our ability to borrow may be limited to additional amounts for working capital, capital expenditures and potential acquisition opportunities; (ii) a substantial portion of our cash flows from operations
must be used to pay our interest expense and repay our debt, which reduces the funds that would otherwise be available for our operations; (iii) we may be more vulnerable to economic downturns and competitive pressures and may have reduced
flexibility in responding to changing business, regulatory and economic conditions; and (iv) fluctuations in market interest rates will affect the cost of our borrowings to the extent not covered by interest rate hedge agreements.
Our credit facility contains covenants that may significantly restrict our operations.
Our senior credit facility contains numerous covenants imposing financial and operating restrictions on our business. These restrictions may affect our ability to operate our business
and may limit our ability to take advantage of potential business opportunities as they arise. These covenants place restrictions on our ability to, among other things, incur more debt, pay dividends, redeem or repurchase our stock or make other
distributions, make acquisitions or investments, use assets as security, dispose of assets or use asset sale proceeds, and extend credit.
In addition, our senior credit facilities require us to meet a number of financial ratios and tests. Our ability to meet these ratios and tests and to comply with other provisions of our credit facilities can be
affected by changes in economic or business conditions or other events beyond our control. Any failure to comply with the obligations in our senior credit facilities could result in an event of default under these facilities, which, if not cured or
waived, could permit acceleration of our indebtedness under the senior credit facilities which could have a material adverse effect on us.
ProQuest’s principal administrative office is located in Ann Arbor,
Michigan. The following table provides certain summary information in square feet with respect to the production and development facilities that the Company owns or leases in connection with its businesses:
| |
|
I&L
|
|
PS
|
|
Total
|
| Owned |
|
113,000 |
|
171,000 |
|
284,000 |
| Leased |
|
245,000 |
|
132,000 |
|
377,000 |
| |
|
|
|
|
|
|
| Total |
|
358,000 |
|
303,000 |
|
661,000 |
| |
|
|
|
|
|
|
The Company primarily leases facilities in the United States, Canada and United
Kingdom. The termination of any one of the leases, some of which are long-term, would not significantly affect the Company’s operations.
The Company deems the buildings, machinery and equipment used in its operations (whether owned or leased), generally to be in good condition and adequate for the purposes for which they are used.
Item 3.
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.
13
Item 4.
Submission of Matters to a Vote of Security Holders.
None.
Executive Officers and Directors
The following table sets forth the names, ages and positions held by the directors and executive officers of the Company as of March 6, 2002:
| Name
|
|
Age
|
|
Positions at the Company
|
| James P. Roemer |
|
54 |
|
Chairman of the Board and Chief Executive Officer |
| Alan Aldworth |
|
47 |
|
Director, President, Chief Operating Officer, and Chief Financial Officer |
| David Bonderman |
|
59 |
|
Director |
| David G. Brown |
|
45 |
|
Director |
| William E. Oberndorf |
|
48 |
|
Director |
| Gary L. Roubos |
|
65 |
|
Director |
| John H. Scully |
|
57 |
|
Director |
| William J. White |
|
63 |
|
Director |
| Todd W. Buchardt |
|
42 |
|
Secretary and General Counsel |
| Joseph P. Reynolds |
|
52 |
|
President and Chief Executive Officer of ProQuest Information and Learning |
| Bruce E. Rhoades |
|
53 |
|
President and Chief Executive Officer of Bell & Howell Publishing Services |
| Linda Longo-Kazanova |
|
49 |
|
Vice President, Human Resources |
| Kevin G. Gregory |
|
38 |
|
Vice President, Controller & Treasurer |
| Mark Trinske |
|
43 |
|
Vice President, Investor Relations |
The business experience and certain other information relating to each director
and executive officer of the Company is set forth below:
James P. Roemer, ProQuest Company’s Chairman and Chief
Executive Officer, has been Chairman of the Board since January 1998 and has been a Director of the Company since February 1995. From February 1997 to January 2002, Mr. Roemer served as President and Chief Executive Officer of the Company, and from
February 1995 to February 1997 he served as President and Chief Operating Officer. Prior to that, he served a s President and Chief Executive Officer of ProQuest Information and Learning Company from January 1994 to June 1995. Mr. Roemer joined
ProQuest as Vice President and Bell & Howell Publishing Services Company as President and Chief Operating Officer in October 1991 and was promoted to President and Chief Executive Officer of Publishing Services Company in September 1993. Prior
to joining ProQuest, Mr. Roemer was President of the Michie Group, Mead Data Central from December 1989 to October 1991. From January 1982 to December 1989 he was Vice President and General Manager of Lexis, an on-line information service. From
April 1981 to December 1982 he served as acting President of Mead Data Central. Mr. Roemer is a Director of bigchalk.com, inc.
Alan Aldworth was appointed President and Chief Operating Officer of ProQuest Company in January 2002. Mr. Aldworth has been Chief Financial Officer of the Company since October 2000. Prior to joining ProQuest, he spent 18 years at
Tribune Company where he held a variety of senior financial management and general management positions the most recent of which was as the General Manager of Tribune Education Company. Mr. Aldworth is a Director of bigchalk.com, inc.
David Bonderman has been a Director of the Company since December 1987. He has been the Managing General Partner of Texas Pacific
Group (a private investment company) since December 1992. He is also a Director of Beringer Wine Estates, Inc., Continental Airlines, Inc., Denbury Resources, Inc., Oxford Health Plans, Inc., Ryanair Ltd., Co-Star Realty Information Group, Inc. and
Washington Mutual Inc.
14
David G. Brown has been a Director of the Company since January 1994. He has been the
Managing Partner of Oak Hill Venture Partners since August 1999 and a Principal in Arbor Investors LLC since August 1995, Chief Financial Officer of Keystone, Inc. from September 1998 to February 2000, and a Vice President of Keystone, Inc. since
August 1993. Prior to joining Keystone, Mr. Brown was a Vice President in the Corporate Finance Department of Salomon Brothers Inc. from August 1985 to July 1993. He is a Director of 2Bridge, AER Energy Resources, FEP Holdings, Lattice
Communications, Lightning Finance, MarketTools, MobileForce Technologies, Owners.com, Sitara Networks, and WOW Networks.
William E. Oberndorf has been a Director of the Company since July 1988. He has served as Managing Director of SPO Partners & Co. since March 1991. He is also a Director of Plum Creek Timber Company, Inc., and bigchalk, inc.
Gary L. Roubos has been a Director of the Company since February 1994. He was Chairman of the Board of Dover Corporation
from August 1989 to May 1998 and was President from May 1977 to May 1993. He is also a Director of Dover Corporation and Omnicom Group, Inc.
John H. Scully has been a Director of the Company since July 1988. He has served as Managing Director of SPO Partners & Co. since March 1991. He is also a Director of Plum Creek Timber Company, Inc.
William J. White has been a Director of the Company since February 1990 and was Chairman of the Board from February 1990
to January 1998. He served as Chief Executive Officer of the Company from February 1990 to February 1997 and was President of the Company from February 1990 to February 1995. Since January 1998 he has been a Professor of Industrial Engineering and
Management Science at Northwestern University. He is also a Director of Ivex Packaging Corporation and Readers Digest Association, Inc.
Todd W. Buchardt was appointed General Counsel in April 1998, and in September 1998 was elected to the additional office of Secretary. Prior to joining ProQuest, he held various legal positions with First Data Corporation from 1986
to 1998.
Joseph P. Reynolds has been President and Chief Executive Officer of ProQuest Information and Learning Company
since April 1998. Prior to joining ProQuest, he was Chief Executive Officer of the School and Career Education Group of Thomson Corporation from June 1997 to April 1998 and was Chief Operating Officer of that Group from June 1995 to June 1997. From
1982 to June 1995 he held various positions in management, sales and marketing at Thomson and its Delmar Publishers subsidiary. Mr. Reynolds is a Director of bigchalk.com, inc.
Bruce E. Rhoades has been President and Chief Executive Officer of Bell & Howell Publishing Services since January 2001. He joined the Company in 1999, and has managed several
of the Company’s business units. Prior to joining the Company, he was Chief Executive Officer of a consulting practice specializing in business and product strategy formulation, software and information product development, and strategic
alliances and acquisitions from 1995 to 1999. Prior to that, he held a number of executive positions at Lexis-Nexis Group from 1979 to 1995, and held various positions at ADP Network Services from 1975 to 1979.
Linda Longo-Kazanova has been Vice President, Human Resources of the Company since May 2000. Prior to joining the Company, she was Senior Vice
President, Human Resources-North America, for Information Resources, Inc. from 1995 to 2000. From 1985 to 1995, she held various human resource positions with Kraft Foods, Inc.
Kevin G. Gregory has been Vice President, Controller & Treasurer of the Company since February 2001. From August 1997 to February 2001, he served as Tax Counsel and Vice
President—Tax. Prior to joining the Company, he was Senior Manager at Ernst & Young LLP, and prior to that spent seven years at PricewaterhouseCoopers.
15
Mark Trinske has been Vice President, Investor Relations of the Company since October
2001. Prior to joining the Company, he was the founder and President of Lafayette, Colorado-based Trinske Communications, a full-service investor relations firm, in 1992. Previously, Mr. Trinske held positions at the investor and public relations
firms Metzger Associates and Carl Thompson Associates. From 1984 to 1989, he was an investment executive with A.G. Edwards and PaineWebber, and prior to that was a corporate securities paralegal at Brobeck, Phleger & Harrison.
Item 5.
Market for Registrant’s Common Equity and Related Stockholder Matters.
The
Company’s common stock is traded on the New York Stock Exchange under the symbol “PQE”.
The high and low closing
prices of the Company’s common stock were as follows:
| |
|
2001
|
|
2000
|
| Quarter
|
|
High
|
|
Low
|
|
High
|
|
Low
|
| First |
|
$ |
23.6000 |
|
$ |
16.4375 |
|
$ |
38.7500 |
|
$ |
29.6250 |
| Second |
|
|
31.0000 |
|
|
21.7000 |
|
|
32.1250 |
|
|
19.8750 |
| Third |
|
|
36.5000 |
|
|
28.2000 |
|
|
26.0625 |
|
|
19.6875 |
| Fourth |
|
|
34.8000 |
|
|
29.9400 |
|
|
21.9375 |
|
|
15.1250 |
The Company has not declared or paid any cash dividends on its common stock. The
Company’s Credit Agreement (as defined herein) contains certain restrictions on the payment of dividends on and repurchases of its common stock. (See Note 9 to the Consolidated Financial Statements.)
Item 6.
Selected Financial Data.
The following selected financial data has been derived from the
audited Consolidated Financial Statements as of the end of and for each of the fiscal years in the five-year period ended December 29, 2001. The following financial data should be read in conjunction with the Consolidated Financial Statements and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein.
| |
|
Fiscal
|
|
| |
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
1998
|
|
|
1997
|
|
| |
|
(Dollars in thousands, except per share data) |
|
| Continuing Operations Data (1)(2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net sales |
|
$ |
401,628 |
|
|
$ |
374,301 |
|
|
$ |
359,460 |
|
|
$ |
321,047 |
|
|
$ |
307,050 |
|
| Cost of sales |
|
|
(186,963 |
) |
|
|
(189,196 |
) |
|
|
(182,300 |
) |
|
|
(159,335 |
) |
|
|
(152,520 |
) |
| Research and development expense |
|
|
(21,381 |
) |
|
|
(19,034 |
) |
|
|
(19,259 |
) |
|
|
(19,974 |
) |
|
|
(18,894 |
) |
| Selling and administrative expense |
|
|
(124,546 |
) |
|
|
(123,642 |
) |
|
|
(115,732 |
) |
|
|
(102,302 |
) |
|
|
(97,220 |
) |
| Gain (loss) on sales of assets |
|
|
(2,312 |
) |
|
|
2,726 |
|
|
|
5,152 |
|
|
|
— |
|
|
|
— |
|
| Restructuring charge |
|
|
— |
|
|
|
(5,196 |
) |
|
|
(10,505 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings before interest, income taxes and equity in loss of affiliate and cumulative effect of a change in accounting
principle |
|
|
66,426 |
|
|
|
39,959 |
|
|
|
36,816 |
|
|
|
39,436 |
|
|
|
38,416 |
|
| Net interest expense |
|
|
(25,039 |
) |
|
|
(28,361 |
) |
|
|
(10,132 |
) |
|
|
(14,165 |
) |
|
|
(22,389 |
) |
| Income tax expense |
|
|
(15,727 |
) |
|
|
(4,639 |
) |
|
|
(10,674 |
) |
|
|
(10,108 |
) |
|
|
(6,411 |
) |
| Equity in loss of affiliate |
|
|
(13,374 |
) |
|
|
(20,848 |
) |
|
|
(950 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings (loss) |
|
|
12,286 |
|
|
|
(13,889 |
) |
|
|
15,060 |
|
|
|
15,163 |
|
|
|
9,616 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted earnings (loss) per common share |
|
$ |
0.51 |
|
|
$ |
(0.59 |
) |
|
$ |
0.64 |
|
|
$ |
0.64 |
|
|
$ |
0.48 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other Continuing Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| EBITDA (3) |
|
$ |
121,650 |
|
|
$ |
93,797 |
|
|
$ |
86,407 |
|
|
$ |
79,357 |
|
|
$ |
75,847 |
|
| Gross profit as a percent of net sales (4) |
|
|
53.4 |
% |
|
|
49.5 |
% |
|
|
49.3 |
% |
|
|
50.4 |
% |
|
|
50.3 |
% |
| Capital expenditures |
|
|
52,924 |
|
|
|
42,623 |
|
|
|
35,055 |
|
|
|
29,874 |
|
|
|
28,181 |
|
16
| |
|
At the End of Fiscal
|
| |
|
2001
|
|
2000
|
|
1999
|
|
1998
|
|
1997
|
| |
|
(Dollars in thousands) |
| Balance Sheet Data (2): |
|
|
|
|
|
|
|
|
|
|
| Total assets |
|
628,097 |
|
806,586 |
|
783,812 |
|
657,598 |
|
633,495 |
| Long-term debt |
|
252,782 |
|
501,821 |
|
506,783 |
|
445,240 |
|
497,252 |
Footnotes to the Selected Consolidated Financial and Operating Data:
(1) In the first quarter of 2000, the Company adopted a plan to divest its Mail and Messaging Technologies and
Imaging businesses and its financing subsidiary. Accordingly, the operating results of these businesses have been segregated from the Company’s continuing operations, and are separately reported as discontinued operations in the consolidated
financial statements. Excludes extraordinary losses of $28.9 million in fiscal 1997, and cumulative effect of a change in accounting principle of $65.3 million in fiscal 2000. The fiscal 1997 to 1999 results have not been retroactively restated to
reflect the impact of the change of the method of revenue recognition.
(2) During
fiscal 2000, the Company changed its method of accounting for certain inventory costs from LIFO to FIFO (see Note 1 to the Consolidated Financial Statements). The fiscal 1997 to 1999 operating and balance sheet data have been retroactively restated
to reflect this change in accounting.
(3) EBITDA from continuing operations is
defined as earnings from continuing operations before gain /(loss) on sales of assets, restructuring charges, interest, income taxes, equity in loss of affiliate and cumulative effect of a change in accounting principle, plus depreciation and
amortization of other long-term assets, primarily intangibles of acquired companies, but excluding the amortization/write-off of deferred financing costs. EBITDA is generally regarded as providing useful information regarding a company’s
financial performance, but it is not a measure of financial performance under generally accepted accounting principles. 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, or as an alternative to the Company’s cash flow from operating activities determined under generally accepted accounting principles as a measure of liquidity. Additionally, the Company’s calculation of
EBITDA from continuing operations may not be comparable to other similarly titled measures of other companies. EBITDA from continuing operations has been included as a supplemental disclosure because it provides useful information about how
management assesses the Company’s ability to service debt and to fund. The Company’s ability to service debt and fund capital expenditures in the future, however, may be affected by other operating or legal requirements.
(4) Gross profit is defined as net sales less cost of sales.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Except for the historical information and discussions contained herein, statements contained in this release may constitute forward-looking statements that involve known and unknown risks, uncertainties, and other factors that may cause
actual results, performance or achievements of the Company to be materially different from those projected in forward-looking statements made by, or on behalf of the Company. Factors that could cause or contribute to such differences include risks
detailed in Part 1, Item 1 under the caption Risk Factors and elsewhere in the Annual Report on Form 10-K. You should read the following discussion in conjunction with the Selected Financial Data and the Company’s Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Report on Form 10-K.
Overview. ProQuest Company is a
leading provider of information and content to the education and transportation industries. Formerly known as Bell & Howell, ProQuest has a 97 year history with more than 50 years in information and content aggregation. Through our Information
and Learning segment, which primarily serves the academic and library markets, we aggregate and publish value-added content from a wide range of sources including newspapers, periodicals and books. Our Publishing Services segment provides electronic
delivery of technical and schematic information to the automotive and powersports (motorcycle, marine, and RV) markets. Our company has demonstrated strong, stable growth in both revenue and earnings in the last few years with 2001 revenue
increasing to $401.6 million from $359.5 million in 1999 and 2001 operating income increasing to $68.7 million from $42.2 million in 1999.
Our predecessor company, Bell & Howell, has been synonymous with creative and technology-based solutions since 1904. In 2001, we sold the legacy Imaging, Mail and Messaging Technologies and finance related
businesses and changed our name to ProQuest. We used the proceeds from the divestitures to significantly reduce our debt.
Discontinued Operations. In the first quarter of 2000, we began plans to divest our Mail and Messaging Technologies and Imaging businesses and our financing subsidiary. Accordingly, the operating results of these
businesses have been segregated from our continuing operations, and are separately reported as a discontinued operation in the consolidated financial statements. We completed our divestiture plan in fiscal 2001.
17
Financial information for each of the Company's business segments and operations by geographic area is contained in Note 2 to the
Consolidated Financial Statements.
Revenue. The Company derives revenues from licenses of
database content (electronic products), sales of microform subscriptions, service, software, and equipment.
Information
& Learning 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. I&L also sells products where revenue is recognized when product is shipped. These products include microform newspaper and periodical backfiles,
research collections, out of print books, dissertation copies, and dissertation publishing.
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.
Cost of Sales. Cost of sales consists of product and service costs. Product costs
include costs such as production costs, depreciation of electronic and microfilm product masters, amortization of capitalized software costs, royalties for the use of content, Internet hosting costs and technical support costs. Service costs consist
primarily of costs for installation and training including personnel, materials, facilities and travel. Except for cost associated with capitalized product development and software, the costs of sales are generally recognized as incurred.
Research and Development Expense. We continually seek to take advantage of new product and
technology opportunities and view product development to be essential to maintaining and growing our market position. We expense all software development costs associated with products until technological feasibility is established. In general, we
have not historically capitalized significant amounts of these costs. Our research and development expenditures include expenses primarily for database development and information delivery systems.
18
Selling and Administrative Expense. Our sales and marketing
expenses primarily consist of salaries and compensation paid to employees engaged in sales and marketing activities, advertising and promotional materials, public relations cost and travel. General and administrative expenses principally consist of
salaries and compensation paid to our executives and other employees, as well as incidental costs incurred in managing our business.
Critical
Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally
accepted in the United States, which requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates which could have a material impact on our financial statements. Our significant accounting policies are described in Note 1 of Notes
to Consolidated Financial Statements. We believe that our most critical accounting policies include accounting for income taxes and risk of impairment of goodwill and product masters.
Income Taxes. Significant judgement is required in determining the Company’s provision for income taxes, deferred tax assets and
liabilities and valuation allowance recorded against the net deferred tax assets. In determining realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. As of December 29, 2001, management believes it is more likely than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances. However, the amount of the deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
Risk of Impairment on Goodwill and Product Masters. The Company reviews the
carrying value of goodwill and other intangible assets and product masters for impairment whenever events or changes in circumstances indicate that the net book value of an asset may not be recoverable from the estimated undiscounted future cash
flows expected to result from its use and eventual disposition. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value as estimated by discounted cash flows. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less cost of disposal.
Results of Operations
The following table sets forth continuing operations financial data, excluding gain / (loss) on sales of assets, restructuring charges, equity in loss of affiliate and cumulative effect
of a change in accounting principle and its related tax impact:
| |
|
Fiscal
|
|
| |
|
2001
|
|
|
2000
|
|
|
1999
|
|
| |
|
Amount
|
|
% of sales
|
|
|
Amount
|
|
% of sales
|
|
|
Amount
|
|
% of sales
|
|
| Revenues |
|
$ |
401.6 |
|
100.0 |
% |
|
$ |
374.3 |
|
100.0 |
% |
|
$ |
359.5 |
|
100.0 |
% |
| Cost of sales |
|
|
187.0 |
|
46.6 |
% |
|
|
189.2 |
|
50.5 |
% |
|
|
182.3 |
|
50.7 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross margin |
|
|
214.6 |
|
53.4 |
% |
|
|
185.1 |
|
49.5 |
% |
|
|
177.2 |
|
49.3 |
% |
| Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Research and development |
|
|
21.4 |
|
5.3 |
% |
|
|
19.0 |
|
5.1 |
% |
|
|
19.3 |
|
5.4 |
% |
| Selling, general and administrative |
|
|
124.5 |
|
31.0 |
% |
|
|
123.7 |
|
33.0 |
% |
|
|
115.7 |
|
32.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income |
|
|
68.7 |
|
17.1 |
% |
|
|
42.4 |
|
11.3 |
% |
|
|
42.2 |
|
11.7 |
% |
| Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest expense |
|
|
25.0 |
|
6.2 |
% |
|
|
28.4 |
|
7.6 |
% |
|
|
10.1 |
|
2.8 |
% |
| Income tax expense |
|
|
16.6 |
|
4.1 |
% |
|
|
5.6 |
|
1.5 |
% |
|
|
12.8 |
|
3.6 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
27.1 |
|
6.7 |
% |
|
$ |
8.4 |
|
2.2 |
% |
|
$ |
19.3 |
|
5.4 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2001 Compared to Fiscal Year 2000
Revenue.
| |
|
2001
|
|
2000
|
| I&L |
|
$ |
236.0 |
|
$ |
220.0 |
| PS |
|
|
165.6 |
|
|
154.3 |
| |
|
|
|
|
|
|
| Total |
|
$ |
401.6 |
|
$ |
374.3 |
| |
|
|
|
|
|
|
The Company’s net sales from continuing operations increased $27.3 million,
or 7.3%, to $401.6 million in 2001. Revenue growth was adversely impacted by lower than expected international sales, a virtual halt in one-time, non-subscription sales of digital vault content and microfilm after the September 11th tragedy, and a decline in revenue from our content wholesale channel due to the overall soft economy in 2001.
I&L revenue increased $16.0 million, or 7.3%, to $236.0 million. Growth in revenue is primarily due to an 11.8% increase in sales of
electronic products. This growth is driven by a price increase of 3.0% and new product sales which increased 9.0%. The growth in electronic products revenue is demonstrated by the growth of the “annualized on-line subscription contract
value”. Annualized on-line subscription contract value is the projected 12-month revenue from all outstanding on-line subscription contracts. The total annualized on-line subscription contract value was $91.1 million and $79.0 million at year
end 2001 and 2000, respectively. This represents a 15.3% increase which we believe is a good indicator of electronic subscription revenue growth, however, actual on-line subscription revenue may be impacted by other factors such as subscription
renewal rates. Microfilm sales increased 7.0% as a result of price increases which more than offset declining unit sales.
19
PS revenue increased $11.3 million, or 7.3%, to $165.6 million. Growth in revenue is primarily
due to a higher number of renewals and higher contract renewal pricing. Additionally, Alison’s revenue grew 11.1% from $25.2 million in 2000 to $28.0 million in 2001 mainly due to the release of the electronic version of their product
TrackerPac in 2001.
Cost of Sales.
| |
|
2001
|
|
2000
|
| I&L |
|
$ |
125.5 |
|
$ |
125.8 |
| PS |
|
|
61.5 |
|
|
63.4 |
| |
|
|
|
|
|
|
| Total |
|
$ |
187.0 |
|
$ |
189.2 |
| |
|
|
|
|
|
|
Our cost of sales decreased $2.2 million, or 1.2%, to $187.0 million in 2001 as a
result of reduced sales of low margin hardware at PS and reduced costs associated with I&L’s data center.
Our overall
gross profit margin (net sales less cost of sales) increased by 3.9 percentage points to 53.4% due to leveraging of our fixed cost infrastructure over increased revenues.
Research and Development.
| |
|
2001
|
|
2000
|
| I&L |
|
$ |
10.0 |
|
$ |
6.1 |
| PS |
|
|
11.4 |
|
|
12.9 |
| |
|
|
|
|
|
|
| Total |
|
$ |
21.4 |
|
$ |
19.0 |
| |
|
|
|
|
|
|
Research and development expense increased $2.4 million, or 12.6%, to $21.4
million in 2001 as we continue to invest in creating new products and integrating technology that streamlines the delivery of this content to our customers. I&L research and development expense increased 63.9% from increased expenditures for
database and information delivery systems, while PS research and development expense decreased 11.6% from expense management.
Selling and Administrative.
| |
|
2001
|
|
2000
|
| I&L |
|
$ |
60.2 |
|
$ |
58.0 |
| PS |
|
|
52.7 |
|
|
52.2 |
| Corporate |
|
|
11.6 |
|
|
13.5 |
| |
|
|
|
|
|
|
| Total |
|
$ |
124.5 |
|
$ |
123.7 |
| |
|
|
|
|
|
|
Selling and administrative expense increased $0.8 million, or 0.6%, to $124.5
million in 2001. This reflects additional sales and marketing resources at I&L and PS offset by reduced Corporate expenses from staff reduction due to sale of discontinued operations.
20
Earnings from Continuing Operations.
| |
|
2001
|
|
|
2000
|
|
| I&L |
|
$ |
40.3 |
|
|
$ |
30.3 |
|
| PS |
|
|
40.0 |
|
|
|
28.0 |
|
| Corporate |
|
|
(11.6 |
) |
|
|
(15.9 |
) |
| |
|
|
|
|
|
|
|
|
| Total |
|
$ |
68.7 |
|
|
$ |
42.4 |
|
| |
|
|
|
|
|
|
|
|
Earnings from continuing operations increased $26.3 million, or 62.0%, to $68.7
million in 2001. The increase in earnings from continuing operations was due to the continuing high levels of subscription renewals, successful development of content for our ProQuest product line, and cost management.
I&L earnings increased $10.0 million, or 33.0%, to $40.3 million in 2001. I&L’s increased operating earnings is due to strong performance
of our core electronic business, sales of new digital products from our Digital Vault Initiative and increased revenue from our XanEdu products.
PS earnings increased $12.0 million, or 42.9%, to $40.0 million in 2001. These strong results reflect the increased sales of EPCs and increased sales of motorcycle, marine and RV dealer management systems from the
Powersports division.
Corporate expenses decreased $4.3 million, or 27.0%, to $11.6 million in 2001 due to reduction in
corporate staff and cost management.
Net Interest Expense. Net interest expense decreased $3.4
million, or 12.0%, to $25.0 million in 2001, primarily reflecting lower debt levels due to the Company utilizing the proceeds from the sales of discontinued operations to reduce the outstanding debt levels.
Income Tax Expense. Income tax expense increased in 2001 as a result of higher operating earnings, partially offset by a
lower effective tax rate for fiscal 2001.
The following items are not reflected in the Results of Operations table, but are
reflected in the Consolidated Statements of Operations:
Restructuring.
| |
|
2001
|
|
2000
|
|
| I&L |
|
$ |
— |
|
$ |
4.8 |
|
| PS |
|
|
— |
|
|
1.7 |
|
| Corporate |
|
|
— |
|
|
(1.3 |
) |
| |
|
|
|
|
|
|
|
| Total |
|
$ |
— |
|
$ |
5.2 |
|
| |
|
|
|
|
|
|
|
In connection with the restructuring plan that commenced
in December 1999, additional restructuring charges of $5.2 million for our continuing operations were incurred in 2000. These charges related to severance, obligations under non-cancelable leases for which no economic benefit will be subsequently
realized, and business separation costs.
Gain / (Loss) on Sales of Assets.
| |
|
2001
|
|
|
2000
|
| I&L |
|
$ |
— |
|
|
$ |
— |
| PS |
|
|
(2.3 |
) |
|
|
— |
| Corporate |
|
|
— |
|
|
|
2.7 |
| |
|
|
|
|
|
|
|
| Total |
|
$ |
(2.3 |
) |
|
$ |
2.7 |
| |
|
|
|
|
|
|
|
On October 31, 2001, the Company sold certain assets of MotorcycleWorld.com, Inc.
(MCW), including MCW’s various domain names and web site content to Powersports Network, Inc. During the fourth quarter of 2001, PS sold its interest in MotorcycleWorld.com, Inc.
Equity Loss. The Company’s equity in bigchalk’s loss equaled $13.4 million in 2001. As a result of both venture capital financing and the exchange
of the Company’s investment in an entity acquired by bigchalk for additional shares in bigchalk, the Company owns approximately 38.0% of bigchalk on a fully-diluted basis as of December 29, 2001.
Acquisitions. In 2001, the Company purchased Softline Information, Campus Custom Publishing, and Heritage Quest for a
total of $17.8 million. We also made an additional $10.0 million investment in bigchalk.
21
The acquisition of CCP strengthens XanEdu’s current business. CCP provides electronic and
paper supplements to more than 1,000 colleges and universities nationwide. In addition, CCP has streamlined copyright capabilities, which accelerates the timeframe in which copyrighted materials can be incorporated into XanEdu products. Finally, we
acquired CCP’s archive of copyrighted content.
The Heritage Quest product line—which includes the popular Heritage
Quest Web-based information service, as well as microfilm, CD-ROMs, and print products (Heritage Quest magazine, Geneaology Bulletin, more than 400 books, and more than 100 indexes)—is a valuable addition to ProQuest’s genealogical
resources, including the Geneaology and Local History Online database and Sanborn Maps Online.
Softline Information offers more
than 500 newspapers and magazines from ethnic, minority, native, gender, alternative, and independent press. The titles are organized into five specialized databases covering ethnic, cultural, and demographic diversity, including: Ethnic NewsWatch,
Ethnic NewsWatch History, Alt-Press Watch, Gender Watch, and Diversity Your World.
These acquisitions did not have a material
effect on the comparability to the 2000 Consolidated Financial Statements.
Fiscal 2000 Compared to Fiscal 1999
Net Sales.
| |
|
2000
|
|
1999
|
| I&L |
|
$ |
220.0 |
|
$ |
198.2 |
| PS |
|
|
154.3 |
|
|
161.3 |
| |
|
|
|
|
|
|
| Total |
|
$ |
374.3 |
|
$ |
359.5 |
| |
|
|
|
|
|
|
The Company’s net sales from continuing operations increased $14.8 million,
or 4.1%, to $374.3 million in 2000, resulting from strong sales growth of the I&L business, partially offset by a decline in sales of lower margin hardware products at PS.
Net sales at I&L increased $21.8 million, or 11.0%, to $220.0 million due to a growing electronic subscription base. Sales growth would have been 18.0% if 1999 sales were adjusted to
reflect treatment consistent with 2000 accounting for both revenue recognition for new on-line subscriptions and for the results of the Company’s kindergarten through twelfth grade (“K-12”) Internet business (which was combined with
the K-12 Internet business of Infonautics, Inc. in December 1999 to form bigchalk). Sales of electronic content (on a comparable basis) increased 33.0%, from fiscal 1999 to fiscal 2000 with the electronic subscription base continuing to reflect
strong sales of ProQuest™ (the Company’s Internet based product offering), which was partially offset by lower
CD-ROM/tape subscriptions as customers continued to migrate to on-line delivery of information via the Internet. Net sales of the more traditional microfilm and paper products (which represent 46.0% of I&L’s 2000 sales) were slightly above
the prior year as increased pricing offset the lower unit volumes in subscription products.
Net sales of PS decreased $7.0
million, or 4.3%, to $154.3 million in 2000 as increased sales of performance database products and increased micropublishing sales to select vertical markets were more than offset by lower sales of hardware related to electronic parts catalogs.
Fiscal 2000 hardware sales were impacted as our former proprietary hardware systems, which were non-Y2K compliant, were previously replaced in 1999. Sales of parts catalogs and dealer management systems and related service increased slightly and
accounted for 68.0% of PS’s 2000 sales. Sales of non-electronic products including hardware decreased 20.0% from prior year, principally due to the lower hardware sales. Despite the modest overall sales decline in fiscal 2000, the installed
base of systems in U.S. dealers subscribing to PS’s electronic parts catalog increased 7.0%. The sales decline would have been 3.0% if the prior year sales were adjusted to reflect consistent revenue recognition.
22
Cost of Sales.
| |
|
2000
|
|
1999
|
| I&L |
|
$ |
125.8 |
|
$ |
113.2 |
| PS |
|
|
63.4 |
|
|
69.1 |
| |
|
|
|
|
|
|
| Total |
|
$ |
189.2 |
|
$ |
182.3 |
| |
|
|
|
|
|
|
The Company’s cost of sales increased $6.9 million, or 3.8%, to $189.2
million in 2000, with the gross profit percentage increasing by 0.2 percentage points to 49.5% reflecting a slightly more profitable product mix, increased pricing, and improved leveraging of the ProQuest™ data center cost infrastructure.
Research and Development.
| |
|
2000
|
|
1999
|
| I&L |
|
$ |
6.1 |
|
$ |
7.0 |
| PS |
|
|
12.9 |
|
|
12.3 |
| |
|
|
|
|
|
|
| Total |
|
$ |
19.0 |
|
$ |
19.3 |
| |
|
|
|
|
|
|
Research and development expense decreased $0.3 million, or 1.6%, to $19.0
million in 2000 as the prior year reflected additional Y2K and ProQuest™ product development costs.
Selling and Administrative.
| |
|
2000
|
|
1999
|
| I&L |
|
$ |
58.0 |
|
$ |
54.4 |
| PS |
|
|
52.2 |
|
|
46.3 |
| Corporate |
|
|
13.5 |
|
|
15.0 |
| |
|
|
|
|
|
|
| Total |
|
$ |
123.7 |
|
$ |
115.7 |
| |
|
|
|
|
|
|
Selling and administrative expense increased $8.0 million, or 6.9%, to $123.7
million in 2000, reflecting additional sales/marketing resources to capitalize on the sales growth opportunities from Internet based products, as well as increased distribution costs associated with the higher sales volumes offset by a decrease in
corporate expenses due to reduced corporate staff levels due to discontinued operations.
23
Earnings from Continuing Operations.
| |
|
2000
|
|
|
1999
|
|
| I&L |
|
$ |
30.3 |
|
|
$ |
23.7 |
|
| PS |
|
|
28.0 |
|
|
|
33.3 |
|
| Corporate |
|
|
(15.9 |
) |
|
|
(14.8 |
) |
| |
|
|
|
|
|
|
|
|
| Total |
|
$ |
42.4 |
|
|
$ |
42.2 |
|
| |
|
|
|
|
|
|
|
|
Earnings from continuing operations increased $0.2 million, or 0.5%, to $42.4
million in 2000 resulting from higher sales volume at I&L and leveraged operating costs and expenses offset by decreases at PS due to costs associated with our Internet initiative MotorcycleWorld.
I&L earnings increased $6.6 million, or 27.8%, to $30.3 million in 2000 as the ProQuest™ on-line service became profitable. The on-line service achieved profitability through continued strong revenue growth as well as several initiatives
to improve the cost structure of the technical infrastructure of the on-line system. Spending on Y2K related activities reduced software development costs in 2000 and helped drive the profit performance as well. Margins continued to improve on the
microfilm business as pricing increases more than offset volume erosion. Partially offsetting this positive earnings performance was continued investment in several new Internet initiatives.
PS earnings decreased $5.3 million, or 15.9%, to $28.0 million in 2000. Improved results from the performance database products and powersports business lines were more than offset by
increased investments.
Corporate expenses increased $1.1 million, or 7.4%, to $15.9 million in 2000 due to inflationary cost
increases.
Net Interest Expense. Net interest expense increased $18.3 million to $28.4 million in
2000, primarily reflecting increased debt levels associated with funding acquisitions in the prior year, the change in revenue recognition methodology at PS (see Note 1 to the Consolidated Financial Statements), and the impact of $4.2 million of
interest income accrued in the prior year related to a favorable settlement with the Internal Revenue Service which resulted in an income tax refund with interest.
Income Tax Expense. Income tax expense decreased in 2000 as a result of the lower level of pretax profit, with the effective income tax rate remaining
constant with the prior year.
The following items are not reflected in the Results of Operations table, but are reflected in
the Consolidated Statements of Operations:
Restructuring.
| |
|
2000
|
|
|
1999
|
| I&L |
|
$ |
4.8 |
|
|
$ |
— |
| PS |
|
|
1.7 |
|
|
|
— |
| Corporate |
|
|
(1.3 |
) |
|
|
10.5 |
| |
|
|
|
|
|
|
|
| Total |
|
$ |
5.2 |
|
|
$ |
10.5 |
| |
|
|
|
|
|
|
|
In connection with the restructuring plan (that commenced in December 1999),
additional restructuring charges for the Company’s continuing operations of $5.2 million were incurred in 2000 related to severance, obligations under non-cancelable leases for which no economic benefit will be subsequently realized, and
business separation costs.
Gain / (Loss) on Sales of Assets.
| |
|
2000
|
|
1999
|
| I&L |
|
$ |
— |
|
$ |
2.6 |
| PS |
|
|
— |
|
|
— |
| Corporate |
|
|
2.7 |
|
|
2.6 |
| |
|
|
|
|
|
|
| Total |
|
$ |
2.7 |
|
$ |
5.2 |
| |
|
|
|
|
|
|
Gains /(losses) on sales of assets during fiscal 2000 of $2.7 million related to:
—the sale of a portion of the Company’s investment in its affiliate bigchalk resulting from the
exercise of stock options granted to employees (gain of $0.9 million),
—the sale of the Company’s
investment in an entity acquired by bigchalk in exchange for additional common stock of bigchalk (gain of $0.5 million), and
—additional proceeds related to the sale in 1999 of vacant land adjacent to one of the Company’s manufacturing operations (gain of $1.3 million).
24
Staff Accounting Bulletin No.101 Implementation
In December 1999, the Securities and Exchange Commission (“SEC”) 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 at I&L, and from electronic parts catalog agreements at PS. See footnotes to the Consolidated Financial
Statements for a more complete discussion of the impact of the implementation of SAB 101.
As a result of the changes in the
methods of accounting for revenue, approximately $114.8 million in revenue recognized in fiscal 1999 and prior years was reversed and included in the cumulative effect adjustment determined as of the beginning of fiscal 2000. Of this amount, $31.7
million and $44.3 million was recognized in 2001 and 2000, respectively. Furthermore, $38.8 million will be recognized in 2002 and future years.
International Operations
| |
|
2001
|
|
2000
|
|
1999
|
| Domestic sales |
|
$ |
310.4 |
|
$ |
293.7 |
|
$ |
290.0 |
| Foreign sales |
|
|
91.2 |
|
|
80.6 |
|
|
69.5 |
| |
|
|
|
|
|
|
|
|
|
| Total sales |
|
$ |
401.6 |
|
$ |
374.3 |
|
$ |
359.5 |
| |
|
|
|
|
|
|
|
|
|
Foreign sales increased $10.6 million, or
13.1%, to $91.2 million in 2001 as a result of increased sales at PS of electronic products. New product sales at I&L were adversely impacted by currency valuations.
For I&L, we generally invoice international customers in U.S. dollars. During 2001 the U.S. dollar was very strong relative to most foreign currencies. Consequently, we reevaluated
our policy of invoicing in U.S. dollars, and for certain customers in certain foreign countries, we began invoicing in local currencies.
Liquidity
and Capital Resources
The Company generated cash from operations of $25.6 million during 2001, compared to cash generated
of $42.1 in 2000. The decrease in cash generated from continuing operations was primarily related to an increase in earnings offset by costs associated with content licenses, and payments in 2001 for charges accrued in 2000 related to accounts
payable and the restructuring.
Cash utilized in funding acquisitions in 2001 was $27.8 million versus $9.7 million for 2000. In
2001, the Company purchased Softline Information, Campus Custom Publishing, and Heritage Quest, and made an additional investment in bigchalk. In 2000, the Company purchased Media Solutions, Inc. and made an additional investment in bigchalk.
Acquisitions and investments are funded from cash generated from operations or from borrowings under the credit facility.
Cash
received from the sale of discontinued operations was $286.9 million for 2001 (net of expenses) compared to none in 2000. The cash received from the sale of discontinued operations was a result of the sales of the Imaging business and the Mail and
Messaging Technologies business and its financing subsidiary.
25
Cash used by financing activities was $252.4 million for 2001, compared to $14.2 million in
2000. The change in cash from financing activities was primarily due to the payment of debt with cash received from the sale of discontinued operations.
As part of the sale of MMT and its financing subsidiary, the Company entered into certain contractual obligations and will continue to monetize limited amounts due from customers through MMT’s financing
subsidiary for the next three years. The Company’s obligation related to certain portions of these monetized amounts have been classified as long-term deferred income on the Consolidated Balance Sheets. In connection with these transactions,
the Company retains maximum credit risk of approximately $0.3 million per year.
The Company primarily finances its operations
via a revolving credit agreement (“Credit Agreement”) which matures in December 2003. The financial covenants of the Credit Agreement require the Company to maintain a minimum net worth level, a maximum leverage ratio, and a minimum fixed
charge coverage ratio. Although there are no principal payments due until December 2002 (at which time the maximum amount of the credit facility is reduced by $50.0 million), there are limitations on the Company’s ability to pay dividends,
repurchase common stock, incur additional indebtedness, and make certain investments, acquisitions or divestitures.
When the
Company sold its discontinued operations, the maximum amount of the credit facility was reduced from $600.0 million to $375.0 million. In February 2002, the credit facility was amended, decreasing the maximum amount of the credit facility to $325.0
million to reflect the Company’s decreased borrowing needs after the sale of discontinued operations.
For the remaining
two years on the term of the existing Credit Agreement, annual maturities of long-term debt are:
| 2002 |
|
$ |
|
0.3 |
|
million |
| 2003 |
|
|
|
252.8 |
|
million |
The Company is in compliance with all debt covenants.
Capital Expenditures and Outlook
| |
|
2001
|
|
2000
|
|
1999
|
| Capital expenditures |
|
|
|
|
|
|
|
|
|
| I&L |
|
$ |
5.3 |
|
$ |
9.1 |
|
$ |
9.6 |
| PS |
|
|
3.7 |
|
|
3.2 |
|
|
2.3 |
| Corporate |
|
|
0.2 |
|
|
0.1 |
|
|
0.4 |
| |
|
|
|
|
|
|
|
|
|
| Total |
|
|
9.2 |
|
|
12.4 |
|
|
12.3 |
| Product masters |
|
|
|
|
|
|
|
|
|
| I&L |
|
|
43.7 |
|
|
30.2 |
|
|
22.8 |
| |
|
|
|
|
|
|
|
|
|
| Total |
|
|
52.9 |
|
$ |
42.6 |
|
$ |
35.1 |
| |
|
|
|
|
|
|
|
|
|
In fiscal 2001, 2000, and 1999, capital expenditures for the Company’s
continuing operations were $52.9 million, $42.6 million, and $35.1 million, respectively, a significant portion of which consisted of expenditures for product masters and creation of databases for I&L.
The Company expects to meet its needs for working capital for operations, to fund capital expenditures and potential acquisitions and to meet its debt
service requirements through cash generated from operations and the credit facilities discussed above. Although there are no material commitments, the Company expects capital spending in 2002 to increase to approximately to $54.0 million. These
expenditures will be concentrated
26
primarily on ongoing and new product master prepublication costs that management believes will generate future revenue growth. The Company’s plans are dependent on the availability of funds
as well as the identification of projects showing sufficient returns. As a result, there is no assurance that the Company’s planned level or type of capital spending will actually occur in the future.
Seasonality
The Company’s quarterly
operating results fluctuate as a result of a number of factors including the sales cycle, the amount and timing of new products and the Company’s spending patterns. In addition, our customers experience cyclical funding issues that can impact
our revenue patterns. Historically, the Company has experienced its lowest earnings and cash flow in the first fiscal quarter with its highest earnings in the fourth fiscal quarter. Due to this seasonal factor, the Company maintains a revolving
credit facility to fund interim cash requirements.
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 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. The net book value of the Company’s goodwill and other intangible assets was $231.5 million
and $222.3 million for 2001 and 2000, respectively. While management is continuing to assess the impact of these Statements on the Company’s results of operations and financial position, the adoption of these statements is expected to reduce
2002 annual goodwill amortization expense by approximately $7.7 million. Additionally, the effects of any future impairment, as provided by SFAS No. 142, on the Company’s consolidated financial position and results of operations are unknown.
In October 2001, the FASB approved Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment
of Disposal of Long-Lived Assets” (SFAS 144). This statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of and supersedes SFAS 121 and APB Opinion No. 30.
SFAS 144. is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The Company is still evaluating the effects of any future impairment and disposal of
long-lived assets, as provided by SFAS 144, but does not believe they will have a material impact on the Company’s results of operations and financial position.
27
Item 7a.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate 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. In seeking to minimize such risks, the Company uses derivative financial instruments. The Company periodically utilizes interest rate swaps, caps and collars
in order to hedge its exposure to interest rate risk on outstanding debt. Specifically, the Company has entered into interest rate swaps having notional amounts totaling $200 million at December 29, 2001. The potential impact on the Company’s
earnings from a 50 basis point increase or decrease in quoted interest rates would be approximately $0.2 million expense or benefit for 2001. The interest rate swaps have expiration dates through December 2003. The notional amounts outstanding and
the approximate weighted-average swap rate versus 3-month LIBOR at December 31 are as follows:
December 31,
2002 $200 million 6.14%
Foreign Currency Risk
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 Company has entered into various contracts to buy or sell foreign currencies. The contracts have maturity dates extending through February 2002, and are for an aggregate amount of $67.3 million (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.
Item
8.
Financial Statements and Supplementary Data
28
INDEPENDENT AUDITORS’ REPORT
The Board of Directors
ProQuest Company:
We have audited the accompanying consolidated balance sheets of ProQuest Company and subsidiaries (the “Company”) as of December 29, 2001 and
December 30, 2000, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for the fiscal years ended December 29, 2001, December 30, 2000, and January 1, 2000. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated 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 financial position of ProQuest Company and subsidiaries as of December 29, 2001 and December 30, 2000, and the results of their operations and their cash flows for the fiscal years ended December 29, 2001, December 30, 2000, and
January 1, 2000 in conformity with accounting principles generally accepted in the United States of America.
As discussed in
Notes 1 and 7 to the Consolidated Financial Statements, the Company changed its methods of accounting for certain inventory costs and revenue recognition during fiscal 2000.
/s/ KPMG LLP
Detroit, Michigan
February 11, 2002
29
PROQUEST COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the fiscal years ended December 29, 2001, December 30, 2000 and January 1, 2000
(In thousands, except per share data)
| |
|
2001
|
|
|
2000
|
|
|
1999
|
|
| Net sales |
|
$ |
401,628 |
|
|
$ |
374,301 |
|
|
$ |
359,460 |
|
| Cost of sales |
|
|
(186,963 |
) |
|
|
(189,196 |
) |
|
|
(182,300 |
) |
| Research and development expense |
|
|
(21,381 |
) |
|
|
(19,034 |
) |
|
|
(19,259 |
) |
| Selling and administrative expense |
|
|
(124,546 |
) |
|
|
(123,642 |
) |
|
|
(115,732 |
) |
| Restructuring charge |
|
|
— |
|
|
|
(5,196 |
) |
|
|
(10,505 |
) |
| Gain /(loss) on sales of assets |
|
|
(2,312 |
) |
|
|
2,726 |
|
|
|
5,152 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings from continuing operations before interest, |
|
|
|
|
|
|
|
|
|
|
|
|
| income taxes, equity in loss of affiliate and |
|
|
|
|
|
|
|
|
|
|
|
|
| cumulative effect of a change in accounting principle |
|
|
66,426 |
|
|
|
39,959 |
|
|
|
36,816 |
|
| Net interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
| Interest income |
|
|
1,159 |
|
|
|
2,404 |
|
|
|
5,450 |
|
| Interest expense |
|
|
(26,198 |
) |
|
|
(30,765 |
) |
|
|
(15,582 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest expense |
|
|
(25,039 |
) |
|
|
(28,361 |
) |
|
|
(10,132 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings from continuing operations before income taxes, |
|
|
|
|
|
|
|
|
|
|
|
|
| equity in loss of affiliate and cumulative |
|
|
|
|
|
|
|
|
|
|
|
|
| effect of a change in accounting principle |
|
|
41,387 |
|
|
|
11,598 |
|
|
|
26,684 |
|
| Income tax expense |
|
|
(15,727 |
) |
|
|
(4,639 |
) |
|
|
(10,674 |
) |
| Equity in loss of affiliate |
|
|
(13,374 |
) |
|
|
(20,848 |
) |
|
|
(950 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings (loss) from continuing operations before |
|
|
|
|
|
|
|
|
|
|
|
|
| cumulative effect of a change in accounting principle |
|
|
12,286 |
|
|
|
(13,889 |
) |
|
|
15,060 |
|
| Earnings from discontinued operations (less applicable income |
|
|
|
|
|
|
|
|
|
|
|
|
| taxes of $1,840, $6,979, and $12,184, respectively) |
|
|
3,002 |
|
|
|
10,469 |
|
|
|
2,731 |
|
| Gain on sales of discontinued operations, net (less applicable |
|
|
|
|
|
|
|
|
|
|
|
|
| income taxes of $1,518, $0, and $0 respectively) |
|
|
2,476 |
|
|
|
— |
|
|
|
— |
|
| Cumulative effect of a change in accounting principle |
|
|
— |
|
|
|
(65,302 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net earnings (loss) |
|
$ |
17,764 |
|
|
$ |
(68,722 |
) |
|
$ |
17,791 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings (loss) from continuing operations before cumulative effect of a change in accounting principle |
|
$ |
0.52 |
|
|
$ |
(0.59 |
) |
|
$ |
0.64 |
|
| Earnings from discontinued operations |
|
|
0.13 |
|
|
|
0.45 |
|
|
|
0.11 |
|
| Gain on sales of discontinued operations |
|
|
0.10 |
|
|
|
— |
|
|
|
— |
|
| Cumulative effect of a change in accounting principle |
|
|
— |
|
|
|
(2.76 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net earnings (loss) per basic common share |
|
$ |
0.75 |
|
|
$ |
(2.90 |
) |
|
$ |
0.75 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings (loss) from continuing operations before cumulative effect of a change in accounting principle |
|
$ |
0.51 |
|
|
$ |
(0.59 |
) |
|
$ |
0.64 |
|
| Earnings from discontinued operations |
|
|
0.13 |
|
|
|
0.45 |
|
|
|
0.11 |
|
| Gain on sales of discontinued operations |
|
|
0.10 |
|
|
|
— |
|
|
|
— |
|
| Cumulative effect of a change in accounting principle |
|
|
— |
|
|
|
(2.76 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net earnings (loss) per diluted common share |
|
$ |
0.74 |
|
|
$ |
(2.90 |
) |
|
$ |
0.75 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Average number of common shares and equivalents outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
|
23,805 |
|
|
|
23,657 |
|
|
|
23,569 |
|
| Diluted |
|
|
24,077 |
|
|
|
23,657 |
|
|
|
23,853 |
|
The accompanying
Notes to the Consolidated Financial Statements are an integral part of these statements.
30
PROQUEST COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 29, 2001 and December 30, 2000
(In
thousands)
| |
|
2001
|
|
|
2000
|
|
| ASSETS |
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
2,659 |
|
|
$ |
10,610 |
|
| Accounts receivable, net |
|
|
89,726 |
|
|
|
76,302 |
|
| Inventory: |
|
|
|
|
|
|
|
|
| Finished products |
|
|
1,821 |
|
|
|
1,932 |
|
| Products in process and materials |
|
|
2,620 |
|
|
|
2,672 |
|
| |
|
|
|
|
|
|
|
|
| Total inventory |
|
|
4,441 |
|
|
|
4,604 |
|
| Other current assets |
|
|
33,283 |
|
|
|
30,111 |
|
| |
|
|
|
|
|
|
|
|
| Total current assets |
|
|
130,109 |
|
|
|
121,627 |
|
| Property, plant, equipment and product masters: |
|
|
|
|
|
|
|
|
| Land |
|
|
915 |
|
|
|
891 |
|
| Buildings |
|
|
29,334 |
|
|
|
26,859 |
|
| Machinery and equipment |
|
|
109,408 |
|
|
|
108,831 |
|
| Product masters |
|
|
307,215 |
|
|
|
263,589 |
|
| |
|
|
|
|
|
|
|
|
| Total property, plant, equipment and product masters, at cost |
|
|
446,872 |
|
|
|
400,170 |
|
| Accumulated depreciation and amortization |
|
|
(292,843 |
) |
|
|
(267,054 |
) |
| |
|
|
|
|
|
|
|
|
| Net property, plant, equipment and product masters |
|
|
154,029 |
|
|
|
133,116 |
|
| Long–term receivables |
|
|
23,200 |
|
|
|
1,450 |
|
| Goodwill, and other intangible assets, net of accumulated amortization |
|
|
231,533 |
|
|
|
222,271 |
|
| Net assets of discontinued operations |
|
|
— |
|
|
|
261,155 |
|
| Other assets |
|
|
89,226 |
|
|
|
66,967 |
|
| |
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
628,097 |
|
|
$ |
806,586 |
|
| |
|
|
|
|
|
|
|
|
The accompanying Notes to the Consolidated
Financial Statements are an integral part of these statements.
31
PROQUEST COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 29, 2001 and December 30, 2000
(In thousands)
| |
|
2001
|
|
|
2000
|
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) |
| Current liabilities: |
|
|
|
|
|
|
|
|
| Notes payable |
|
$ |
564 |
|
|
$ |
15,568 |
|
| Current maturities of long–term debt |
|
|
292 |
|
|
|
466 |
|
| Accounts payable |
|
|
42,633 |
|
|
|
43,134 |
|
| Accrued expenses |
|
|
85,740 |
|
|
|
35,594 |
|
| Current portion of long-term deferred income |
|
|
26,124 |
|
|
|
24,725 |
|
| Deferred income |
|
|
114,739 |
|
|
|
112,881 |
|
| |
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
270,092 |
|
|
|
232,368 |
|
| Long-term liabilities: |
|
|
|
|
|
|
|
|
| Long–term debt, less current maturities |
|
|
252,782 |
|
|
|
501,821 |
|
| Long-term deferred income |
|
|
59,933 |
|
|
|
63,923 |
|
| Other liabilities |
|
|
90,362 |
|
|
|
78,133 |
|
| |
|
|
|
|
|
|
|
|
| Total long-term liabilities |
|
|
403,077 |
|
|
|
643,877 |
|
| |
|
|
|
|
|
|
|
|
| Shareholders’ equity: |
|
|
|
|
|
|
|
|
| Common stock (24,546 shares issued and 24,096 shares |
|
|
|
|
|
|
|
|
| outstanding at the end of fiscal 2001, and 24,078 shares |
|
|
|
|
|
|
|
|
| issued and 23,622 shares outstanding at the end of fiscal 2000) |
|
|
24 |
|
|
|
24 |
|
| Capital surplus |
|
|
169,050 |
|
|
|
156,708 |
|
| Notes receivable for stock purchases |
|
|
(1,071 |
) |
|
|
(1,180 |
) |
| Retained earnings (accumulated deficit) |
|
|
(195,851 |
) |
|
|
(213,615 |
) |
| Treasury stock |
|
|
(11,335 |
) |
|
|
(11,493 |
) |
| Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
| Accumulated foreign currency translation adjustment |
|
|
1,001 |
|
|
|
(103 |
) |
| Unrealized loss from derivatives |
|
|
(6,890 |
) |
|
|
— |
|
| Accumulated other comprehensive loss |
|
|
(5,889 |
) |
|
|
(103 |
) |
| |
|
|
|
|
|
|
|
|
| Total shareholders’ equity (deficit) |
|
|
(45,072 |
) |
|
|
(69,659 |
) |
| Total liabilities and shareholders’ equity (deficit) |
|
$ |
628,097 |
|
|
$ |
806,586 |
|
| |
|
|
|
|
|
|
|
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of
these statements.
32
PROQUEST COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the fiscal years ended December 29, 2001, December 30, 2000 and January
1, 2000
(In thousands)
| |
|
2001
|
|
|
2000
|
|
|
1999
|
|
| Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings (loss) from continuing operations before cumulative effect of a change in accounting principle |
|
$ |
12,286 |
|
|
$ |
(13,889 |
) |
|
$ |
15,060 |
|
| |
| Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Equity in loss of affiliate |
|
|
13,374 |
|
|
|
20,848 |
|
|
|
950 |
|
| (Gain) / loss on sales of assets |
|
|
2,312 |
|
|
|
(2,726 |
) |
|
|
(5,152 |
) |
| Depreciation and amortization |
|
|
53,554 |
|
|
|
51,737 |
|
|
|
44,653 |
|
| Deferred taxes |
|
|
(9,132 |
) |
|
|
10,907 |
|
|
|
8,668 |
|
| |
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts receivable |
|
|
(11,882 |
) |
|
|
(10,066 |
) |
|
|
(12,016 |
) |
| Inventory |
|
|
556 |
|
|
|
1,802 |
|
|
|
(1,647 |
) |
| Other assets |
|
|
(10,075 |
) |
|
|
(2,346 |
) |
|
|
210 |
|
| Long-term receivables, net |
|
|
— |
|
|
|
2,881 |
|
|
|
(4,523 |
) |
| Accounts payable |
|
|
(2,085 |
) |
|
|
5,432 |
|
|
|
(3,766 |
) |
| Accrued expenses |
|
|
1,525 |
|
|
|
(139 |
) |
|
|
(6,312 |
) |
| Deferred income and other long-term liabilities |
|
|
(8,394 |
) |
|
|
(6,897 |
) |
|
|
(59 |
) |
| Other, net |
|
|
(16,398 |
) |
|
|
(15,488 |
) |
|
|
(7,043 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash provided by operating activities |
|
|
25,641 |
|
|
|
42,056 |
|
|
|
29,023 |
|
| Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Expenditures for property, plant, equipment and product masters |
|
|
(52,924 |
) |
|
|
(42,623 |
) |
|
|
(35,055 |
) |
| Acquisitions, net of cash acquired |
|
|
(27,803 |
) |
|
|
(9,650 |
) |
|
|
(102,154 |
) |
| Proceeds from asset sales |
|
|
100 |
|
|
|
2,556 |
|
|
|
12,955 |
|
| Proceeds from sales of discontinued operations |
|
|
286,928 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash provided by (used in) investing activities |
|
|
206,301 |
|
|
|
(49,717 |
) |
|
|
(124,254 |
) |
| Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Proceeds from short-term debt |
|
|
5,644 |
|
|
|
14,629 |
|
|
|
34,200 |
|
| Repayment of short-term debt |
|
|
(19,988 |
) |
|
|
(23,141 |
) |
|
|
(11,369 |
) |
| Proceeds from long-term debt |
|
|
43,683 |
|
|
|
37,335 |
|
|
|
108,982 |
|
| Repayment of long-term debt |
|
|
(292,896 |
) |
|
|
(43,747 |
) |
|
|
(48,888 |
) |
| Proceeds from sales of common stock, net |
|
|
11,169 |
|
|
|
688 |
|
|
|
7,602 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash provided by (used in) financing activities |
|
|
(252,388 |
) |
|
|
(14,236 |
) |
|
|
90,527 |
|
| |
| Net cash provided (used) by discontinued operations. |
|
|
12,923 |
|
|
|
28,885 |
|
|
|
(8,027 |
) |
| Effect of exchange rate changes on cash |
|
|
(428 |
) |
|
|
(1,151 |
) |
|
|
(570 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Increase (decrease) in cash and cash equivalents |
|
|
(7,951 |
) |
|
|
5,837 |
|
|
|
(13,301 |
) |
| |
| Cash and cash equivalents, beginning of period |
|
|
10,610 |
|
|
|
4,773 |
|
|
|
18,074 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents, end of period |
|
$ |
2,659 |
|
|
$ |
10,610 |
|
|
$ |
4,773 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to the Consolidated
Financial Statements are an integral part of these statements.
33
PROQUEST COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
for the fiscal years ended
December 29, 2001, December 30, 2000 and January 1, 2000
(Dollars and shares in thousands)
| |
|
Common Stock
|
|
|
Capital Surplus
|
|
Notes Receivable from Stock Purchases
|
|
|
Retained Earnings (Deficit)
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Total
|
|
| |
|
Issued
|
|
Treasury
|
|
|
|
|
|
|
| Balance, at the end of fiscal 1998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Common stock, 23,516 shares; |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| treasury stock, 239 shares) |
|
$ |
24 |
|
$ |
(5,845 |
) |
|
|
140,819 |
|
|
(2,523 |
) |
|
|
(162,684 |
) |
|
(244) |
|
|
(30,453 |
) |
| Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,791 |
|
|
|
|
|
17,791 |
|
| Foreign exchange |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(170) |
|
|
(170 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,621 |
|
| |
| Common stock, net 453 shares |
|
|
|
|
|
|
|
|
|
9,701 |
|
|
|
|
|
|
|
|
|
|
|
|
9,701 |
|
| Tax benefit from stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| exercised |
|
|
|
|
|
|
|
|
|
3,074 |
|
|
|
|
|
|
|
|
|
|
|
|
3,074 |
|
| Notes receivable |
|
|
|
|
|
|
|
|
|
|
|
|
979 |
|
|
|
|
|
|
|
|
|
979 |
|
| Treasury stock, net 98 shares |
|
|
|
|
|
(2,947 |
) |
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
(2,887 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, at the end of fiscal 1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Common stock, 23,969 shares; |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| treasury stock, 337 shares) |
|
|
24 |
|
|
(8,792 |
) |
|
|
153,654 |
|
|
(1,544 |
) |
|
|
(144,893 |
) |
|
(414) |
|
|
(1,965 |
) |
| Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68,722 |
) |
|
|
|
|
(68,722 |
) |
| Foreign exchange translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311 |
|
|
311 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68,411 |
) |
| |
| Common stock, net 109 shares |
|
|
|
|
|
|
|
|
|
2,941 |
|
|
|
|
|
|
|
|
|
|
|
|
2,941 |
|
| Tax benefit from stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| exercised |
|
|
|
|
|
|
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
113 |
|
| Notes receivable |
|
|
|
|
|
|
|
|
|
|
|
|
364 |
|
|
|
|
|
|
|
|
|
364 |
|
| Treasury stock, net 119 shares |
|
|
|
|
|
(2,701 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,701 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, at the end of fiscal 2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Common stock, 24,078 shares; |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| treasury stock, 456 shares) |
|
$ |
24 |
|
|
(11,493 |
) |
|
|
156,708 |
|
|
(1,180 |
) |
|
|
(213,615 |
) |
|
(103) |
|
|
(69,659 |
) |
| Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,764 |
|
|
|
|
|
17,764 |
|
| Foreign exchange translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,104 |
|
|
1,104 |
|
| Unrealized gain (loss) from derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,890) |
|
|
(6,890 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,978 |
|
| |
| Common stock, net 468 shares |
|
|
|
|
|
|
|
|
|
11,169 |
|
|
|
|
|
|
|
|
|
|
|
|
11,169 |
|
| Tax benefit from stock options exercised |
|
|
|
|
|
|
|
|
|
1,173 |
|
|
|
|
|
|
|
|
|
|
|
|
1,173 |
|
| Notes receivable |
|
|
|
|
|
|
|
|
|
|
|
|
109 |
|
|
|
|
|
|
|
|
|
109 |
|
| Treasury stock, net 6 shares |
|
|
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, at the end of fiscal 2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Common stock, 24,546 shares; |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| treasury stock, 450 shares) |
|
$ |
24 |
|
$ |
(11,335 |
) |
|
$ |
169,050 |
|
$ |
(1,071 |
) |
|
$ |
(195,851 |
) |
|
$(5,889) |
|
$ |
(45,072 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of
these statements.
34
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands, except per share data)
Note 1—Significant Accounting Policies
Nature of Operations. ProQuest Company and its subsidiaries (collectively, the “Company”) is a leading global information solutions provider. The Company consists of two business segments, Information
and Learning (I&L), and Publishing Services (PS). Within its I&L segment, ProQuest develops and markets information services and systems that are focused on the needs of its customers in select vertical niches, including libraries of all
kinds (government, college/university, corporate and public). PS provides systems and information products used by automotive, powersports and recreational vehicle dealers.
Basis of Presentation. Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year presentation.
Use of Estimates. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. Subsequent actual results may differ from those estimates.
Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries except where control is temporary.
In December 1999, the Company combined its kindergarten through twelfth grade (“K-12”) Internet business with the K-12 Internet
business from Infonautics, Inc. to form bigchalk.com, inc. (“bigchalk”). At the end of fiscal 1999, the Company owned 69% of the common equity of bigchalk; such control was temporary, as in January 2000, venture capital financing was
raised which lowered the Company’s ownership interest to approximately 45%. Further venture capital financing was raised in December 2000 and February 2001 which lowered the Company’s ownership interest to approximately 38% on a
fully-diluted basis. Accordingly, the Company accounts for its ownership interest in bigchalk using the equity method.
In the
first quarter of 2000, the Company adopted a plan to divest its Mail and Messaging Technologies and Imaging businesses and its financing subsidiary. Accordingly, the operating results of these businesses have been segregated from the Company’s
continuing operations, and are separately reported as discontinued operations in the consolidated financial statements. (See Note 6)
Fiscal Year. The Company’s fiscal year ends on the Saturday nearest to December 31. References to fiscal 2001 are for the 52 weeks ended December 29, 2001, references to fiscal 2000 are for the 52 weeks
ended December 30, 2001, and references to fiscal 1999 are for the 52 weeks ended January 1, 2000.
Revenue
Recognition. The Company derives revenues from licenses of database content, sales of microform subscriptions, service, software, and equipment.
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. In addition to sales of subscription products, I&L also sells products where revenue is
recognized when all material elements of the sale have been realized. These products include microform newspaper and periodical backfiles, research collections, out of print books, dissertation copies, and dissertation publishing.
35
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
The Company periodically reviews its accounts receivable balances and estimates required allowances for doubtful accounts. Allowances for
doubtful accounts at the end of fiscal 2001 and 2000 were $1,353 and $1,693, respectively.
Foreign Currency
Translation. The financial position and results of operations of each of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Revenues and expenses are translated at
average exchange rates prevailing during the respective fiscal periods. Assets and liabilities are translated into U.S. dollars using the exchange rates at the end of the respective fiscal periods. Balance sheet translation adjustments arising from
differences in exchange rates from period to period are reflected as a separate component of shareholders’ equity, and are included in the determination of the Company’s comprehensive income.
Net Earnings (Loss) per Common Share. Basic net earnings (loss) per common share is computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding during the period. Diluted net earnings (loss) per common share is computed by dividing net earnings (loss) 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 used in the calculation of basic
and diluted net earnings (loss) per common share is shown in the table below for the periods indicated:
| |
|
2001
|
|
2000
|
|
1999
|
| Basic |
|
23,805 |
|
23,657 |
|
23,569 |
| Dilutive effect of stock options |
|
272 |
|
— |
|
284 |
| |
|
|
|
|
|
|
| Diluted |
|
24,077 |
|
23,657 |
|
23,853 |
| |
|
|
|
|
|
|
Cash and Cash Equivalents. The Company considers
all highly liquid investments with maturities of three months or less (when purchased) to be cash equivalents. The carrying amount reported in the consolidated balance sheets approximates fair value.
36
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. During the fourth quarter of 2000, the Company changed its method of inventory valuation for the PS
business from the last-in, first-out (“LIFO”) method to the FIFO method as the majority of the inventory items for this business have been continuing to decrease in price. Accordingly, the Company believes that the FIFO method results in a
better measurement of operating results. All previously reported results have been restated to reflect the retroactive application of this accounting change as required by generally accepted accounting principles. The accounting change lowered net
earnings by $105 and $197 for 2000 and 1999, respectively.
Property, Plant, Equipment and Product
Masters. Property, plant, equipment and product masters are recorded at cost. The straight-line method of depreciation is primarily used, except for I&L product masters (which represent the cost to create electronic
and microform master document copies which are subsequently used in the production process to fulfill customers’ information requirements), which are depreciated on the double declining balance method. Estimated lives range from 10 to 40 years
for buildings and building improvements, 3 to 15 years for machinery and equipment and 10 years for product masters.
Goodwill and Other Intangible Assets. Goodwill and other intangible assets are amortized on a straight-line basis over the expected future periods to be benefited, which range from 15 to 40 years. The Company
periodically evaluates the recoverability of the net book value of this intangible asset, particularly in the case of a change in business circumstances or other triggering event, by determining whether the amortization of the asset balance over its
remaining life can be recovered through forecasted future operating cash flows for each operation having a significant goodwill balance. In cases where expected undiscounted future cash flows are less than the net book value, an impairment loss is
recognized equal to the amount by which the net book value exceeds the fair value of the assets. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. Accumulated amortization at
the end of fiscal 2001 and 2000 was $64,905 and $56,853, respectively.
Impairment of Long-Lived
Assets. The Company reviews the carrying value of property, plant, equipment and product masters and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the net book
value of an asset may not be recoverable from the estimated undiscounted future cash flows expected to result from its use and eventual disposition. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value as
estimated by discounted cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost of disposal.
Long-Term Deferred Income. Long-term deferred income represents amounts due from customers in the future that have been monetized by the Company’s previously owned finance subsidiary
(Bell & Howell Financial Services, or BHFS). As part of the sale of MMT, 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. The Company’s obligation related to certain portions of these monetized amounts will be satisfied within the next twelve months; these amounts have been classified as the current portion of long-term deferred income.
Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect for the year in
which those temporary differences are expected to be recovered or settled.
37
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock Option Plan. As permitted by Statement of
Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock Based Compensation”, the Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the
exercise price. Pro forma net income and earnings per share disclosures for employee stock option grants based on the fair value-based method (defined in SFAS No. 123), whereby the fair value of stock-based awards at the date of grant would be
subsequently expensed over the related vesting periods, are included in Note 15.
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, $200,000 of notional amount US dollar interest rate swaps are currently designated as cash flow hedges of the U.S. dollar LIBOR interest rate debt issuances. During fiscal 2001, the Company dedesignated
$150,000 of notional amount swaps due to the sale of discontinued operations.
All derivative contracts that are designated as
cash flow hedges are also 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 $6,258 million (net
of tax) expense as a result of the dedesignation of these cash flow hedges, and is reporting it as a component of the gain on sales of discontinued operations.
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 |
38
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accumulated Other Comprehensive Income
| |
• |
|
Interest rate swaps designated as cash flow hedges |
Interest Expense
| |
• |
|
Interest rate swaps designated as cash flow hedges |
Gain on Sales of Discontinued Operations, net
| |
• |
|
Interest rate swaps dedesignated as cash flow hedges |
Approximately $11,113 of net derivative losses included in other comprehensive income at December 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 fiscal 2001:
| Cumulative effect of adopting SFAS No. 133 as of December 31, 2000 |
|
$ |
(3,277 |
) |
| (Gains)/losses reclassified into net earnings |
|
|
5,760 |
|
| Year-to-date net unrealized loss on derivatives |
|
|
(13,595 |
) |
| Income tax expense related to items of other comprehensive income |
|
|
4,222 |
|
| |
|
|
|
|
| Total, net of tax |
|
$ |
(6,890 |
) |
| |
|
|
|
|
For the year ended December 30, 2000, prior to the adoption of SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” Amounts related to derivative contracts were recorded using the hedge accounting approach, and gains and losses on derivative instruments were included in the basis of
the underlying hedged transaction. The Company did not recognize the fair values of these derivative financial investments or their changes in fair value in its consolidated financial statements.
New Accounting Pronouncements. In accordance with recently issued accounting pronouncements, the Company will be required to comply with certain
changes in accounting rules and regulations.
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 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. The net book value of the
Company’s goodwill and other intangible assets was $231.5 million and $222.3 million for 2001 and 2000, respectively. While management is continuing to assess the impact of these Statements on the Company’s results of operations and
financial position, the adoption of these statements is expected to reduce 2002 annual goodwill amortization expense by approximately $7.7 million. Additionally, the effects of any future impairment, as provided by SFAS No. 142, on the
Company’s consolidated financial position and results of operations are unknown.
In October 2001, the FASB approved
Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). This Statement addresses financial accounting and reporting for the impairment of long-lived assets
and for long-lived assets to be disposed of and supersedes SFAS 121 and APB Opinion No. 30. SFAS 144 is effective for fiscal years beginning after
39
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The Company is still evaluating the effects of any future impairment and disposal of
long-lived assets as provided by SFAS 144.
Note 2—Business Segments
The Company has two reportable business segments, I&L and PS. (Refer to Note 1 to the Consolidated Financial Statements for a description of segment operations.) The Company
evaluates the performance of and allocates resources to each of the segments based on their operating results excluding interest and taxes. The accounting policies for each of the segments are described in the summary of significant accounting
policies in Note 1.
Information concerning the Company’s reportable business segments and operations by geographic area
for fiscal 2001, 2000, and 1999 for its continuing operations is as follows (dollars in millions):
| |
|
2001
|
| |
|
I&L
|
|
PS
|
|
Corp.
|
|
|
Total
|
| Net Sales |
|
$ |
236.0 |
|
$ |
165.6 |
|
— |
|
|
$ |
401.6 |
| Operating Income(1) |
|
|
40.3 |
|
|
40.0 |
|
(11.6 |
) |
|
|
68.7 |
| Capital Expenditures |
|
|
49.0 |
|
|
3.7 |
|
0.2 |
|
|
|
52.9 |
| Depreciation and Amortization(2) |
|
|
45.7 |
|
|
6.7 |
|
0.5 |
|
|
|
52.9 |
| Total Assets |
|
|
428.8 |
|
|
101.8 |
|
97.5 |
|
|
|
628.1 |
| |
|
2000
|
| |
|
I&L
|
|
PS
|
|
Corp.
|
|
|
Total
|
| Net Sales |
|
$ |
220.0 |
|
$ |
154.3 |
|
— |
|
|
$ |
374.3 |
| Operating Income(1) |
|
|
30.3 |
|
|
28.0 |
|
(15.9 |
) |
|
|
42.4 |
| Capital Expenditures |
|
|
39.3 |
|
|
3.2 |
|
0.1 |
|
|
|
42.6 |
| Depreciation and Amortization(2) |
|
|
44.2 |
|
|
6.6 |
|
0.6 |
|
|
|
51.4 |
| Total Assets |
|
|
381.8 |
|
|
101.8 |
|
61.8 |
|
|
|
545.4 |
| |
|
1999
|
| |
|
I&L
|
|
PS
|
|
Corp.
|
|
|
Total
|
| Net Sales |
|
$ |
198.2 |
|
$ |
161.3 |
|
— |
|
|
$ |
359.5 |
| Operating Income(1) |
|
|
23.7 |
|
|
33.3 |
|
(14.8 |
) |
|
|
42.2 |
| Capital Expenditures |
|
|
32.4 |
|
|
2.3 |
|
0.4 |
|
|
|
35.1 |
| Depreciation and Amortization(2) |
|
|
37.7 |
|
|
5.9 |
|
0.6 |
|
|
|
44.2 |
| Total Assets |
|
|
374.5 |
|
|
108.4 |
|
22.4 |
|
|
|
505.3 |
(1) |
|
Operating Income excludes gain /(loss) on sales of assets, restructuring charges, equity in loss of affiliate and cumulative effect of a change in accounting principle.
|
(2) |
|
Excludes amortization/write-off of deferred financing costs. |
40
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| |
|
2001
|
|
2000
|
|
1999
|
| Geographic Area Data |
|
|
|
|
|
|
|
|
|
| Net Sales(3): |
|
|
|
|
|
|
|
|
|
| United States |
|
$ |
310.4 |
|
$ |
293.7 |
|
$ |
290.0 |
| Europe |
|
|
58.5 |
|
|
56.9 |
|
|
48.5 |
| Other |
|
|
32.7 |
|
|
23.7 |
|
|
21.0 |
| |
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
401.6 |
|
$ |
374.3 |
|
$ |
359.5 |
| |
|
|
|
|
|
|
|
|
|
| Total Assets: |
|
|
|
|
|
|
|
|
|
| United States |
|
$ |
549.2 |
|
$ |
465.9 |
|
$ |
423.9 |
| Europe |
|
|
77.5 |
|
|
77.4 |
|
|
77.9 |
| Other |
|
|
1.6 |
|
|
2.1 |
|
|
3.5 |
| |
|
|
|
|
|
|
|
|
|
| Total |
|
|
628.1 |
|
|
545.4 |
|
|
505.3 |
| Discontinued operations |
|
|
0.0 |
|
|
261.2 |
|
|
278.5 |
| |
|
|
|
|
|
|
|
|
|
| Consolidated |
|
$ |
628.1 |
|
$ |
806.6 |
|
$ |
783.8 |
| |
|
|
|
|
|
|
|
|
|
(3) |
|
Revenue is classified according to its country of destination (including exports to such areas). |
Note 3—Acquisitions and Disposal of Assets
In April 2001, the Company
acquired the collegiate copyright and print coursepack service, Campus Custom Publishing (CCP) for $2.3 million. The $3.4 million excess of the consideration given over the estimated fair value of net assets acquired has been recorded as goodwill.
In August 2001, the Company acquired Heritage Quest, the Salt Lake City-based genealogical information company, from Sierra
On-Line, Inc. for $5.5 million. The $3.1 million excess of the consideration given over the estimated fair value of net assets acquired has been recorded as goodwill.
In November 2001, the Company acquired SoftLine Information, the Stamford, Connecticut-based producer of online databases for libraries and education institutions for $10.0 million. The
$12.3 million excess of the consideration given over the estimated fair value of net assets acquired has been recorded as goodwill.
The fiscal 2001 sales of assets included:
| |
|
Proceeds
|
|
Loss on Sale
|
|
| The sale of MotorcycleWorld.com |
|
$ |
100 |
|
$ |
(2,312 |
) |
| |
|
|
|
|
|
|
|
On October 31, 2001, the Company sold certain assets of MotorcycleWorld.com, Inc.
(MCW), including MCW’s various domain names and web site content to Powersports Network, Inc.
41
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The fiscal 2000 sales of assets included:
| |
|
Proceeds
|
|
Gain on Sale
|
| The sale of a portion of the Company’s investment in its affiliate bigchalk |
|
|
1,156 |
|
|
867 |
| The sale of the Company’s investment in an entity acquired by bigchalk in exchange for additional common stock of
bigchalk |
|
|
— |
|
|
489 |
| Additional proceeds related to the sale in 1999 of vacant land adjacent to one of the Company’s manufacturing
operations |
|
|
1,400 |
|
|
1,370 |
| |
|
|
|
|
|
|
| |
|
$ |
2,556 |
|
$ |
2,726 |
| |
|
|
|
|
|
|
The fiscal 1999 sales of assets included:
| |
|
Proceeds
|
|
Gain on Sale
|
| The sale of a portion of the Company’s investment in its affiliate bigchalk |
|
|
3,500 |
|
|
2,626 |
| The sale of vacant land adjacent to one of the Company’s manufacturing operations |
|
|
9,455 |
|
|
2,526 |
| |
|
|
|
|
|
|
| |
|
$ |
12,955 |
|
$ |
5,152 |
| |
|
|
|
|
|
|
Note 4—Restructuring
In December 1999, the Company approved a plan to separate its Mail and Messaging Technologies business, BHFS, and its Imaging business 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. In
connection with the implementation of this plan, the Company recorded a charge in continuing operations of $10,505 in fiscal 1999, of which $8,909 related to restructuring at the corporate headquarters and $1,198 and $400 related to personnel
reductions at PS and I&L, respectively. The Company also recognized an additional charge of $26,260 related to discontinued operations in connection with this restructuring plan.
In fiscal 2000, the Company recorded additional restructuring charges related to the original plan adopted in 1999. In continuing operations, a charge of $5,196 was recognized in 2000.
The Company also recognized additional charges of $7,393 in discontinued operations in 2000.
The plan to separate the
Company’s Mail and Messaging Technologies, BHFS and Imaging businesses included restructuring the Company’s corporate staff. In 1999, a charge of $4,307 was recorded related to the planned severance of 69 corporate staff employees. The
headquarters facility relocation resulted in a charge of $4,600 for costs related to estimated future obligations under a noncancellable lease for the facility.
The personnel reductions at PS affected the areas of micropublishing and various other support functions, and resulted in the planned termination of 51 employees and the recognition of a
severance charge of $1,198. I&L restructured its operation into business units and, as a result, recorded a charge of $400 in connection with the termination of 2 support function employees.
In total, the fiscal 1999 restructuring provided for the separation of 122 employees (114 domestic employees and 8 international employees) of which approximately twenty percent
(24) were management and eighty percent (98) were non-management employees.
42
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In 2000, the Company continued to pursue its plan to divest its non-core businesses
and to focus its resources on its PS and I&L businesses. In 2000, the Company incurred various legal, accounting and consulting fees related to the implementation of the restructuring plan and the separation of the businesses, and recorded a
charge of $1,490. In late 2000, the Company entered into a sublease for its former headquarters facility and, as a result, reduced the accrual for loss on this noncancellable lease by $3,100. This reversal of the accrual is netted against a charge
taken in 2000 by I&L for future costs related to noncancellable computer hardware leases (see further discussion below) in the table detailing the 2000 activity related to restructuring (below).
A charge of $1,159 was recorded at PS related to further consolidation of its microfilm businesses that resulted in the termination of 34 employees in
various support functions. In addition, PS recorded a charge of $474 for the impairment of goodwill related to Microfilm Systems, which the Company acquired in 1998. This company provided microfilm publishing for a single customer. During 2000, PS
determined it would no longer provide microfilm publishing to this customer, and the associated goodwill was deemed to be impaired.
The Company also recorded an additional charge of $279 related to the reorganization of the I&L segment into business units. This charge reflected the costs associated with the planned severance of 33 customer/technology support
employees. I&L also recorded a charge of $4,500 for future costs related to noncancellable computer hardware leases. Such equipment was no longer needed as a result of the consolidation of certain of its computer systems.
The fiscal 2000 restructuring charge provided for the separation of a total of 72 employees (65 domestic employees and 7 international
employees) of which approximately ten percent (7) were management and ninety percent (65) were non-management employees.
During
fiscal 2001, all remaining employees included in the restructuring plan were terminated.
The details of the restructuring
charges are as follows:
| |
|
Balance End of 2000
|
|
2001 Activity
|
|
|
Balance End of 2001
|
| |
|
|
Restruct. Charge
|
|
Utilized
|
|
|
| |
|
|
|
Cash
|
|
|
Noncash(1)
|
|
|
| Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Severance |
|
$ |
1,980 |
|
$ |
— |
|
$ |
(1,980 |
) |
|
$ |
— |
|
|
$ |
— |
| Asset impairment costs |
|
|
— |
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
| Obligations under various noncancellable leases |
|
|
4,293 |
|
|
— |
|
|
(4,293 |
) |
|
|
— |
|
|
|
— |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Continuing Operations |
|
$ |
6,273 |
|
|
— |
|
|
(6,273 |
) |
|
|
— |
|
|
|
— |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Severance |
|
$ |
327 |
|
$ |
— |
|
$ |
(211 |
) |
|
$ |
(116 |
) |
|
$ |
— |
| Asset impairment costs |
|
|
— |
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
| Obligations under various noncancellable leases |
|
|
2,743 |
|
|
— |
|
|
(31 |
) |
|
|
(2,712 |
) |
|
|
— |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Discontinued Operations |
|
|
3,070 |
|
|
— |
|
|
(242 |
) |
|
|
(2,828 |
) |
|
|
— |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Company |
|
$ |
9,343 |
|
|
— |
|
$ |
(6,515 |
) |
|
$ |
(2,828 |
) |
|
$ |
— |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Non-cash charge is to eliminate restructuring reserve at discontinued operations which were sold during fiscal 2001. |
43
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 5—Income Taxes
The earnings from continuing operations before income taxes, equity in loss of affiliate and cumulative effect of a change in accounting principle, on which income taxes were provided in
fiscal 2001, 2000, and 1999 were:
| |
|
2001
|
|
|
2000
|
|
|
1999
|
|
| United States |
|
$ |
43,568 |
|
|
$ |
12,958 |
|
|
$ |
27,498 |
|
| Foreign |
|
|
(2,181 |
) |
|
|
(1,360 |
) |
|
|
(814 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings from continuing operations before income taxes, equity in loss of affiliate and cumulative effect of change in accounting
principle |
|
$ |
41,387 |
|
|
$ |
11,598 |
|
|
$ |
26,684 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes in fiscal 2001, 2000, and 1999 included the
following:
| |
|
2001
|
|
|
2000
|
|
|
1999
|
|
| Current income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
| United States |
|
$ |
10,475 |
|
|
$ |
3,509 |
|
|
$ |
6,912 |
|
| State and local |
|
|
803 |
|
|
|
649 |
|
|
|
1,858 |
|
| Foreign |
|
|
591 |
|
|
|
22 |
|
|
|
217 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Current income tax expense |
|
|
11,869 |
|
|
|
4,180 |
|
|
|
8,987 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
| United States |
|
|
3,622 |
|
|
|
(83 |
) |
|
|
2,431 |
|
| State and local |
|
|
356 |
|
|
|
301 |
|
|
|
(455 |
) |
| Foreign |
|
|
(120 |
) |
|
|
241 |
|
|
|
(289 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred income tax expense |
|
|
3,858 |
|
|
|
459 |
|
|
|
1,687 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Income tax expense |
|
$ |
15,727 |
|
|
$ |
4,639 |
|
|
$ |
10,674 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred income tax expense in fiscal 2001, 2000,
and 1999 were as follows:
| |
|
2001
|
|
|
2000
|
|
|
1999
|
|
| Deferred income tax expense (benefit), exclusive of components listed below |
|
$ |
(3,796 |
) |
|
$ |
(1,626 |
) |
|
$ |
(1,220 |
) |
| Operating loss carryforwards |
|
|
15,178 |
|
|
|
3,683 |
|
|
|
10,523 |
|
| Tax credits |
|
|
(7,524 |
) |
|
|
(1,598 |
) |
|
|
(7,616 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred income tax expense |
|
$ |
3,858 |
|
|
$ |
459 |
|
|
$ |
1,687 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
44
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred income taxes are primarily provided for temporary differences between the
financial reporting bases and the tax bases of the Company’s assets and liabilities. The tax effects of the major temporary differences (for both continuing and discontinued operations) that gave rise to the deferred tax asset (liability) at
the end of fiscal 2001 and 2000 were as follows:
| |
|
2001
|
|
|
2000
|
|
| Deferred tax assets are attributable to: |
|
|
|
|
|
|
|
|
| Accrued expenses |
|
$ |
6,142 |
|
|
$ |
4,878 |
|
| Deferred compensation |
|
|
13,889 |
|
|
|
8,054 |
|
| Postretirement benefits |
|
|
745 |
|
|
|
3,514 |
|
| Accounts receivable |
|
|
391 |
|
|
|
3,441 |
|
| Deferred income |
|
|
12,634 |
|
|
|
1,562 |
|
| Inventory |
|
|
— |
|
|
|
7,158 |
|
| Loss carryforwards |
|
|
49,535 |
|
|
|
8,300 |
|
| Tax credits |
|
|
32,791 |
|
|
|
16,420 |
|
| Other |
|
|
3,662 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| Total gross deferred tax assets |
|
|
119,789 |
|
|
|
53,327 |
|
| Valuation allowance |
|
|
(64,969 |
) |
|
|
(12,480 |
) |
| |
|
|
|
|
|
|
|
|
| Net deferred tax assets |
|
|
54,820 |
|
|
|
40,847 |
|
| |
|
|
|
|
|
|
|
|
| Deferred tax liabilities are attributable to: |
|
|
|
|
|
|
|
|
| Property, plant and equipment |
|
|
(10,593 |
) |
|
|
(9,052 |
) |
| Intangibles |
|
|
(8,946 |
) |
|
|
(14,281 |
) |
| Inventory |
|
|
(26 |
) |
|
|
— |
|
| Undistributed foreign earnings |
|
|
— |
|
|
|
(3,104 |
) |
| Other |
|
|
— |
|
|
|
(4,181 |
) |
| |
|
|
|
|
|
|
|
|
| Total gross deferred tax liabilities |
|
|
(19,565 |
) |
|
|
(30,618 |
) |
| |
|
|
|
|
|
|
|
|
| Net deferred tax asset |
|
$ |
35,255 |
|
|
$ |
10,229 |
|
| |
|
|
|
|
|
|
|
|
The change in the valuation allowance in 2001 related to increases in the
Company’s equity loss of affiliate, net operating losses of certain foreign jurisdictions and a capital loss carryover where the future realization of deferred tax assets is not considered likely. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. As of December
29, 2001, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances. However, the amount of the deferred tax asset considered realizable could be
reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
45
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The differences between the Company’s effective rate for income taxes on the
Company’s continuing operations and the statutory federal income tax rate in fiscal 2001, 2000, and 1999 were as follows:
| |
|
2001
|
|
|
2000
|
|
|
1999
|
|
| Statutory federal income tax rate |
|
35.0 |
% |
|
35.0 |
% |
|
35.0 |
% |
| Increase (reduction) in taxes resulting from: |
|
|
|
|
|
|
|
|
|
| State income taxes, net of federal benefit |
|
2.8 |
|
|
6.9 |
|
|
5.3 |
|
| Foreign tax rate differential |
|
3.0 |
|
|
7.5 |
|
|
.8 |
|
| Amortization/write-off of intangibles |
|
2.0 |
|
|
8.5 |
|
|
2.9 |
|
| Benefit from foreign sales corporation |
|
(2.4 |
) |
|
(8.1 |
) |
|
(10.8 |
) |
| Other |
|
(2.4 |
) |
|
(9.8 |
) |
|
6.8 |
|
| |
|
|
|
|
|
|
|
|
|
| Effective income tax rate |
|
38.0 |
% |
|
40.0 |
% |
|
40.0 |
% |
| |
|
|
|
|
|
|
|
|
|
At the end of fiscal 2001, the foreign net operating loss carryforwards were
$6,306 and expire as follows: $904 in 2002, $3,776 in 2003, $82 in 2006 and $1,544 may be carried forward indefinitely.
In the
United States, the Company’s current tax liability is the greater of its regular tax or alternative minimum tax (“AMT”). To the extent that AMT exceeds regular tax, the Company is entitled to an AMT credit. At the end of fiscal 2001,
the Company has AMT credits of $16,211 that may be carried forward indefinitely and used as credits in future tax returns against regular tax in the event that the regular tax exceeds the AMT.
Income taxes paid, net of refunds, for fiscal 2001, 2000, and 1999 were $2,516, $4,708 and $20,629, respectively.
Note 6—Discontinued Operations
In the first quarter of fiscal 2000, the Company
adopted a plan to divest its Mail and Messaging Technologies (MMT) business in both the North American and international markets, BHFS, and the Imaging business. 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 includes an allocation of the Company’s interest expense based on average asset
basis. The Consolidated Balance Sheets separately reflect the net assets of these businesses as a non-current asset.
Results
from discontinued operations are shown in the tables below for the fiscal years indicated:
| |
|
Fifty-Two Weeks Ended December 29, 2001
|
|
| |
|
MMT NA & BHFS
|
|
Imaging
|
|
MMT Int’l
|
|
|
Total Disc. Ops.
|
|
| Net sales |
|
$ |
259,618 |
|
$ |
10,924 |
|
$ |
29,542 |
|
|
$ |
300,084 |
|
| Earnings (loss) before restructuring charge, interest and income taxes |
|
|
12,993 |
|
|
1,133 |
|
|
(893 |
) |
|
|
13,233 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings (loss) before interest and income taxes |
|
$ |
12,993 |
|
$ |
1,133 |
|
$ |
(893 |
) |
|
$ |
13,233 |
|
| Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
(8,391 |
) |
| Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
(1,840 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
$ |
3,002 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| |
|
Fifty-Two Weeks Ended December 30, 2000
|
|
| |
|
MMT NA & BHFS
|
|
|
Imaging
|
|
|
MMT Int’l
|
|
|
Total Disc. Ops.
|
|
| Net sales |
|
$ |
358,597 |
|
|
$ |
134,003 |
|
|
$ |
83,518 |
|
|
$ |
576,118 |
|
| Earnings before restructuring charge, interest and income taxes |
|
|
20,046 |
|
|
|
16,611 |
|
|
|
664 |
|
|
|
37,321 |
|
| Restructuring charge |
|
|
(1,879 |
) |
|
|
(2,347 |
) |
|
|
(3,168 |
) |
|
|
(7,394 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings (loss) before interest and income taxes |
|
$ |
18,167 |
|
|
$ |
14,264 |
|
|
$ |
(2,504 |
) |
|
$ |
29,927 |
|
| Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,479 |
) |
| Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,979 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,469 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fifty-Two Weeks Ended January 1, 2000
|
|
| |
|
MMT NA & BHFS
|
|
|
Imaging
|
|
|
MMT Int’l
|
|
|
Total Disc. Ops.
|
|
| Net sales |
|
$ |
350,416 |
|
|
$ |
173,987 |
|
|
$ |
105,491 |
|
|
$ |
629,894 |
|
| Earnings before restructuring charge, interest and income taxes |
|
|
22,534 |
|
|
|
20,701 |
|
|
|
8,521 |
|
|
|
51,756 |
|
| Restructuring charge |
|
|
(8,581 |
) |
|
|
(17,179 |
) |
|
|
(500 |
) |
|
|
(26,260 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings before interest and income taxes |
|
$ |
13,953 |
|
|
$ |
3,522 |
|
|
|
8,021 |
|
|
$ |
25,496 |
|
| Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,581 |
) |
| Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,184 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,731 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In January 2000, the Company announced it would divest its disparate lines of
business, namely the MMT, BHFS and the Imaging businesses. While the Company’s original plan was to establish and operate the MMT, BHFS and Imaging businesses as a single separate company, adverse changes in the credit and equity markets in the
first half of fiscal 2000 caused management to revise the plan. The revised plan was to sell these businesses either together or separately, and to use the proceeds to reduce debt. In February 2001, the Company sold its Imaging business to Kodak for
$135,000. In June 2001, the Company sold a majority of MMT’s foreign operations to Pitney Bowes for $51,000. In September 2001, the Company sold its North American MMT business and BHFS to Glencoe Capital for $145,000 less amounts retained by
the buyer for proposed working capital adjustments. Included in the proceeds from Glencoe Capital is a seller-financing note in the amount of $21,750 million. This note has an 8½ year term, with an initial interest rate of 7.5%. Certain
disincentives exist if the note is not paid off in 42 months, including warrants representing 3.5% of the new entity which detach after 42 months. The Company has assigned no value to these warrants, as the likelihood of them detaching is low.
Each of the sales agreements are subject to working capital adjustments. The Company is currently working through the working
capital adjustments with each of the buyers. The Company believes it has adequately reserved for all anticipated working capital adjustments as of December 29, 2001.
Further, gains or losses resulted from the sale of each discontinued business, and were derived as follows:
| |
|
Imaging
|
|
|
MMT NA & BHFS
|
|
|
MMT International
|
|
|
Total
|
|
| Purchase price |
|
$ |
135.0 |
|
|
$ |
145.0 |
|
|
$ |
51.0 |
|
|
$ |
331.0 |
|
| Net assets, reserves, and expenses |
|
|
(62.4 |
) |
|
|
(213.6 |
) |
|
|
(51.0 |
) |
|
|
(327.0 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gain/(loss) on sale |
|
$ |
72.6 |
|
|
$ |
(68.6 |
) |
|
$ |
— |
|
|
$ |
4.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 7—Cumulative Effect of a Change in Accounting Principle
In December 1999, the Securities and Exchange Commission (“SEC”) 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 the I&L business, and from electronic parts catalog agreements in
the PS business.
Consistent with the SEC guidelines contained in SAB 101, beginning in fiscal 2000, revenue for new on-line
subscriptions at I&L is recognized equally throughout the initial subscription period, with appropriate cost deferral. Previously, such revenue was recognized during the initial subscription period in proportion to costs incurred, in order to
yield a constant gross profit percentage throughout the subscription period.
Under the new method of revenue recognition at PS,
all electronic parts catalog content revenue is recognized over the term of the agreement using the straight-line method. Previously, the Company recognized revenue related to the content element of these agreements primarily upon delivery of the
product to the customer, with a portion deferred and recognized on the straight-line basis over the initial agreement period. A liability of approximately $88,600 as of December 29, 2000 represents the amount due from customers in the future that
had been monetized by the Company’s finance subsidiary prior to the revenue recognition change.
The cumulative effect of
adopting these changes in accounting for revenue are reported as a cumulative effect of a change in accounting principle of $65,300 (net of a tax benefit of $38,500) as of the beginning of fiscal 2000. The effect of the changes in fiscal 2001 and
2000 was to reduce earnings from continuing operations by approximately $4,900 (or $0.20 per diluted share) and $8,000 (or $0.34 per diluted share), respectively. The pro-forma amounts shown below have been adjusted for the effect of retroactive
application of the new revenue recognition methods and the related income taxes:
| |
|
1999
|
| Earnings from continuing operations |
|
$ |
6,388 |
| Net earnings |
|
$ |
9,119 |
| |
| Net earnings per common share: |
|
|
|
| Basic: |
|
|
|
| Earnings from continuing operations |
|
$ |
0.27 |
| Net earnings per common share |
|
$ |
0.39 |
| Diluted: |
|
|
|
| Earnings from continuing operations |
|
$ |
0.27 |
| Net earnings per common share |
|
$ |
0.38 |
As a result of the changes in the methods of accounting for revenue,
approximately $114,800 in revenue recognized in fiscal 1999 and prior years was reversed and included in the cumulative effect adjustment determined as of the beginning of fiscal 2000. Of this amount, $31.7 million and $44.3 million was recognized
in 2001 and 2000, respectively and $38.8 million will be recognized in 2002 and future years.
48
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 8—Other Current Assets
Other current assets at the end of fiscal 2001 and 2000 consisted of the following:
| |
|
2001
|
|
2000
|
| Short-term deferred tax asset |
|
$ |
19,167 |
|
$ |
17,039 |
| Prepaid royalties |
|
|
6,614 |
|
|
6,175 |
| Commissions |
|
|
2,385 |
|
|
998 |
| Other |
|
|
5,117 |
|
|
5,899 |
| |
|
|
|
|
|
|
| Total |
|
$ |
33,283 |
|
$ |
30,111 |
| |
|
|
|
|
|
|
Note 9—Other Assets
Other assets at the end of fiscal 2001 and 2000 consisted of the following:
| |
|
2001
|
|
2000
|
| Licenses |
|
$ |
10,939 |
|
$ |
1,811 |
| Purchased/developed software |
|
|
33,995 |
|
|
27,490 |
| Long-term deferred tax asset |
|
|
35,653 |
|
|
23,808 |
| Long-term commissions |
|
|
5,277 |
|
|
6,106 |
| Investment in bigchalk |
|
|
— |
|
|
3,374 |
| Other |
|
|
3,362 |
|
|
4,378 |
| |
|
|
|
|
|
|
| Total |
|
$ |
89,226 |
|
$ |
66,967 |
| |
|
|
|
|
|
|
Included in amortization expense is software amortization of $9,200, $9,137 and
$5,686 for the years 2001, 2000, and 1999, respectively.
Note 10—Accrued Expenses
Accrued expenses at the end of fiscal 2001 and 2000 consisted of the following:
| |
|
2001
|
|
2000
|
| Salaries and wages |
|
$ |
18,105 |
|
$ |
17,140 |
| Profit sharing |
|
|
2,954 |
|
|
2,971 |
| Reserve for buyer’s note and business sold |
|
|
26,750 |
|
|
— |
| Accrued income taxes |
|
|
11,365 |
|
|
4,091 |
| Other |
|
|
26,566 |
|
|
11,392 |
| |
|
|
|
|
|
|
| Total |
|
$ |
85,740 |
|
$ |
35,594 |
| |
|
|
|
|
|
|
49
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 11—Debt and Lines of Credit
Debt at the end of fiscal 2001 and 2000 consisted of the following:
| |
|
2001
|
|
2000
|
| Notes payable |
|
$ |
564 |
|
$ |
15,568 |
| |
|
|
|
|
|
|
| Long-term debt: |
|
|
|
|
|
|
| Revolving credit agreement |
|
$ |
252,700 |
|
$ |
497,600 |
| Other long-term debt |
|
|
374 |
|
|
4,687 |
| |
|
|
|
|
|
|
| Long-term debt |
|
253,074 |
|
502,287 |
| Less: current maturities |
|
|
292 |
|
|
466 |
| |
|
|
|
|
|
|
| Long-term debt, less current maturities |
|
$ |
252,782 |
|
$ |
501,821 |
| |
|
|
|
|
|
|
The weighted average interest rate on short-term borrowings at the end of fiscal
2001 and 2000 was 5.75% and 7.76%, respectively.
Under the Company’s revolving credit agreement (“Credit
Agreement”), the maximum amount available is currently $325,000. The initial $600,000 credit limit was reduced by $275,000 subsequent to the closing of the sale of the Company’s discontinued operations. The final maturity date of the
Credit Agreement is December 31, 2003, with no principal payments due until December 31, 2002, at which time the maximum amount of the credit facility is reduced by $50,000. The interest rate on borrowings under the Credit Agreement is determined at
the time of borrowing, and is based upon the Company’s leverage ratio. The interest rate in effect as of December 29, 2001 was (at the Company’s option), either LIBOR + 2.00% ($235,000 outstanding), or the prime rate + 1.00% ($17,700
outstanding at December 24, 2001). The Company utilizes swaps to hedge its exposure to interest rate risk on debt outstanding.
The Credit Agreement requires compliance with leverage, fixed charge and net worth covenants. The Company and its domestic operating subsidiaries are jointly and severally liable as guarantors under the Credit Agreement. The Credit
Agreement contains certain restrictions on the payment of dividends on and repurchases of the Company’s common stock.
A
portion of the Company’s availability under its Credit Agreement has been utilized to issue letters of credit to support the Company’s various insurance coverages. At December 29, 2001, the total of the face amounts of the outstanding
letters of credit was $2,929. The letters of credit renew either annually or automatically with the face amount adjusted based on the underlying insurance requirement. At the end of fiscal 2001, the Company had $69,300 of additional credit available
under the Credit Agreement.
For the five years subsequent to 2001, annual maturities of long–term debt are:
2002—$292; 2003—$252,781; 2004—$1, 2005—$0, and 2006—$0.
Interest paid for continuing and discontinued
operations in fiscal 2001, 2000, and 1999 was $49,053, $54,074, and $48,007, respectively.
50
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 12—Leases
The Company leases certain facilities and equipment for production, selling and administrative purposes. Future minimum rental payments required under long-term noncancelable operating
leases at the end of fiscal 2001 were as follows:
| 2002 |
|
$ |
13,297 |
| 2003 |
|
10,482 |
| 2004 |
|
|
9,258 |
| 2005 |
|
|
4,467 |
| 2006 |
|
|
3,388 |
| Subsequent to 2006 |
|
|
4,478 |
| |
|
|
|
| Total |
|
$ |
45,370 |
| |
|
|
|
Total rental expenses for fiscal 2001, 2000, and 1999 were $16,714, $21,798, and
$17,887, respectively.
Note 13—Profit-Sharing, Pension, and Other Postretirement Benefit Plans
Eligible employees of the Company’s domestic and Canadian operations who elect to do so participate in defined contribution profit–sharing
retirement plans. The amounts charged to earnings for fiscal 2001, 2000, and 1999 were $3,121, $8,114, and $8,076, respectively.
The Company also has defined benefit pension plans covering certain domestic and most foreign employees. The benefits are primarily based on years of service and/or compensation during the years immediately preceding retirement. The Company
funds its foreign plans based on local statutes and funds its domestic plans in amounts that fulfill the funding requirements of the Employee Retirement Income Security Act of 1974. Plan assets consist principally of common stocks, fixed income
securities and cash equivalents.
In addition, the Company has contributory and non-contributory postretirement medical benefit
plans and a non-contributory postretirement life insurance benefit plan covering certain domestic employees. All of these other postretirement benefit plans are unfunded.
The net cost (income) of pension and other postretirement benefit plans for fiscal 2001, 2000, and 1999 was as follows:
| |
|
|
|
| |
|
Pension Benefits
|
|
|
Other Postretirement Benefits
|
| |
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
2001
|
|
2000
|
|
1999
|
| Service cost |
|
$ |
1,491 |
|
|
$ |
3,217 |
|
|
$ |
3,200 |
|
|
$ |
39 |
|
$ |
243 |
|
$ |
262 |
| Interest cost |
|
|
4,305 |
|
|
|
6,009 |
|
|
|
5,738 |
|
|
|
137 |
|
|
1,301 |
|
|
1,148 |
| Expected return on plan assets |
|
|
(4,306 |
) |
|
|
(8,829 |
) |
|
|
(8,000 |
) |
|
|
— |
|
|
— |
|
|
— |
| Amortization of prior service cost |
|
|
257 |
|
|
|
222 |
|
|
|
299 |
|
|
|
— |
|
|
— |
|
|
— |
| Recognized net actuarial (gain)/loss |
|
|
82 |
|
|
|
(1,196 |
) |
|
|
(118 |
) |
|
|
26 |
|
|
392 |
|
|
461 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net pension and other postretirement benefit cost (income) |
|
$ |
1,829 |
|
|
$ |
(577 |
) |
|
$ |
1,119 |
|
|
$ |
202 |
|
$ |
1,936 |
|
$ |
1,871 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The funded status of pension and other postretirement benefit plans at the end of
fiscal 2001 and 2000 was as follows:
| |
|
Pension Benefits
|
|
|
Other Postretirement Benefits
|
|
| |
|
2001
|
|
|
2000
|
|
|
2001
|
|
|
2000
|
|
| Change in Benefit Obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Benefit obligation, beginning of year |
|
$ |
95,626 |
|
|
$ |
87,474 |
|
|
$ |
16,624 |
|
|
$ |
14,827 |
|
| Service cost |
|
|
1,491 |
|
|
|
3,217 |
|
|
|
39 |
|
|
|
243 |
|
| Interest cost |
|
|
4,305 |
|
|
|
6,009 |
|
|
|
137 |
|
|
|
1,301 |
|
| Participant contributions |
|
|
421 |
|
|
|
643 |
|
|
|
— |
|
|
|
193 |
|
| Effect of sold businesses(1) |
|
|
(25,670 |
) |
|
|
(371 |
) |
|
|
(16,152 |
) |
|
|
— |
|
| Actuarial (gain)/loss |
|
|
(4,094 |
) |
|
|
2,540 |
|
|
|
1,810 |
|
|
|
1,353 |
|
| Benefits paid |
|
|
(2,721 |
) |
|
|
(3,886 |
) |
|
|
(310 |
) |
|
|
(1,293 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Benefit obligation, end of year |
|
$ |
69,358 |
|
|
$ |
95,626 |
|
|
$ |
2,148 |
|
|
$ |
16,624 |
|
| |
| Change in Plan Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair value, beginning of year |
|
$ |
88,323 |
|
|
$ |
95,536 |
|
|
$ |
— |
|
|
$ |
— |
|
| Actual return on plan assets (loss) |
|
|
(6,501 |
) |
|
|
(6,105 |
) |
|
|
— |
|
|
|
— |
|
| Participant contributions |
|
|
421 |
|
|
|
643 |
|
|
|
— |
|
|
|
193 |
|
| Effect of sold businesses |
|
|
(36,185 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Company contributions |
|
|
2,128 |
|
|
|
2,136 |
|
|
|
310 |
|
|
|
1,100 |
|
| Benefits paid |
|
|
(2,721 |
) |
|
|
(3,886 |
) |
|
|
(310 |
) |
|
|
(1,293 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair value, end of year |
|
$ |
45,465 |
|
|
$ |
88,324 |
|
|
$ |
- |
|
|
$ |
- |
|
| |
| Funded / (unfunded) status |
|
$ |
(23,878 |
) |
|
$ |
(7,302 |
) |
|
$ |
(2,148 |
) |
|
$ |
(16,624 |
) |
| Unrecognized net actuarial (gain)/loss |
|
|
8,298 |
|
|
|
4,083 |
|
|
|
— |
|
|
|
6,591 |
|
| Unrecognized prior service cost |
|
|
561 |
|
|
|
819 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Prepaid (accrued) benefit cost |
|
$ |
(15,019 |
) |
|
$ |
(2,400 |
) |
|
$ |
(2,148 |
) |
|
$ |
(10,033 |
) |
| |
| Amounts Recognized in the Consolidated Balance Sheets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Prepaid benefit cost |
|
$ |
4,537 |
|
|
$ |
16,307 |
|
|
$ |
— |
|
|
$ |
— |
|
| Accrued benefit liability |
|
|
(19,556 |
) |
|
|
(18,707 |
) |
|
|
(2,148 |
) |
|
|
(10,033 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net amount recognized |
|
$ |
(15,019 |
) |
|
$ |
(2,400 |
) |
|
$ |
(2,148 |
) |
|
$ |
(10,033 |
) |
| |
| Weighted Average Assumptions as of End of Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Discount rate |
|
|
6.35 |
% |
|
|
6.75 |
% |
|
|
7.25 |
% |
|
|
8.25 |
% |
| Expected return on plan assets |
|
|
8.50 |
% |
|
|
9.50 |
% |
|
|
— |
|
|
|
— |
|
| Rate of compensation increase |
|
|
4.28 |
% |
|
|
4.50 |
% |
|
|
— |
|
|
|
— |
|
| Rate of healthcare benefit cost increase(2) |
|
|
— |
|
|
|
— |
|
|
|
10.00 |
% |
|
|
4.50 |
% |
(1) |
|
The Mail and Messaging Technologies pension plan was transferred to the buyer at the date of sale. |
(2) |
|
The assumed rate of healthcare benefit cost increase remains at 10.00% through 2002, then decreases to 5.00% over ten years, by one-half percent each year.
|
For the Company’s unfunded supplemental pension plans, the projected benefit obligation and accumulated benefit
obligation at the end of fiscal 2001 and 2000 were as follows:
| |
|
2001
|
|
2000
|
| Projected benefit obligation |
|
$ |
19,571 |
|
$ |
22,508 |
| Accumulated benefit obligation |
|
|
19,556 |
|
|
19,505 |
52
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Assumed future health care cost trend rates have a significant effect on
postretirement medical benefit costs. A one percentage point change in the assumed health care cost trend rates would have the following effects:
| 1% Increase |
|
|
|
| Benefit obligation, end of fiscal 2001 |
|
$ |
119 |
|
| Net postretirement benefit cost for fiscal 2001 |
|
$ |
15 |
|
| |
| 1% Decrease |
|
|
|
| Benefit obligation, end of fiscal 2001 |
|
$ |
(113 |
) |
| Net postretirement benefit cost for fiscal 2001 |
|
$ |
(13 |
) |
| |
| 1% Increase |
|
|
|
| Benefit obligation, end of fiscal 2000 |
|
$ |
1,325 |
|
| Net postretirement benefit cost for fiscal 2000 |
|
$ |
139 |
|
| |
| 1% Decrease |
|
|
|
| Benefit obligation, end of fiscal 2000 |
|
$ |
(1,227 |
) |
| Net postretirement benefit cost for fiscal 2000 |
|
$ |
(127 |
) |
Note 14—Common Stock
The Company has 50,000 authorized shares of common stock, ($.001 par value per share), 24,546 shares issued and 24,096 outstanding as of December 29, 2001, and 24,078 shares issued and
23,622 shares outstanding as of December 30, 2000. The Company’s Credit Agreement contains certain restrictions on the payment of dividends on and repurchases of its common stock (see Note 9).
Note 15—Stock Compensation Plans
Stock Option Plan
In fiscal 1995, the Company adopted the 1995 Stock Option Plan (the “Option Plan”), under which 2,160 shares of
common stock were reserved for issuance. In fiscal 1998, the Company increased the shares reserved for issuance under the Option Plan to 3,660. The Option Plan is administered by the Compensation Committee of the Board of Directors which has
authority to determine which officers and key employees of the Company will be granted options. All options are granted at not less than the fair market value on the date of the grant.
Additionally, concurrent with the initial public equity offering, the Company granted options for 1,115 shares to certain senior executives (the “Senior Executive Grantees”),
with a series of six option exercise prices (the first of which equaled the initial public equity offering price, with each subsequent exercise price set at 120% of the preceding exercise price). The term for these options was six years, with the
options vesting in installments commencing after year three. In fiscal 1999, the unvested options set to expire in May 2000, were extended through May 2005. In fiscal 1999, options for 100 shares were granted to one of the Senior Executive Grantees,
which have a six-year term and which vest after three years. In fiscal 2001, options for 406,250 shares were granted to one of the Senior Executive Grantees, which have a ten year term and vest after seven years, however, some or all of these
options may vest after three years if certain stock price targets are exceeded.
Options may be granted to other officers and
key employees of the Company (the “Key Executive Grantees”), selected by the Compensation Committee. At the end of fiscal 2001, the Company had options outstanding for 1,124 shares to the Key Executive Grantees. The term for these options
is ten years, vesting in equal annual increments over either a three-year or a five-year period.
53
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Per the provisions of SFAS No. 123, the Company has elected to continue to apply APB Opinion No. 25 and related
interpretations in accounting for the Option Plan, and accordingly, no compensation cost has been recognized. Had compensation cost for the Option Plan been determined based on the fair value of options granted (consistent with SFAS No. 123), the
Company’s net income (loss) and earnings (loss) per share would have been the pro forma amounts indicated below:
| |
|
2001
|
|
2000
|
|
|
1999
|
| Net earnings (loss): |
|
|
|
|
|
|
|
|
|
|
| As reported |
|
$ |
17,764 |
|
$ |
(68,722 |
) |
|
$ |
17,791 |
| Pro forma |
|
|
13,836 |
|
|
(71,740 |
) |
|
|
15,117 |
| |
|
|
|
|
|
|
|
|
|
|
| Basic earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
| As reported |
|
$ |
0.75 |
|
$ |
(2.91 |
) |
|
$ |
0.75 |
| Pro forma |
|
|
0.58 |
|
|
(3.03 |
) |
|
|
0.64 |
| |
|
|
|
|
|
|
|
|
|
|
| Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
| As reported |
|
$ |
0.73 |
|
$ |
(2.91 |
) |
|
$ |
0.75 |
| Pro forma |
|
|
0.58 |
|
|
(3.03 |
) |
|
|
0.64 |
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: volatility of 41.03%; risk free interest rate of 4.86%; expected lives of 5 years; and no dividend yield.
54
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A summary of the stock option transactions for fiscal 1999, 2000 and 2001 is as
follows:
| |
|
Senior Executive Grantees
|
|
Key Executive Grantees
|
| |
|
Shares (000s)
|
|
|
Weighted-Average Exercise Price
|
|
Shares (000s)
|
|
|
Weighted-Average Exercise Price
|
| Balance at the end of fiscal 1998 |
|
|
1,365 |
|
|
$ |
27.22 |
|
|
729 |
|
|
$ |
25.55 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1999: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Granted |
|
|
382 |
|
|
|
34.58 |
|
|
355 |
|
|
|
32.80 |
| Exercised |
|
|
(318 |
) |
|
|
19.73 |
|
|
(114 |
) |
|
|
24.21 |
| Forfeited/Cancelled |
|
|
(262 |
) |
|
|
35.25 |
|
|
(56 |
) |
|
|
26.89 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options outstanding at the end of fiscal 1999 |
|
|
1,167 |
|
|
|
29.87 |
|
|
914 |
|
|
$ |
28.45 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options exercisable at the end of fiscal 1999 |
|
|
470 |
|
|
$ |
28.06 |
|
|
196 |
|
|
$ |
25.43 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average fair value of options granted during fiscal 1999 |
|
$ |
7.43 |
|
|
|
|
|
$ |
10.17 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2000: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Granted |
|
|
— |
|
|
|
— |
|
|
805 |
|
|
|
22.79 |
| Exercised |
|
|
— |
|
|
|
— |
|
|
(91 |
) |
|
|
16.38 |
| Forfeited/Cancelled |
|
|
— |
|
|
|
— |
|
|
(540 |
) |
|
|
18.29 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options outstanding at the end of fiscal 2000 |
|
|
1,167 |
|
|
|
29.87 |
|
|
1,088 |
|
|
|
23.91 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options exercisable at the end of fiscal 2000 |
|
|
801 |
|
|
$ |
30.33 |
|
|
227 |
|
|
$ |
26.39 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average fair value of options granted during fiscal 2000 |
|
$ |
— |
|
|
|
|
|
$ |
7.07 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2001: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Granted |
|
|
406 |
|
|
|
25.26 |
|
|
398 |
|
|
|
24.15 |
| Exercised |
|
|
(182 |
) |
|
|
20.39 |
|
|
(269 |
) |
|
|
24.46 |
| Forfeited/Cancelled |
|
|
(353 |
) |
|
|
32.91 |
|
|
(93 |
) |
|
|
28.13 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options outstanding at the end of fiscal 2001 |
|
|
1,038 |
|
|
|
25.65 |
|
|
1,124 |
|
|
|
23.21 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options exercisable at the end of fiscal 2001 |
|
|
508 |
|
|
$ |
31.19 |
|
|
317 |
|
|
$ |
24.12 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average fair value of options granted during fiscal 2001 |
|
$ |
4.06 |
|
|
|
|
|
$ |
8.86 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table provides additional information with respect to stock options
outstanding at the end of fiscal 2001:
| |
|
Options Outstanding
|
|
Options Exercisable
|
| Range of Exercise Price
|
|
Number Outstanding
|
|
Weighted Average Remaining Contractual Life(Years)
|
|
Weighted Average Exercise Price
|
|
Number Exercisable
|
|
Weighted Average Exercise Price
|
| $15.01—$20.00 |
|
921 |
|
8.9 |
|
$ |
18.18 |
|
170 |
|
$ |
19.37 |
| 20.01—$25.00 |
|
353 |
|
9.3 |
|
|
22.88 |
|
29 |
|
|
22.62 |
| 25.01—$30.00 |
|
328 |
|
3.4 |
|
|
27.02 |
|
278 |
|
|
26.90 |
| 30.01—$35.00 |
|
424 |
|
5.2 |
|
|
32.57 |
|
213 |
|
|
32.27 |
| 35.01—$40.00 |
|
136 |
|
3.5 |
|
|
38.43 |
|
136 |
|
|
38.43 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2,162 |
|
6.5 |
|
$ |
24.10 |
|
826 |
|
$ |
28.47 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan
In fiscal 1996, the Company’s Board of Directors adopted the Associate Stock Purchase Plan (the “ASPP”), whereby employees are afforded the opportunity to purchase shares
in the Company, by authorizing the sale of up to 500 shares of common stock. The purchase price of the shares is 95% of the lower of the closing market price at the beginning or end of each quarter. Under SFAS No. 123, the ASPP is a non-compensatory
plan.
Note 16—Foreign Currency Transactions
The Company has entered into various contracts to buy or sell foreign currencies. The contracts have maturity dates extending through February 2002, and are for an aggregate amount of $67,300 (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.
Net foreign currency transaction gains (losses) for fiscal 2001, 2000, and 1999 of $(1,121), $193 and $184, respectively, have been included
in the earnings of the respective periods.
Note 17—Contingent Liabilities
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.
A portion of the Company’s availability under its Credit
Agreement has been utilized to issue letters of credit to support the Company’s various insurance coverages. At December 29, 2001, the total of the face amounts of the outstanding letters of credit was $2,929. The letters of credit renew either
annually or automatically with the face amount adjusted based on the underlying insurance requirement.
Note 18—Related Party Transactions
The Company has made loans (the balance of which totaled $1,070 at the end of fiscal 2001) to certain key current and
former executives in connection with their purchases of the Company’s common stock. Pursuant to the terms of such loans, the shares acquired are pledged as security. The following officers had loans outstanding
56
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
at the end of fiscal 2001: Joseph Reynolds ($305) and Todd Buchardt ($170). Each loan is evidenced by an installment note maturing five years from the date of the note and bearing interest at the
Company’s marginal rate of borrowing. Interest and principal may be deferred until the maturity date.
The Company has made
loans to certain key employees related to relocation expenses. As of the end of fiscal year 2001, Mark Trinske had an interest-free loan from the Company in the amount of $176. Mr. Trinske’s loan is due and payable on March 31, 2002.
Note 19—Investments in Affiliates
In December 1999, the Company combined its K-12 Internet business with the K-12 Internet business of Infonautics, Inc., to form bigchalk. bigchalk develops and markets products and services for research, curriculum
integration, assessment, peer collaboration, professional development, on-line community, and e-commerce for teachers, students, parents, librarians and school administrators in the K-12 educational community. The Company’s equity in
bigchalk’s loss equaled $13,374 in 2001. As a result of both venture capital financing and the exchange of the Company’s investment in an entity acquired by bigchalk for additional shares in bigchalk, the Company owns approximately 38.0%
of bigchalk on a fully diluted basis. The carrying value of this investment was $0 at the end of fiscal 2001. The Company accounts for its investment in bigchalk on the equity method.
Summarized financial information of bigchalk for fiscal 2001 and 2000 is as follows:
Condensed Statement of Operations:
| |
|
2001
|
|
|
2000
|
|
| Net sales |
|
$ |
28,152 |
|
|
$ |
33,185 |
|
| Gross profit |
|
|
18,494 |
|
|
|
21,068 |
|
| Loss before income taxes |
|
|
(71,292 |
) |
|
|
(49,245 |
) |
| Net loss |
|
|
(70,574 |
) |
|
|
(45,966 |
) |
Condensed Statement of Financial Condition:
| |
|
2001
|
|
|
2000
|
|
| Current assets |
|
$ |
28,985 |
|
|
$ |
32,347 |
|
| Non-current assets |
|
|
18,852 |
|
|
|
70,193 |
|
| |
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
47,837 |
|
|
$ |
102,540 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Current liabilities |
|
$ |
20,592 |
|
|
$ |
26,343 |
|
| Non-current liabilities |
|
|
117,344 |
|
|
|
79,068 |
|
| Stockholders’ deficit |
|
|
(90,099 |
) |
|
|
(2,871 |
) |
| |
|
|
|
|
|
|
|
|
| Total liabilities and stockholders’ deficit |
|
$ |
47,837 |
|
|
$ |
102,540 |
|
| |
|
|
|
|
|
|
|
|
57
PROQUEST COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 18—Interim Financial Information (unaudited)
The following table presents the Company’s quarterly results of continuing operations for fiscal 2001 and fiscal 2000:
| |
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
Year
|
|
| 2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Sales |
|
$ |
95,853 |
|
|
$ |
100,743 |
|
|
$ |
98,617 |
|
|
$ |
106,415 |
|
|
$ |
401,628 |
|
| Gross profit |
|
|
48,713 |
|
|
|
55,188 |
|
|
|
54,063 |
|
|
|
56,701 |
|
|
|
214,665 |
|
| Gain /(loss) on sales of assets(1) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,312 |
) |
|
|
(2,312 |
) |
| Equity in loss of affiliate |
|
|
(5,471 |
) |
|
|
(6,101 |
) |
|
|
(1,802 |
) |
|
|
— |
|
|
|
(13,374 |
) |
| Earnings (loss) from continuing operations before
cumulative effect of a change in accounting principle |
|
$ |
(410 |
) |
|
$ |
219 |
|
|
$ |
4,079 |
|
|
$ |
8,398 |
|
|
$ |
12,286 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings per basic share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings (loss) from continuing operations before cumulative effect of a change in accounting principle |
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
|
$ |
0.17 |
|
|
$ |
0.35 |
|
|
$ |
0.52 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings per diluted share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings (loss) from continuing operations before cumulative effect of a change in accounting principle |
|
$ |
(0.02 |
) |
|
$ |
0.01 |
|
|
$ |
0.17 |
|
|
$ |
0.35 |
|
|
$ |
0.51 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
Year
|
|
| 2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Sales |
|
$ |
88,627 |
|
|
$ |
94,257 |
|
|
$ |
91,671 |
|
|
$ |
99,746 |
|
|
$ |
374,301 |
|
| Gross profit |
|
|
41,301 |
|
|
|
46,424 |
|
|
|
45,137 |
|
|
|
52,243 |
|
|
|
185,105 |
|
| Gain /(loss) on sales of assets(1) |
|
|
1,356 |
|
|
|
1,395 |
|
|
|
— |
|
|
|
(25 |
) |
|
|
2,726 |
|
| Restructuring charge(2) |
|
|
— |
|
|
|
(1,233 |
) |
|
|
(1,194 |
) |
|
|
(2,769 |
) |
|
|
(5,196 |
) |
| Equity in earnings (loss) of affiliate |
|
|
(3,721 |
) |
|
|
(5,051 |
) |
|
|
(5,573 |
) |
|
|
(6,503 |
) |
|
|
(20,848 |
) |
| Earnings (loss) from continuing operations before cumulative effect of a change in accounting principle |
|
$ |
(3,140 |
) |
|
$ |
(2,604 |
) |
|
$ |
(3,562 |
) |
|
$ |
(4,583 |
) |
|
$ |
(13,889 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings per basic share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings (loss) from continuing operations before cumulative effect of a change in accounting principle |
|
$ |
(0.13 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.59 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings per diluted share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings (loss) from continuing operations before cumulative effect of a change in accounting principle |
|
$ |
(0.13 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.59 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 3 to the Consolidated Financial Statements for a description of the Company’s gain/(loss) on sales of assets. |
(2) |
|
See Note 4 to the Consolidated Financial Statements for a description of the Company’s restructuring charge. |
58
BIGCHALK.COM, INC. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(With Independent Auditors’ Report Thereon)
59
BIGCHALK.COM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
| |
|
Page
|
| Independent Auditors’ Report |
|
61 |
| |
| Consolidated Financial Statements: |
|
|
| |
| Consolidated Balance Sheets, as of December 31, 2001 and 2000 |
|
62 |
| |
| Consolidated Statements of Operations, Years ended December 31, 2001, 2000, and 1999 |
|
63 |
| |
| Consolidated Statements of Equity (Deficit), Years ended December 31, 2001, 2000, and 1999 |
|
64 |
| |
| Consolidated Statements of Cash Flows, Years ended December 31, 2001, 2000, and 1999 |
|
65 |
| |
| Notes to Consolidated Financial Statements |
|
|
60
INDEPENDENT AUDITORS’ REPORT
The Board of Directors
bigchalk.com, inc.:
We have audited the accompanying consolidated balance sheets of bigchalk.com, inc. and subsidiaries (the Company) as of December 31, 2001 and
2000, and the related consolidated statements of operations, equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 financial position of bigchalk.com, inc. and subsidiaries as of
December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
Chicago, Illinois
March 22, 2002
61
BIGCHALK.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(dollars in thousands, except per share amounts)
| ASSETS |
|
| |
|
2001
|
|
|
2000
|
|
| Current assets: |
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
23,086 |
|
|
17,589 |
|
| Accounts receivable, net of allowance of $207 and $65 |
|
|
4,354 |
|
|
11,714 |
|
| Prepaid expenses and other current assets |
|
|
1,545 |
|
|
3,044 |
|
| |
|
|
|
|
|
|
|
| Total current assets |
|
|
28,985 |
|
|
32,347 |
|
| |
| Restricted investment |
|
|
829 |
|
|
900 |
|
| Property and equipment, net |
|
|
6,919 |
|
|
10,846 |
|
| Goodwill and other intangible assets, net |
|
|
10,423 |
|
|
57,588 |
|
| Other |
|
|
681 |
|
|
859 |
|
| |
|
|
|
|
|
|
|
| Total assets |
|
$ |
47,837 |
|
|
102,540 |
|
| |
|
|
|
|
|
|
|
| |
| LIABILITIES AND DEFICIT |
| Current liabilities: |
|
|
|
|
|
|
|
| Accounts payable |
|
$ |
1,837 |
|
|
5,195 |
|
| Accrued expenses |
|
|
1,653 |
|
|
2,686 |
|
| Accrued royalties |
|
|
1,316 |
|
|
1,302 |
|
| Accrued facilities costs |
|
|
1,053 |
|
|
— |
|
| Current portion of capital lease obligations |
|
|
— |
|
|
116 |
|
| Deferred revenue |
|
|
14,733 |
|
|
17,044 |
|
| |
|
|
|
|
|
|
|
| Total current liabilities |
|
|
20,592 |
|
|
26,343 |
|
| |
| Long term deferred revenue |
|
|
373 |
|
|
2,692 |
|
| Long term accrued facilities costs |
|
|
2,272 |
|
|
— |
|
| Capital lease obligations, less current portion |
|
|
— |
|
|
10 |
|
| Deferred income taxes |
|
|
152 |
|
|
870 |
|
| |
|
|
|
|
|
|
|
| Total liabilities |
|
|
23,389 |
|
|
29,915 |
|
| |
| Series A Preferred Stock; $ 0.01 par value; 1,544,286 and 7,600,002 shares authorized; 1,544,286 and 7,600,002 shares issued and
outstanding at December 31, 2001 and 2000 (aggregate liquidation preferences of $16,916 at December 31, 2001 and aggregate redemption value of $17,511, including accrued dividends, at December 31, 2003) |
|
|
13,088 |
|
|
55,256 |
|
| |
| Series A-2 Preferred Stock; $ 0.01 par value; 6,055,716 and 7,600,002 shares authorized; 6,055,716 and -0- shares issued and
outstanding at December 31, 2001 and 2000 (aggregate liquidation preferences of $66,331 at December 31, 2001 and aggregate redemption value of $68,672, including accrued dividends, at December 31, 2003) |
|
|
51,291 |
|
|
— |
|
| |
| Series B Preferred Stock; $ 0.01 par value; 20,000,000 shares authorized; 14,302,423 and 6,676,846 shares issued and outstanding
at December 31, 2001 and 2000 (aggregate liquidation preferences of $66,584 at December 31, 2001 and aggregate redemption value of $70,213, including accrued dividends, at December 31, 2003) |
|
|
50,168 |
|
|
20,240 |
|
| Deficit: |
|
|
|
|
|
|
|
| Undesignated Preferred Stock; $0.01 par value; 20,000,000 shares authorized; -0- shares issued and outstanding at December 31, 2001 and 2000 |
|
|
— |
|
|
— |
|
| Common Stock; $0.01 par value; 100,000,000 shares authorized; 16,816,620 and 16,816,620 shares issued and outstanding at December 31, 2001 and 2000 |
|
|
168 |
|
|
168 |
|
| Additional paid-in capital |
|
|
26,273 |
|
|
42,927 |
|
| Accumulated deficit |
|
|
(116,540 |
) |
|
(45,966 |
) |
| |
|
|
|
|
|
|
|
| Total deficit |
|
|
(90,099 |
) |
|
(2,871 |
) |
| |
|
|
|
|
|
|
|
| Total liabilities and deficit |
|
$ |
47,837 |
|
|
102,540 |
|
| |
|
|
|
|
|
|
|
| See accompanying notes to consolidated financial statements. |
62
BIGCHALK.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2001, 2000, and 1999
(dollars in thousands, except per share amounts)
| |
|
2001
|
|
|
2000
|
|
|
1999
|
|
| Sales |
|
$ |
28,152 |
|
|
33,185 |
|
|
14,701 |
|
| Cost of sales |
|
|
9,658 |
|
|
12,117 |
|
|
6,461 |
|
| |
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
|
18,494 |
|
|
21,068 |
|
|
8,240 |
|
| |
|
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
| Sales and marketing |
|
|
16,824 |
|
|
25,265 |
|
|
7,866 |
|
| Product development |
|
|
3,633 |
|
|
3,067 |
|
|
1,761 |
|
| Information and technology |
|
|
9,958 |
|
|
15,553 |
|
|
774 |
|
| General and administrative |
|
|
4,731 |
|
|
9,163 |
|
|
2,621 |
|
| |
|
|
|
|
|
|
|
|
|
|
| Loss before interest, taxes, depreciation and amortization, closure of facilities, impairment charges and loss on disposal of fixed
assets |
|
|
(16,652 |
) |
|
(31,980 |
) |
|
(4,782 |
) |
| Charges for closure of facilities |
|
|
3,675 |
|
|
— |
|
|
— |
|
| Impairment charge for goodwill and other intangible assets |
|
|
30,282 |
|
|
— |
|
|
— |
|
| Depreciation and amortization |
|
|
21,350 |
|
|
18,401 |
|
|
657 |
|
| Loss on disposal of fixed assets |
|
|
355 |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
| Operating loss |
|
|
(72,314 |
) |
|
(50,381 |
) |
|
(5,439 |
) |
| Interest income (expense), net |
|
|
1,022 |
|
|
1,136 |
|
|
(30 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| Loss before income taxes |
|
|
(71,292 |
) |
|
(49,245 |
) |
|
(5,469 |
) |
| Income tax benefit |
|
|
718 |
|
|
3,279 |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
|
(70,574 |
) |
|
(45,966 |
) |
|
(5,469 |
) |
| Dividends on and accretion of Series A Preferred Stock, Series A-2 Preferred Stock and Series B Preferred Stock |
|
|
(16,654 |
) |
|
(2,407 |
) |
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
| Net loss available to common shareholders |
|
$ |
(87,228 |
) |
|
(48,373 |
) |
|
(5,469 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| Basic and diluted loss per share |
|
$ |
(5.19 |
) |
|
(2.95 |
) |
|
(0.36 |
) |
| Weighted-average common shares outstanding |
|
|
16,816,620 |
|
|
16,423,042 |
|
|
15,000,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
63
BIGCHALK.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
Years ended December 31, 2001, 2000, and 1999
(dollars in thousands)
| |
|
Undesignated Preferred Stock
|
|
Common Stock
|
|
Additional paid-in capital
|
|
|
Accumulated deficit
|
|
|
Members’ interests
|
|
|
Total
|
|
| |
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
| Balance at December 31, 1998 |
|
— |
|
$ |
— |
|
— |
|
$ |
— |
|
— |
|
|
— |
|
|
(6,148 |
) |
|
(6,148 |
) |
| Net loss |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
(5,469 |
) |
|
(5,469 |
) |
| Contributions from ProQuest, net |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
2,252 |
|
|
2,252 |
|
| Issuance of members’ interests |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
43,500 |
|
|
43,500 |
|
| Due from member for members’ interest |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
(15,000 |
) |
|
(15,000 |
) |
| Common Stock subscribed |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
50 |
|
|
50 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at December 31, 1999 |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
19,185 |
|
|
19,185 |
|
| Receipt of amount due from member for members’ interests |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
15,000 |
|
|
15,000 |
|
| Exchange of members’ interests for Common Stock |
|
— |
|
|
— |
|
15,000,000 |
|
|
150 |
|
33,985 |
|
|
— |
|
|
(34,135 |
) |
|
— |
|
| Issuance of Common Stock |
|
— |
|
|
— |
|
1,816,620 |
|
|
18 |
|
10,721 |
|
|
— |
|
|
(50 |
) |
|
10,689 |
|
| Issuance of stock options and warrants in Common Stock |
|
— |
|
|
— |
|
— |
|
|
— |
|
469 |
|
|
— |
|
|
— |
|
|
469 |
|
| Issuance of stock options in Common Stock to non-employee |
|
— |
|
|
— |
|
— |
|
|
— |
|
159 |
|
|
— |
|
|
— |
|
|
159 |
|
| Dividends earned on convertible, redeemable Series A Preferred Stock |
|
— |
|
|
— |
|
— |
|
|
— |
|
(2,032 |
) |
|
— |
|
|
— |
|
|
(2,032 |
) |
| Adjustment to accrete convertible, redeemable Series A Preferred Stock to redemption value by December 31, 2003 |
|
— |
|
|
— |
|
— |
|
|
— |
|
(268 |
) |
|
— |
|
|
— |
|
|
(268 |
) |
| Dividends earned on convertible, redeemable Series B Preferred Stock |
|
— |
|
|
— |
|
— |
|
|
— |
|
(23 |
) |
|
— |
|
|
— |
|
|
(23 |
) |
| Adjustment to accrete convertible, redeemable Series B Preferred Stock to redemption value by December 31, 2003 |
|
— |
|
|
— |
|
— |
|
|
— |
|
(84 |
) |
|
— |
|
|
— |
|
|
(84 |
) |
| Net loss |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
(45,966 |
) |
|
— |
|
|
(45,966 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at December 31, 2000 |
|
— |
|
$ |
— |
|
16,816,620 |
|
$ |
168 |
|
42,927 |
|
|
(45,966 |
) |
|
— |
|
|
(2,871 |
) |
| Dividends earned on convertible, redeemable Series A Preferred Stock |
|
— |
|
|
— |
|
— |
|
|
— |
|
(474 |
) |
|
— |
|
|
— |
|
|
(474 |
) |
| Adjustment to accrete convertible, redeemable Series A Preferred Stock to redemption value by December 31, 2003 |
|
— |
|
|
— |
|
— |
|
|
— |
|
(2,536 |
) |
|
— |
|
|
— |
|
|
(2,536 |
) |
| Dividends earned on convertible, redeemable Series A-2 Preferred Stock |
|
— |
|
|
— |
|
— |
|
|
— |
|
(940 |
) |
|
— |
|
|
— |
|
|
(940 |
) |
| Adjustment to accrete convertible, redeemable Series A-2 Preferred Stock to redemption value by December 31, 2003 |
|
— |
|
|
— |
|
— |
|
|
— |
|
(5,176 |
) |
|
— |
|
|
— |
|
|
(5,176 |
) |
| Dividends earned on convertible, redeemable Series B Preferred Stock |
|
— |
|
|
— |
|
— |
|
|
— |
|
(1,556 |
) |
|
— |
|
|
— |
|
|
(1,556 |
) |
| Adjustment to accrete convertible, redeemable Series B Preferred Stock to redemption value by December 31, 2003 |
|
— |
|
|
— |
|
— |
|
|
— |
|
(5,972 |
) |
|
— |
|
|
— |
|
|
(5,972 |
) |
| Net loss |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
(70,574 |
) |
|
— |
|
|
(70,574 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at December 31, 2001 |
|
— |
|
$ |
— |
|
16,816,620 |
|
$ |
168 |
|
26,273 |
|
|
(116,540 |
) |
|
— |
|
|
(90,099 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
64
BIGCHALK.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2000, and 1999
(dollars in thousands)
| |
|
2001
|
|
|
2000
|
|
|
1999
|
|
| Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(70,574 |
) |
|
(45,966 |
) |
|
(5,469 |
) |
| Adjustments to reconcile net loss to net cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
| Charges for closure of facilities |
|
|
3,675 |
|
|
— |
|
|
— |
|
| Impairment charge for goodwill and other intangible assets |
|
|
30,282 |
|
|
— |
|
|
— |
|
| Depreciation and amortization |
|
|
21,350 |
|
|
18,401 |
|
|
657 |
|
| Loss on disposal of fixed assets |
|
|
355 |
|
|
— |
|
|
— |
|
| Provision for doubtful accounts |
|
|
285 |
|
|
305 |
|
|
— |
|
| Non-cash compensation expense |
|
|
— |
|
|
159 |
|
|
— |
|
| Deferred income taxes |
|
|
(718 |
) |
|
(3,279 |
) |
|
— |
|
| Changes in operating assets and liabilities, net of effect of acquisitions: |
|
|
|
|
|
|
|
|
|
|
| Accounts receivable |
|
|
7,075 |
|
|
(4,574 |
) |
|
14 |
|
| Prepaid expenses and other current assets |
|
|
1,499 |
|
|
(1,368 |
) |
|
(768 |
) |
| Restricted investment |
|
|
71 |
|
|
(900 |
) |
|
— |
|
| Other non-current assets |
|
|
178 |
|
|
(856 |
) |
|
— |
|
| Accounts payable |
|
|
(3,358 |
) |
|
1,304 |
|
|
736 |
|
| Accrued expenses and royalties |
|
|
(1,019 |
) |
|
1,346 |
|
|
53 |
|
| Due to members |
|
|
— |
|
|
(2,970 |
) |
|
2,970 |
|
| Deferred revenue |
|
|
(4,630 |
) |
|
1,140 |
|
|
629 |
|
| |
|
|
|
|
|
|
|
|
|
|
| Net cash flows used in operating activities |
|
|
(15,529 |
) |
|
(37,258 |
) |
|
(1,178 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
| Deposit for acquisition |
|
|
— |
|
|
— |
|
|
(1,000 |
) |
| Acquisition of businesses, less cash acquired |
|
|
— |
|
|
(23,286 |
) |
|
(5,000 |
) |
| Capital expenditures, net of minor disposals |
|
|
(1,277 |
) |
|
(11,298 |
) |
|
10 |
|
| Purchases of marketable securities |
|
|
(13,305 |
) |
|
— |
|
|
— |
|
| Maturities of marketable securities |
|
|
13,305 |
|
|
— |
|
|
— |
|
| Proceeds from sale of fixed assets |
|
|
32 |
|
|
— |
|
|
— |
|
| Issuance of note receivable |
|
|
— |
|
|
(240 |
) |
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
| Net cash flows used in investing activities |
|
|
(1,245 |
) |
|
(34,824 |
) |
|
(5,990 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
| Contributions from ProQuest, net |
|
|
— |
|
|
— |
|
|
2,252 |
|
| Proceeds from issuance of members’ interests |
|
|
— |
|
|
— |
|
|
5,000 |
|
| Proceeds from Common Stock subscribed |
|
|
— |
|
|
— |
|
|
50 |
|
| Principal payments on capital lease obligations |
|
|
(126 |
) |
|
(304 |
) |
|
— |
|
| Receipt of amount due from member for members’ interests |
|
|
— |
|
|
15,000 |
|
|
— |
|
| Proceeds from issuance of Series A Preferred Stock and Series B Preferred Stock, net of issuance costs |
|
|
22,397 |
|
|
73,089 |
|
|
— |
|
| Proceeds from issuance of Common Stock |
|
|
— |
|
|
1,752 |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
| Net cash flows provided by financing activities |
|
|
22,271 |
|
|
89,537 |
|
|
7,302 |
|
| |
|
|
|
|
|
|
|
|
|
|
| Net increase in cash and cash equivalents |
|
|
5,497 |
|
|
17,455 |
|
|
134 |
|
| Cash and cash equivalents at beginning of year |
|
|
17,589 |
|
|
134 |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents at end of year |
|
$ |
23,086 |
|
|
17,589 |
|
|
134 |
|
| |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
65
BIGCHALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
(dollars
in thousands, except share and per share amounts)
(1) Description and Formation of Business
bigchalk.com, inc., including its subsidiaries, (the “Company”) is a leading online learning destination in the kindergarten through twelfth grade (“K-12”)
domestic educational market, which includes teachers, administrators, students, and parents of students of public and private schools (the “K-12 Market”) and publicly-owned and government-funded libraries (the “Public Library
Market”). The Company provides a portfolio of products and services, including: research and reference services consisting of an extensive collection of published material; standards correlation services for educational resources;
standards-based curriculum solutions; and professional development services for teachers. The Company currently operates in one segment.
On September 30, 1999, ProQuest Information and Learning Company (formerly known as Bell & Howell Information and Learning Company) (“ProQuest”) and Tucows Inc. (formerly known as Infonautics, Inc.) (“Tucows”)
(collectively, the “Members”) entered into an Amended and Restated Limited Liability Company Agreement (the “LLC Agreement”) that provided for the formation and capitalization of BHW/INFO/EDCO.COM, LLC (“LLC”) under the
Delaware Limited Liability Company Act. On December 15, 1999, ProQuest contributed the assets and liabilities that relate exclusively to or arise from sales to the K-12 Market, $5,000 in cash, and an obligation to pay $15,000 in cash on January 3,
2000 in exchange for an equity investment in LLC. On that same date, Tucows contributed the assets and liabilities that relate exclusively to or arise from sales to the K-12 Market and Public Library Market in exchange for an equity investment in
LLC, $5,000 in cash, and the right to receive $15,000 in cash on January 3, 2000. Subsequent to the contributions, the equity interests owned by ProQuest and Tucows were approximately 73% and 27%, respectively. On January 10, 2000, pursuant to the
Certificate of Conversion, the LLC Agreement was terminated and the LLC was converted to bigchalk.com, inc., a Delaware corporation.
For financial reporting purposes, the above transactions have been accounted for as if the Company is a successor to the contributed ProQuest business. The Tucows contribution has been accounted for as a purchase business combination, and
accordingly, the assets acquired and liabilities assumed from Tucows have been reflected in these financial statements at fair value as of the contribution date.
On January 10, 2000, the Company converted from a limited liability company under the Delaware Limited Liability Company Act to a Delaware corporation. The Certificate of Incorporation
provided for the authorization of 25,900,002 shares of Common Stock and 7,600,002 shares of Series A Preferred Stock.
On
December 19, 2000, the Company amended and restated its Certificate of Incorporation. The Amended and Restated Certificate of Incorporation provides for the authorization of 100,000,000 shares of Common Stock, 7,600,002 shares of Series A Preferred
Stock, 7,600,002 shares of Series A-2 Preferred Stock, 20,000,000 shares of Series B Preferred Stock, and 20,000,000 shares of Undesignated Preferred Stock.
On June 29, 2001, the Company amended and restated its Certificate of Incorporation. The Second Amended and Restated Certificate of Incorporation provides for the authorization of 100,000,000 shares of Common Stock,
1,544,286 shares of Series A Preferred Stock, 6,055,716 shares of Series A-2 Preferred Stock, 20,000,000 shares of Series B Preferred Stock, and 20,000,000 shares of Undesignated Preferred Stock.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements have been prepared as if the Company
operated as a stand-alone entity prior to December 15, 1999. Accordingly, for periods prior to December 15, 1999, certain expenses
66
BIGCHALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
reflected in the consolidated financial statements include allocations from ProQuest. These allocations take into consideration related business volume, personnel, or other appropriate bases, and
generally include administrative expenses related to general management, information management, and other services provided to the Company by ProQuest. The allocations of expenses are based on ProQuest’s assessment of actual expenses incurred
by the Company and are reasonable in the opinion of ProQuest’s management.
The financial information for periods prior to
December 15, 1999 may not necessarily reflect the financial position, results of operations, or cash flows of the Company in the future, or what the financial position, results of operations, or cash flows of the Company would have been if it had
been a separate, stand-alone corporation during such periods.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of MediaSeek Technologies, Inc. (“MediaSeek”) and HomeworkCentral.com,
Inc. (“HomeworkCentral”), the Company’s wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
(c) Use of Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Subsequent actual results may differ from those estimates.
(d) Cash Equivalents
Cash equivalents are comprised of investments in highly liquid debt instruments, with original maturities of 90 days or less.
(e) Restricted Investment
Restricted investments represent certificates of deposit that are security
for letters of credit for leases of the Company’s office space in Berwyn, Pennsylvania and New York, New York.
(f) Marketable Securities
Management determines the appropriate classification of marketable debt
securities at the time of purchase and re-evaluates such designation as of each balance sheet date.
(g) Revenue/Commission Expense Recognition
The Company principally derives its revenue from
subscriptions. Subscription sales are deferred as a liability and recognized ratably as revenue in the periods the subscriptions are fulfilled, normally over twelve months. Prepaid expenses and other current assets includes commissions paid to sales
representatives on successful subscription sales, which are recorded as an asset and recognized as expense over the periods the subscriptions are fulfilled.
67
BIGCHALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(h) Contributions from (Distributions to) ProQuest
Prior to December 15, 1999, ProQuest provided funding for working capital. The Company participated in Bell & Howell Company’s cash
management system, and accordingly, all cash generated from and cash required to support the Company’s operations was deposited and received through ProQuest’s cash accounts. The amounts represented by the caption “Contributions from
ProQuest, net” in the Company’s consolidated statements of cash flows and equity (deficit) represent the net effect of all cash transactions between the Company and ProQuest. No interest expense has been charged on such activity. The
average balance of the member’s deficit was $7,079 for the period from January 1, 1999 to December 15, 1999.
(i) Income Taxes
The consolidated financial statements of the Company have been prepared assuming
the Company was a limited liability company prior to December 15, 1999. On December 15, 1999, the Company was formed as a limited liability company in the state of Delaware. As such, the net loss of the Company for the period from December 16, 1999
to December 31, 1999 was reportable in the members’ tax returns. As discussed in note 1, on January 10, 2000, the Company converted from a limited liability company to a C corporation. Accordingly, prior to January 10, 2000, the consolidated
financial statements contain no provision or benefit and no assets or liabilities for Federal or state income taxes as the net loss recorded prior to January 10, 2000 was reported in the members’ tax returns.
Beginning January 10, 2000, the Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date.
(j) Basic and Diluted Loss
per Share
The Company computes net loss per share in accordance with the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 128, Earnings per Share. Under the provisions of SFAS 128, basic and diluted net loss per share is computed by dividing the net loss for the period by the weighted-average number of common shares outstanding
for the period. All share and per share data have been retroactively adjusted to January 1, 1999 to reflect the incorporation of the Company as described in note 1 as if all shares were outstanding for the periods presented.
The Company has equity securities that may have had a dilutive effect on earnings per share had the Company generated income during the years ended
December 31, 2001 and 2000. There were no equity securities that could have had a dilutive effect on earnings per share for the year ended December 31, 1999. Shares issuable from securities that could potentially dilute earnings per share in the
future that were not included in the computation of loss per share because their effect was anti-dilutive were as follows:
| |
|
Years ended December 31,
|
| |
|
2001
|
|
2000
|
| Common stock options |
|
3,217,006 |
|
2,651,256 |
| Common stock warrants |
|
61,432 |
|
61,432 |
| Convertible preferred stock |
|
23,751,804 |
|
14,276,848 |
| |
|
|
|
|
68
BIGCHALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(k) Financial Instruments
The Company believes that the carrying amounts of its financial instruments, consisting of cash and cash equivalents, accounts receivable, note
receivable, restricted investment, accounts payable, accrued expenses, and capital lease obligations, approximate the fair values of such items based on their short maturities.
(l) Property and Equipment
Property and
equipment is recorded at cost and depreciated on a straight-line basis over their estimated useful lives as follows:
| Equipment |
|
3 years |
| Furniture and fixtures |
|
7 years |
| Leasehold improvements |
|
3 years |
| Software |
|
3 years |
| Web-site development costs |
|
3 years |
| |
|
|
Equipment held under capital leases is stated at the present value of minimum
lease payments at inception of the lease and is depreciated on a straight-line basis over the estimated useful life of the equipment or the lease term, whichever is shorter.
(m) Computer Software and Web-site Development Costs
The Company has adopted the provisions of Statement of Position 98-1 (“SOP 98-1”), Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, and Emerging Issues Task Force Issue No. 00-2
(“EITF 00-2”), Accounting for Web-site Development Costs. During 2001 and 2000, the Company capitalized costs incurred to purchase and install computer software in accordance with SOP 98-1. In addition, during 2000, the Company
capitalized costs associated with acquiring and developing technology to operate its website in accordance with EITF 00-2. The Company has recorded these capitalized costs as property and equipment in the accompanying consolidated balance sheet.
All costs incurred by the Company in the planning stage for the development of its web-site and costs incurred in operating its
web-site were expensed.
(n) Intangible Assets
Intangible assets consist of the values assigned to customer lists, technology, workforce, tradename, license agreements, and non-compete agreements in connection with purchase business
combinations. Intangible assets also include goodwill, which represents the excess of purchase price over fair value of net assets acquired for such transactions. Goodwill is amortized on a straight-line basis over five years. Other intangible
assets are amortized over their estimated useful lives, which range from two to five years, on a straight-line basis. When events and circumstances so indicate, the Company assesses the recoverability of intangible assets by comparing the carrying
amount of the asset balances to undiscounted future net operating cash flows. The amount of impairment, if any, is measured based on projected discounted future operating cash flows expected to be generated by the asset using a discount rate
reflecting the Company’s average cost of funds and other available information. The assessment of the recoverability of intangible assets will be impacted if estimated future operating cash flows are not achieved.
(o) Stock-based Compensation
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to apply the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
69
BIGCHALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Employees (“Opinion No. 25”), in recognizing compensation costs associated with its stock option plan. Under Opinion No. 25, compensation is measured as the difference between
the stock option exercise price and the estimated fair value of the stock at the measurement date. The measurement date is the first date on which both the number of shares subject to the option and the option exercise price are known. As required
by SFAS No. 123, the Company provides pro forma net loss information as if compensation had been measured under the fair value based method defined in SFAS No. 123. Under that method, compensation is measured by the fair value of the stock option.
Under both SFAS No. 123 and Opinion No. 25, compensation is recognized using straight-line and accelerated methods over the periods in which an employee renders service to the Company, generally the vesting period.
(p) Retirement Savings Plan
On February 1, 2000, the Company established the bigchalk.com Retirement Savings Plan (“Retirement Savings Plan”) which covers substantially all full-time employees.
Participants may make tax-deferred contributions up to 20% of annual compensation (subject to limitations specified by the Internal Revenue Code). The Retirement Savings Plan provides for an annual Company match dollar for dollar up to $1 after the
employee has achieved one year of service. During 2001 and 2000, the Company contributed $210 and $161, respectively, to the Retirement Savings Plan on behalf of employees of the Company.
(q) Advertising Costs
Advertising costs are recognized as incurred. During 2001 and 2000, advertising expense totaled $391 and $811, respectively.
(r) Supplemental Cash Flow Information
In connection with the sale of the Series B Preferred Stock, holders of Series A Preferred Stock who also invested in Series B Preferred Stock exchanged their Series A Preferred Stock for Series A-2 Preferred Stock. A
total of 6,055,716 shares of Series A Preferred Stock were exchanged for shares of Series A-2 Preferred Stock.
During 2000, the
Company’s investing activities included the following non-cash transactions: (1) the Company acquired equipment when it purchased MediaSeek and assumed a lease obligation totaling $97 to acquire this equipment, (2) the purchase price for
HomeworkCentral included 1,516,622 shares of Common Stock valued at $9,096, and (3) the Company acquired equipment totaling $101 by incurring a lease obligation.
During 1999, the Company’s investing activities included a non-cash transaction whereby the Company acquired equipment totaling $217 by incurring a lease obligation.
The Company paid interest of $10, $40, and $3, for 2001, 2000, and 1999, respectively.
(s) Reclassifications
Certain
reclassifications have been made in the prior period financial statements to conform to the current year presentation.
(3) Business Combinations
As described in note 1, on December 15, 1999, Tucows
contributed the assets and liabilities that relate exclusively to or arise from sales to the K-12 Market and the Public Library Market to the Company, in exchange for $5,055 in cash, the right to receive $15,000 in cash, and an interest valued at
$23,500.
70
BIGCHALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The acquisition was accounted for in these consolidated financial statements using
the purchase method of accounting. The following allocation of the purchase price to the assets acquired and liabilities assumed has been made using estimated fair values that include values based on independent appraisals and management estimates:
| |
|
|
|
|
| Purchase price |
|
$ |
(43,555 |
) |
| Long-term assets acquired |
|
|
1,599 |
|
| Long-term liabilities assumed |
|
|
(1,867 |
) |
| Working capital |
|
|
(7,033 |
) |
| Other intangible assets |
|
|
20,799 |
|
| Goodwill |
|
|
30,057 |
|
| |
|
|
|
|
On January 27, 2000, the Company, MediaSeek, and the principal vendors of
MediaSeek entered into a Share Purchase Agreement whereby the Company acquired all of the issued and outstanding shares of MediaSeek pursuant to a purchase business combination. The Company provided aggregate consideration of $8,004.
The acquisition was accounted for in these consolidated financial statements using the purchase method of accounting. The following
allocation of the purchase price to the assets acquired and liabilities assumed has been made using estimated fair values that include values based on independent appraisals and management estimates:
| |
|
|
|
|
| Purchase price |
|
$ |
(8,004 |
) |
| Long-term assets acquired |
|
|
126 |
|
| Long-term liabilities assumed |
|
|
(39 |
) |
| Deferred income taxes |
|
|
(1,563 |
) |
| Working capital |
|
|
(45 |
) |
| Other intangible assets |
|
|
4,597 |
|
| Goodwill |
|
|
4,928 |
|
| |
|
|
|
|
On April 1, 2000, the Company and HomeworkCentral completed an Agreement and Plan
of Reorganization whereby the Company acquired all of the issued and outstanding shares of HomeworkCentral pursuant to a purchase business combination. The shareholders of HomeworkCentral had the option to receive either cash or shares of the
Company’s Common Stock. Aggregate consideration was $11,472, comprised of $1,907 in cash, 1,516,622 shares of Common Stock valued at $9,096, and 122,506 Common Stock options valued at $150 and 61,432 Common Stock warrants valued at $319.
In connection with the acquisition of HomeworkCentral, employee stock options for HomeworkCentral common stock were exchanged
for 122,506 of stock options for the Company’s Common Stock. The exchange of these options occurred in the same ratio as the exchange of HomeworkCentral stock for the Company’s Common Stock and the exercise prices of these options were
adjusted to reflect the change in the number of options held by each employee as a result of the exchange.
Also in connection
with the acquisition of HomeworkCentral, warrants to purchase shares of HomeworkCentral common stock were exchanged for 61,432 warrants to purchase shares of the Company’s Common Stock. The exchange of these warrants occurred in the same ratio
as the exchange of
71
BIGCHALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
HomeworkCentral stock for the Company’s Common Stock and the price at which these warrants were exercisable was adjusted reflect the change in the number of warrants outstanding as a result
of the exchange. At December 31, 2001, the Company had outstanding warrants to purchase 61,432 shares of the Company’s Common Stock at an exercise price of $8.79 per share, to be reduced upon certain conditions in the issuance of Common Stock.
The warrants are exercisable at any time and expire on dates ranging from October 1, 2004 to December 22, 2004.
The acquisition
was accounted for in these consolidated financial statements using the purchase method of accounting. The following allocation of the purchase price to the assets acquired and liabilities assumed has been made using estimated fair values that
include values based on independent appraisals and management estimates:
| |
|
|
|
|
| Purchase price |
|
$ |
(11,472 |
) |
| Long-term assets acquired |
|
|
329 |
|
| Deferred income taxes |
|
|
(2,586 |
) |
| Working capital |
|
|
132 |
|
| Other intangible assets |
|
|
6,466 |
|
| Goodwill |
|
|
7,131 |
|
| |
|
|
|
|
(4) Property and Equipment
Property and equipment consisted of the following at December 31:
| |
|
2001
|
|
|
2000
|
|
| Equipment |
|
$ |
5,584 |
|
|
4,919 |
|
| Equipment under capital lease |
|
|
— |
|
|
326 |
|
| Furniture and fixtures |
|
|
1,326 |
|
|
1,329 |
|
| Leasehold improvements |
|
|
2,378 |
|
|
2,885 |
|
| Software |
|
|
2,542 |
|
|
2,241 |
|
| Web-site development costs |
|
|
1,594 |
|
|
1,594 |
|
| |
|
|
|
|
|
|
|
| |
|
|
13,424 |
|
|
13,294 |
|
| Less accumulated depreciation and amortization |
|
|
(6,505 |
) |
|
(2,448 |
) |
| |
|
|
|
|
|
|
|
| |
|
$ |
6,919 |
|
|
10,846 |
|
| |
|
|
|
|
|
|
|
(5) Impairment of Goodwill and Other Intangible Assets
During the year ended December 31, 2001, certain events and changes in circumstances caused the Company to conduct a review of the carrying
value of its goodwill and intangible assets. These events included: (1) the consolidation and integration of the operations of HomeworkCentral and MediaSeek with the Company’s core K-12 business, (2) workforce reductions, initiated in May 2001,
and (3) changes in the business climate, which have generated the valuation declines of dot com companies. Certain intangibles were determined to be impaired because the carrying amount of the assets exceeded the undiscounted future cash flows
expected to be derived from the assets. These impairment losses were measured as the amount by which the carrying amounts of the assets exceeded the fair values of the assets, determined based on the discounted future cash flows expected to be
derived from the assets and other available information. Accordingly, actual results could vary significantly from such estimates.
72
BIGCHALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The goodwill and certain intangible assets acquired in the purchase of Tucows,
HomeworkCentral, and MediaSeek were determined to be impaired. The resulting impairment charge totaled $30,282 and was reported as a component of operating expenses.
A summary of the asset impairment charge is outlined as follows:
| |
|
Impairment charge
|
| Goodwill |
|
$ |
25,486 |
| Customer list |
|
|
2,611 |
| Technology |
|
|
1,164 |
| Workforce |
|
|
552 |
| Tradename |
|
|
450 |
| Non-compete agreements |
|
|
19 |
| |
|
|
|
| |
|
$ |
30,282 |
| |
|
|
|
(6) Goodwill and Other Intangible Assets
Goodwill and other intangible assets consisted of the following at December 31:
| |
|
2001
|
|
|
2000
|
|
|
Estimated useful life
|
| Customer list |
|
$ |
16,429 |
|
|
19,040 |
|
|
3-5 years |
| Technology |
|
|
6,545 |
|
|
7,709 |
|
|
3-4 years |
| Workforce |
|
|
2,014 |
|
|
2,625 |
|
|
4-5 years |
| Tradename |
|
|
792 |
|
|
1,242 |
|
|
5 years |
| License agreements |
|
|
— |
|
|
1,023 |
|
|
2 years |
| Non-compete agreements |
|
|
204 |
|
|
223 |
|
|
3 years |
| Goodwill |
|
|
— |
|
|
42,116 |
|
|
5 years |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
25,984 |
|
|
73,978 |
|
|
|
| Less accumulated amortization |
|
|
(15,561 |
) |
|
(16,390 |
) |
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
10,423 |
|
|
57,588 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
(7) Lease Obligations
The Company leases its facilities and certain equipment under non-cancelable operating leases expiring at varying dates through June 2008. Rent expense was approximately $2,078,
$1,639, and $504, for the years ended December 31, 2001, 2000, and 1999.
73
BIGCHALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Minimum lease payments as of December 31, 2001 are as follows:
| |
|
Operating leases
|
| 2002 |
|
$ |
2,376 |
| 2003 |
|
|
1,985 |
| 2004 |
|
|
1,899 |
| 2005 |
|
|
1,615 |
| 2006 |
|
|
1,497 |
| Thereafter |
|
|
2,101 |
| |
|
|
|
| Total future minimum lease payments |
|
$ |
11,473 |
| |
|
|
|
During 2000, the Company moved its primary office space to a new facility. In
2001, the Company entered into sublease arrangements for its previous office spaces expiring at varying dates through March 2005. Minimum lease payments to be received under non-cancelable subleases as of December 31, 2001 are as follows:
| 2002 |
|
$ |
324 |
| 2003 |
|
|
314 |
| 2004 |
|
|
300 |
| 2005 |
|
|
75 |
| |
|
|
|
| Total future minimum lease payments to be received |
|
$ |
1,013 |
| |
|
|
|
The Company recorded a charge of $3,675 related to the reduction and
consolidation of office space. The charge includes the write-off of leasehold improvements of $350 and the ongoing lease obligations and related expenses of the unoccupied office space, net of estimated sublease income, of $3,325. The accrued
liability at December 31, 2001, will be reduced as the Company makes lease payments in excess of sublease income and may be adjusted in future periods when additional information regarding subleases is available.
(8) Income Taxes
No
provision for Federal or state income taxes was recorded prior to January 10, 2000, as such liability (benefit) was the responsibility of the Company’s members, rather than of the Company. As a result of the Company’s change from a limited
liability company to a C corporation on January 10, 2000, the Company recorded initial deferred income taxes of $4,687 to reflect the establishment of deferred tax assets and liabilities. The provision for income taxes for the year then ended
relates to the period subsequent to January 10, 2000.
74
BIGCHALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The provision for income taxes consists of the following:
| |
|
Year ended December 31,
|
|
| |
|
2001
|
|
|
2000
|
|
| Current taxes: |
|
|
|
|
|
|
|
| Federal |
|
$ |
— |
|
|
— |
|
| State |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
| Total |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
| Deferred taxes: |
|
|
|
|
|
|
|
| Federal |
|
|
(718 |
) |
|
(2,541 |
) |
| State |
|
|
— |
|
|
(738 |
) |
| |
|
|
|
|
|
|
|
| Total |
|
|
(718 |
) |
|
(3,279 |
) |
| |
|
|
|
|
|
|
|
| Provision for income taxes |
|
$ |
(718 |
) |
|
(3,279 |
) |
| |
|
|
|
|
|
|
|
Deferred taxes assets (liabilities) are comprised of the following at December
31:
| |
|
2001
|
|
|
2000
|
|
| Deferred tax assets: |
|
|
|
|
|
|
|
| Net operating loss carryforwards |
|
$ |
21,515 |
|
|
12,711 |
|
| Accrued facilities costs |
|
|
1,470 |
|
|
— |
|
| Deferred revenue and accrued expenses |
|
|
1,053 |
|
|
1,343 |
|
| |
|
|
|
|
|
|
|
| Subtotal |
|
|
24,038 |
|
|
14,054 |
|
| Less valuation allowance |
|
|
(22,312 |
) |
|
(8,166 |
) |
| |
|
|
|
|
|
|
|
| Net deferred tax assets |
|
|
1,726 |
|
|
5,888 |
|
| |
|
|
|
|
|
|
|
| Deferred tax liabilities: |
|
|
|
|
|
|
|
| Intangible assets |
|
|
(1,010 |
) |
|
(6,002 |
) |
| Capitalized software costs and accrued expenses |
|
|
(868 |
) |
|
(756 |
) |
| |
|
|
|
|
|
|
|
| Subtotal |
|
|
(1,878 |
) |
|
(6,758 |
) |
| |
|
|
|
|
|
|
|
| Net deferred income taxes |
|
$ |
(152 |
) |
|
(870 |
) |
| |
|
|
|
|
|
|
|
The reconciliation of the expected income tax benefit using the Federal statutory
rate of 34% for the year ended December 31, 2001 and 2000 to the Company’s income tax expense is as follows:
| |
|
2001
|
|
|
2000
|
|
| Federal income tax benefit at statutory rate |
|
(34.00 |
)% |
|
(34.00 |
)% |
| State income tax benefit, net of Federal taxes |
|
(2.94 |
) |
|
(3.25 |
) |
| Permanent differences |
|
16.15 |
|
|
5.81 |
|
| Establishment of deferred tax liabilities upon conversion to C corporation |
|
— |
|
|
8.12 |
|
| Increase in valuation allowance |
|
19.85 |
|
|
16.64 |
|
| Other |
|
(0.07 |
) |
|
0.02 |
|
| |
|
|
|
|
|
|
| Total |
|
(1.01 |
)% |
|
(6.66 |
)% |
| |
|
|
|
|
|
|
The Company has Federal net operating loss carryforwards aggregating
approximately $54,000 as of December 31, 2001, which can potentially be carried forward twenty years and will expire at various dates
75
BIGCHALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
through 2021. Under the Tax Reform Act of 1986, the utilization of a corporation’s net operating loss carryforward is limited following a greater-than-50% change in ownership within a three
year period. Due to the Company’s prior equity transactions, the Company’s net operating loss carryforwards may be subject to an annual limitation generally determined by multiplying the value of the Company on the date of the ownership
change by the Federal long-term tax-exempt rate. Any unused limitation can be carried forward to future years for the balance of the net operating loss carryforward period. The Company has state net operating loss carryforwards aggregating
approximately $52,000 as of December 31, 2001, which can potentially be carried forward for up to twenty years. The majority of the state net operating loss carryforwards relate to Pennsylvania which are subject to an annual utilization limitation
of $2,000.
During the years ended December 31, 2001 and 2000, the valuation allowance increased by $14,146 and $8,166,
respectively.
Although realization of the gross deferred tax assets is not assured, management believes that it is more likely
than not that the deferred tax assets will be realized after considering the reversal of the deferred tax liabilities.
(9) Redeemable Preferred Stock
On January 10, 2000, the Company completed the sale of
7,600,002 shares of Series A Preferred Stock for proceeds of $53,200. On December 20, 2000, the Company completed the sale of 6,676,846 shares of Series B Preferred Stock for proceeds of $20,231. On February 28, 2001, the Company completed the sale
of 7,625,577 shares of Series B Preferred Stock for proceeds of $23,105. In connection with the sale of the Series B Preferred Stock, holders of Series A Preferred Stock who also invested in Series B Preferred Stock exchanged their Series A
Preferred Stock for Series A-2 Preferred Stock. A total of 6,055,716 shares of Series A Preferred Stock were exchanged for shares of Series A-2 Preferred Stock.
As described in the Second Amended and Restated Certificates of Incorporation, each share of Series A Preferred Stock, Series A-2 Preferred Stock, and Series B Preferred Stock
(collectively, “Preferred Stock”) is convertible at the shareholder’s option into such number of shares of Common Stock as determined by the Series A Conversion Price, the Series A-2 Conversion Price, and the Series B Conversion Price
(collectively, “Conversion Prices”), respectively, as defined in the Second Amended and Restated Certificates of Incorporation (1.24-for-one, 1.24-for-one and one-for-one, for Series A Preferred Stock, Series A-2 Preferred Stock, and
Series B Preferred Stock, respectively, at December 31, 2001). The Company reserved 23,751,804 shares of its Common Stock to provide for the conversion of such Preferred Stock. Upon the closing of a qualified public offering of the Company’s
Common Stock, the Preferred Stock will automatically convert to a number of shares of Common Stock as determined by the Conversion Prices.
Beginning January 1, 2002, the holders of Preferred Stock shall be entitled to receive cumulative dividends of 6% per annum of the original issue price of $7.00 per share for Series A and Series A-2 Preferred Stock
and of the original issue price of $3.03 per share for the Series B Preferred Stock, payable in preference and priority to payment of dividends on common stock. The holders of Preferred Stock shall also be entitled to receive, when and if declared,
dividends in the same amount per share as would be payable on the number of shares of Common Stock into which the Preferred Stock is then convertible.
At the earliest of: (1) the redemption of the Series A Preferred Stock, Series A-2 Preferred Stock and Series B Preferred Stock; (2) the consummation of the sale of securities in the Corporation’s initial public
offering of securities; or (3) a liquidation, dissolution or winding up of the Corporation, any accrued and unpaid dividends shall be paid to the holders of record of outstanding shares of Series A Preferred Stock, Series A-2 Preferred Stock and
Series B Preferred Stock.
76
BIGCHALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
After December 31, 2003, and at the request of the holders of a majority of the
outstanding shares of preferred stock, the Company will redeem all of the outstanding shares of Series A Preferred Stock, Series A-2 Preferred Stock and Series B Preferred Stock for $10.50, $10.50, and $4.545 per share, respectively, plus accrued
and unpaid dividends. The Company is accreting the value of the redemption feature over the period from the issuance through December 31, 2003.
Upon the liquidation, dissolution or winding up of the Company, holders of Series A Preferred Stock, Series A-2 Preferred Stock and Series B Preferred Stock shall be first entitled, before any distribution or payment
to holders of common stock, to a minimum amount of $10.50, $10.50, and $4.545 per share, respectively, plus accrued and unpaid dividends. As of December 31, 2001, the holders of Series A Preferred Stock, Series A-2 Preferred Stock and Series B
Preferred Stock would be entitled to a minimum aggregate amount of $16,916, $66,331, and $66,584, respectively, in the event of a liquidation.
(10) Equity Instruments
On January 10, 2000, the Company’s Board of Directors
adopted the bigchalk.com, inc. 2000 Stock Plan (the 2000 Plan), covering employees, directors, and unaffiliated consultants. On July 30, 2001, the Company’s Board of Directors adopted the bigchalk.com, inc. 2001 Stock Plan (the 2001 Plan),
covering employees, directors, and unaffiliated consultants. Stock options are granted at an exercise price equal to the stock’s fair value on the date of grant. All stock options have a contractual life of ten years and generally vest ratably
over a period of four years; however, certain options vested in part immediately upon grant and ratably over a period of three years. The Company has reserved 3,000,000 shares of common stock for issuance under both the 2000 Plan and the 2001 Plan.
Stock option transactions consisted of the following:
| |
|
2001
|
|
2000
|
| |
|
Shares
|
|
|
Weighted- average exercise price
|
|
Shares
|
|
|
Weighted- average exercise price
|
| Outstanding at beginning of year |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at January 10, 2000 |
|
2,651,256 |
|
|
$ |
5.87 |
|
— |
|
|
$ |
— |
| Granted |
|
1,286,500 |
|
|
|
3.14 |
|
2,968,750 |
|
|
|
6.00 |
| Granted in connection with HomeworkCentral acquisition |
|
— |
|
|
|
— |
|
122,506 |
|
|
|
3.19 |
| Exercised |
|
— |
|
|
|
— |
|
(100 |
) |
|
|
6.00 |
| Cancelled |
|
(720,750 |
) |
|
|
6.00 |
|
(439,900 |
) |
|
|
6.00 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding at end of year |
|
3,217,006 |
|
|
|
4.76 |
|
2,651,256 |
|
|
$ |
5.87 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-average fair value of options granted |
|
|
|
|
$ |
0.53 |
|
|
|
|
$ |
1.17 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Options exercisable at end of year |
|
891,881 |
|
|
|
|
|
516,491 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average contractual life of options outstanding at December 31, 2001
and 2000 is 8.4 years and 9.6 years. The exercise prices for options outstanding at December 31, 2001 that were granted in connection with the HomeworkCentral acquisition range from $.59 to $9.88. The exercise prices for all other options
outstanding at December 31, 2001 are either $3.03 or $6.00.
The Company applies Opinion No. 25 in accounting for the Plan and,
accordingly, no compensation expense has been recognized as the exercise price of all grants equaled the fair value of the underlying stock on the
77
BIGCHALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
date of grant. The pro forma impact of recognizing the fair value of granted options as expense is as follows for the years ended December 31, 2001 and 2000:
| |
|
2001
|
|
|
2000
|
| Net loss to common stockholders: |
|
|
|
|
|
|
| As reported |
|
$ |
(87,228 |
) |
|
(48,373) |
| Pro forma |
|
|
(87,799 |
) |
|
(49,443) |
| |
|
|
|
|
|
|
| Loss per common share: |
|
|
|
|
|
|
| As reported |
|
$ |
(5.19 |
) |
|
(2.95) |
| Pro forma |
|
|
(5.22 |
) |
|
(3.01) |
| |
|
|
|
|
|
|
For purposes of calculating pro forma compensation expense, the fair value of
each stock option is estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions for fiscal 2001 and 2000: nominal volatility; risk free interest rate of 4.65% and 6.00%; no dividend
yield; and expected life of 4 years and 2.6 years.
During 2000, the Company granted 37,500 stock options in Common Stock with
an exercise price of $6.00 per share to a consultant and recorded the related compensation expense of $159 in accordance with EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services”. At December 31, 2000, all of these options are exerciseable and are outstanding.
(11) Related-party Transactions
The Company enters into various transactions with two of
its significant shareholders, ProQuest and Tucows.
The Company sells ProQuest’s products and pays royalties to ProQuest
based on a percentage of revenue. The amounts paid to ProQuest are recorded as costs of sales in the accompanying consolidated statements of operations and amounted to $3,287 and $5,927 in fiscal 2001 and 2000, respectively. At December 31, 2001 and
2000, the Company was obligated to ProQuest for $449 and $2,343, respectively. These amounts were included in accounts payable and accrued expenses at December 31, 2001 and 2000 in the accompanying consolidated balance sheets.
Tucows sells the Company’s products and pays royalties to the Company based on a percentage of revenue. The amounts received from Tucows
are recorded as sales in the accompanying consolidated statements of operations and amounted to $2,027 and $3,472 in 2001 and 2000, respectively. At December 31, 2001 and 2000, Tucows was obligated to the Company for $293 and $655, respectively.
This amount is included in accounts receivable in the accompanying consolidated balance sheet.
(12) Commitments and
Contingencies
The Company is subject to pending and threatened legal actions that arise in the normal course of business.
In the opinion of management, no such actions are known to have a material adverse impact on the financial position of the Company.
The Company has entered into contracts with several partners to provide content for the Company’s portfolio of products and services. Under these contracts, the Company is obligated to make minimum payments for license fees of $2,229,
$2,409, and $1,910 in 2002, 2003, and 2004, respectively. In addition,
78
BIGCHALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
under the terms of most of these contracts, the Company is required to pay royalties based on various units of measure related to the content provided the Company.
79
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Part III
Item
10.
Directors and Executive Officers of the Registrant.
Information regarding Directors and
Executive Officers of the Registrant is included at the end of Part I of this report under the caption “Executive Officers and Directors.”
Item 11.
Executive Compensation.
The information required by this Item will be set forth in the
Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 15, 2002 (under the captions “Compensation of Directors”, “Executive Compensation”, “Supplemental Retirement Plan”, and
“Compensation Committee Interlocks and Insider Participation”), and is hereby incorporated by reference.
Item
12.
Security Ownership of Certain Beneficial Owners and Management.
The information required
by this Item will be set forth in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 15, 2002 (under the captions “Security Ownership of Certain Beneficial Owners and Management”, and
“Information Relating to Directors and Executive Officers”), and is hereby incorporated by reference.
Item
13.
Certain Relationships and Related Transactions.
Information regarding Related Party
Transactions is included in Note 18 to the financial statements contained in Item 8 of this report. The remaining information required by this Item is set forth in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held
on May 15, 2002 (under the caption “Shareholders Agreement”), and is hereby incorporated by reference.
Part IV
Item 14.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1.
(i) Financial statements:
The following consolidated financial statements of ProQuest Company
are included in Part II, Item 8, Financial Statements and Supplementary Data (pages 29-58)
Independent
Auditors’ Report
Consolidated Statements of Operations—Fiscal Years 2001, 2000, and 1999
Consolidated Balance Sheets—At the end of Fiscal Years 2001 and 2000
Consolidated Statements of Cash Flows—Fiscal Years 2001, 2000, and 1999
Consolidated Statements of Shareholders’ Equity and Comprehensive Income
(Loss)—Fiscal Years 2001, 2000, and 1999
Notes to Consolidated Financial Statements
80
(ii) Financial statements:
The consolidated financial statements of bigchalk.com, inc. are included in this Annual Report on Form 10K. (See Note 19 to the Consolidated Financial Statements for
summarized financials of bigchalk.com, inc.)
2. Financial statement schedules filed as a part of this report:
Financial Statement Schedules are omitted as the required information is either inapplicable, immaterial,
or is presented in the Company’s Consolidated Financial Statements or the Notes thereto.
3. Exhibits and
Financial Statement Schedules
(a) Exhibits.
| Exhibit No.
|
|
Description
|
| *2.1 |
|
Purchase and Sale Agreement by and between the Company and BH Acquisition, Inc., dated September 20, 2001, is incorporated by reference to the Company’s Current Report
on Form 8-K filed October 12, 2001. |
| *2.2 |
|
Purchase and Sale Agreement, dated April 18, 2001, by and among the Company, Bell & Howell UK Holdings Limited, Bell & Howell Mail and Messaging Technologies
Company, Pitney Bowes Inc., and Pitney Bowes International Holdings, Inc., is incorporated by reference to the Company’s Current Report on Form 8-K filed June 18, 2001. |
| 3.1 |
|
Form of Amended and Restated Certificate of Incorporation of ProQuest Company |
| *3.2 |
|
By-laws of ProQuest Company (f/k/a Bell & Howell Operating Company) are incorporated herein by reference to Exhibit 4.2 to Bell & Howell Company’s Registration
Statement on Form S-8, Registration No. 333-48425. |
| *10.1 |
|
Amended and Restated Profit Sharing Retirement Plan is incorporated herein by reference to Exhibit 10.1 to Bell & Howell Company’s (f/k/a Bell & Howell
Operating Company) Registration Statement on Form S-1, as amended, Registration No. 33-63556 |
| *10.2 |
|
Amended and Restated Replacement Benefit Plan is incorporated herein by reference to Exhibit 10.4 to Bell & Howell Company’s Registration Statement on Form S-1, as
amended, Registration No. 33-63556 |
| *10.3 |
|
Supplemental Retirement Plan is incorporated herein by reference to Exhibit 10.3 to Bell & Howell Company’s Registration Statement on Form S-1, as amended,
Registration No. 33-63556 |
| *10.4 |
|
Management Incentive Bonus Plan is incorporated herein by reference to Exhibit 10.5 to Bell & Howell Company’s Registration Statement on Form S-1, as amended,
Registration No. 33-63556 |
81
| Exhibit No.
|
|
Description
|
| *10.5 |
|
Long Term Incentive Plan II, 1993-1996, is incorporated herein by reference to Exhibit to Bell & Howell Company’s Registration Statement on Form S-1, as amended,
Registration No. 33-89992 |
| *10.6 |
|
Deferred Benefit Trust is incorporated herein by reference to Exhibit 10.10 to Bell & Howell Company’s Registration Statement on Form S-1, as amended, Registration
No. 33-63556 |
| *10.7 |
|
Shareholders Agreement dated May 10, 1988, as amended, among certain Management Stockholders (as defined therein) and Investor Shareholders (as defined therein) is
incorporated herein by reference to Exhibit 10.17 to Bell & Howell Company’s Registration Statement on Form S-1, as amended, Registration No. 33-59994 |
| *10.8 |
|
Registration Rights Agreement dated as of May 10, 1988 by and among Bell & Howell Group, Inc. and each of the Purchasers referred to therein is incorporated herein by
reference to Exhibit 10.1 to Bell & Howell Company’s Registration Statement on Form S-1, as amended, Registration No. 33-63556 |
| *10.10 |
|
Supplement to Fourth Amendment to the Shareholders Agreement dated May 10, 1988, as amended, among certain Management Stockholders (as defined therein) and Investor
Shareholders (as defined therein) is incorporated herein by reference to Bell & Howell Company’s Registration Statement on Form S-1, as amended, Registration No. 33-89992 |
| *10.11 |
|
Receivables Purchase Agreement dated May 1, 1996, between Bell & Howell Financial Services Company and the First National Bank of Chicago, is incorporated herein by
reference to Bell & Howell Company’s Registration Statement on Form S-1, as amended, Registration No. 33-59994 |
| 10.11A |
|
Revolving Credit Agreement, dated as of September 22, 1997, among Bell & Howell Operating Company, the Lenders listed therein, and Bankers Trust Company incorporated
herein by reference to Exhibit 10.11 to Bell & Howell Operating Company’s Registration Statement on Form S-4, as amended, Registration No. 333-36401. |
| *10.12 |
|
Bell & Howell Profit Sharing Retirement Plan and Bell & Howell Associate Stock Purchase Plan, is incorporated herein by reference to Bell & Howell Company’s
Registration Statement on Form S-8, Registration No. 33-99982 |
| *10.13 |
|
Bell & Howell Company 1995 Stock Option Plan, as amended, is incorporated |
| *10.14 |
|
Bell & Howell Company 1995 Non-Employee Director’s Stock Option Compensation Plan, is incorporated herein by reference to Bell & Howell Company’s
Registration Statement on Form S-8, Registration No. 333-93099 |
| 10.15 |
|
Sixth Amendment to the Revolving Credit Agreement, dated as of September 22, 1997, among Bell & Howell Operating Company, the Lenders listed therein, and Bankers Trust
Company |
| 21.1 |
|
Subsidiaries of ProQuest Company |
| 23.1 |
|
Consent of KPMG LLP |
| 23.2 |
|
Consent of KPMG LLP |
4. Reports on Form 8-K
A Current Report on Form 8-K was filed on October 12, 2001,
reporting the sale of the Company’s Mail and Messaging Technologies business, its Scanners business and its financing services business.
82
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, therefore duly authorized.
Date: March 29, 2002
| PROQUEST COMPANY |
| |
| By: |
|
/s/ JAMES P. ROEMER
James P. Roemer Chairman and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature
|
|
Title
|
|
Date
|
| |
| /s/ JAMES P. ROEMER
James P. Roemer |
|
Chairman and Chief Executive Officer |
|
March 29, 2002 |
| |
| /s/ ALAN ALDWORTH
Alan Aldworth |
|
President, Chief Operating Officer
and Chief Financial Officer |
|
March 29, 2002 |
| |
| /s/ TODD W. BUCHARDT
Todd W. Buchardt |
|
General Counsel and Secretary |
|
March 29, 2002 |
| |
| /s/ DAVID BONDERMAN
David Bonderman |
|
Director |
|
March 29, 2002 |
| |
| /s/ DAVID G. BROWN
David G. Brown |
|
Director |
|
March 29, 2002 |
| |
| /s/ WILLIAM E. OBERNDORF
William E. Oberndorf |
|
Director |
|
March 29, 2002 |
| |
| /s/ GARY L. ROUBOS
Gary L. Roubos |
|
Director |
|
March 29, 2002 |
| |
| /s/ JOHN H. SCULLY
John H. Scully |
|
Director |
|
March 29, 2002 |
| |
| /s/ WILLIAM J. WHITE
William J. White |
|
Director |
|
March 29, 2002 |
83