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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 29, 2001
Commission File Number: 1-3246
PROQUEST
COMPANY
(Exact Name of Registrant as Specified in its Charter)
| Delaware |
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36-3580106 |
| (State or Other Jurisdiction of Incorporation or
Organization) |
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(I.R.S. Employer Identification No.) |
| 300 North Zeeb Road, Ann Arbor, Michigan |
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48103-1553 |
| (Address of Principal Executive Offices) |
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(Zip Code) |
(734) 761-4700
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class
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Name of each exchange on which registered
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| common stock, $.001 par value per share |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether
the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
The aggregate market value of the Registrant’s voting stock held by non-affiliates (based upon the per share closing price of $37.46 on March 15, 2002) was approximately $504 million.
The number of shares of the Registrant’s common stock, $.001 par value, outstanding as of March 15, 2002 was 24,126,187.
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the Riegistrant’s Proxy Statement related to the 2002 Annual Meeting of Stockholders, to be filed subsequent to the date hereof—Part III.
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Submission of Matters to a Vote of Security Holders |
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Executive Officers and Directors |
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PART III |
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PART IV |
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EXHIBITS
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ProQuest Company
ProQuest Company is a leading provider of information and content to the
education and transportation industries. Formerly known as Bell & Howell, ProQuest has a 97 year history with more than 50 years in information and content aggregation. Through our Information and Learning segment, which primarily serves the
academic and library markets, we aggregate and publish value-added content from a wide range of sources including newspapers, periodicals and books. Our Publishing Services segment provides electronic delivery of technical and schematic information
to the automotive and powersports (motorcycle, marine, and RV) markets. Our company has demonstrated strong, stable growth in both revenue and earnings in the last few years with 2001 revenue increasing to $401.6 million from $359.5 million in 1999
and 2001 operating income increasing to $68.7 million from $42.2 million in 1999.
Our predecessor company, Bell & Howell,
has been synonymous with creative and technology-based solutions since 1904. In 2001, we sold the legacy Imaging, Mail and Messaging Technologies and finance-related businesses and changed our name to ProQuest. We used the proceeds from the
divestitures to significantly reduce our debt.
Information and Learning (I&L). I&L
transforms information contained in periodicals, newspapers, dissertations, out-of-print books and other scholarly material into easily accessible electronic form, microfilm or print on demand. I&L aggregates information from a broad array of
newspapers and periodicals with which we have licensing arrangements, including the New York Times, The Wall Street Journal, and The Christian Science Monitor. We convert this information through our proprietary methods and add proprietary
abstracts to create an expansive microfilm and electronic information vault. I&L’s information vault includes information from over 21,000 periodical titles and 7,000 newspaper titles, as well as a unique content base consisting of over 1.5
million dissertations, 390,000 out-of-print books, 550 research collections, and over 15 million proprietary abstracts. The information vault covers all major categories of study—business, humanities, social science, medical / health, ethnic
and diversity studies, genealogy, psychology, biology and current events. This content is primarily English language-based, but also includes content in German, French and Spanish. The ability to provide our customers with full image content as it
was originally published distinguishes us from other information providers, which typically store and provide information in a text-only format, omitting essential charts, graphs, pictures and other images. Our products are present in virtually
every academic library in the U.S., and our library customers generally sign one year subscription contracts to access I&L’s proprietary database. Over the last three years we have enjoyed approximately 90% renewal rates. In 2001, I&L
represented approximately 59% of our total revenues.
Publishing Services (PS). PS is the
leader in the development and deployment of parts and service-oriented catalogs for the automotive and powersports industries worldwide. In 1985, we pioneered the automotive Electronic Parts Catalog (EPC). The system replaced paper and microfiche
parts catalogs to provide a powerful and flexible technical reference system using CD-ROM technology. Over 30,000 automobile dealerships now use our EPC worldwide. PS currently publishes electronic catalogs for GM, Ford, DaimlerChrysler, Honda,
Toyota, Volvo, Nissan, Porsche, Saturn, and Land Rover among others. In addition, PS is a leading provider of dealer management systems and EPCs to dealers in the powersports markets. PS customer contracts are usually three to five years in
duration, and we have enjoyed approximately 90% renewal rates over the last three years. In 2001, PS represented approximately 41% of our total revenues.
Product Overview—I&L
ProQuest Online. Introduced in 1995, ProQuest
Online allows users to search and find useful information from full-text articles of thousands of newspapers and periodicals dating back to 1986. Our service helps librarians build information bridges that will enable users to locate resources
appropriate to their needs. Our service combines easy-to-use search menus, current information, content in a variety of formats, and convenient delivery options and support. We provide the tools to efficiently create predefined searches, electronic
reserve rooms for multiple simultaneous users, create magazine racks, establish reading rooms, and generate table-of-content services (curriculum support). All online text is customizable and allows easy integration with our customers’ other
information holdings. ProQuest SiteBuilderTM helps librarians by
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providing easy-to-use templates, copy-and-paste technology, and step-by-step help. Librarians can link selected ProQuest content to their online catalogs, library web sites and other Web-based
resources. Durable Links™ ensures that subscribers will have continuous access to our content.
ProQuest Online allows users to search and find useful information from more than 7,000 periodicals, newspapers, and other resources
contained in our databases. Users can pinpoint information quickly using simple or advanced search techniques. Quality indexing ensures unparalleled accuracy and specificity. We couple databases, primary sources, web tools, and curriculum support
together to enhance and improve the research and education process for all of our users. We add approximately 37 million pages of current information to ProQuest Online each year.
Chadwyck-Healey. The Chadwyck-Healey brand, acquired in 1999, is recognized internationally as a leading source of high-quality publications in the
humanities. Chadwyck-Healey provides users with world-class databases in the arts, humanities and reference with particular strengths in language and literature, history, music, performing arts and film, biography, and news and reference on the
United Kingdom, European Union and Asia.
Publications range from databases of medieval texts in Latin and Greek to
up-to-the-minute reference resources such as KnowUK, an online reference service on the people, places and institutions that make up life in the United Kingdom.
Other humanities titles include flagship services such as Literature Online and History Online, both of which deliver a combination of primary works and extensive contextual support.
UMI. UMI sells microform newspaper and periodical subscriptions, microform newspaper and
periodical backfiles, dissertation copies, dissertation publishing, out-of-print books, phonefiche, and scholarly research collections. Today, the UMI microform vault constitutes the largest commercially available microform collection in the world
with over 6.5 billion pages.
Digital Vault Initiative. Based on our customers’ needs, we
have selected portions of our UMI microfilm collection to digitize and provide online access to important and difficult to find content from the 1980’s back to as early as the 1400’s. Customers include libraries and information centers,
colleges and universities, and public, corporate and government libraries. Core to our initiative is the intent to create specialized content targeted at niche subject areas that allow us to segment the market more distinctly as well as broaden our
selection of academic and research product offerings.
Digital Vault Initiative products include Early English Books Online
(EEBO), a digital compilation of nearly all of the books printed in the English language from 1400-1700, the Gerritsen Collection of women’s history and the American Periodical Series which features journal content from over 1,000 titles from
1741-1900. Historical Newspapers is an initiative to digitize the full run of several of the nation’s leading newspapers, including the New York Times, Wall Street Journal, Christian Science Monitor, and Washington Post. Once completed,
libraries and educational institutions will have electronic access to newspapers dating back to 1851. Digital Sanborn Maps provides electronic maps. These maps contain the detailed property and land-use records that depict such information as
building online, size and shape, construction materials, height, windows and doors, and house numbers, showing the grid of everyday life in more than 12,000 U.S. towns and cities from 1867-1970.
XanEdu. We recently launched XanEdu to further leverage our content through the development of supplemental curriculum materials for the college
classroom. XanEdu is the world’s largest source of premium online content targeted directly at students and faculty of higher education institutions. Driven by our vision to deliver core courseware content and to create tools for customizing
online course materials, XanEdu seeks to improve the way students learn and the way instructors teach. XanEdu has experienced strong market acceptance with over 1,000 education institutions and more than 7,500 professors utilizing the service as of
the end of 2001.
Our XanEdu service is comprised of two components—the customizable XanEdu™CoursePack products and textbook supplements. We employ subject-area specialists who have created a core portfolio of XanEdu
CoursePacks, which professors can use to create customizable, copyright-cleared CoursePacks that are
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comprehensive, current and relevant to students. We have also partnered with major publishers such as Wiley, Pearson, and McGraw Hill, to create on-line supplemental materials that expand and
enrich the publisher’s textbook.
Further strengthening XanEdu’s capability is XanEdu Publishing Services. With the
acquisition of Campus Custom Publishing, we now offer instructors a turnkey solution to building CoursePacks, with the ultimate choice of distribution either online, in print, or by a hybrid combination of the two. Also, our copyright clearance
services offer a streamlined solution for clearing content not currently found in XanEdu’s extensive collections.
Content Wholesale. I&L provides content to premier information companies such as Reed Elsevier and Dow Jones which in turn provide content to their corporate desktop users. Under these relationships, we
receive revenue based on the amount of ProQuest content accessed by these users.
I&L also provides content to
bigchalk.com,inc. (“bigchalk”). bigchalk develops and markets products and services for research, curriculum integration, assessment, professional development, online community, and e-commerce for teachers, students, parents, librarians
and school administrators in the kindergarten through twelfth grade (K-12) educational community. We have an approximate 38.0% ownership interest in bigchalk on a diluted basis.
Product Overview—PS
Global Automotive. For over 17
years, we have been developing customized market-leading EPC solutions for the franchised automotive dealer market. Our ability to consolidate and transform manufacturer parts data from disparate sources into cohesive, integrated and highly
customized systems is unmatched in the industry. This expertise has been recognized worldwide and is applied every day by 28 different manufacturers and over an estimated 250,000 users worldwide.
For our automotive customers, we create and market turnkey electronic parts catalog systems in 17 languages that allow automotive dealerships to electronically access
manufacturers’ proprietary technical documentation (such as parts catalogs, parts and service bulletins and other reference materials) and to interface with other important information systems (such as inventory management and billing) within
the dealership. These applications help dealers improve business processes by transforming complex technical and performance measurement data into easily accessed answers. These applications also improve the parts-selling operations of dealerships
and manufacturers, resulting in the sale of more Original Equipment Manufacturer (OEM) parts.
Performance Management
Information and Services. With the acquisition of Alison Associates in 1999, we began offering performance management information to the automotive industry. Alison collects, manages and publishes key decision support
information and provides tools that help automobile manufacturers and their networks measure and compare relative performance. Alison is a global company that services 29 brands in 24 key markets with 30,000 dealers worldwide.
Dealer Management Systems. The Powersports unit provides dealer management and cataloging systems for the
motorcycle, marine, and recreational vehicle (RV) industries. These systems include accounting, customer service, and inventory as well as electronic parts catalog modules that help manage every aspect of the dealer’s business.
Media Solutions. Media Solutions designs, develops and distributes software systems for the construction,
mining and heavy equipment industries that automate product, e-commerce and corporate support functions between manufacturers, dealers and their customers.
OEConnection (OEC). OEC is a joint venture among PS, Ford Motor Company, General Motors and DaimlerChrysler. OEC extends the established electronic parts cataloging business by providing
dealers and their wholesale customers a comprehensive, secure e-commerce portal. OEC has established and maintains this portal with the primary objective of facilitating the sale of original equipment automotive parts delivered through
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the franchised automotive dealership channel. OEC’s current product offerings include “CollisionLink”, which allows the dealer to extend sales to their wholesale customers,
primarily collision shops, and “D2Dlink” which is an advanced parts locator system.
Financial information for each of
our business segments and operations by geographic area is contained in Note 2 to the Consolidated Financial Statements.
Research and Development. We continually seek to take advantage of new product and technology opportunities and view product development to be essential to maintaining and growing our market position. Our
research and development expenditures include expenses primarily for database development and information delivery systems.
Sales & Marketing. I&L and PS employ separate sales forces. ProQuest Online, UMI, Chadwyck-Healey and Digital Vault products are sold directly to libraries. As of December 29, 2001, the ProQuest sales
force was comprised of both North American and international sales representatives. Within North America, we have dedicated sales representatives for each major product type: traditional (17 salespeople), electronic (44 salespeople), and XanEdu (13
salespeople). These representatives sell directly to libraries, educational institutions, and bookstores throughout the United States and Canada. Outside of the U.S. and Canada, we use a direct international sales force comprised of 33 sales
representatives who sell the full portfolio of products to markets across the globe. Third-party international distributors augment this direct sales force. We use a variety of approaches to market our products, including trade shows, direct
mailings, product brochures, and online product trials.
We sell Global Automotive, Alison, Powersports and Media Solutions
products both domestically and internationally through an internal sales force of 60 salespeople. We market our products and services to two groups: OEMs and individual dealership locations. To effectively reach the large OEMs, such as
DaimlerChrysler, Ford, General Motors, and Toyota, we have strategically deployed a team of business development professionals in the world’s principal automotive centers in the U.S., U.K., Germany and Japan. In the U.S. and Canada, products
and services are sold directly to individual automotive and powersports dealerships using an experienced sales force. Key technology providers such as Reynolds and Reynolds and Automatic Data Processing (ADP) are also utilized as distributors and
sales agents to supplement the efforts of our direct sales force. Through various strategic and tactical marketing efforts including trade shows, events and targeted direct response programs, our sales force is able to continue to build strong and
profitable customer relationships.
Proprietary Rights
We regard certain of our technologies and content as proprietary and rely primarily on a combination of patent, copyright, trademark and trade secret laws and employee non-disclosure statements to protect our rights.
There can be no assurance that the steps we have taken will be adequate to protect our rights. Although we do not believe that we have infringed on the proprietary rights of third parties, there is no assurance that a third party will not make a
contrary claim. The cost of responding to such an assertion may be material, whether or not the assertion is valid.
Seasonality
Our quarterly operating results fluctuate as a result of a number of factors including the sales cycle, the amount and timing of new products
and our spending patterns. In addition, our customers experience cyclical funding issues that can impact our revenue patterns. Historically, we have experienced our lowest earnings and cash flow in the first fiscal quarter with our highest earnings
in the fourth fiscal quarter. Due to this seasonal factor, the Company maintains a revolving credit facility to fund interim cash requirements.
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Competition
The markets in which we sell our products are highly competitive and, in certain instances, include competitors with substantially greater financial resources. In the I&L segment, our main competitors are Gale
Group, a division of Thomson Corporation and EBSCO Company. We also compete with universities such as Massachusetts Institute of Technology for distribution of doctoral dissertations. Newspaper and book publishers also compete with us in the
distribution of information either electronically or through another medium, such as print.
I&L competitors also range from
free Internet sites to traditional primary publishers and include software publishers that market educational curriculum products to schools and homes; online educational content and electronic commerce providers; and programs that enable remote
learning, or management of schools.
In the PS segment, we compete with Automated Data Processing Company, Electronic Data
Systems, UCS, Infomedia, and the proprietary electronic parts systems of many original equipment manufacturers such as DaimlerChrysler, Ford Motor Company, Harley-Davidson, Honda Motor Company, and Toyota Motor Company for the distribution of
electronic or other parts catalogs.
Many of our current and potential future competitors may have greater name recognition,
experience and larger existing customer bases than we do. Accordingly, our competitors may succeed in responding more quickly to new technologies; responding more quickly to changes in customer requirements; devoting greater resources to the
development and sale of their products; establishing stronger relationships with affiliates, advertisers, content providers, and vendors; and developing superior services and products.
Government Regulations
We are subject to various federal, state, local and foreign
environmental laws and regulations limiting the discharge, storage, handling and disposal of a variety of substances. Our operations are also governed by laws and regulations relating to equal employment opportunity, workplace safety and worker
health, including the Occupational Safety and Health Act and regulations thereunder. We believe that ProQuest is in compliance in all material respects with applicable laws and regulations, and that future compliance will not have a material adverse
effect upon our consolidated operations or financial condition.
Concentration Risk
We are not dependent upon any one customer or a few customers, the loss of which would have a material adverse effect on our businesses. In fiscal 2001, no single customer represented
more than 10.0% of the consolidated net sales of the Company. Our top five customers accounted for 11.0% of consolidated net sales in fiscal 2001.
Employees
Our future success is substantially dependent on the performance of our management team and our
ability to attract and retain qualified technical and managerial personnel. We consider our employee relations to be excellent. As of December 29, 2001, we had the following number of employees, broken out by segment:
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Employees
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| I&L |
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1,530 |
| PS |
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970 |
| Corporate |
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40 |
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| Total |
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2,540 |
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None of our employees are represented by collective bargaining agreements.
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Content and Data Licenses
We obtain most of the information and content used in our products from license agreements with third parties. These licenses are generally limited in scope and are nonexclusive.
Licenses for content used in our I&L business generally have automatic renewal terms and renew for like terms unless terminated by I&L or the publishers. Our licenses with automobile and powersports manufacturers that are used in the PS
business generally have a term of five years. Also, under these agreements the manufacturers have contracted to continue to provide content for the term remaining on the agreements in effect with our customers at the time of the termination. These
licenses generally provide for the use of the content in many media formats including electronic, microform or paper.
Risk Factors
You should carefully consider the following risk factors in addition to the other information contained and incorporated by reference in
this 10-K before purchasing our common stock.
Our sales and profitability depend on our ability to continue to develop new products that appeal
to consumers.
We intend to continue to commit substantial resources to product development. We must continue to invest in
technologies that help customers to use our products and services, develop new products, enhance the quality of images being transmitted to the customer, increase delivery of our products over the Internet and other electronic media, and reduce the
time in which such products are transmitted. The technological life cycles of our products are difficult to estimate as some of our market niches are mature and demand for our products and services in these niches has stabilized or begun to migrate
to other products such as the shift from microfilm-based products to electronic-based products, while some of our other market niches remain in their early stages of development. Our future success will depend upon our ability to continue to
introduce new products, to enhance our current products, and to develop and introduce delivery and search technologies that enhance the customer experience in order to offset declining revenue from any of our more mature products. Our focus on
product development may result in unanticipated expenditures and capital costs that may not be recovered. Our failure to develop and introduce new or enhanced services and products that achieve consumer acceptance in a timely and cost-effective
manner would significantly harm our business.
Our products currently depend on data access agreements with third parties, and the failure to maintain
these agreements or to maintain the pricing at which we obtain the data could harm our ability to manufacture existing and develop new products.
Our products are in part based on content and data supplied pursuant to data access agreements with third parties. We may not be able to maintain our current agreements at cost-effective prices. The content supplied
by many of our licensors, such as the New York Times, is unique and cannot be replaced. Even if we are able to substitute content providers, we may not be able to enter into new data access agreements with alternative content providers on
commercially reasonable terms, on a timely basis or at all. In addition, data used in our products might become unavailable or not be updated as required. The failure to obtain necessary third party data on reasonable terms or identify and implement
alternative data access approaches could hurt our business. If a significant number of our content providers decide to terminate or not to renew their relationships with us, we may:
—be at a competitive disadvantage with respect to our competitors;
—lose customers that rely on us as a single source of resources; and
—be unable to increase the amount of revenue generated from particular clients.
Any of these results could adversely impact our operating and financial condition.
Our
business will suffer if we do not anticipate changes in computer platforms and other evolving technologies.
We compete in
markets characterized by continual technological change, product introductions and enhancements, changes in customer demands and evolving industry standards. For example, we rely on databases from providers such as Oracle and other software
providers and we produce additional databases for production of our products and services. If our databases become incompatible with the databases on our customers’ computer networks or become outdated and cannot support our products, then our
products could become obsolete and our business will suffer. We must continue to expand our databases and invest in new technologies in anticipation of the needs of our customers.
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Similarly, we must manage our development efforts to anticipate and adapt to changes in
computer operating environments and other evolving technologies. To remain competitive, we must be able to make our products available in numerous and evolving operating environments. Also, we consistently update our software to enhance retrieval
speeds and ease of use. These changes must be made on a timely and cost effective basis which is difficult in our evolving technological landscape. Our business will suffer if we do not update our products and introduce new products that incorporate
current technologies and media and if such updating forces us to incur costs that are not recoverable in the sales of our products.
Our businesses
utilize the Internet to generate revenues. Uncertainty about the future of the Internet may have a negative impact on our ability to increase revenues.
Our businesses utilize “online” exchange of information and Internet commerce. We cannot predict whether the Internet will prove to be an effective vehicle for delivering our content or conducting our
electronic commerce. The Internet infrastructure may be unable to support future demand as the number of users and potential customers for our products, frequency of use and bandwidth requirements continue to increase. Our business may not succeed
without the continued development and maintenance of the Internet.
In addition, the Internet is rapidly changing, and we will
continually need to adapt our web sites to emerging Internet standards and practices, technological advances developed by our competition, and changing subscriber, user and sponsor preferences. Ongoing adaptation of our web sites will entail
significant expenditures in technology research and development and services to input the enhanced technology that may not improve our web sites markedly. If our attempted improvements of our web sites are delayed, result in systems interruptions or
do not gain market acceptance, then our future revenue growth may suffer.
Unless we maintain a strong brand identity, our business may not grow.
We believe that maintaining and enhancing the value of our ProQuest and ABI brands is critical to attracting customers. Our
success in growing brand awareness will depend on our ability to continually provide educational technology that students enjoy using and teachers and parents consider beneficial to the learning process. Some of our brand names are new and we may
not be successful in growing our brand equity.
We will not be able to grow our Internet businesses if the market for those businesses does not
continue to develop.
The success of our Internet businesses will depend in large part on the continued emergence and growth
of a market for Internet-based educational technology products. The market for educational technology is characterized by rapid technological change and product innovation, unpredictable product lifecycles and unpredictable preferences among
students, teachers and parents. It is difficult to estimate how and when growth or other changes in this market will occur.
The competition we face
is intense, and we may not be able to compete effectively or successfully attract and retain customers.
The market for our
products is fragmented and highly competitive. Increased competition may affect our ability to be successful in attracting and retaining customers that would cause revenues to decline. The information and learning markets are intensely competitive
and subject to increasing commercial attention. Barriers to entering Internet markets are relatively low, and we expect competition to intensify in the future. We also may be adversely affected by pricing and other operational decisions like the
recent decision of several of our competitors to offer free educational content services.
I&L’s competitors range from
free Internet sites to traditional primary publishers and include software publishers that market educational curriculum products to schools and homes, online educational content and electronic commerce providers, and programs that enable remote
learning, or management of schools. In addition, many of our content providers could decide to produce and distribute offerings that compete with ours.
In the PS segment, we compete with Automated Data Processing Company, Electronic Data Systems, UCS, Infomedia, and the proprietary electronic parts systems of many original equipment manufacturers such as
DaimlerChrysler, Ford Motor Company, Harley-Davidson, Honda Motor Company, and Toyota Motor Company for the distribution of electronic or other parts catalogs.
Many of our current and potential future competitors have substantially greater name recognition, experience and larger existing customer bases than we do. Accordingly, our competitors may succeed in responding more
quickly to new technologies; responding more quickly to changes in customer requirements; devoting greater resources to the development and sale of their products; establishing stronger relationships with affiliates, advertisers, content providers,
and vendors; and developing superior services and products.
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If we cannot attract, retain and motivate skilled personnel, our ability to compete will be impaired.
Our success depends on our ability to attract, retain and motivate highly qualified management and scientific personnel. We
face intense competition for qualified personnel. If we are unable to continue to employ our key personnel or to attract and retain qualified personnel in the future, our business will suffer.
Several members of our senior management team have joined us recently. If we are unable to effectively integrate them into our business or work together as a management team, then
our business will suffer. In addition, our employees, including members of our senior management team, may terminate their employment with us at any time. If any one of our key employees left or was otherwise unable to work, and we were unable to
find a qualified replacement, our business could be harmed. In addition, the industry in which we compete has a high level of employee mobility and aggressive recruiting of skilled personnel.
Our products currently depend on components licensed from third parties, and the failure to maintain these licenses could harm our ability to produce and enhance existing products and develop new
products.
Our products incorporate third party technologies. We do not generally have exclusive arrangements or long-term
contracts with these third parties. We have obtained licenses for some of these technologies and may be required to obtain licenses for others. We may not be able to obtain all of the necessary licenses for the third party technology used in our
products on commercially reasonable terms, on a timely basis or at all. In addition, technology used in our products might become unavailable or not be updated as required.
We may not be able to develop alternative approaches if third party technologies become unavailable to us on reasonable terms or obsolete. The failure to obtain necessary third party
technology or identify and implement alternative technology approaches could hurt our business.
Our intellectual property protection may be
inadequate, allowing others to use our technologies and thereby reduce our ability to compete.
We regard much of the
technology underlying our services and products as proprietary. The steps we take to protect our proprietary technology may be inadequate to prevent misappropriation of our technology, or third parties may develop similar technology independently.
We rely on a combination of patents, trademark, copyright and trade secret laws, employee and third-party non-disclosure agreements and other contracts to establish and protect our technology and other intellectual property rights. Existing trade
secrets, patent and copyright law afford us limited protection. The agreements and contracts may be breached or terminated, and we may not have adequate remedies for any breach. Furthermore, policing unauthorized use of our intellectual property is
difficult. A third party could copy or otherwise obtain and use our products or technology without authorization. Litigation may be necessary to protect our intellectual property rights, which could result in substantial cost to us and diversion of
our efforts. Any such litigation may not even be successful, in which case our business could be further adversely affected.
Our products could
infringe on the intellectual property of others, which may cause us to engage in costly litigation and, if we are not successful, could cause us to pay substantial damages and prohibit us from selling our products.
Third parties may assert infringement or other intellectual property claims against us based on their patents or other intellectual property claims. If
such claims are successful, we may have to pay substantial damages, possibly including treble damages, for past infringement.
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We might also be prohibited from selling our products without first obtaining a license from the third party, which, if available at all, may require us to pay substantial royalties. Even if
infringement claims against us are without merit, defending a lawsuit takes significant time, may be expensive and may divert management attention from other business concerns.
Our employees may be bound by confidentiality and other nondisclosure agreements regarding the trade secrets of their former employers. As a result, we could be subject to allegations of
trade secret violations and other similar violations if claims are made that any of our employees have breached these agreements. Such claims could also have an adverse effect on our business.
A key component of our growth strategy is to continue to expand our operations into international markets. We may not succeed with this strategy.
Doing business in international markets is subject to a number of risks, including, among others: acceptance by foreign educational systems of our approach to educational products;
expenses associated with customizing products for foreign countries; lack of existing customer base; longer accounts receivable collection periods and greater difficulty in collection; unexpected changes in regulatory requirements; potentially
adverse tax consequences; tariffs and other trade barriers; difficulties in staffing and managing foreign operations; changing economic conditions; exposure to different legal standards (particularly with respect to intellectual property); burdens
of complying with a variety of foreign laws; and fluctuations in currency exchange rates. If any of these risks were to materialize, our business, financial condition, and results of operations could be adversely affected.
We have entered into strategic alliances and into acquisitions and may pursue others that may disrupt our operations or fail to result in the benefits that we anticipated.
We have entered into and may make strategic acquisitions of companies, products or technologies or enter into strategic
alliances as necessary in order to implement our business strategy. If we are unable to fully integrate acquired businesses, products or technologies with our existing operations, we may not receive the intended benefits of such acquisitions. A
future strategic acquisition or joint venture may require us to incur debt or issue equity securities, which could dilute our existing stockholders. The success of our existing and future joint venture and strategic alliances depends in part on the
ability of the other parties to these transactions to fulfill their obligations thereunder. In addition, the acquisitions or joint ventures may subject us to unanticipated risks or liabilities or disrupt our operations and divert management's
attention from day-to-day operations.
Changes in funding for public school systems and libraries could reduce our revenues and impede the growth of
our company.
We derive a portion of our revenues from public school and library funding, which is heavily dependent on
support from federal, state and local governments. Government budget deficits may adversely affect the availability of this funding. In addition, the government appropriations process is often slow, unpredictable and subject to factors outside of
our control. Curtailments, delays or reductions in the funding of schools, colleges or libraries, for example, a reduction of funds allocated to schools under Title I of the Elementary and Secondary Education Act of 1965, could delay or reduce our
revenues, in part because schools may not have sufficient capital to purchase our products or services.Funding difficulties experienced by schools, colleges or libraries could also cause those institutions to be more resistant to price increases in
our product, compared to other business that might better be able to pass on price increases to their customers. The growth of our business depends on continued investment by public school systems and libraries in educational technology and
products. Changes to funding of public school systems and libraries could slow this kind of investment.
The loss of a few of our larger clients would
adversely affect our results of operations.
While we are not dependent upon any one customer or a few customers, the loss
of a few of our larger customers would adversely affect our results of operations. In fiscal 2001, no single customer represented more than 10.0% of our consolidated net sales. Our top five customers accounted for 11.0% of consolidated net sales in
fiscal 2001. The loss of these customers would adversely affect us.
Our operating results continue to fluctuate and a revenue or earnings shortfall
in a particular quarter could have a negative impact on the price of our common stock.
Variations in our operating results
occur from time to time as a result of many factors, such as timing of customers’ capital expenditures, the mix of distribution channels through which our products are distributed, annual budgetary considerations of customers, new product
introductions, and general economic conditions.
Certain customers’ buying patterns and funding availability cause our
sales and cash flow to be generally higher in the fourth quarter of the year. Due to this seasonal factor, we require and expect to have a seasonal working capital credit line to fund cash requirements primarily during our second and third quarters.
Because a high percentage of our expenses are relatively fixed, a variation in the timing of customer orders can cause
variations in operating results from quarter to quarter. Our sales cycles are relatively long and depend on factors such as the size of customer orders and the terms of subscription agreements. As a result of the difficulty in forecasting our
quarterly revenues, our operating results in any given quarter may fall below securities analysts’ expectations, which may cause the price of our common stock to fall abruptly and significantly.
In addition, a deterioration in economic conditions generally may adversely affect the market for our products and thereby cause our operating results
to fall below expectations.
We could experience system failures, software errors, or capacity constraints, any of which would cause interruptions in
the electronic content we provide to our customers and ultimately cause us to lose customers.
Any delays or failures in the
systems or errors in the software that we use to deliver our electronic content to our customers would harm our business. We have occasionally suffered failures of the computer and telecommunication systems that we use to deliver our electronic
content to customers. These failures have caused interruptions in the functioning of our electronic content for our customers. The growth of our customer base, as well as the number of sites we provide, may strain our systems in the future.
The systems we currently use to deliver our services to our customers (except for external telecommunications systems) are
located in our facilities in Michigan and Ohio. Although we maintain property insurance, claims for any system failure could exceed the coverage obtained.
Any delays, failures or problems with our systems or software could result in loss of or delay in market acceptance and sales, diversion of development resources, injury to our reputation, or increased service and
support costs.
11
Our systems face security risks and our customers have concerns about their privacy.
We have taken security precautions with respect to our systems and sites. Still, they may be vulnerable to unauthorized access and use by hackers,
computer viruses and other disruptive problems. Any security breaches or problems could lead to misappropriation of our customers’ information, misappropriation of our sites, misappropriation of our intellectual property and other rights, as
well as disruption and interruption in the use of our systems and sites. Unauthorized access to and theft of customer information as well as denial of various Internet and online services have occurred in the past, and will likely occur again in the
future. In order to maintain our security precautions or to correct problems caused by security breaches, we may need to spend significant capital or other resources. We intend to continue to put industry–standard security measures in place for
our systems and sites. Nevertheless, those measures may be circumvented and in order to monitor continually and maintain these measures, we may cause disruption to and interruption in our customers’ use of our systems and sites. These
disruptions and interruptions could harm our business.
In general, users of the Internet and online services are very concerned
about the security and privacy of their communications and data transmitted. These concerns may inhibit the growth of the Internet and other online services generally, and our sites in particular. Any security breach related to our sites could hurt
our reputation and expose us to damages and litigation. These kinds of breaches could harm our business.
We have had limited
attempts by users to gain access to certain areas of the systems that are generally not available to such users. Such attempts are constantly monitored. Upon detection a notice is investigated and an appropriate level of action is taken.
The occurrence of a fire, flood or other form of natural disaster at certain of our locations would adversely impact our business.
Copies of our microfilm collections are stored at various of our properties. If a fire, flood or similar event were to occur at one or more
of these locations and destroy those collections, our operations could be materially and adversely affected.
We may be subject to government
regulation and legal liabilities that may be costly and may interfere with our ability to conduct business.
We are not
currently subject to direct regulation by any United States or state government agency other than the laws and regulations applicable to businesses generally. Also, there are few laws or regulations directly applicable to access to or commerce on
the Internet. Because of the increasing popularity and use of the Internet, federal and state governments may adopt laws or regulations in the future with respect to commercial online services and the Internet, with respect to user privacy;
copyrights and other intellectual property rights and infringement; domain names; pricing; content regulation; defamation; and taxation.
Laws and regulations directly applicable to online commerce or Internet communications are becoming more prevalent and could expose us to substantial liability. For example, recently enacted United States laws, such as the federal Digital
Millennium Copyright Act and various federal laws aimed at protecting children, their privacy, and the content made available to them could expose us to substantial liability. Furthermore, various proposals at the federal, state and local level
could impose additional taxes on Internet sales. These laws, regulations and proposals could decrease Internet commerce and other Internet uses, and adversely affect our opportunity to derive financial benefit from our activities.
Further, governments of foreign countries might try to regulate our Internet transmissions or prosecute us for violations of their laws
covering a variety of topics, many of which are the same as those described above for United States laws and regulations. For example, Germany has taken actions to restrict the free flow of material deemed to be objectionable on the Internet. The
European Union has adopted privacy, copyright, and database directives that may impose additional burdens and costs on us. We may incur substantial costs in responding to charges of violations of local laws by foreign governments.
Our stock price may be volatile and your investment in our stock could decline in value.
Our common stock price has fluctuated significantly in the recent past. In addition, market prices for securities of companies in our industries have been highly volatile and may
continue to be highly volatile in the future. Often this volatility is unrelated to our operating performance.
12
As of December 29, 2001, we had $251.0 million of total indebtedness, net of cash and cash equivalents, which could
hurt our ability to borrow and utilize cash flow as necessary.
The degree to which we are leveraged could have important
consequences, including the following: (i) our ability to borrow may be limited to additional amounts for working capital, capital expenditures and potential acquisition opportunities; (ii) a substantial portion of our cash flows from operations
must be used to pay our interest expense and repay our debt, which reduces the funds that would otherwise be available for our operations; (iii) we may be more vulnerable to economic downturns and competitive pressures and may have reduced
flexibility in responding to changing business, regulatory and economic conditions; and (iv) fluctuations in market interest rates will affect the cost of our borrowings to the extent not covered by interest rate hedge agreements.
Our credit facility contains covenants that may significantly restrict our operations.
Our senior credit facility contains numerous covenants imposing financial and operating restrictions on our business. These restrictions may affect our ability to operate our business
and may limit our ability to take advantage of potential business opportunities as they arise. These covenants place restrictions on our ability to, among other things, incur more debt, pay dividends, redeem or repurchase our stock or make other
distributions, make acquisitions or investments, use assets as security, dispose of assets or use asset sale proceeds, and extend credit.
In addition, our senior credit facilities require us to meet a number of financial ratios and tests. Our ability to meet these ratios and tests and to comply with other provisions of our credit facilities can be
affected by changes in economic or business conditions or other events beyond our control. Any failure to comply with the obligations in our senior credit facilities could result in an event of default under these facilities, which, if not cured or
waived, could permit acceleration of our indebtedness under the senior credit facilities which could have a material adverse effect on us.
ProQuest’s principal administrative office is located in Ann Arbor,
Michigan. The following table provides certain summary information in square feet with respect to the production and development facilities that the Company owns or leases in connection with its businesses:
| |
|
I&L
|
|
PS
|
|
Total
|
| Owned |
|
113,000 |
|
171,000 |
|
284,000 |
| Leased |
|
245,000 |
|
132,000 |
|
377,000 |
| |
|
|
|
|
|
|
| Total |
|
358,000 |
|
303,000 |
|
661,000 |
| |
|
|
|
|
|
|
The Company primarily leases facilities in the United States, Canada and United
Kingdom. The termination of any one of the leases, some of which are long-term, would not significantly affect the Company’s operations.
The Company deems the buildings, machinery and equipment used in its operations (whether owned or leased), generally to be in good condition and adequate for the purposes for which they are used.
Item 3.
Legal Proceedings.
The Company is involved in various legal proceedings incidental to its
business. Management believes that the outcome of such proceedings will not have a material adverse effect upon the consolidated operations or financial condition of the Company.
13
Item 4.
Submission of Matters to a Vote of Security Holders.
None.
Executive Officers and Directors
The following table sets forth the names, ages and positions held by the directors and executive officers of the Company as of March 6, 2002:
| Name
|
|
Age
|
|
Positions at the Company
|
| James P. Roemer |
|
54 |
|
Chairman of the Board and Chief Executive Officer |
| Alan Aldworth |
|
47 |
|
Director, President, Chief Operating Officer, and Chief Financial Officer |
| David Bonderman |
|
59 |
|
Director |
| David G. Brown |
|
45 |
|
Director |
| William E. Oberndorf |
|
48 |
|
Director |
| Gary L. Roubos |
|
65 |
|
Director |
| John H. Scully |
|
57 |
|
Director |
| William J. White |
|
63 |
|
Director |
| Todd W. Buchardt |
|
42 |
|
Secretary and General Counsel |
| Joseph P. Reynolds |
|
52 |
|
President and Chief Executive Officer of ProQuest Information and Learning |
| Bruce E. Rhoades |
|
53 |
|
President and Chief Executive Officer of Bell & Howell Publishing Services |
| Linda Longo-Kazanova |
|
49 |
|
Vice President, Human Resources |
| Kevin G. Gregory |
|
38 |
|
Vice President, Controller & Treasurer |
| Mark Trinske |
|
43 |
|
Vice President, Investor Relations |
The business experience and certain other information relating to each director
and executive officer of the Company is set forth below:
James P. Roemer, ProQuest Company’s Chairman and Chief
Executive Officer, has been Chairman of the Board since January 1998 and has been a Director of the Company since February 1995. From February 1997 to January 2002, Mr. Roemer served as President and Chief Executive Officer of the Company, and from
February 1995 to February 1997 he served as President and Chief Operating Officer. Prior to that, he served a s President and Chief Executive Officer of ProQuest Information and Learning Company from January 1994 to June 1995. Mr. Roemer joined
ProQuest as Vice President and Bell & Howell Publishing Services Company as President and Chief Operating Officer in October 1991 and was promoted to President and Chief Executive Officer of Publishing Services Company in September 1993. Prior
to joining ProQuest, Mr. Roemer was President of the Michie Group, Mead Data Central from December 1989 to October 1991. From January 1982 to December 1989 he was Vice President and General Manager of Lexis, an on-line information service. From
April 1981 to December 1982 he served as acting President of Mead Data Central. Mr. Roemer is a Director of bigchalk.com, inc.
Alan Aldworth was appointed President and Chief Operating Officer of ProQuest Company in January 2002. Mr. Aldworth has been Chief Financial Officer of the Company since October 2000. Prior to joining ProQuest, he spent 18 years at
Tribune Company where he held a variety of senior financial management and general management positions the most recent of which was as the General Manager of Tribune Education Company. Mr. Aldworth is a Director of bigchalk.com, inc.
David Bonderman has been a Director of the Company since December 1987. He has been the Managing General Partner of Texas Pacific
Group (a private investment company) since December 1992. He is also a Director of Beringer Wine Estates, Inc., Continental Airlines, Inc., Denbury Resources, Inc., Oxford Health Plans, Inc., Ryanair Ltd., Co-Star Realty Information Group, Inc. and
Washington Mutual Inc.
14
David G. Brown has been a Director of the Company since January 1994. He has been the
Managing Partner of Oak Hill Venture Partners since August 1999 and a Principal in Arbor Investors LLC since August 1995, Chief Financial Officer of Keystone, Inc. from September 1998 to February 2000, and a Vice President of Keystone, Inc. since
August 1993. Prior to joining Keystone, Mr. Brown was a Vice President in the Corporate Finance Department of Salomon Brothers Inc. from August 1985 to July 1993. He is a Director of 2Bridge, AER Energy Resources, FEP Holdings, Lattice
Communications, Lightning Finance, MarketTools, MobileForce Technologies, Owners.com, Sitara Networks, and WOW Networks.
William E. Oberndorf has been a Director of the Company since July 1988. He has served as Managing Director of SPO Partners & Co. since March 1991. He is also a Director of Plum Creek Timber Company, Inc., and bigchalk, inc.
Gary L. Roubos has been a Director of the Company since February 1994. He was Chairman of the Board of Dover Corporation
from August 1989 to May 1998 and was President from May 1977 to May 1993. He is also a Director of Dover Corporation and Omnicom Group, Inc.
John H. Scully has been a Director of the Company since July 1988. He has served as Managing Director of SPO Partners & Co. since March 1991. He is also a Director of Plum Creek Timber Company, Inc.
William J. White has been a Director of the Company since February 1990 and was Chairman of the Board from February 1990
to January 1998. He served as Chief Executive Officer of the Company from February 1990 to February 1997 and was President of the Company from February 1990 to February 1995. Since January 1998 he has been a Professor of Industrial Engineering and
Management Science at Northwestern University. He is also a Director of Ivex Packaging Corporation and Readers Digest Association, Inc.
Todd W. Buchardt was appointed General Counsel in April 1998, and in September 1998 was elected to the additional office of Secretary. Prior to joining ProQuest, he held various legal positions with First Data Corporation from 1986
to 1998.
Joseph P. Reynolds has been President and Chief Executive Officer of ProQuest Information and Learning Company
since April 1998. Prior to joining ProQuest, he was Chief Executive Officer of the School and Career Education Group of Thomson Corporation from June 1997 to April 1998 and was Chief Operating Officer of that Group from June 1995 to June 1997. From
1982 to June 1995 he held various positions in management, sales and marketing at Thomson and its Delmar Publishers subsidiary. Mr. Reynolds is a Director of bigchalk.com, inc.
Bruce E. Rhoades has been President and Chief Executive Officer of Bell & Howell Publishing Services since January 2001. He joined the Company in 1999, and has managed several
of the Company’s business units. Prior to joining the Company, he was Chief Executive Officer of a consulting practice specializing in business and product strategy formulation, software and information product development, and strategic
alliances and acquisitions from 1995 to 1999. Prior to that, he held a number of executive positions at Lexis-Nexis Group from 1979 to 1995, and held various positions at ADP Network Services from 1975 to 1979.
Linda Longo-Kazanova has been Vice President, Human Resources of the Company since May 2000. Prior to joining the Company, she was Senior Vice
President, Human Resources-North America, for Information Resources, Inc. from 1995 to 2000. From 1985 to 1995, she held various human resource positions with Kraft Foods, Inc.
Kevin G. Gregory has been Vice President, Controller & Treasurer of the Company since February 2001. From August 1997 to February 2001, he served as Tax Counsel and Vice
President—Tax. Prior to joining the Company, he was Senior Manager at Ernst & Young LLP, and prior to that spent seven years at PricewaterhouseCoopers.
15
Mark Trinske has been Vice President, Investor Relations of the Company since October
2001. Prior to joining the Company, he was the founder and President of Lafayette, Colorado-based Trinske Communications, a full-service investor relations firm, in 1992. Previously, Mr. Trinske held positions at the investor and public relations
firms Metzger Associates and Carl Thompson Associates. From 1984 to 1989, he was an investment executive with A.G. Edwards and PaineWebber, and prior to that was a corporate securities paralegal at Brobeck, Phleger & Harrison.
Item 5.
Market for Registrant’s Common Equity and Related Stockholder Matters.
The
Company’s common stock is traded on the New York Stock Exchange under the symbol “PQE”.
The high and low closing
prices of the Company’s common stock were as follows:
| |
|
2001
|
|
2000
|
| Quarter
|
|
High
|
|
Low
|
|
High
|
|
Low
|
| First |
|
$ |
23.6000 |
|
$ |
16.4375 |
|
$ |
38.7500 |
|
$ |
29.6250 |
| Second |
|
|
31.0000 |
|
|
21.7000 |
|
|
32.1250 |
|
|
19.8750 |
| Third |
|
|
36.5000 |
|
|
28.2000 |
|
|
26.0625 |
|
|
19.6875 |
| Fourth |
|
|
34.8000 |
|
|
29.9400 |
|
|
21.9375 |
|
|
15.1250 |
The Company has not declared or paid any cash dividends on its common stock. The
Company’s Credit Agreement (as defined herein) contains certain restrictions on the payment of dividends on and repurchases of its common stock. (See Note 9 to the Consolidated Financial Statements.)
Item 6.
Selected Financial Data.
The following selected financial data has been derived from the
audited Consolidated Financial Statements as of the end of and for each of the fiscal years in the five-year period ended December 29, 2001. The following financial data should be read in conjunction with the Consolidated Financial Statements and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein.
| |
|
Fiscal
|
|
| |
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
1998
|
|
|
1997
|
|
| |
|
|