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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended Commission file number
September 28, 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 November 4, 2002 was 28,005,019.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations for
the Thirteen and Thirty-Nine Weeks Ended
September 28, 2002 and September 29, 2001 ..................... 1
Consolidated Balance Sheets as of
September 28, 2002, December 29, 2001 and
September 29, 2001 ............................................ 2
Consolidated Statements of Cash Flows for
the Thirty-Nine Weeks Ended
September 28, 2002 and September 29, 2001 ..................... 3
Notes to the Consolidated Financial
Statements .................................................... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ...................................................... 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ............................................... 25
Item 4. Controls and Procedures ........................................... 25
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings ................................................. 26
Item 5. Other Information ................................................. 26
Item 6. Exhibits and Reports on Form 8-K .................................. 26
SIGNATURE PAGE ............................................................. 27
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER ............................... 28
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER ............................... 30
ProQuest Company and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------------- ------------------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales $ 106,370 $ 98,617 $ 318,102 $ 295,213
Cost of sales (52,094) (44,554) (151,464) (137,249)
------------- ------------- ------------- --------------
Gross profit 54,276 54,063 166,638 157,964
Research and development expense (4,364) (5,365) (14,853) (15,946)
Selling and administrative expense (28,010) (32,951) (86,079) (95,548)
------------- ------------- ------------- --------------
Earnings from continuing operations before interest,
income taxes and equity in loss of affiliate 21,902 15,747 65,706 46,470
Net interest expense:
Interest income 1,000 35 2,153 217
Interest expense (13,286) (6,297) (28,519) (18,845)
------------- ------------- ------------- -------------
Net interest expense (12,286) (6,262) (26,366) (18,628)
Earnings from continuing operations before income
taxes and equity in loss of affiliate 9,616 9,485 39,340 27,842
Income tax expense (3,654) (3,794) (14,949) (11,137)
Equity in loss of affiliate - (1,802) - (13,374)
------------- ------------- ------------- -------------
Earnings from continuing operations 5,962 3,889 24,391 3,331
Discontinued Operations:
Earnings from discontinued operations, net (less
applicable income taxes of $0, $534, $0 and
$1,937 respectively) - 800 - 2,905
(Loss) gain on sales of discontinued operations,
net, (less applicable income taxes (benefit)
of $0, ($23,458), $0 and $5,598 respectively) - (35,187) - 8,396
------------- ------------- ------------- -------------
Net earnings (loss) 5,962 (30,498) 24,391 14,632
============= ============= ============= =============
Net earnings (loss) per common share:
Basic:
Earnings from continuing operations 0.21 0.16 0.95 0.14
Earnings from discontinued operations - 0.03 - 0.12
(Loss) gain on sales of discontinued operations - (1.47) - 0.36
Net earnings (loss) 0.21 (1.28) 0.95 0.62
Diluted:
Earnings from continuing operations 0.21 0.16 0.94 0.14
Earnings from discontinued operations - 0.03 - 0.12
(Loss) gain on sales of discontinued operations - (1.45) - 0.35
Net earnings (loss) 0.21 (1.26) 0.94 0.61
Average number of common shares and equivalents outstanding:
Basic 27,993 23,865 25,581 23,735
Diluted 28,343 24,271 26,056 24,006
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these statements.
1
ProQuest Company and Subsidiaries
Consolidated Balance Sheets
(In thousands)
(Unaudited)
ASSETS
Sept. 28, 2002 Dec. 29, 2001 Sept. 29, 2001
---------------- ----------------- -----------------
Current assets:
Cash and cash equivalents $ 1,110 $ 495 $ 114,577
Accounts receivable, net 111,313 89,726 105,246
Inventory 4,127 4,441 5,033
Other current assets 43,832 33,283 34,130
--------------- --------------- ---------------
Total current assets 160,382 127,945 258,986
Property, plant, equipment and product masters, at cost 486,799 446,872 434,650
Accumulated depreciation (320,882) (292,843) (288,507)
--------------- --------------- ---------------
Net property, plant, equipment and product masters 165,917 154,029 146,143
Long-term receivables 2,730 23,200 23,717
Goodwill 243,209 231,533 221,750
Other assets 102,489 89,226 74,697
--------------- --------------- ---------------
Total assets $ 674,727 $ 625,933 $ 725,293
=============== =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 19 $ 564 $ 1,010
Current maturities of long-term debt 138 292 328
Accounts payable 39,728 40,469 35,272
Accrued expenses 45,004 85,740 49,449
Current portion of long-term deferred income 27,223 28,948 28,484
Deferred income 105,290 111,915 109,504
--------------- --------------- ---------------
Total current liabilities 217,402 267,928 224,047
--------------- --------------- ---------------
Long-term liabilities:
Long-term debt, less current maturities 209,361 252,782 374,246
Long-term deferred income 51,711 59,933 61,806
Other liabilities 86,134 90,362 119,256
--------------- --------------- ---------------
Total long-term liabilities 347,206 403,077 555,308
--------------- --------------- ---------------
Shareholders' equity:
Common stock, $.001 par value, 28,455 issued and 28,005
outstanding at September 28, 2002, 24,546 shares issued and 24,096
shares outstanding at December 29, 2001, and 24,381 shares issued and
23,939 shares outstanding at September 29, 2001 28 24 24
Capital surplus 296,924 169,050 163,515
Notes receivable from executives (674) (1,071) (1,229)
Retained earnings (accumulated deficit) (171,460) (195,851) (198,983)
Treasury stock (11,529) (11,335) (11,073)
Other comprehensive income (loss):
Accumulated foreign currency translation adjustment (2,220) 1,001 952
Unrealized loss from derivatives (950) (6,890) (7,268)
--------------- --------------- ---------------
Accumulated other comprehensive loss (3,170) (5,889) (6,316)
--------------- --------------- ---------------
Total shareholders' equity (deficit) 110,119 (45,072) (54,062)
--------------- --------------- ---------------
Total liabilities and shareholders' equity $ 674,727 $ 625,933 $ 725,293
=============== =============== ===============
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
(In thousands)
(Unaudited)
Thirty-Nine Weeks Ended
----------------------------------------
September 28, September 29,
2002 2001
---------------- ---------------
Operating activities:
Earnings from continuing operations $ 24,391 $ 3,331
Adjustments to reconcile net earnings to net cash used
in operating activities:
Equity in loss of affiliate - 13,374
Depreciation and amortization 35,057 40,647
Deferred income taxes 13,234 7,920
Interest expense due to swap settlement 7,414 -
Changes in operating assets and liabilities:
Accounts receivable, net (24,229) (27,949)
Inventory 352 (39)
Other current assets (10,155) (13,041)
Long-term receivables (1,280) (517)
Other assets (19,317) (10,345)
Accounts payable (1,507) (4,002)
Accrued expenses (22,017) (11,603)
Deferred income (12,578) 3,065
Long-term deferred income (9,947) (4,800)
Other long-term liabilities (3,547) 61
Other, net 460 1,180
-------------- -------------
Net cash used in continuing operations (23,669) (2,718)
Investing activities:
Expenditures for property, plant, equipment and product masters (42,532) (37,326)
Acquisitions, net of cash acquired (4,751) (17,805)
Proceeds from sales of discontinued operations - 294,250
Cash paid for settlement of interest rate derivative contracts (9,765) -
-------------- -------------
Net cash (used in) provided by investing activities (57,048) 239,119
Financing activities:
Net decrease in short-term debt (827) (13,926)
Proceeds from long-term debt 363,470 33,683
Repayment of long-term debt (407,045) (161,396)
Proceeds from sales of common stock, net 123,295 -
Proceeds from exercise of stock options, net 4,583 6,807
-------------- -------------
Net cash provided by (used in) financing activities 83,476 (134,832)
Net cash provided by discontinued operations - 7,815
Effect of exchange rate changes on cash (2,144) (433)
-------------- -------------
Increase in cash and cash equivalents 615 108,951
Cash and cash equivalents, beginning of period 495 5,626
-------------- -------------
Cash and cash equivalents, end of period $ 1,110 $ 114,577
============== =============
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, including Information & Learning ("I&L") and
ProQuest Business Solutions ("PBS"), 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 our annual report for the fiscal year ended December 29, 2001.
In the first quarter of fiscal 2000, we adopted a plan to divest the Mail
and Messaging Technologies and Imaging businesses and our financing subsidiary.
During 2001, we completed these divestitures. In 2001, the operating results of
these businesses have been segregated from our continuing operations.
Note 2 - Significant Accounting Policies
Accounts Receivable. Accounts receivable are stated net of the allowance
for doubtful accounts which was $1,585, $1,353 and $1,590 at September 28, 2002,
December 29, 2001 and September 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.
4
The components of inventory are shown in the table below as of the dates
indicated:
September 28, December 29, September 29,
2002 2001 2001
--------------- -------------- ---------------
Finished products $ 1,513 $ 1,821 $ 2,085
Products in process and materials 2,614 2,620 2,948
--------------- -------------- ---------------
Total Inventory $ 4,127 $ 4,441 $ 5,033
=============== ============== ===============
Property, Plant, Equipment, and Product Masters.
Property, plant, equipment, and product masters are recorded at cost. The
straight-line method of depreciation is primarily used, except for I&L product
masters (which represent the cost to create electronic and microform master
document copies), which are 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 is $125,634 (net of $224,038
of depreciation), $104,701 (net of $202,514 of depreciation) and $99,892 (net of
$196,442 of depreciation) at September 28, 2002, December 29, 2001 and September
29, 2001, respectively.
Derivative Financial Instruments and Hedging Activities.
All derivative instruments are recognized as assets or liabilities in the
balance sheet and measured at fair value.
In the past, all of our interest bearing loans and borrowings were subject
to interest rate risk. As part of our risk management program, we utilized US
dollar interest rate swaps and designated them as cash flow hedges of the US
dollar LIBOR interest rate debt issuances.
During the third quarter of fiscal 2002, we dedesignated and settled $200
million notional amount of interest rate swaps as a result of our debt
refinancing (see Note 11). As a result, we recognized an additional $8,272 in
interest expense.
Also in anticipation of our debt refinancing, (see Note 11) we entered into
Treasury Rate Locks ("locks") in August 2002 with the notional amount of $75
million. These locks effectively fixed the underlying treasury rate for the
pricing of our private placement at 3.67%. These locks settled on September 17,
2002, the same day our private placement deal was priced. The unrealized loss
of these locks in the amount of $950 (net of tax) is recorded in Other
Comprehensive Income, and will be recognized over the life of the notes.
Approximately $0.2 million of net derivative losses included in other
comprehensive income at September 28, 2002 will be reclassified into earnings
within twelve months from that date.
During the third quarter of 2001, we dedesignated $150 million of notional
amount swaps due to the sale of discontinued operations (see Note 3). The
Company recognized an additional $6
5
million (net of tax) expense as a result of the dedesignation of these cash flow
hedges, and reported it in the (loss) gain on sales of discontinued operations.
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 period indicated:
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
---------------------------------- ----------------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Basic 27,993 23,865 25,581 23,735
Dilutive effect of
stock options 350 406 475 271
--------------- --------------- --------------- ---------------
Diluted 28,343 24,271 26,056 24,006
=============== =============== =============== ===============
Note 3 - Discontinued Operations
The net (loss) gain resulting from the sales of the Imaging and MMT
International businesses and the North American MMT business, the scanner
equipment business and the financing subsidiary in 2001 was derived as follows:
September 29, 2001
-------------------------------------------
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
------------------ ---------------------
Purchase price $ 145,000 $ 331,000
Net assets, reserves, and expenses (203,645) (317,006)
------------------ ---------------------
(Loss) gain on sales $ (58,645) $ 13,994
Income tax benefit (expense) 23,458 (5,598)
------------------ ---------------------
(Loss) gain on sales of discontinued
operations, net of tax $ (35,187) $ 8,396
================== =====================
Results for discontinued operations are shown in the tables below for the
periods indicated:
6
Thirteen Weeks Ended September 29, 2001 Thirty-Nine Weeks Ended September 29, 2001
-------------------------------------------------- ---------------------------------------------------------
MMT N.A. Total MMT N.A. Total
& BHFS Imaging MMT Intl. Disc. Ops. & BHFS Imaging MMT Intl. Disc. Ops.
----------- --------- ----------- ------------- ------------ ----------- ------------- ---------------
Net sales $ 83,719 $ - $ - $ 83,719 $ 258,311 $ 10,924 $ 29,542 $ 298,777
=========== ========= =========== ============= ============ =========== ============= ===============
EBIT (1) $ 3,877 $ - $ - $ 3,877 $ 12,993 $ 1,133 $ (893) $ 13,233
Interest expense (2,543) (8,391)
------------- ---------------
Earnings before
income tax $ 1,334 $ 4,842
Income tax
expense $ (534) $ (1,937)
------------- ---------------
Earnings from
discontinued
operations, net $ 800 $ 2,905
============= ===============
(1) EBIT is defined as earnings (loss) from discontinued operations before
interest and income taxes.
Note 4 - Comprehensive Income
Comprehensive income 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 Thirty-Nine Weeks
Ended Ended
--------------------------------- ---------------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Net earnings (loss) $ 5,962 $ (30,498) $ 24,391 $ 14,632
Other comprehensive income (loss):
Unrealized gain (loss)
from derivative instruments,
net of tax 3,587 (1,907) 5,940 (7,268)
Foreign currency translation
adjustments (1,415) 626 (3,221) 1,055
--------------- --------------- --------------- ---------------
Comprehensive income (loss) $ 8,134 $ (31,779) $ 27,110 $ 8,419
=============== =============== =============== ===============
The net unrealized gain (loss) on derivative instruments and foreign
currency translation adjustments does not impact our current income tax expense.
Note 5 - Segment Reporting
Information concerning our reportable business segments is shown in the
tables below for the periods indicated:
Thirteen Weeks Ended September 28, 2002
---------------------------------------------------------------
I&L PBS Corp. Total
------------- -------------- ------------- --------------
Net sales $ 61,711 $ 44,659 $ - $ 106,370
Earnings from continuing operations
before interest and taxes 11,894 13,234 (3,226) 21,902
Capital expenditures 12,047 695 6 12,748
Depreciation & amortization 10,459 915 34 11,408
Total assets 501,477 106,379 66,871 674,727
Thirteen Weeks Ended September 29, 2001
---------------------------------------------------------------
I&L PBS Corp. Total
------------- -------------- ------------- --------------
Net sales $ 57,408 $ 41,209 $ - $ 98,617
Earnings from continuing operations
before interest and taxes(1) 8,526 10,113 (2,892) 15,747
Capital expenditures 11,759 1,036 21 12,816
Depreciation & amortization(2) 11,429 1,248 105 12,782
Total assets 428,249 109,654 187,390 725,293
Thirty-Nine Weeks Ended September 28, 2002
---------------------------------------------------------------
I&L PBS Corp. Total
------------- -------------- ------------- --------------
Net sales $ 186,910 $ 131,192 $ - $ 318,102
Earnings from continuing operations
before interest and taxes 37,819 37,114 (9,227) 65,706
Capital expenditures 40,544 1,764 224 42,532
Depreciation & amortization 31,387 3,596 74 35,057
Thirty-Nine Weeks Ended September 29, 2001
---------------------------------------------------------------
I&L PBS Corp. Total
------------- -------------- ------------- --------------
Net sales $ 172,821 $ 122,392 $ - $ 295,213
Earnings from continuing operations
before interest and taxes(1) 27,051 28,620 (9,201) 46,470
Capital expenditures 34,010 3,285 31 37,326
Depreciation & amortization(2) 34,594 5,063 307 39,964
(1) Excludes equity in loss of affiliate and gain (loss) on sales of
discontinued operations.
(2) Excludes amortization/write-off of deferred financing costs.
Note 6 - Investments in Affiliates
We own 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. We account for our
investment in bigchalk on the equity method and the carrying value of this
investment was $0 at September 28, 2002, December 29, 2001 and September 29,
2001.
We record our equity investment in bigchalk on the consolidated balance
sheets within "Other assets" and our share of bigchalk's losses as "Equity in
loss of affiliate".
Summarized financial information of bigchalk, which is accounted for as
indicated above, is as follows:
Condensed Statements of Operations:
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
----------------------------------------- -----------------------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
------------------- -------------------- ------------------- -------------------
Net sales $ 5,958 $ 7,085 $ 19,952 $ 21,223
Gross profit 4,232 4,762 13,852 14,196
Loss before income taxes (2,655) (6,555) (7,590) (27,908)
Net loss (7,619) (11,822) (21,896) (40,541)
9
Condensed Statements of Financial Condition:
September 28, December 29, September 29,
2002 2001 2001
--------------------- --------------------- ---------------------
Current assets $ 26,837 $ 28,985 $ 35,873
Non-current assets 11,297 18,852 53,615
--------------------- --------------------- ---------------------
Total assets $ 38,134 $ 47,837 $ 89,488
===================== ===================== =====================
Current liabilities 18,783 20,592 21,969
Non-current liabilities 131,344 117,344 110,930
Stockholders' deficit (111,993) (90,099) (43,411)
--------------------- --------------------- ---------------------
Total liabilities and stockholders' deficit $ 38,134 $ 47,837 $ 89,488
===================== ===================== =====================
Note 7 - 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.
The following sets forth a reconciliation of net earnings and earnings
per share information adjusted for the non-amortization provisions for SFAS No.
142 for the periods indicated:
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
------------------------------------- -------------------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
----------------- ------------------ ------------------ -----------------
Earnings from continuing operations $ 5,962 $ 3,889 $ 24,391 $ 3,331
Earnings from discontinued
operations, net of tax - 800 - 2,905
(Loss) gain on sales of discontinued
operations, net of tax - (35,187) - 8,396
Add back: Goodwill amortization,
net of tax - 1,231 - 3,665
----------------- ------------------ ------------------ -----------------
Adjusted net earnings (loss) $ 5,962 $ (29,267) $ 24,391 $ 18,297
================= ================== ================== =================
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
------------------------------------- -------------------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
----------------- ------------------ ------------------ -----------------
Basic net earnings per share:
Earnings from continuing operations $ 0.21 $ 0.16 $ 0.95 $ 0.14
Earnings from discontinued operations - 0.03 - 0.12
(Loss) gain on sales of
discontinued operations - (1.47) - 0.36
Add back: Goodwill amortization - 0.05 - 0.15
----------------- ------------------ ------------------ -----------------
Adjusted basic net earnings (loss)
per share $ 0.21 $ (1.23) $ 0.95 $ 0.77
=============================================================================
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
------------------------------------- -------------------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
----------------- ------------------ ------------------ -----------------
Diluted net earnings per share:
Earnings from continuing operations $ 0.21 $ 0.16 $ 0.94 $ 0.14
Earnings from
discontinued operations - 0.03 - 0.12
(Loss) gain on sales of
discontinued operations - (1.45) - 0.35
Add back: Goodwill amortization - 0.05 - 0.15
----------------- ------------------ ------------------ -----------------
Adjusted diluted net earnings (loss)
per share $ 0.21 $ (1.21) $ 0.94 $ 0.76
================= ================== ================== =================
10
The changes in the carrying amount of goodwill for the thirty-nine
weeks ended September 28, 2002 are as follows:
I&L PBS Total
--------- ------- ---------
Balance as of December 30, 2001 $ 183,948 $47,585 $ 231,533
Reclassification of goodwill previously
included in other assets 2,054 - 2,054
Goodwill acquired (1) 9,622 - 9,622
--------- ------- ---------
Balance as of September 28, 2002 $ 195,624 $47,585 $ 243,209
========= ======= =========
(1) Goodwill consists of current year acquisitions as well as the finalization
of our preliminary purchase price allocations for acquisitions.
11
Note 8 - Other Assets
Other assets at September 28, 2002, December 29, 2001 and September 29,
2001 consisted of the following:
As of
------------------------------------------
September 28, December 29, September 29,
2002 2001 2001
------------- ----------- ------------
Long-term deferred tax asset $ 35,653 $ 35,653 $ 23,808
Licenses, net 12,939 10,939 10,588
Purchased / developed software, net 43,571 33,995 31,287
Long-term commissions 4,914 5,277 5,394
Other 5,412 3,362 3,620
------------- ----------- ------------
Total $ 102,489 $ 89,226 $ 74,697
============= =========== ============
Note 9 - Other Liabilities
Other liabilities at September 28, 2002, December 29, 2001 and
September 29, 2001 consisted of the following:
As of
------------------------------------------
September 28, December 29, September 29,
2002 2001 2001
------------- ----------- ------------
Deferred incentive compensation $ 38,667 $ 42,841 $ 50,921
Interest rate swaps - 10,093 20,137
Deferred taxes 47,394 37,162 47,230
Other 73 266 968
------------- ----------- ------------
Total $ 86,134 $ 90,362 $ 119,256
============= =========== ============
Note 10 - Stock Offering
On June 21, 2002, we successfully completed a secondary stock offering
of 3.7 million shares of $.001 par value common stock at a price of $35.40 per
share in which we received net proceeds of $123.3 million, after offering
expenses.
Note 11 - Debt Refinancing
On October 3, 2002 we replaced our $375 million fixed rate credit
facility with a private placement of $150 million in 5.45% senior notes due
October 1, 2012 and a new $175 million variable rate revolving credit facility.
This debt refinancing is reflected in the third quarter as it was agreed upon
and priced on September 17, 2002 and funded on October 3, 2002.
12
The proceeds from the sale of these notes and the new facility were
used to pay off our current revolving credit facility, and for general corporate
purposes.
Interest on the notes is payable semi-annually on April 1 and
October 1.
As a result of this debt refinancing, we recorded a one-time charge in
the amount of approximately $8.2 million in interest expense related to the
dedesignation and settlement of $200 million notional amount of interest rate
swaps we had outstanding as part of our previous risk management strategy as
well as writing off the remaining deferred fees on the $375 million credit
facility.
13
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This section should be read in conjunction with the Consolidated
Financial Statements of ProQuest Company and Subsidiaries (collectively the
"Company") and the notes thereto included in the annual report for the year
ended December 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 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 our filings with the SEC, including without limitation, our Annual
Report on Form 10-K for fiscal 2001 and our S-3 filed on June 17, 2002. These
factors may cause our actual results to differ from any forward-looking
statement.
14
Results of Operations
- ---------------------
Third Quarter of Fiscal 2002 Compared to Third Quarter of Fiscal 2001
- ---------------------------------------------------------------------
Thirteen Weeks Ended
(dollars in millions)
------------------------------------------------------------
Pro Forma (2)
Sept. 28, % of Sept. 29, % of Sept. 29, % of
2002 sales 2001 sales 2001 sales
--------- -------- -------- ------ -------- ------
Net sales $106.4 100.0% $ 98.6 100.0% $ 98.6 100.0%
Cost of sales (52.1) (49.0%) (44.5) (45.1%) (46.1) (46.8%)
--------- -------- -------- ------ -------- ------
Gross profit 54.3 51.0% 54.1 54.9% 52.5 53.2%
Research and development (4.4) (4.1%) (5.3) (5.4%) (5.3) (5.3%)
Selling and
administrative expense (28.0) (26.3%) (33.0) (33.5%) (29.4) (29.8%)
--------- -------- -------- ------ -------- ------
Earnings from continuing
operations before interest,
income taxes and equity in
loss of affiliate 21.9 20.6% 15.8 16.0% 17.8 18.1%
Net interest expense (12.3) (11.6%) (6.3) (6.4%) (6.3) (6.4%)
Income tax expense (3.6) (3.4%) (3.8) (3.8%) (4.6) (4.7%)
Equity in loss of affiliate - 0.0% (1.8) (1.8%) (1.8) (1.8%)
--------- -------- -------- ------ -------- ------
Earnings from
continuing operations(1) $ 6.0 5.6% $ 3.9 4.0% $ 5.1 5.2%
========= ======== ======== ====== ======== ======
1) Excludes (loss) gain on sales of discontinued operations and earnings from
discontinued operations.
2) Amounts have been adjusted to remove goodwill amortization to assist in
comparing the results of operations for the periods presented following the
adoption of SFAS No. 142 in the first quarter of fiscal 2002, as well as for
the reclassification of expenses at I&L included in selling and
administrative for the third quarter of 2001 that are included in cost of
sales in 2002.
Net sales.
Thirteen Weeks
Ended
-----------------------------
September 28, September 29,
2002 2001
------------- -------------
I&L $ 61.7 $ 57.4
PBS 44.7 41.2
------------- -------------
Total $ 106.4 $ 98.6
============= =============
15
Our net sales increased $7.8 million, or 7.9%, to $106.4 million in the
third quarter of 2002 primarily due to continuing growth in sales of electronic
products.
Net sales at I&L increased $4.3 million, or 7.5%, to $61.7 million
primarily as a result of a 13.5% increase in sales of electronic products
partially offset by flat sales of traditional products (microfilm and paper
product). A metric that we use to gauge growth in electronic products is 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 $90.8
million and $85.1 million at third quarter end 2002 and 2001, respectively, an
increase of 6.7%.
Net sales of PBS increased $3.5 million, or 8.5%, to $44.7 million in
the third quarter of 2002. This increase is primarily due to 13.3% growth in the
automotive sector as a result of the completion of the transition of ADP's
General Motors dealers to our electronic parts catalog in addition to higher
revenues from the automotive installed base. In addition, revenue from Alison
and Powersports increased 8.5% and 5.7%, respectively. This increase was
partially offset by a $0.9 million decrease in sales at Media Solutions.
Cost of Sales.
Thirteen Weeks Ended
---------------------------------------------
Pro Forma(1)
September 28, September 29, September 29,
2002 2001 2001
------------- ------------- ------------
I&L $ 34.9 $ 29.8 $ 31.4
PBS 17.2 14.7 14.7
------------ ------------ ------------
Total $ 52.1 $ 44.5 $ 46.1
============ ============ ============
(1) Amounts are pro forma for the reclassification at I&L of expenses included
in selling and administrative for the third quarter of 2001 that are
included in cost of sales in 2002.
Our cost of sales increased $6.0 million to $52.1 million in
the third quarter of 2002 compared to the pro forma 2001 results. The gross
profit margin (net sales less cost of sales) percentage decreased 220 basis
points as a result of pricing pressure in general reference products and higher
levels of costs associated with XanEdu coursepacks delivered in paper format.
16
Research and Development.
Thirteen Weeks
Ended
---------------------------------------
September 28, September 29,
2002 2001
------------------- ------------------
I&L $ 2.1 $ 2.4
PBS 2.3 2.9
------------------- ------------------
Total $ 4.4 $ 5.3
=================== ==================
Research and development expense for the third quarter 2002 decreased $0.9
million, or 17.0% to $4.4 million, due to the timing of research and development
projects, as well as the completion of the development of Alison's TrackerPac
product in 2001 and the decrease in research and development expenditures
related to Motorcycleworld.com, which ceased operations in 2001.
Selling and Administrative Expense.
Thirteen Weeks Ended
-----------------------------------------------------------
Pro Forma(1)
September 28, September 29, September 29,
2002 2001 2001
------------------ ------------------- ------------------
I&L $ 12.8 $ 16.6 $ 13.6
PBS 12.0 13.5 12.9
Corporate 3.2 2.9 2.9
------------------ ------------------- ------------------
Total $ 28.0 $ 33.0 $ 29.4
================== =================== ==================
(1) Amounts are pro forma to remove goodwill amortization to assist in
comparing the results of operations for the periods presented following the
adoption of SFAS No. 142 in the first quarter of fiscal 2002, as well as
for the reclassification at I&L of expenses included in selling and
administrative for the third quarter of 2001 that are included in cost of
sales in 2002.
Selling and administrative expense decreased from the pro forma 2001
results by $1.4 million, or 4.8%. The decrease at I&L is due to prudent
management of selling expenses. The decrease at PBS is primarily associated with
decreased selling and administrative expenses associated with Media Solutions
products.
17
Net Interest Expense.
Thirteen Weeks
Ended
---------------------------------------
September 28, September 29,
2002 2001
------------------ ------------------
Interest income $ (1.0) $ -
Debt 2.5 3.1
Interest rate swaps 8.6 1.0
Monetized contracts 1.8 1.8
Other 0.4 0.4
------------------ ------------------
Total $ 12.3 $ 6.3
================== ==================
Net interest expense increased $6.0 million, or 95.2%, to $12.3 million in
the third quarter of 2002 primarily due to an $8.2 million one-time charge
related to the settlement of our interest rate swaps as a result of our debt
refinancing. Interest income increased primarily due to accrued income related
to a refund on an IRS tax claim. Interest expense related to debt decreased as a
result of lower interest rates.
18
Nine Months Year-to-Date 2002 Compared to Nine Months Year-to-Date 2001
- -----------------------------------------------------------------------
Thirty-Nine Weeks Ended
(dollars in millions)
------------------------------------------------------------------------------------------
Pro Forma (2)
Sept. 28, % of Sept. 29, % of Sept. 29, % of
2002 sales 2001 sales 2001 sales
-------------- ------------ -------------- ------------ -------------- ------------
Net sales $ 318.1 100.0% $ 295.2 100.0% $ 295.2 100.0%
Cost of sales (151.5) (47.6%) (137.2) (46.5%) (142.0) (48.1%)
-------------- ------------ -------------- ------------ -------------- ------------
Gross profit 166.6 52.4% 158.0 53.5% 153.2 51.9%
Research and development (14.9) (4.7%) (15.9) (5.4%) (15.9) (5.4%)
Selling and
administrative expense (86.0) (27.0%) (95.6) (32.4%) (84.7) (28.7%)
-------------- ------------ -------------- ------------ -------------- ------------
Earnings from continuing
operations before interest,
income taxes and equity in
loss of affiliate 65.7 20.7% 46.5 15.7% 52.6 17.8%
Net interest expense (26.4) (8.3%) (18.6) (6.3%) (18.6) (6.3%)
Income tax expense (14.9) (4.7%) (11.2) (3.8%) (13.6) (4.6%)
Equity in loss of affiliate - 0.0% (13.4) (4.5%) (13.4) (4.5%)
-------------- ------------ -------------- ------------ -------------- ------------
Earnings from
continuing operations(1) $ 24.4 7.7% $ 3.3 1.1% $ 7.0 2.4%
============== ============ ============== ============ ============== ============
(1) Excludes (loss) gain on sales of discontinued operations and earnings from
discontinued operations.
(2) Amounts are pro forma to remove goodwill amortization to assist in
comparing the results of operations for the periods presented following the
adoption of SFAS No. 142 in the first quarter of fiscal 2002, as well as
for the reclassification of expenses at I&L included in selling and
administrative for the first nine months of 2001 that are included in cost
of sales in 2002.
Net sales.
Thirty-Nine Weeks
Ended
---------------------------------------
September 28, September 29,
2002 2001
------------------- ------------------
I&L $ 186.9 $ 172.8
PBS 131.2 122.4
------------------- ------------------
Total $ 318.1 $ 295.2
=================== ==================
Our net sales increased $22.9 million, or 7.8%, to $318.1 million in
the first nine months of 2002.
19
Net sales of I&L increased $14.1 million, or 8.2%, to $186.9 million
primarily as a result of increasing sales at XanEdu and a 14.3% overall increase
in sales of electronic products.
Net sales of PBS increased $8.8 million, or 7.2%, to $131.2 million in
the first nine months of 2002. This increase is primarily due to 10.1% growth in
the automotive sector as a result of the completion of the transition of ADP's
General Motors dealers to our electronic parts catalog in addition to higher
revenues from the automotive installed base. In addition, revenue from Alison
and Powersports increased 11.2% and 9.3%, respectively. This increase was
partially offset by a $2.2 million decrease in sales at Media Solutions.
Cost of Sales.
Thirty-Nine Weeks Ended
------------------------------------------------------------
Pro Forma(1)
September 28, September 29, September 29,
2002 2001 2001
------------------- ------------------ ------------------
I&L $ 102.1 $ 91.3 $ 96.1
PBS 49.4 45.9 45.9
------------------- ------------------ ------------------
Total $ 151.5 $ 137.2 $ 142.0
=================== ================== ==================
(1) Amounts are pro forma for the reclassification at I&L of expenses included
in selling and administrative for the first nine months of 2001 that are
included in cost of sales in 2002.
Our cost of sales increased $9.5 million to $151.5 million in the first
nine months of 2002 compared to the pro forma numbers for 2001. The gross profit
margin (net sales less cost of sales) percentage increased 50 basis points
compared to the adjusted 2001 results due to product mix.
Research and Development.
Thirty-Nine Weeks
Ended
---------------------------------------
September 28, September 29,
2002 2001
------------------ -------------------
I&L $ 7.1 $ 7.4
PBS 7.8 8.5
------------------ -------------------
Total $ 14.9 $ 15.9
================== ===================
Research and development expense for the first nine months of 2002
decreased $1.0 million, or 6.3% to $14.9 million. This decrease is primarily due
to the completion of the development of Alison's TrackerPac product in 2001 and
the decrease in
20
research and development expenditures related to Motorcycleworld.com, which
ceased operations in 2001.
Selling and Administrative Expense.
Thirty-Nine Weeks Ended
----------------------------------------------------------------
Pro Forma(1)
September 28, September 29, September 29,
2002 2001 2001
-------------------- -------------------- --------------------
I&L $ 39.9 $ 47.0 $ 37.9
PBS 36.9 39.4 37.6
Corporate 9.2 9.2 9.2
-------------------- -------------------- --------------------
Total $ 86.0 $ 95.6 $ 84.7
==================== ==================== ====================
(1) Amounts are pro forma to remove goodwill amortization to assist in
comparing the results of operations for the periods presented following the
adoption of SFAS No. 142 in the first quarter of fiscal 2002, as well as
for the reclassification of expenses at I&L included in selling and
administrative for the first nine months of 2001 that are included in cost
of sales in 2002.
Selling and administrative expense remained relatively flat increasing
$1.3 million, or 1.5%, compared to the pro forma 2001 results due to costs
related to recent acquisitions.
Net Interest Expense.
Thirty-Nine Weeks
Ended
------------------------------------
September 28, September 29,
2002 2001
----------------- -----------------
Interest income $ (2.2) $ (0.2)
Debt 9.4 10.1
Interest rate swaps 12.8 1.6
Monetized contracts 5.4 6.0
Other 1.0 1.1
----------------- -----------------
Total $ 26.4 $ 18.6
================= =================
Net interest expense increased $7.8 million, or 41.9%, to $26.4 million
in the first nine months of 2002 primarily due to an $8.2 million one-time
charge taken in the third quarter of 2002 related to the settlement of our
interest rate swaps as a result of our debt refinancing as well as the fact that
interest expense from interest rate swaps also increased due to a reduction in
interest rates. Interest income increased primarily due to accrued income
related to a refund on an IRS tax claim. Interest expense related to debt
decreased as a result of lower interest rates. Interest related to the PBS
monetized contracts decreased due to the reduced level of monetized contracts
at PBS.
21
Income Tax Expense.
For the nine months ended September 28, 2002, income taxes are
recorded at an effective rate of 38%. Income tax expense increased in the first
nine months of 2002 as a result of the higher level of pretax profit.
Liquidity
Debt (net of cash and cash equivalents) decreased by $44.7 million to
$208.4 million in the first nine months of 2002 as a result of the proceeds from
the equity offering of $123.3 million, partially offset by cash used in
operations and capital expenditures.
In the first nine months of 2002, we utilized cash for operations of $23.7
million. Cash from operations is seasonal with net cash typically utilized in
the first half of the year and cash typically generated during the second half
of the year. Cash is typically generated in the second half of the year
primarily because we bill and collect a significant portion of our annual
microfilm subscription fees during late third quarter and fourth quarter.
In addition to the seasonality of our cash flow, there were several items
that impacted operating cash flow for the nine month period ended September 28,
2002. During the first nine months, we utilized operating cash of $15.6 million
for the payment of working capital adjustments and retained liabilities related
to the sales of discontinued operations in the prior year. These payments are
one-time in nature and will not happen again.
Also during the first nine months of the year, we utilized cash related to
several technology projects in our Digital Vault Initiative and XanEdu
production processes as well as our back office order entry system. These
projects were undertaken to improve the processes and reduce costs. These
projects comprise internal use software and are included in other assets on our
balance sheet. We expect that these projects will be substantially completed by
year-end.
With regards to our Business Solutions' EPC agreements, we have monetized a
portion of the future cash stream generated by these customer contracts. At the
time of monetization, we receive a discounted amount from our formerly owned
financing subsidiary (Bell & Howell Financial Services, or BHFS). The amount
received is recorded as long-term deferred revenue. As the updates and service
related to the EPC is delivered to the customer, a portion of the long-term
deferred revenue is recognized as revenue and a portion of the discount is
recognized as interest expense. As a result of the sale of BHFS and the
refinancing of our new credit facility, monetization of the EPC contracts is no
longer an effective strategy. We intend to reduce the number of EPC contracts
that we monetize with BHFS, while complying with our contractual obligation to
monetize a certain portion of EPC contracts through August 2004. As a result,
the long-term deferred revenue and current portion of long-term deferred revenue
will decline and there will be a cash flow effect. The reduced level of EPC
contract monetization had a negative impact on cash flows for the first nine
months of 2002 of $9.9 million.
We used $57.0 million of cash in our investing activities for the first
nine months of 2002. Capital expenditures increased $5.2 million or 13.9% over
the first nine months of 2001, to $42.5 million due to increased expenditures on
Historical Newspapers and other digital vault products. Additionally $4.8
million was used in the acquisition of Micromedia and MetaText and $9.8 million
was used for the settlement of the interest rate swaps and treasury locks as a
result of our debt refinancing.
We believe that current cash balances, cash generated from operations, and
availability under our 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. Under ProQuest's $175.0 million revolving
credit facility, only $59.4 million was outstanding as of September 28, 2002.
22
Financial Condition
Selected Balance Sheet information.
As of
---------------------------------------
September 28, December 29,
2002 2001
------------------- ------------------
Accounts receivable, net $ 111.3 $ 89.7
Other current assets 43.8 33.3
Other assets 102.5 89.2
Accrued expenses 45.0 85.7
Deferred income 105.3 111.9
Other liabilities 86.1 90.4
Accounts receivable increased by $21.6 million during the first nine
months ended September 28, 2002, primarily due to microfilm subscriptions being
billed shortly before the end of the third quarter.
Other current assets increased primarily due to prepaid royalty
payments to publishers and prepaid insurance.
Other assets increased primarily due to payments to content providers
and for software licenses and developed software to assist in digitizing
products and facilitate back office functions.
The decrease in accrued expenses compared to December 29, 2001 is due
to payments made in 2002 related to discontinued operations in addition to the
cancellation of the $21.7 million buyers note as part of the working capital
settlement on the sale of our MMT North American business, the scanner equipment
business and our financing subsidiary.
Deferred income decreased by $6.6 million during the first nine months
ended September 28, 2002, due to the timing of subscription billings and a loss
of certain general reference database contracts in the third quarter of 2002.
The decrease in other liabilities is mainly attributable to the
settlement of $200 million notional amount interest rate swaps in July 2002 as
a result of our debt refinancing.
Debt Refinancing
On October 3, 2002 we replaced our $375 million credit facility with a
$175 million variable rate revolving credit facility and a private placement of
$150 million in 5.45% fixed rate senior notes due October 1, 2012. Interest on
the notes is payable semi-annually on April 1 and October 1. This debt
refinancing is reflected in the third quarter as it was agreed upon and priced
on September 17, 2002 and funded on October 3, 2002.
23
The proceeds from the sale of these notes and the new facility were
used to pay off the company's current revolving credit facility, and for general
corporate purposes.
As a result of this debt refinancing, we recorded a one-time charge in
the amount of approximately $8.2 million in interest expense related to settling
$200 million notional amount of interest rate swaps we had outstanding as part
of our previous risk management strategy as well as writing off the remaining
deferred fees on the original revolver loan.
Interest Rate Risk Management
As part of our debt refinancing, we have fixed a portion of our
long-term debt. The new revolver loan is variable-rate long-term debt, which
exposes us 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.
We have decided not to hedge this interest rate risk, instead we have
limited this risk by refinancing a portion of our debt to 10-year notes with a
seven year average life and fixed rate, with a 5.45% fixed coupon rate, and a
5.6% effective rate.
24
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
As a result of our financing activities, we are exposed to changes in
interest rates which may adversely effect our results of operations and
financial position. We have decided not to hedge this interest rate risk.
Instead we have limited this risk by refinancing $150 million of our debt to
long-term fixed rate notes with a 5.45% fixed coupon rate and a 5.60% effective
rate. These notes have a seven year average life. Our remaining debt is
variable-rate long-term debt which exposes us to variability in interest
payments due to changes in interest rates.
Foreign Currency Risk
As a result of our global operations, we are exposed to changes in
foreign currencies. Our practice is to hedge our significant operating balance
sheet exposures to foreign currency rate fluctuations via use of foreign
currency forward or option contracts. We do not utilize financial derivatives
for trading or other speculative purposes. We have entered into various
contracts to buy or sell foreign currencies. The contracts have maturity dates
extending through October 2002 and are for an aggregate notional amount of $47.6
million at September 28, 2002. We are exposed to market risk in the event of
nonperformance by our counterparties (major international banks) to these
contracts; however, such nonperformance is not anticipated. The potential impact
on our earnings from a 10% adverse change in quoted foreign currency rates would
be insignificant.
Item 4.
Controls and Procedures
Based on recent evaluation, which was completed within 90 days of the
filing of this Form 10-Q, the Company's chief executive officer and chief
financial officer have concluded that the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are effective to
ensure that information required to be disclosed in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. There have been no significant changes in
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of the previously mentioned evaluation.
25
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 5.
Other Information
In an effort to provide more disclosure of financial results, we
included a quarterly cash flow statement in the third quarter press release. The
third quarter net cash provided by operations before unusual items was
understated due to the inclusion of some of the exchange rate changes in
operating cash flow as opposed to including them in "Effect of exchange rate
changes on cash". In the press release cash flow schedule, the nine-month
year-to-date figures are correct. In addition, the overall change in cash was
correct in the third quarter cash flow statement. The following is a corrected
cash flow schedule for the third quarter ended September 28, 2002.
Third Quarter
--------------------------------------------------
September 28, September 29,
2002 2001
----------------------- ---------------------
Operating activities:
Pro forma earnings (1) 11,090 6,905
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization (2) 11,408 10,977
Deferred income taxes 3,077 6,263
Changes in operating assets and liabilities:
Accounts receivable, net (36,771) (42,466)
Inventory 278 154
Other current assets (5,155) (3,713)
Long-term receivables 517 (669)
Other assets (12,469) (4,005)
Accounts payable 4,125 2,576
Accrued expenses 7,631 3,311
Deferred income 27,085 27,516
Other long-term liabilities (81) (5,335)
Other, net 6,258 4,002
Deferred income - monetized contracts (4,217) (1,208)
----------------------- ---------------------
Net cash provided by operations before unusual items 12,776 4,308
Changes in working capital items related to discontinued operations (3,000) 0
----------------------- ---------------------
Net cash provided by operations 9,776 4,308
Investing activities:
Expenditures for property, plant, equipment and product masters (12,748) (12,816)
Acquisitions, net of cash acquired (2,134) (5,500)
Proceeds from sales of discontinued operations - 108,250
Cash paid for settlement of interest rate swap contracts (9,765) -
----------------------- ---------------------
Net cash (used in) provided by investing activities (24,647) 89,934
Financing activities:
Net decrease in short-term debt (57) (3,412)
Net payments of long-term debt 9,266 (6,037)
Proceeds from common stock, net 253 3,185
----------------------- ---------------------
Net cash provided by (used in) financing activities 9,462 (6,264)
Net cash used in discontinued operations - 12,791
Effect of exchange rate changes on cash (2,467) 52
----------------------- ---------------------
(Decrease) / increase in cash and cash equivalents (7,876) 100,821
Cash and cash equivalents, beginning of period 8,986 13,756
----------------------- ---------------------
Cash and cash equivalents, end of period $ 1,110 $ 114,577
======================= =====================
(1) In 2002, amounts have been adjusted to exclude settlement of related
interest rate swaps and the write-off of remaining fees on previous
revolving credit facility in third quarter of 2002. In 2001, amounts have
been adjusted for the equity in loss of affiliate and to remove goodwill
amortization to assist in comparing the impact of the adoption of SFAS 142.
(2) In 2001, amounts have been adjusted to remove goodwill amortization to
assist in comparing the impact of the adoption of SFAS 142.
Note: Certain reclassifications to the 2001 consolidated financial statements
have been made to conform to the 2002 presentation.
Item 6. Exhibits and Reports on form 8-K.
(a) Exhibits:
Index Number Description
- ------------ -----------
10.16 Note Purchase Agreement dated as of October 1, 2002
ProQuest Company $150,000,000 5.45% Senior Notes due
October 1, 2012.
10.17 Revolving Credit Agreement dated as of October 3, 2002
among ProQuest Company, the lenders listed therein and
Banc of America Securities LLC.
99.1 Certification of James P. Roemer, Chairman and Chief
Executive Officer of ProQuest Company Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.2 Certification of Kevin Gregory, Vice President, Chief
Financial Officer and Assistant Secretary of ProQuest
Company, Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on form 8-K.
None.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 2002 PROQUEST COMPANY
/s/ James P. Roemer
----------------------
Chairman and Chief
Executive Officer
/s/ Kevin Gregory
----------------------
Vice President, Chief
Financial Officer and
Assistant Secretary
27
CERTIFICATIONS
Certification of Principal Executive Officer
I, James P. Roemer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ProQuest Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
28
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ James P. Roemer
--------------------
James P. Roemer
Chairman & Chief
Executive Officer
29
Certification of Principal Financial Officer
I, Kevin Gregory, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ProQuest
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and
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report financial data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Kevin Gregory
-----------------------
Kevin Gregory
Vice President, Chief
Financial Officer and
Assistant Secretary
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