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
March 30, 2002 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 May 6, 2002 was 24,260,893.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
------ --------------------- ----
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations for
the Thirteen Weeks Ended March 30, 2002 and
March 31, 2001.......................................... 3
Consolidated Balance Sheets as of
March 30, 2002 and December 29, 2001.................... 4
Consolidated Statements of Cash Flows for
the Thirteen Weeks Ended March 30, 2002 and
March 31, 2001.......................................... 5
Notes to the Consolidated Financial
Statements.............................................. 6
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......................................... 23
Item 6. Exhibits and Reports on Form 8-K.......................... 23
SIGNATURE PAGE....................................................... 24
ProQuest Company and Subsidiaries
Consolidated Statements of Operations
For the Thirteen Weeks Ended March 30, 2002 and March 31, 2001
(In thousands, except per share amounts)
(Unaudited)
2002 2001
--------- ---------
Net sales .......................................................... $ 102,752 $ 95,853
Cost of sales ...................................................... (47,750) (47,140)
Research and development expense ................................... (4,956) (5,082)
Selling and administrative expense ................................. (29,528) (29,390)
--------- ---------
Earnings from continuing operations before interest, income taxes,
equity in loss of affiliate, discontinued operations and
cumulative effect of a change in accounting principle ............ 20,518 14,241
Net interest expense:
Interest income ................................................... 572 110
Interest expense .................................................. (7,738) (6,188)
--------- ---------
Net interest expense ............................................... (7,166) (6,078)
Earnings from continuing operations before income taxes, equity
in loss of affiliate, discontinued operations and cumulative
effect of a change in accounting principle ........................ 13,352 8,163
Income tax expense ................................................. (5,074) (3,265)
Equity in loss of affiliate ........................................ - (5,471)
--------- ---------
Earnings/(loss) from continuing operations before discontinued
operations and cumulative effect of a change in accounting
principle ......................................................... 8,278 (573)
Earnings from discontinued operations, net of tax .................. - 2,217
Gain on sale of discontinued operations, net (less applicable
income taxes of $0 and $29,056, respectively) ..................... - 43,583
Cumulative effect of a change in accounting principle, net (less
applicable income taxes of $3,023) ................................ (4,933) -
--------- ---------
Net earnings ....................................................... $ 3,345 $ 45,227
========= =========
Net earnings per common share:
Basic:
Earnings from continuing operations before discontinued operations
and cumulative effect of a change in accounting principle ......... 0.34 (0.02)
Earnings from discontinued operations .............................. - 0.09
Gain from sale of discontinued operations .......................... - 1.85
Cumulative effect of a change in accounting principle .............. (0.20) -
Diluted:
Earnings from continuing operations before discontinued operations
and cumulative effect of a change in accounting principle ......... 0.34 (0.02)
Earnings from discontinued operations .............................. 0.09
Gain from sale of discontinued operations .......................... 1.84
Cumulative effect of a change in accounting principle .............. (0.20) -
Average number of common shares and equivalents outstanding:
Basic .............................................................. 24,130 23,622
Diluted ............................................................ 24,666 23,670
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
3
ProQuest Company and Subsidiaries
Consolidated Balance Sheets
As of March 30, 2002 and December 29, 2001
(In thousands)
(Unaudited)
Assets
------
2002 2001
--------- ---------
Current assets:
Cash and cash equivalents ............................... $ 1,644 $ 495
Accounts receivable, net................................. 78,032 89,726
Inventory ............................................... 4,443 4,441
Other current assets .................................... 38,154 33,283
--------- ---------
Total current assets .................................... 122,273 127,945
Property, plant, equipment and product masters........... 458,959 446,872
Accumulated depreciation ................................ (304,076) (292,843)
--------- ---------
Net property, plant, equipment and product masters ...... 154,883 154,029
Long-term receivables ................................... 24,692 23,200
Intangibles, net of accumulated amortization............. 7,887 18,220
Goodwill ................................................ 228,169 222,701
Other assets ............................................ 89,017 79,838
--------- ---------
Total assets ............................................ $ 626,921 $ 625,933
========= =========
Liabilities and Shareholders' Equity (Deficit)
----------------------------------------------
Current liabilities:
Notes payable ........................................... $ - $ 564
Current maturities of long-term debt .................... 10,599 292
Accounts payable ........................................ 36,754 40,469
Accrued expenses ........................................ 69,159 85,740
Current portion of long-term deferred income ............ 26,656 26,124
Deferred income ......................................... 101,537 114,739
--------- ---------
Total current liabilities ............................... 244,705 267,928
Long-term liabilities:
Long-term debt, less current maturities.................. 275,000 252,782
Long-term deferred income, less current portion ......... 56,286 59,933
Other liabilities ....................................... 88,806 90,362
--------- ---------
Total long-term liabilities ............................. 420,092 403,077
Shareholders' equity (deficit):
Common stock, $.001 par value, 24,669 shares issued
and 24,219 shares outstanding at March 30, 2002,
and 24,546 shares issued and 24,096 shares outstanding
at December 29, 2001 ................................... 24 24
Capital surplus ......................................... 171,473 169,050
Notes receivable from executives ........................ (683) (1,071)
Retained earnings (accumulated deficit) ................. (192,506) (195,851)
Treasury stock .......................................... (11,529) (11,335)
Other comprehensive income (loss):
Accumulated foreign currency translation adjustment..... 541 1,001
Unrealized loss from derivatives........................ (5,196) (6,890)
--------- ---------
Accumulated other comprehensive loss .................... (4,655) (5,889)
--------- ---------
Total shareholders' equity (deficit) .................... (37,876) (45,072)
--------- ---------
Total liabilities and shareholders' equity .............. $ 626,921 $ 625,933
========= =========
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
4
ProQuest Company and Subsidiaries
Consolidated Statements of Cash Flows
For the Thirteen Weeks Ended March 30, 2002 and March 31, 2001
(In thousands)
(Unaudited)
Thirteen Weeks
Ended
------------------------
2002 2001
--------- ---------
Operating Activities:
Earnings/(loss) from continuing operations before discontinued operations and
cumulative effect of a change in accounting principle .................................. $ 8,278 $ (573)
Adjustments to reconcile net earnings/(loss) to net cash provided by (used in)
operating activities:
Equity in loss of affiliate .............................................................. - 5,471
Depreciation and amortization ............................................................ 12,117 13,715
Deferred taxes ........................................................................... 4,745 3,521
Changes in operating assets and liabilities:
Accounts receivable ...................................................................... 10,170 25,217
Inventory ................................................................................ 9 429
Other assets ............................................................................. (4,592) (8,874)
Long-term receivables, net ............................................................... (1,002) 319
Accounts payable ......................................................................... (3,678) (4,900)
Accrued expenses ......................................................................... (16,315) (17,152)
Deferred income and other long-term liabilities .......................................... (22,285) (20,517)
Other, net ............................................................................... (2,440) 3,816
--------- ---------
Net cash provided by (used in) continuing operations ..................................... (14,993) 472
Investing activities:
Expenditures for property, plant, equipment and product masters .......................... (15,588) (12,503)
Acquisitions, net of cash acquired ....................................................... (2,617) (10,000)
Proceeds from sale of discontinued operations ............................................ - 135,000
--------- ---------
Net cash provided by (used in) investing activities ...................................... (18,205) 112,497
Financing activities:
Net decrease in short-term debt .......................................................... (498) (11,702)
Proceeds from long-term debt ............................................................. 32,600 10,614
Repayment of long-term debt .............................................................. (75) (103,604)
Proceeds from sales of common stock, net ................................................. 2,423 100
--------- ---------
Net cash provided by (used in) financing activities ...................................... 34,450 (104,592)
Net cash used by discontinued operations ................................................. - (6,129)
Effect of exchange rate changes on cash .................................................. (103) 1,460
--------- ---------
Increase in cash and cash equivalents .................................................... 1,149 3,708
Cash and cash equivalents, beginning of period ........................................... 495 10,610
--------- ---------
Cash and cash equivalents, end of period ................................................. 1,644 14,318
========= =========
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
5
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
The 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 2001 consolidated financial statements have
been made to conform to the 2002 presentation. We believe 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 29,
2001.
In the first quarter of fiscal 2000, the Company adopted a plan to
divest its Mail and Messaging Technologies and Imaging businesses and its
financing subsidiary. During 2001, the Company completed the divestitures.
Accordingly, in 2001, the operating results and net assets of these businesses
have been segregated from the Company's continuing operations.
Note 2 - Significant Accounting Policies
6
Accounts Receivable. Accounts receivable are stated net of the allowance
-------------------
for doubtful accounts which was $1,511 and $1,353 at March 30, 2002 and
December 29, 2001, respectively.
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.
7
The components of inventory are shown in the table below as of the dates
indicated:
For the Fiscal Quarter Ended
----------------------------
March 30, December 29,
2002 2001
---------- ----------
Finished products ..................... $ 1,575 $ 1,821
Products in process and materials ..... 2,868 2,620
-------- -------
Total inventory ....................... $ 4,443 $ 4,441
======== =======
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 Information and Learning ("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. The carrying value of the product masters at
March 30, 2002 is $115,701 (net of $210,013 of depreciation) and at December 29,
2001 is $104,701 (net of $202,514 of depreciation).
Intangible Assets. Intangible assets are identified and accounted for apart
-----------------
from goodwill if they arise from either contractual or other legal rights or are
separable, at their fair values. Intangible assets with estimable useful lives
are amortized to their estimated residual values over those estimated useful
lives. Intangible assets with indefinite useful lives are tested for impairment
annually in lieu of being amortized. The estimated useful lives of intangible
assets, including the determination of whether the life is indefinite, is
reevaluated annually.
Derivative Financial Instruments and Hedging Activities. All derivative
--------------------------------------------------------
instruments are recognized as assets or liabilities in the balance sheet and
measured at fair value.
8
For the first quarter of fiscal 2002, there were no net gains or losses
reclassified into earnings as a result of the discontinuance of cash flow
hedges. Approximately $6,987 of net derivative losses included in other
comprehensive income at March 30, 2002 will be reclassified into earnings within
twelve months
9
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 quarter of fiscal 2002:
Balance as of December 29, 2001.................... $ (6,890)
Net losses reclassified into net earnings.......... 2,596
Year-to-date net unrealized gain on derivatives.... 406
Income tax expense related to items of other (1,308)
comprehensive income............................. --------
Total, net of tax.................................. $ (5,196)
========
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
in the table below for the periods indicated:
Thirteen Weeks Ended
--------------------
March 30, March 31,
2002 2001
------ -------
Basic........................................... 24,130 23,622
Dilutive effect of stock options................ 536 48
------ -------
Diluted......................................... 24,666 23,670
====== =======
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, discontinued operations and
cumulative effect of a change in accounting
principle........................................... $ 0.34 $ 0.21
Equity in loss of affiliate.......................... - (0.23)
------- -------
Earnings / (loss) from continuing operations before
discontinued operations and cumulative effect of a
change in accounting principle...................... $ 0.34 $ (0.02)
======= =======
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).
10
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 Company completed the
divestiture of all discontinued operations in 2001. In February 2001, the
Company sold its Imaging business to Eastman Kodak.
Further, the gain resulting from the sale of the Imaging business was derived as
follows:
Purchase price ....................................... $135,000
Net assets, reserves, and expenses ................... (62,361)
--------
Gain on sale ......................................... $ 72,639
Income tax expense ................................... (29,056)
--------
Gain on sale of discontinued operation, net of tax ... $ 43,583
========
Results from discontinued operations are shown in the tables below for the
period indicated:
Thirteen Weeks Ended March 31, 2001
-------------------------------------------
MMT N.A Total
& BHFS Imaging MMT Intl. Disc. Ops.
-------- --------- --------- -----------
Net sales .................... $ 84,859 $ 10,882 $ 19,779 $ 115,520
======== ======== ======== =========
Earnings before interest and
taxes....................... 5,135 894 166 6,195
======== ======== ========
Interest expense ............. (2,500)
Income tax expense ........... (1,478)
---------
Earnings from discontinued
operations .................. $ 2,217
=========
Note 4 - Cumulative Effect of a Change in Accounting Principle
In the first quarter of fiscal 2002, the Company adopted Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires
that goodwill no longer be amortized to earnings, but instead be reviewed for
impairment on an annual basis. Under the transitional provisions of SFAS No.
142, the Company recorded an impairment loss on intangible assets associated
with its ProQuest Business Solutions ("PBS") reporting unit of $4,933 (net of
tax benefit of $3,023), in the first quarter of 2002. The impairment loss has
been recorded as a cumulative effect of a change in accounting principle in the
11
accompanying Consolidated Statements of Operations for the thirteen weeks ended
March 30, 2002. (Note 8)
In December 1999, the 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 PBS business.
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, $6,586 and $8,452 was recognized in
the first fiscal quarters of 2002 and 2001, respectively.
Note 5 - Comprehensive Income
Comprehensive earnings or losses include all changes in stockholders'
equity during the period except those resulting from investments by owners and
distributions to owners.
Comprehensive income is shown in the table below for the periods indicated:
Thirteen Weeks Ended
--------------------
March 30, March 31,
2002 2001
-------- --------
Net earnings (loss) ...................................... 3,345 45,227
Other comprehensive income (loss):
Net unrealized gain / (loss) on derivative instruments ... 1,694 (6,594)
Foreign currency translation adjustments ................. (460) 767
------- --------
Comprehensive income ..................................... $ 4,579 $ 39,400
======= ========
The foreign currency translation adjustments and net gain / (loss) on
derivative instruments do not impact the Company's income tax expense.
Note 6 - Segment Reporting
Information concerning the Company's reportable business
12
segments for the first fiscal quarter of 2002 and 2001:
2002
----------------------------------------
I&L PBS Corp. Total
-------- -------- -------- --------
Net Sales .......................... $ 60,226 $ 42,526 $ - $102,752
Earnings from continuing operations
before interest and taxes (1)..... 12,799 10,805 (3,086) 20,518
Capital Expenditures................ 14,789 606 193 15,588
Depreciation and Amortization (2)... 10,607 1,487 23 12,117
Total Assets........................ 438,168 95,470 93,283 626,921
2001
----------------------------------------
I&L PBS Corp. Total
-------- -------- -------- --------
Net Sales .......................... $ 55,914 $ 39,939 $ - $ 95,853
Earnings from continuing operations
before interest and taxes (1)..... 9,004 8,538 (3,301) 14,241
Capital Expenditures................ 11,027 1,476 - 12,503
Depreciation and Amortization (2)... 11,509 1,997 209 13,715
Total Assets........................ 428,858 104,283 92,792 625,933
(1) Excludes equity in loss of affiliate, discontinued operations and
cumulative effect of a change in accounting principle.
(2) Excludes amortization / write-off of deferred financing costs.
Note 7 - Investments in Affiliates
The Company owns approximately 38% of bigchalk.com, inc. ("bigchalk") on a
fully-diluted basis. bigchalk develops and markets products and services for
research, curriculum integration, assessment, peer collaboration and
professional development for teachers, librarians and school administrators in
the kindergarten through twelfth grade educational community. The Company
accounts for its investment in bigchalk on the equity method and the carrying
value of this investment was $0 at March 30, 2002.
Summarized financial information of bigchalk is as follows:
Condensed Statement of Operations:
Thirteen Weeks
Ended
------------------------
March 30, March 31,
2002 2001
--------- ----------
Net sales ............................. $ 6,927 $ 7,134
Gross profit .......................... 4,692 4,775
Loss before income taxes .............. (2,760) (11,534)
Net loss .............................. (2,608) (11,343)
13
Condensed Statement of Financial Condition:
March 30, December 29,
2002 2001
--------- --------
Current assets ........................ $ 25,341 $ 28,985
Non-current assets .................... 16,110 18,852
--------- ---------
Total assets .......................... $ 41,451 $ 47,837
========= =========
Current liabilities ................... $ 16,278 $ 20,592
Non-current liabilities ............... 122,559 117,344
Stockholders' deficit ................. (97,386) (90,099)
--------- ---------
Total liabilities
and stockholders' deficit ............. $ 41,451 $ 47,837
========= =========
Note 8 - Goodwill and Other Intangible Assets
In the first quarter of fiscal 2002, we adopted Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that
goodwill no longer be amortized to earnings, but instead be reviewed for
impairment on an annual basis. As a result of adopting SFAS No. 142, we ceased
amortization of goodwill, which is expected to result in an increase in net
income of approximately $7.7 million for the year ending December 28, 2002, and
performed the first step of the required two-step goodwill impairment test. The
first step of the impairment test requires us to compare the fair value of each
reporting unit to its carrying value. If the carrying value is higher than the
fair value, there is an indication that an impairment may exist; if the carrying
value is less than the fair value, no indication of impairment exists and the
second step does not need to be completed. If there is an indication of
impairment, the second step of the impairment test requires us to allocate the
fair value of the reporting unit to its assets and liabilities as if the
reporting unit had been acquired in a business combination. The amount of
impairment for goodwill is measured as the excess of its carrying value over its
fair value. During the first step of the impairment test, no indication of
impairment was evident, as determined utilizing various evaluation techniques
including discounted cash flow and the Guideline Company Method. Therefore we
did not need to complete the second step, and no impairment for goodwill was
recorded for the initial adoption of SFAS 142. Under the transitional provisions
of SFAS No. 142, the Company recorded an impairment loss on intangible assets
associated with its Business Solutions reporting unit of $4,933, net of tax
benefit of $3,023, in the first quarter. The impairment loss has been recorded
as a cumulative effect of change in accounting principle in the accompanying
Consolidated Statements of Operations for the thirteen weeks ended March 30,
2002.
14
The following sets forth a reconciliation of net income and earnings
per share information for the thirteen weeks ended March 30, 2002 and March 31,
2001 adjusted for the non-amortization provisions for SFAS No. 142:
Thirteen Weeks
Ended
----------------------
March 30, March 31,
2002 2001
--------- ---------
Earnings/(loss) from continuing operations
before discontinued operations and
cumulative effect of a change in
accounting principle...................... $ 8,278 $ (573)
Earnings from discontinued operations, net of
tax....................................... - 2,217
Gain on sale of discontinued operations...... - 43,583
Cumulative effect of a change in accounting
principle................................. (4,933) -
Add back: Goodwill amortization, net
of tax ................................... - 1,192
--------- ---------
Adjusted net income.......................... $ 3,345 $ 46,419
========= =========
Thirteen Weeks
Ended
----------------------
March 30, March 31,
2002 2001
--------- ---------
Basic earnings per share:
As reported $0.14 $(0.02)
Goodwill amortization - 0.05
----- ------
Adjusted $0.14 $ 0.03
===== ======
Diluted earnings per share:
As reported $0.14 $(0.02)
Goodwill amortization - 0.05
----- ------
Adjusted $0.14 $ 0.03
===== ======
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 29,
2001.
Safe Harbor for Forward-looking Statements
------------------------------------------
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, business execution risk, risk of new competitors, any
necessary regulatory approvals, decreases in funding for Internet access as well
as overall acceptance and usage of the Internet in the education and library
markets, the availability of free or advertising-supported research information
on the Internet, including effects of and rate of acceptance of internet-based
solutions, 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
filings with the SEC, including without limitation, our Annual Report on Form
10-K for fiscal 2001. These factors may cause our actual results to differ from
any forward-looking statement. We are under no obligation to update or revise
any of these forward-looking statements.
Results of Operations
---------------------
The following table sets forth continuing operations financial data
excluding nonrecurring items which consist of equity in loss of affiliate,
discontinued operations and
16
cumulative effect of a change in accounting principle and its related tax
impact:
Thirteen Weeks Ended
(dollars in millions)
---------------------------------------------
March 30, % of March 31, % of
2002 sales 2001 sales
--------- ------- --------- -------
Net sales .................... $ 102.8 100.0% $ 95.9 100.0%
Cost of sales............... 47.8 46.5% 47.1 49.1%
--------- ------- --------- -------
Gross profit.................. 55.0 53.5% 48.8 50.9%
Less:
Research and development.... 5.0 4.9% 5.1 5.3%
Selling and administrative.. 29.5 28.7% 29.5 30.8%
--------- ------- --------- -------
Earnings from continuing
operations before interest
and taxes................... 20.5 19.9% 14.2 14.8%
Less:
Net interest expense....... 7.2 7.0% 6.1 6.4%
Income tax expense......... 5.0 4.9% 3.2 3.3%
--------- ------- --------- -------
Earnings from continuing
operations(1)............... 8.3 8.1% 4.9 5.1%
========= ======= ========= =======
(1) Excludes equity in loss of affiliate, gain on sale of discontinued
operations, earnings from discontinued operations and cumulative effect of
a change in accounting principle.
First Quarter of Fiscal 2002 Compared to First Quarter of Fiscal 2001
---------------------------------------------------------------------
Net sales.
Thirteen Weeks
Ended
------------------------
March 30, March 31,
2002 2001
--------- ---------
I&L .............................. $ 60.3 $ 55.9
PBS .............................. 42.5 40.0
-------- --------
Total ............................ $ 102.8 $ 95.9
======== ========
The Company's net sales from continuing operations increased $6.9 million,
or 7.2%, to $102.8 million in the first quarter of 2002.
Net sales of I&L increased $4.4 million, or 7.9%, to $60.3 million
primarily as a result of a 15.4% increase in sales of electronic products. The
growth in electronic products is demonstrated by the growth of the "annualized
online subscription contract value". Annualized online subscription contract
value is the projected 12-month revenue from all outstanding online
subscription contracts. The total annualized online subscription value was
$90.4 million and $79.4 million at first quarter end 2002 and 2001,
respectively, an increase of 13.9%.
Net sales of PBS increased $2.5 million, or 6.3%, to $42.5
17
million in the first quarter of 2002. This increase is primarily due to
continued strong sales of automotive electronic parts catalogs, which grew 8.1%.
There was also an increase in revenue related to dealer management systems as
well as Alison new product offerings, partially offset by a decrease in sales at
Media Solutions.
Cost of Sales.
Thirteen Weeks
Ended
------------------------
March 30, March 31,
2002 2001
--------- ---------
I&L .............................. $ 32.1 $ 31.3
PBS .............................. 15.7 15.8
-------- --------
Total ............................ $ 47.8 $ 47.1
======== ========
The Company's cost of sales increased $0.7 million to $47.8 million in the
first quarter of 2002, with the gross profit (net sales less cost of sales)
percentage increasing by 2.7 percentage points to 53.5%. The higher gross
profit percentage in 2002 primarily resulted from favorable product mix.
Research and Development.
Thirteen Weeks
Ended
------------------------
March 30, March 31,
2002 2001
--------- ---------
I&L .............................. $ 2.2 $ 2.4
PBS .............................. 2.8 2.7
-------- --------
Total ............................ $ 5.0 $ 5.1
======== ========
Research and development expense for the first quarter 2002 essentially
remained flat compared to 2001 levels. The Company's research and development
expenditures include investments for database and software development,
information delivery systems and other electronic products.
Selling and Administrative.
Thirteen Weeks
Ended
------------------------
March 30, March 31,
2002 2001
--------- ---------
I&L .............................. $ 13.2 $ 13.2
PBS .............................. 13.2 13.0
Corporate......................... 3.1 3.3
-------- --------
Total ............................ $ 29.5 $ 29.5
======== ========
Selling and administrative expense of $29.5 million in the first quarter
of 2002 was flat compared to the same period of last year. However, as a percent
of sales, selling and
18
administrative expenses declined from 31% in the first quarter of 2001 to 29% in
the first quarter of 2002. This improvement in current cost efficiency is the
result of the company's continued focus on leveraging its current selling and
marketing infrastructure.
Earnings from Continuing Operations before Interest and Taxes.
Thirteen Weeks
Ended
------------------------
March 30, March 31,
2002 2001
-------- --------
I&L .................. $ 12.8 $ 9.0
PBS .................. 10.8 8.5
Corporate ............ (3.1) (3.3)
-------- --------
Total ................ $ 20.5 $ 14.2
======== ========
Earnings from continuing operations before interest and taxes increased
$6.3 million, or 44.4%, to $20.5 million in the first quarter of 2002 resulting
from the increasing electronic product sales and leveraging our current
operating infrastructure.
Net Interest Expense.
Net interest expense increased $1.1 million, or 18.0%, to $7.2 million in
the first quarter of 2002, primarily reflecting a higher debt level for 2002
versus the debt allocated to continuing operations in 2001.
Income Tax Expense.
Income tax expense increased in the first quarter of 2002 as a result of
the higher level of pretax profit. Partially offsetting this increase is the
change in the effective tax rate from 40% in 2001 to 38% in 2002.
Accounts Receivable.
As of
----------------------------
March 30, December 29,
2002 2001
-------- -----------
I&L .................. $ 40.8 $ 47.0
PBS .................. 27.8 28.4
Corporate ............ 9.4 14.3
-------- --------
Total ................ $ 78.0 $ 89.7
======== ========
Accounts receivable decreased by $11.7 million during the quarter ended
March 30, 2002. This decrease is principally the result of a business-cycle
related increase in year-end receivables due to the timing of annual
subscription invoicing.
19
Deferred Income.
As of
--------------------------
March 30, December 29,
2002 2001
-------- --------
I&L ............... $ 96.1 $ 109.4
PBS ............... 5.4 5.3
-------- --------
Total ............. $ 101.5 $ 114.7
======== ========
Deferred income decreased by $13.2 million during the quarter ended March 30,
2002. This change relates to the reduction in deferred revenue resulting from
the recognition of income over the subscription term.
Liquidity and Capital Resources.
Debt (net of cash and cash equivalents) increased by $33.0 million to
$283.9 million in the first quarter of 2002 primarily as a result of working
capital changes associated with an increase in working capital 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.
The Company's credit agreement requires a $50 million reduction in the
credit facility at December 31, 2002 taking the total available from $325
million to $275 million. Accordingly, $10.6 million has been reclassified from
long-term debt to current maturities of long-term debt as of March 30, 2002.
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. If interest rates increase, interest expense
increases. Conversely, if interest rates decrease, interest expense also
decreases.
Management believes it is prudent to limit the variability of most of its
interest payments. To meet this objective, management enters into interest rate
swaps to manage fluctuations in cash flows resulting from interest rate risk.
The Company assesses interest rate cash flow risk by continually identifying and
monitoring changes in interest rate exposures that may adversely impact expected
future cash flows.
The interest rate swaps change the variable-rate cash flow exposure on the
long-term debt obligations to fixed-rate cash
20
flows by entering into receive-variable, pay-fixed interest rate agreements,
thereby creating fixed-rate long-term debt.
Recently Adopted Financial Accounting Standards.
In July 2001, the Financial Accounting Standards Board (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 was
December 30, 2001, the first day of the Company's fiscal year. The net book
value of the Company's goodwill and other intangible assets was $236.1 million
and $240.9 million for 2002 and 2001, respectively. The adoption of the
non-amortization provision of SFAS No. 142 is expected to reduce 2002 annual
goodwill amortization expense by approximately $7.7 million. Under the
transitional provisions of SFAS No. 142, the Company recorded an impairment loss
on intangible assets associated with its Business Solutions reporting unit of
$4.9 million, net of tax benefit of $3.0 million, in the first quarter. The
impairment loss has been recorded as a cumulative effect of change in accounting
principle in the accompanying Consolidated Statements of Operations for the
thirteen weeks ended March 30, 2002. The Company has completed the first step of
the required two-step goodwill impairment test. The first step of the impairment
test requires us to compare the fair value of each reporting unit to its
carrying value. If the carrying value is higher than the fair value, there is an
indication that an impairment may exist; if the carrying value is less than the
fair value, no indication of impairment exists and the second step does not need
to be completed. If there is an indication of impairment, the second step of the
impairment test requires us to allocate the fair value of the reporting unit to
its assets and liabilities as if the reporting unit had been acquired in a
business combination. The amount of impairment for goodwill is measured as the
excess of its carrying value over its fair value. During the first step of the
impairment test, no indication of impairment was evident, as determined
utilizing various evaluation techniques including discounted cash flow and the
Guideline Company Method. Therefore we did not need to complete the second step,
and no impairment for goodwill was recorded for the initial adoption of SFAS
142.
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 adoption of SFAS No. 144
did not have a material impact on the Company's results of operations and
financial position.
21
Item 3.
-------
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 debt outstanding. Specifically, the
Company has entered into interest rate swaps having notional amounts totaling
$200 million at March 30, 2002. The potential impact on the Company's earnings
from a 50 basis point increase or decrease in quoted interest rates would be
approximately $108 thousand expense or benefit for the first quarter of 2002.
The interest rate swaps have expiration dates through December 2003. At March
30, 2002, the notional amounts outstanding were $200 million and the approximate
weighted-average swap rate versus 3-month LIBOR was 6.16%.
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 May 2002, and are for an aggregate amount of
$63.5 million at March 30, 2002 (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.
22
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
(b) Reports on Form 8-K.
None
23
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: May 14, 2002 PROQUEST COMPANY
/s/ Alan Aldworth
--------------------------------
Alan Aldworth
President and
Chief Operating Officer
/s/ Kevin Gregory
--------------------------------
Kevin Gregory
Vice President,
Chief Financial Officer
and Assistant Secretary
24