UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended Commission file number
June 30, 2001 1-3246
PROQUEST COMPANY
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-3580106
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
300 North Zeeb Road, Ann Arbor, Michigan 48103-1553
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (734) 761-4700
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares of the Registrant's Common Stock, $.001 par value,
outstanding as of August 4, 2001 was 23,845,219.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
------ --------------------- ----
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations for
the Thirteen and Twenty-Six Weeks Ended
June 30, 2001 and July 1, 2000 ............... 1
Consolidated Balance Sheets at
June 30, 2001 and December 30, 2000 .......... 2
Consolidated Statements of Cash Flows for
the Twenty-Six Weeks Ended June 30, 2001 and
July 1, 2000 ................................. 3
Notes to the Consolidated Financial
Statements ................................... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................... 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ............................. 22
PART II. OTHER INFORMATION
-------- -----------------
Item 1. Legal Proceedings .............................. 22
Item 6. Exhibits and Reports on Form 8-K ............... 22
SIGNATURE PAGE ............................................ 23
ProQuest Company and Subsidiaries
Consolidated Statements of Operations
(Dollars and shares in thousands, except per share data)
(Unaudited)
Thirteen Weeks Twenty-Six Weeks
Ended Ended
---------------------- ----------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
--------- --------- --------- ---------
Net sales .................................................. $ 100,743 $ 94,257 $ 196,596 $ 182,884
Cost of sales .............................................. 45,555 47,833 92,695 95,159
Research and development expense ........................... 5,499 4,141 10,581 8,510
Selling and administrative expense ......................... 33,207 31,544 62,597 60,950
Restructuring charges ...................................... -- 1,233 -- 1,233
Gains on sales of assets ................................... -- 1,395 -- 2,751
--------- --------- --------- ---------
Earnings from continuing operations before interest,
income taxes, equity in loss of affiliate, and
cumulative effect of a change in accounting
principle ................................................. 16,482 10,901 30,723 $ 19,783
Net interest expense:
Interest income ............................................ 56 825 182 1,147
Interest expense ........................................... (6,344) (7,648) (12,548) (15,883)
--------- --------- --------- ---------
Net interest expense ....................................... (6,288) (6,823) (12,366) (14,736)
Earnings from continuing operations before income
taxes, equity in loss of affiliate, and cumulative
effect of a change in accounting principle ................ 10,194 4,078 18,357 5,047
Income tax expense ......................................... 4,077 1,631 7,343 2,019
Equity in loss of affiliate ................................ (6,101) (5,051) (11,572) (8,772)
--------- --------- --------- ---------
Earnings (loss) from continuing operations before
cumulative effect of a change in accounting principle ..... 16 (2,604) (558) (5,744)
Discontinued Operations:
Earnings (loss) from discontinued operations, net
(less applicable income taxes (benefit) of $(75),
$(248), $1,403, and $496 respectively) .................... (112) (374) 2,105 743
Gains on sale of discontinued operations, net (less
applicable income taxes of $29,056) ....................... -- -- 43,583 --
Cumulative effect of a change in accounting principle ...... -- -- -- (65,302)
--------- --------- --------- ---------
Net earnings (loss) ........................................ $ (96) $ (2,978) $ 45,130 $ (70,303)
========= ========= ========= =========
Net earnings (loss) per common share:
Basic:
Earnings (loss) from continuing operations before
cumulative effect of a change in accounting principle ..... $ -- $ (0.11) $ (0.02) (0.24)
Earnings (loss) from discontinued operations ............... -- (0.02) 0.09 0.03
Gains from sale of discontinued operations ................. -- -- 1.84 --
Cumulative effect of a change in accounting principle ...... -- -- -- (2.76)
--------- --------- --------- ---------
Net earnings (loss) ........................................ $ -- $ (0.13) $ 1.91 (2.97)
========= ========= ========= =========
Diluted:
Earnings (loss) from continuing operations before
cumulative effect of a change in accounting principle ..... $ -- $ (0.11) $ (0.02) $ (0.24)
Earnings (loss) from discontinued operations ............... -- (0.02) 0.09 0.03
Gains from sale of discontinued operations ................. -- -- 1.84 --
Cumulative effect of a change in accounting principle ...... -- -- -- (2.76)
--------- --------- --------- ---------
Net earnings (loss) ........................................ $ -- $ (0.13) $ 1.91 $ (2.97)
========= ========= ========= =========
Average number of common shares and equivalents outstanding:
Basic ...................................................... 23,718 23,680 23,670 23,679
Diluted .................................................... 23,985 23,680 23,670 23,679
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements
1
ProQuest Company and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
Assets
June 30, Dec. 30,
2001 2000
--------- ---------
Current assets:
Cash and cash equivalents ..................... $ 14,451 $ 10,610
Accounts receivable, net ...................... 62,272 76,302
Inventory ..................................... 4,714 4,604
Other current assets .......................... 13,305 13,072
--------- ---------
Total current assets .......................... 94,742 104,588
Property, plant and equipment, at cost ........ 419,590 400,170
Accumulated depreciation ...................... (281,006) (267,054)
--------- ---------
Net property, plant and equipment ............. 138,584 133,116
Long-term receivables ......................... 1,298 1,450
Goodwill, net of accumulated amortization ..... 218,199 222,271
Net assets of discontinued operations ......... 162,353 261,155
Other assets .................................. 51,665 43,159
--------- ---------
Total assets .................................. $ 666,841 $ 765,739
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable ................................. $ 5,058 $ 15,568
Current maturities of long-term debt .......... 365 466
Accounts payable .............................. 32,319 43,134
Accrued expenses .............................. 25,602 35,594
Deferred income ............................... 81,988 112,881
--------- ---------
Total current liabilities ..................... 145,332 207,643
Long-term liabilities:
Long-term debt, less current maturities ....... 380,246 501,821
Other liabilities ............................. 166,562 125,934
--------- ---------
Total long-term liabilities ................... 546,808 627,755
Shareholders' equity:
Common Stock, $.001 par value, 24,284 shares
issued and 23,842 shares outstanding at
June 30, 2001 and 24,078 shares issued and
23,622 shares outstanding at December 30, 2000 24 24
Capital surplus ............................... 160,486 156,708
Notes receivable from executives .............. (1,216) (1,180)
Retained earnings (deficit) ................... (168,485) (213,615)
Treasury stock ................................ (11,073) (11,493)
Other comprehensive income (loss):
Accumulated foreign currency translation
adjustment ................................. 326 (103)
SFAS 133 unrealized gain/loss ............... (5,361) --
--------- ---------
Accumulated other comprehensive loss .......... (5,035) (103)
--------- ---------
Total shareholders' equity (deficit) .......... (25,299) (69,659)
--------- ---------
Total liabilities and shareholders' equity .... $ 666,841 $ 765,739
========= =========
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
2
ProQuest Company and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Twenty-Six Weeks Ended
----------------------
June 30, July 1,
2001 2000
--------- ---------
Operating activities:
Earnings (loss) from continuing operations before
cumulative effect of a change in accounting principle .. $ (558) $ (5,744)
Adjustments to reconcile to cash used in operating
activities of continuing operations:
Depreciation and amortization ........................... 27,646 26,746
Equity in loss of affiliates ............................ 11,572 8,772
Gains on sales of assets ................................ -- (2,751)
Changes in operating assets and liabilities:
Accounts receivable ..................................... 14,517 6,225
Inventory ............................................... (193) 914
Other miscellaneous assets .............................. (9,328) 445
Long-term receivables ................................... 152 (1,436)
Income taxes ............................................ 23 634
Accounts payable ........................................ (11,562) (6,081)
Accrued expenses ........................................ (13,280) (2,623)
Deferred income and other long-term liabilities ......... (22,647) (30,926)
Other, net .............................................. (8,352) (5,261)
--------- ---------
Net cash used in continuing operations .................. (12,010) (11,086)
Investing activities:
Expenditures for property, plant and equipment .......... (24,510) (18,901)
Acquisitions ............................................ (12,305) (4,650)
Proceeds from sales of discontinued operations .......... 186,000 --
Proceeds from asset sales ............................... -- 2,551
--------- ---------
Net cash provided by (used in) investing activities ..... 149,185 (21,000)
Financing activities:
Proceeds from short-term debt ........................... 695 7,859
Repayment of short-term debt ............................ (10,514) (18,142)
Proceeds from long-term debt ............................ 22,162 35,554
Repayment of long-term debt ............................. (143,838) (2,104)
Proceeds from Common Stock, net ......................... 3,622 548
--------- ---------
Net cash (used in) provided by financing activities ..... (127,873) 23,715
Net cash (used in) provided by discontinued operations .. (4,976) 18,578
Effect of exchange rate changes on cash ................. (485) (1,098)
--------- ---------
Increase in cash and cash equivalents ................... 3,841 9,109
Cash and cash equivalents, beginning of period .......... 10,610 4,773
--------- ---------
Cash and cash equivalents, end of period ................ $ 14,451 $ 13,882
========= =========
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
3
ProQuest Company and Subsidiaries
Notes to the Consolidated Financial Statements
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
Note 1 - Basis of Presentation
These consolidated financial statements include the accounts of
ProQuest Company and its subsidiaries (collectively the "Company") and are
unaudited.
As permitted under the Securities and Exchange Commission (SEC)
requirements for interim reporting, certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted.
Certain reclassifications to the 2000 consolidated financial statements have
been made to conform to the 2001 presentation. The Company believes that these
financial statements include all necessary and recurring adjustments for the
fair presentation of the interim period results. These financial statements
should be read in conjunction with the Consolidated Financial Statements and
related notes included in the Company's annual report for the fiscal year ended
December 30, 2000.
In the first quarter of fiscal 2000, the Company adopted a plan to
divest the Mail and Messaging Technologies and Imaging businesses and its
financing subsidiary. Accordingly, the operating results and net assets of these
businesses have been segregated from the Company's continuing operations.
Note 2 - Significant Accounting Policies
Revenue Recognition. The Company derives revenues from sales of
equipment, software, licenses of database content, service, and subscriptions.
Information & Learning (I&L) provides its customers with access to
periodicals, newspapers, dissertations, out-of-print books and other scholarly
material in exchange for a fee that normally covers a period of twelve months.
Revenues from these subscription agreements are recognized ratably over the term
of the agreements using the straight-line method.
4
Publishing Services (PS) publishes parts catalogs for automotive
dealerships and also provides dealer management systems software for powersports
dealerships. Parts catalog products are generally sold under multiple-element
arrangements that include hardware and related operating systems software, an
electronic parts catalog (EPC) database and retrieval system, an agreement to
provide periodic updates to the EPC database over the term of the arrangement,
and specified services. The Company allocates the total revenue to be received
under these arrangements between two elements--the hardware and related
operating system software element and the remaining deliverables considered
together as a group--based on relative fair value.
The Company accounts for the hardware and related operating systems
software element as a sales-type lease, and recognizes sales revenue equal to
the normal selling price for such systems upon shipment, when all significant
contractual obligations are satisfied and collection of the resulting receivable
is reasonably assured. The remainder of the fee due under these arrangements is
recognized as revenue on a straight-line basis over the term of the agreement.
Revenue from powersports dealer management systems software is
recognized when evidence of an arrangement exists, delivery has occurred, the
fee is fixed or determinable, and collection is probable. Multiple element
software license fees are allocated based on the relative fair values of the
elements and recognized when accepted by the customer.
Inventory. Inventory costs include material, labor and overhead.
Inventories are stated at the lower of cost (determined using the first-in,
first-out ("FIFO") method) or market. During the fourth quarter of 2000, the
Company changed its method of inventory valuation for the Publishing Services
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 will
result 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 accounting principles generally accepted in the
United States of America.
The components of inventory are shown in the table below as
5
of the dates indicated:
June 30, December 30,
2001 2000
-------- -----------
Finished products .................... $ 1,585 $ 1,932
Products in process and materials .... 3,129 2,672
------- --------
Total inventory ...................... $ 4,714 $ 4,604
======= =======
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, $350 million of
notional amount US dollar interest rate swaps are designated as cash flow hedges
of the US dollar "LIBOR" interest rate debt issuances.
All derivatives contracts are reported at fair value with the changes
in fair value recorded in Other Comprehensive Income (Loss). The Company
recognizes the earnings impact of interest rate swaps designated as cash flow
hedges upon the payment of the interest related to the hedged debt. The terms of
the interest rate swaps exactly match the terms of the underlying transaction,
therefore, there is no hedge ineffectiveness nor corresponding earnings impact.
Foreign Exchange Risks
----------------------
A portion of revenues, earnings and net investment in foreign
affiliates are 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
6
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
o Fair value of interest rate swaps designated as cash flow
hedges
Accumulated Other Comprehensive Income
o Interest rate swaps designated as cash flow hedges
Interest Expense
o Interest rate swaps designated as cash flow hedges
For the first half of fiscal 2001, there were no net gains or losses
reclassified into earnings as a result of the discontinuance of cash flow
hedges. Approximately $8,248 of net derivative losses included in other
comprehensive income at June 30, 2001 will be reclassified into earnings within
twelve months from that date.
The following table summarizes the net activities in other
comprehensive income related to derivatives classified as cash flow hedges held
by the Company during the first half of fiscal 2001:
Cumulative effect of adopting SFAS No. 133 as of
December 31, 2000 ................................ $ (2,032)
Gains/(losses) reclassified into net earnings....... 1,283
Year-to-date net unrealized loss on derivatives..... (4,612)
---------
Total............................................... $ (5,361)
=========
Net Earnings per Common Share. Basic net earnings per common share is
computed by dividing net earnings by the weighted average number of common
shares outstanding during the period. Diluted net earnings per common share is
computed by dividing net earnings by the weighted average number of common
shares outstanding during the period, and assumes the issuance of additional
common shares for all dilutive stock options outstanding during the period. A
reconciliation of the weighted average number of common shares and equivalents
outstanding in the calculation of basic and diluted earnings per share is shown
7
in the table below for the periods indicated:
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
------- ------- ------- -------
Basic ................................. 23,718 23,680 23,670 23,679
Dilutive effect of stock options ...... 267 - - -
------- ------- ------- -------
Diluted ............................... 23,985 23,680 23,670 23,679
======= ======= ======= =======
Diluted Earnings (Loss) Per Common Share from Continuing Operations
before Equity in Loss of Affiliate and Cumulative Effect of a
Change in Accounting Principle:
-------------------------------------------------------------------
Earnings from continuing operations before
equity in loss of affiliate and cumulative
effect of a change in accounting principle... $ 0.25 $ 0.10 $ 0.47 $ 0.13
Equity in loss of affiliate .................. (0.25) (0.21) (0.49) (0.37)
------- ------- ------- -------
Loss from continuing operations before
cumulative effect of a change in accounting
principle.................................... $ - $ (0.11) $ (0.02) $ (0.24)
======= ======= ======= =======
Note 3 - Discontinued Operations
In the first quarter of fiscal 2000, the Company adopted a plan to
divest its Mail and Messaging Technologies (MMT) and Imaging businesses and its
financing subsidiary (BHFS). Accordingly, the operating results and net assets
of these businesses have been segregated from the Company's continuing
operations. The Consolidated Statements of Operations separately reflect the
earnings of these businesses, which include an allocation of the Company's
interest expense. The Consolidated Balance Sheets separately reflect the net
assets of these businesses as a non-current asset.
In October 2000, the Company announced an agreement to sell its Imaging
business to Eastman Kodak. The transaction was completed in February 2001 for
$135,000 with the scanner equipment business excluded due to regulatory issues.
Further, in June 2001 the Company sold a majority of MMT's foreign operations to
Pitney Bowes for $51,000.
Currently, the Company's discontinued operations consist of its North
American MMT business, the scanner equipment business that was excluded from the
sale of the Imaging business to Eastman Kodak, and BHFS. The Company expects to
complete the disposition of its remaining discontinued operations by sale before
the end of fiscal 2001.
Amounts related to MMT's international business are shown
8
separately herein. Results for discontinued operations are shown in the tables
below for the periods indicated:
Thirteen Weeks Ended June 30, 2001 Thirteen Weeks Ended July 1, 2000
-------------------------------------------- --------------------------------------------
MMT N.A. Total MMT N.A. MMT Total
& BHFS Imaging MMT Intl. Disc. Ops. & BHFS Imaging Intl. Disc. Ops.
-------- ------- -------- ---------- -------- -------- -------- ----------
Net sales ... $ 89,733 $ - $ 9,763 $ 99,496 $ 83,675 $ 31,244 $ 16,702 $131,621
EBIT (1) before
restruct-
uring ...... $ 4,154 $ - $ (993) $ 3,161 $ 1,786 $ 3,375 $ (1,051) $ 4,110
Restructuring
charges .... $ - $ - $ - $ - $ - $ 1,924 $ - $ 1,924
-------- ------- -------- -------- -------- -------- -------- --------
EBIT (1) .... $ 4,154 $ - $ (993) $ 3,161 $ 1,786 $ 1,451 $ (1,051) $ 2,186
Interest
expense .... 3,348 2,808
-------- --------
Earnings (loss)
before income
taxes ...... $ (187) $ (622)
Income tax
benefit ... $ (75) $ (248)
-------- --------
Earnings (loss)
from discontinued
operations . $ (112) $ (374)
======== ========
(1) EBIT is defined as earnings (loss) from discontinuing operations before
restructuring, interest, and income taxes.
9
Twenty-Six Weeks Ended June 30, 2001 Twenty-Six Weeks Ended July 1, 2000
--------------------------------------------- --------------------------------------------
MMT N.A. Total MMT N.A. MMT Total
& BHFS Imaging MMT Intl. Disc. Ops. & BHFS Imaging Intl. Disc. Ops.
-------- ------- --------- ---------- -------- -------- -------- ----------
Net sales ... $174,592 $10,924 $ 29,542 $215,058 $163,841 $ 68,502 $ 37,102 $269,445
EBIT (1) before
restruct-
uring ...... $ 9,116 $ 1,133 $ (893) $ 9,356 $ 6,403 $ 7,140 $ (1,765) $ 11,778
Restructuring
charges .... $ - $ - $ - $ - $ 155 $ 2,064 $ 3,167 $ 5,386
-------- ------- -------- -------- -------- -------- -------- --------
EBIT (1) .... $ 9,116 $ 1,133 $ (893) $ 9,356 $ 6,248 $ 5,076 $ (4,932) $ 6,392
Interest
expense .... 5,848 5,153
-------- --------
Earnings (loss)
before income
taxes ...... $ 3,508 $ 1,239
Income tax
expense..... $ 1,403 $ 496
-------- --------
Earnings (loss)
from discontinued
operations . $ 2,105 $ 743
======== ========
(1) EBIT is defined as earnings (loss) from discontinuing operations before
restructuring, interest, and income taxes.
Assets and liabilities of discontinued operations were as follows as of
June 30, 2001:
June 30, 2001
-----------------------------------------------
MMT Total
& BHFS Imaging MMT Intl. Disc. Ops.
-------- --------- ---------- -----------
Current assets ............. $166,135 $ - $ - $166,135
Non-current assets ......... 103,979 - - 103,979
-------- -------- -------- --------
Total assets $270,114 $ - $ - $270,114
-------- -------- -------- --------
Current liabilities ........ $107,761 $ - $ - $107,761
Long-term liabilities ...... - - - -
-------- -------- -------- --------
Total liabilities $107,761 $ - $ - $107,761
-------- -------- -------- --------
Net assets of discontinued
operations .............. $162,353 $ - $ - $162,353
======== ======== ======== ========
10
Note 4 - Sales of Assets
Gains on sales of assets in the first half of fiscal 2000 included:
- a portion of the Company's investment in its
affiliate (bigchalk.com) resulting from the exercise
of stock options granted to employees (proceeds of
$1,156 and gain on sale of $867),
- the Company's investment in an entity acquired by
bigchalk.com in exchange for additional common stock
in bigchalk.com with a value of $4,935 (a resulting
gain on sale of $489), and
- additional proceeds related to the sale in 1999 of
vacant land which was adjacent to one of the
Company's manufacturing operations (additional
proceeds/gain on sale of $1,395).
Note 5 - Restructuring
In December 1999, the Company approved a plan to separate its Mail and
Messaging Technologies and Imaging businesses and its financial subsidiary from
its core information and publishing operations, and to restructure and
consolidate its corporate headquarters and certain activities of its continuing
operations. The plan was developed to enhance the Company's operational focus
and growth prospects and reduce its leverage.
The restructuring plan was approved by the Company's Board of
Directors, with the related severance costs based on preexisting severance
agreements and the number, job classification and location of affected employees
to be terminated. Accrued costs for obligations under various noncancellable
leases relate to contractual payments that were committed to prior to approving
the restructuring plan, for which no economic benefit to the Company will be
subsequently realized. The restructuring plan identifies all significant actions
to be taken and significant changes to such plan are not likely.
In connection with the implementation of this plan, the Company
recorded a charge in continuing operations of $10,505 in fiscal 1999. The
Company also recognized an additional charge of $26,260 related to discontinued
operations in connection with this restructuring plan.
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
11
(24) were management and eighty percent (98) were non-management employees.
In 2000, the Company continued to pursue its plan to divest its
non-core businesses and recorded a charge of $5,196.
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.
At June 30, 2001, all employees included in the restructuring plan had
been terminated. The restructuring plan will be substantially completed during
fiscal 2001. The details of the restructuring charges as follows:
Twenty-six Weeks Ended June 30, 2001
Balance ------------------------------------ Balance
Dec. 31, Restruct. Utilized June 30,
2000 Charge Cash Noncash 2001
----------- -------- ------- -------- --------
Continuing Operations
---------------------
Severance ................ $ 1,980 $ - $(1,886) $ - $ 94
Obligations under various
noncancellable leases... 4,293 - (2,564) (178) 1,551
------- ------- -------- -------- --------
Continuing Operations .... $ 6,273 $ - $(4,450) $ (178) $ 1,645
------- ------- -------- -------- --------
Twenty-six Weeks Ended June 30, 2001
Balance ------------------------------------ Balance
Dec. 31, Restruct. Utilized June 30,
2000 Charge Cash Noncash(1) 2001
----------- -------- ------- ---------- --------
Discontinued Operations
-----------------------
Severance ................ $ 327 $ - $ (211) $ (116) $ -
Obligations under various
noncancellable leases... 2,743 - (299) (2,100) 344
------- ------- -------- -------- --------
Discontinued Operations .. $ 3,070 $ - $ (510) $(2,216) $ 344
------- ------- -------- -------- --------
Total Company ........... $ 9,343 $ - $(4,960) $(2,394) $ 1,989
====== ======= ======== ======== ========
(1) Non-cash charge is to eliminate restructuring reserve at discontinued
operations which were sold in the twenty-six weeks ended June 30, 2001
(Imaging and MMT International).
Note 6 - 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
12
revenue from new on-line subscriptions in the Information & Learning (I&L)
business and from electronic parts catalog (EPC) agreements in the Publishing
Services (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 EPC 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.
The cumulative effect of adopting these changes in accounting for
revenue are reported as a cumulative effect of a change in accounting principle
as of the beginning of fiscal 2000. 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 of $65,302 (net of tax benefit of $38,500). In connection with the
initial recognition of these changes in the method of accounting for revenue,
the Company reversed certain accounts receivable balances and recorded a
liability of approximately $88,600 representing amounts due from customers in
the future that were monetized by the Company's finance subsidiary prior to the
change in the method of revenue recognition. The effect of these changes in the
first half of fiscal 2000 was to increase sales by $1,791, selling and
administrative expense by $605, and net interest expense by $3,880.
During the first half of fiscal 2001 and 2000, the Company recognized
revenue of approximately $16,664 and $23,463, respectively, that was recognized
in 1999 and prior years under the Company's prior revenue recognition methods.
Note 7 - Comprehensive Income
Comprehensive earnings or loss includes all changes in stockholders'
equity during the period except those resulting from investments by owners and
distributions to owners.
13
Comprehensive income is shown in the table below for the periods
indicated:
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
-------- -------- --------- ---------
Net earnings (loss) .................... $ (96) $(2,978) $ 45,130 $(70,303)
Other comprehensive income (loss):
Unrealized gain (loss) on derivative
instruments, net of tax ............... 1,233 - (5,361) -
Foreign currency translation
adjustments ........................... (338) 179 429 208
------- ------- -------- --------
Comprehensive income (loss)............. $ 799 $(2,799) $ 40,198 $(70,095)
======= ======= ======== ========
The foreign currency translation adjustments and net loss on derivative
instruments do not impact the Company's income tax expense.
Note 8 - Segment Reporting
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------- ----------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
--------- --------- --------- ---------
NET SALES
Information and Learning....... $ 59,499 $ 55,809 $115,413 $106,184
Publishing Services............ 41,244 38,448 81,183 76,700
-------- -------- -------- --------
Total Net Sales $100,743 $ 94,257 $196,596 $182,884
======== ======== ======== ========
EBIT (1)
Information and Learning....... $ 9,521 $ 7,455 $ 18,525 $ 12,188
Publishing Services............ 9,969 7,305 18,507 13,848
Corporate/Other................ (3,008) (4,021) (6,309) (7,771)
-------- -------- -------- --------
Total EBIT (1)................... $ 16,482 $ 10,739 $ 30,723 $ 18,265
======== ======== ======== ========
June 30, 2001 July 1, 2000
------------- ------------
ASSETS
Information and Learning.................................. $378,522 $364,249
Publishing Services....................................... 102,970 102,670
Corporate/Other........................................... 22,996 37,665
-------- --------
Total Assets................................................ $504,488 $504,584
======== ========
(1) The Company uses earnings from continuing operations before interest, income
taxes, restructuring, gains on sales of assets, equity in earnings of affiliate
and cumulative effect of a change in accounting principle (EBIT) as a measure of
segment operating performance. EBIT is generally viewed as providing useful
information regarding a company's operations, but it is not a measure of
financial performance under generally accepted accounting principles. EBIT from
continuing operations should not be considered in isolation from or as a
substitute for net income as a measure of the Company's profitability.
Additionally, the Company's calculations of EBIT from continuing operations may
not be comparable to other similarly titled measures of other companies. EBIT
from continuing operations has been included because it provides useful
information about how management assesses the Company's operating performance.
14
Note 9 - 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.com. bigchalk.com
develops and markets products and services for research, curriculum integration,
assessment, peer collaboration, professional development, online community, and
e-commerce for teachers, students, parents, librarians and school administrators
in the K-12 educational community. The Company's equity in bigchalk.com's loss
equaled $11.6 million in the first half of 2001. As a result of both venture
capital financing and the exchange of the Company's investment in an entity
acquired by bigchalk.com for additional shares in bigchalk.com, the Company owns
approximately 40% of bigchalk.com. The carrying value of this investment was
$1,801 at June 30, 2001. The Company accounts for its investment in bigchalk.com
on the equity method.
Summarized financial information of bigchalk.com was as follows:
Condensed Statement of Operations:
Thirteen Weeks Twenty-Six Weeks
Ended Ended
------------------- -------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
-------- -------- -------- --------
Net sales ............................. $ 7,004 $ 9,024 $ 14,138 $ 17,463
Gross profit .......................... 4,660 5,860 9,434 11,300
Loss before income taxes .............. (9,817) (10,550) (21,353) (17,901)
Net loss .............................. (9,667) (6,988) (21,011) (16,998)
Condensed Statement of Financial Condition:
June 30, Dec. 30,
2001 2000
-------- --------
Current assets ................ $ 39,120 $ 33,247
Non-current assets ............ 58,621 69,293
-------- --------
Total assets .................. $ 97,741 $102,540
======== ========
Current liabilities ........... $ 22,045 $ 26,343
Non-current liabilities........ 107,293 79,068
Members' interest ............. (31,597) (2,871)
-------- --------
Total liabilities
and members' interest ........ $ 97,741 $102,540
======== ========
15
Item 2.
-------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
This section should be read in conjunction with the Consolidated
Financial Statements of ProQuest Company and Subsidiaries (collectively the
"Company") and the notes thereto included in the annual report for the year
ended December 30, 2000.
Except for the historical information and discussions contained herein,
statements contained in this release may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements involve a number of risks, uncertainties and other factors,
including, without limitation, the cost and availability of intellectual
property from third parties, decreases in the ability to attract and retain
employees, obtain capital, including interest rate risks, unexpected
merger-related effects, timing and market conditions relating to the sale of the
Mail & Messaging Technologies business as well as business execution risk and
risk of new competitors, and any necessary regulatory approvals, decreases in
funding for Internet access as well as overall acceptance and usage of the
Internet in the education and library markets, the availability of free or
advertising-supported research information on the Internet, decreases or shifts
in mail volumes, rate of acceptance of electronic-based mailings, including
effects of an rate of acceptance of internet-based solutions, including the
automotive business, changes in the business services market, changes in the
automotive industry, and general economic conditions, all of which could cause
actual results to differ materially, and such other risks as discussed in the
Company's filing with the Securities and Exchange Commission.
Results of Operations
---------------------
Second Quarter 2001 Compared to Second Quarter 2000
---------------------------------------------------
The Company's net sales from continuing operations increased $6.5
million, or 6.9%, to $100.7 million in the second quarter of 2001.
Net sales of the Information & Learning business increased $3.7
million, or 6.6%, to $59.5 million due to strong sales at ProQuest On-Line,
which grew 18%, partially offset by lower than expected international sales and
non-subscription digital products.
16
Net sales of Publishing Services business increased $2.8 million, or
7.3% to $41.2 million in the second quarter of 2001. This increase is primarily
due to strong sales of the automotive electronic parts catalogs, which grew
9.9%, partially offset by a slight decline in sales of computer hardware and
microfilm, which are less strategic and more mature product lines.
The Company's cost of sales decreased $2.3 million, or 4.8% to $45.6
million in the second quarter of 2001, with the gross profit (net sales less
cost of sales) percentage of sales increasing 5.5%, primarily due to favorable
product mix and effective expense management.
Research and development expense increased $1.4 million, or 32.8%, to
$5.5 million in the second quarter of 2001 as the Company continually seeks to
take advantage of new product/technology opportunities in each of its
businesses.
Selling and administrative expense increased $1.7 million, or 5.3%, to
$33.2 million in the second quarter of 2001, reflecting additional
sales/marketing resources to capitalize on the sales growth opportunities.
Earnings from continuing operations before interest, income taxes,
restructuring, gains on sales of assets, equity in loss of affiliate, and
cumulative effect of a change in accounting principle increased $5.7 million, or
53.5%, to $16.5 million in the second quarter of 2001 resulting from increased
sales and leveraged operating costs/expenses (despite significant investments in
e-commerce-related initiatives). EBITDA (which adds back depreciation and
amortization) increased $5.9 million, or 24.4%, to $30.1 million in the second
quarter of 2001.
The Company uses earnings from continuing operations before interest,
income taxes, restructuring, gains on sales of assets, equity in earnings of
affiliate and cumulative effect of a change in accounting principle (EBIT) as a
measure of segment operating performance. The Company also uses EBITDA from
continuing operations (which is defined as EBIT plus depreciation and
amortization of other long-term assets, primarily intangibles of acquired
companies) as a measure in assessing both operating performance and cash flows.
Both EBIT and EBITDA are generally viewed as providing useful information
regarding a company's operation, but they are not measures of financial
performance under generally accepted accounting principles. EBIT and EBITDA from
continuing operations should not be considered in isolation from or as a
substitute for net income as a measure of the Company's profitability.
Additionally, the Company's calculations of EBIT and EBITDA from continuing
operations may not be comparable to other similarly titled measures of other
companies.
17
Net interest expense decreased $0.5 million, or 7.8%, to $6.3 million
in the second quarter of 2001, primarily reflecting decreased debt levels due to
the Company utilizing the proceeds from the sales of discontinued operations to
pay down debt.
Income tax expense increased in the second quarter of 2001 as a result
of the higher level of pretax profit, with the income tax rate remaining
constant with the prior year.
Financial Condition and Liquidity
---------------------------------
Debt (net of cash and cash equivalents) decreased by $26.0 million to
$371.2 million in the second quarter of 2001 as a result of the proceeds from
the sales of discontinued operations, partially offset by cash used by
operations and capital expenditures.
First Half 2001 Compared to First Half 2000
-------------------------------------------
The Company's net sales from continuing operations increased $13.7
million, or 7.5%, to $196.6 million in the first half of 2001, resulting from
strong sales growth of the Information & Learning business. Net sales of the
Information & Learning business increased $9.2 million, or 8.7%, to $115.4
million due to strong sales at ProQuest On-Line, which grew 18%, partially
offset by lower than expected international sales and non-subscription digital
products.
Net sales of the Publishing Services business increased $4.5 million,
or 5.8% to $81.2 million in the first half of 2001. This increase is primarily
due to strong sales of the automotive electronic parts catalogs, which grew
5.8%, partially offset by a slight decline in sales of computer hardware and
microfilm, which are less strategic and more mature product lines.
The Company's cost of sales decreased $2.5 million, or 2.6% to $92.7
million in the first half of 2001, with the gross profit (net sales less cost of
sales) percentage increasing 4.9% primarily as a result of favorable product mix
and effective expense management.
Research and development expense increased $2.1 million, or 24.3%, to
$10.6 million in the first half of 2001 as the Company continually seeks to take
advantage of new product/technology opportunities in each of its businesses. The
Company's research and development expenditures include investments in a variety
of e-commerce initiatives, expenses for database and software development,
information delivery systems and other electronic devices.
18
Selling and administrative expense increased $1.6 million, or 2.7%, to
$62.6 million in the first half of 2001, reflecting additional sales/marketing
resources to capitalize on the sales growth opportunities from internet-based
products.
Earnings from continuing operations before interest, income taxes,
restructuring, gains on sales of assets, equity in loss of affiliate, and
cumulative effect of a change in accounting principle increased $12.5 million,
or 68.2%, to $30.7 million in the first half of 2001 resulting from increased
sales and leveraged operating costs/expenses. EBITDA (which adds back
restructuring costs, and depreciation and amortization) increased $13.0 million,
or 29.0%, to $57.9 million in the first half of 2001.
The Company uses earnings from continuing operations before interest,
income taxes, restructuring, gains on sales of assets, equity in earnings of
affiliate and cumulative effect of a change in accounting principle (EBIT) as a
measure of segment operating performance. The Company also uses EBITDA from
continuing operations (which is defined as EBIT plus depreciation and
amortization of other long-term assets, primarily intangibles of acquired
companies) as a measure in assessing both operating performance and cash flows.
Both EBIT and EBITDA are generally viewed as providing useful information
regarding a company's operation, but they are not measures of financial
performance under generally accepted accounting principles. EBIT and EBITDA from
continuing operations should not be considered in isolation from or as a
substitute for net income as a measure of the Company's profitability.
Additionally, the Company's calculations of EBIT and EBITDA from continuing
operations may not be comparable to other similarly titled measures of other
companies.
Net interest expense decreased $2.4 million, or 16.1%, to $12.4 million
in the first half of 2001, primarily reflecting decreased debt levels due to the
Company utilizing the proceeds from the sales of discontinued operations to pay
down debt.
Income tax expense increased in the first half of 2001 as a result of
the higher level of pretax profit, with the income tax rate remaining constant
with the prior year.
In December 1999, the Company combined its kindergarten through twelfth
grade ("K-12") internet business with the K-12 internet business of Infonautics,
Inc., to form bigchalk.com, with the equity in bigchalk.com's loss equaling
$11.6 million in the first half of 2001. Subsequent to both venture capital
financing and the sale of the Company's investment in an entity acquired by
bigchalk.com (in exchange for additional common
19
stock) in the first half of 2001, the company owns approximately 40% of
bigchalk.com. bigchalk.com develops and markets products and services for
research, curriculum integration, assessment, peer collaboration, professional
development, online community, and e-commerce for teachers, students, parents,
librarians and school administrators in the K-12 educational community.
In the first quarter of 2000, the Company adopted a plan to divest its
Mail and Messaging Technologies and Imaging business and its financing
subsidiary. Accordingly, the operating results of these businesses have been
segregated from the Company's continuing operations, and are separately reported
as a discontinued operation in the consolidated financial statements.
Financial Condition and Liquidity
---------------------------------
Debt (net of cash and cash equivalents) decreased by $135.0 million to
$371.2 million in the first half of 2001 as a result of the proceeds from the
sales of discontinued operations, partially offset by cash used by operations
and capital expenditures.
The Company believes that current cash balances, cash generated from
operations, and availability under its line of credit will be adequate to fund
the growth in working capital and capital expenditures necessary to support
planned increases in sales for the foreseeable future.
Interest Rate Risk Management
The Company uses variable-rate long-term debt to finance its
operations. These debt obligations expose the Company to variability in interest
payments due to changes in interest rates. Management believes it is prudent to
limit the variability of most of its interest payments. It is the Company's
objective to hedge between 75 and 95 percent of its variable-rate longer term
interest payments. To meet this objective, management enters into interest rate
swaps to manage fluctuations in cash flows resulting from interest rate risk.
Recently Issued Financial Accounting Standards
In July 2001, the Financial Accounting Standards Boards (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141
addresses financial accounting
20
and reporting for business combinations, and eliminates the pooling of interests
method as a valid method to account for a business combination for all business
combinations initiated after June 30, 2001. SFAS No. 142 addresses financial
accounting and reporting for acquired goodwill and other intangible assets as
well as how goodwill and other intangible assets should be accounted for after
they have been initially recognized in the financial statements. SFAS No. 142
requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment. 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. Management is currently assessing the impact of
these Statements on the Company's results of operations and financial position.
21
Item 3.
-------
Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company, as a result of its global operating and financing
activities, is exposed to changes in foreign currency and interest rates which
may adversely affect its results of operations and financial position. The
Company has entered into interest rate swaps having notional amounts totaling
$350 million at June 30, 2001. The potential impact on the Company's earnings
from a 50 basis point increase or decrease in quoted interest rates would be
approximately $185 expense or benefit for the first half of 2001. The interest
rate swaps have expiration dates through September 2005.
The Company's practice is to hedge its significant operating balance
sheet exposures to foreign currency rate fluctuations via use of foreign
currency forward or option contracts. The Company does not utilize financial
derivatives for trading or other speculative purposes. The derivative contracts
have maturity dates extending through August 2001, and are for an aggregate
amount of $59.2 million at June 30, 2001 (which approximates the fair value
based on quoted market prices). The Company is exposed to market risk in the
event of nonperformance by the other parties (major international banks) to
these contracts; however, such nonperformance is not anticipated. The potential
impact on the Company's earnings from a 10% adverse change in quoted foreign
currency rates would be insignificant.
Part II. Other Information
-------- -----------------
Item 1. Legal Proceedings.
------- ------------------
The Company is involved in various legal proceedings incidental to its
business. Management believes that the outcome of such proceedings will not have
a material adverse effect upon the consolidated operations or financial
condition of the Company.
Item 6. Exhibits and Reports on Form 8-K.
------- ---------------------------------
(a) Exhibits:
Index Number Description
------------ -----------
None
22
(b) Reports on Form 8-K.
The Company filed the following Form 8-Ks during the thirteen weeks
ended June 30, 2001:
- On June 13, 2001 regarding the Company's name change from Bell
& Howell Company to ProQuest Company,
- on June 18, 2001 regarding the sale of its international Mail
and Messaging Technologies unit, and
- on June 22, 2001, a Form 8-K/A regarding the sale of its
Imaging unit.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 2001 PROQUEST COMPANY
/s/ James P. Roemer
-------------------------------------
James P. Roemer
Chairman of the Board
of Directors, President and
Chief Executive Officer
/s/ Alan Aldworth
-------------------------------------
Chief Financial Officer
and Director
23