UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 30, 2002
ProQuest Company
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 1-3246 36-3580106
(State or Other Jurisdiction of (Commission (I.R.S. Employer
Incorporation or Organization) File No.) 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
Item 7. Financial Statements and Exhibits.
The following financial statements and pro forma financial information omitted
from the Form 8-K dated January 14, 2003, (December 30, 2002, date of earliest
event reported) in reliance upon Item 7 (a) (4) and 7 (b) (2) of Form 8-K are
filed herewith.
(a) (1) Consolidated Financial Statements of Bigchalk, Inc. and Subsidiaries
as of December 31, 2001 and 2000, and for each of the years in the three-
year period ended December 31, 2001.
Report of Independent Auditors.
Consolidated Balance Sheet.
Consolidated Statement of Operations.
Consolidated Statements of Equity (Deficit).
Consolidated Statements of Cash Flows.
(2) Unaudited Condensed Consolidated Balance Sheet of Bigchalk, Inc. and
Subsidiaries as of September 30, 2002 and Unaudited Condensed
Consolidated Statements of Operations for the nine amd three months
ended September 30, 2002.
(b) Pro Forma Combined Condensed Financial Statements of ProQuest Company.
Pro Forma Combined Condensed Balance Sheet as of September 28, 2002
Pro Forma Combined Condensed Consolidated Statement of Operations
as of December 29, 2001.
Pro Forma Combined Condensed Statement of Operations for the
thirty-nine weeks ended September 28, 2002.
(c) Exhibits.
23.1 Consent of KPMG LLP
BIGCHALK.COM, INC. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(With Independent Auditors' Report Thereon)
bigchalk.com, inc. and Subsidiaries
TABLE OF CONTENTS
PAGE
Independent Auditors' Report 3
Consolidated Financial Statements:
Consolidated Balance Sheets, as of December 31, 2001 and 2000 4
Consolidated Statements of Operations,
Years ended December 31, 2001, 2000, and 1999 5
Consolidated Statements of Equity (Deficit),
Years ended December 31, 2001, 2000, and 1999 6
Consolidated Statements of Cash Flows,
Years ended December 31, 2001, 2000, and 1999 7
Notes to Consolidated Financial Statements 8
INDEPENDENT AUDITORS' REPORT
The Board of Directors
bigchalk.com, inc.:
We have audited the accompanying consolidated balance sheets of
bigchalk.com, inc. and subsidiaries (the Company) as of December 31, 2001
and 2000, and the related consolidated statements of operations, equity
(deficit), and cash flows for each of the years in the three-year period
ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
bigchalk.com, inc. and subsidiaries as of December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
Chicago, Illinois
March 22, 2002
bigchalk.com, inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2001 and 2000
(dollars in thousands, except per share amounts)
ASSETS 2001 2000
---------- --------
Current assets:
Cash and cash equivalents $ 23,086 17,589
Accounts receivable, net of allowance of $207 and $65 4,354 11,714
Prepaid expenses and other current assets 1,545 3,044
---------- --------
Total current assets 28,985 32,347
Restricted investment 829 900
Property and equipment, net 6,919 10,846
Goodwill and other intangible assets, net 10,423 57,588
Other 681 859
---------- --------
Total assets $ 47,837 102,540
========== =========
LIABILITIES AND DEFICIT
Current liabilities:
Accounts payable $ 1,837 5,195
Accrued expenses 1,653 2,686
Accrued royalties 1,316 1,302
Accrued facilities costs 1,053 --
Current portion of capital lease obligations -- 116
Deferred revenue 14,733 17,044
---------- --------
Total current liabilities 20,592 26,343
Long term deferred revenue 373 2,692
Long term accrued facilities costs 2,272 --
Capital lease obligations, less current portion -- 10
Deferred income taxes 152 870
---------- --------
Total liabilities 23,389 29,915
Series A Preferred Stock; $0.01 par value; 1,544,286 and 7,600,002 shares
authorized; 1,544,286 and 7,600,002 shares issued and outstanding at
December 31, 2001 and 2000
(aggregate liquidation preferences of $16,916 at December 31, 2001
and aggregate redemption value of $17,511, including accrued dividends,
at December 31, 2003) 13,088 55,256
Series A-2 Preferred Stock; $0.01 par value; 6,055,716 and 7,600,002
shares authorized; 6,055,716 and -0- shares issued and outstanding at
December 31, 2001 and 2000 51,291 --
(aggregate liquidation preferences of $66,331 at December 31,
2001 and aggregate redemption value of $68,672, including accrued
dividends, at December 31, 2003)
Series B Preferred Stock; $0.01 par value; 20,000,000 shares authorized;
14,302,423 and 6,676,846 shares issued and outstanding at December 31,
2001 and 2000
(aggregate liquidation preferences of $66,584 at December 31, 2001
and aggregate redemption value of $70,213, including accrued
dividends, at December 31, 2003) 50,168 20,240
Deficit:
Undesignated Preferred Stock; $0.01 par value; 20,000,000 shares authorized;
-0- shares issued and outstanding at December 31, 2001 and 2000 -- --
Common Stock; $0.01 par value; 100,000,000 shares authorized;
16,816,620 and 16,816,620 shares issued and outstanding at December 31,
2001 and 2000 168 168
Additional paid-in capital 26,273 42,927
Accumulated deficit (116,540) (45,966)
---------- --------
Total deficit (90,099) (2,871)
---------- --------
Total liabilities and deficit $ 47,837 102,540
========= ========
See accompanying notes to consolidated financial statements.
bigchalk.com, inc. and Subsidiaries
Consolidated Statements of Operations
Years ended December 31, 2001, 2000, and 1999
(dollars in thousands, except per share amounts)
2001 2000 1999
---- ---- ----
Sales $ 28,152 33,185 14,701
Cost of Sales 9,658 12,117 6,461
---------- ---------- ----------
Gross Profit 18,494 21,068 8,240
---------- ---------- ----------
Operating expenses
Sales and marketing 16,824 25,265 7,866
Product development 3,633 3,067 1,761
Information and technology 9,958 15,553 774
General and administration 4,731 9,163 2,621
---------- ---------- ----------
Loss before interest, taxes,
depreciation and amortization,
closure of facilities, impairment
charges and loss on disposal of
fixed assets (16,652) (31,980) (4,782)
Charges for closure of facilities 3,675 - -
Impairment charge for good will 30,282 - -
and other intangible assets
Depreciation and amortization 21,350 18,401 657
Loss on disposal of fixed assets 335 - -
---------- ---------- ----------
Operating Loss (72,314) (50,381) (5,439)
Interest Income (expense), net 1,022 1,136 (30)
---------- ---------- ----------
Loss before income taxes (71,292) (49,245) (5,469)
Income tax benefit 718 3,279 -
---------- ---------- ----------
Net Loss (70,574) (45,966) (5,469)
Dividends on and accretion of
Series A Preferred Stock, Series
A-2 Preferred Stock and Series B
Preferred Stock (16,654) (2,407) -
Net loss available to common
shareholders $ (87,228) (48,373) (5,469)
---------- ---------- ----------
Basic and diluted loss per share $ (5.19) (2.95) (0.36)
Weighted-average common shares
outstanding 16,816,620 16,423,042 15,000,000
========== ========== ==========
See accompanying notes to consolidated financial statements.
bigchalk.com, inc. and Subsidiaries
Consolidated Statements of Equity (Deficit)
Years ended December 31, 2001, 2000, and 1999
(dollars in thousands)
Undesignated Additional
Preferred Stock Common Stock paid-in Additional Members'
Shares Amount Shares Amount capital deficit interests Total
------------- ------ ------ ------- ------- --------- -----
Balance at December 31, 1998 - $ - - $ - - - (6,148) (6,148)
Net Loss - - - - - - (5,469) (5,469)
Contributions from ProQuest, net - - - - - - 2,252 2,252
Issuance of members' interests - - - - - - 43,500 43,500
Due from member for members'
interest - - - - - - (15,000) (15,000)
Common Stock subscribed - - - - - - 50 50
--- ------ ------------ ------ ------- --------- ---- ---------
Balance at December 31, 1999 - - - - - - 19,185 19,185
Receipt of amount due from
member for members' interests - - - - - - 15,000 15,000
Exchange of members' interests
for Common Stock - - 15,000,000 150 33,985 - (34,135) -
Issuance of Common Stock - - 1,816,620 18 10,721 - (50) 10,689
Issuance of stock options and
warrants in Common Stock - - - - 469 - - 469
Issuance of stock options in
Common Stock non-employee - - - - 159 - - 159
Dividends earned on convertible,
redeemable Series A
preferred Stock - - - - (2,032) - - (2,032)
Adjustment to accrete
convertible, redeemable
Series A preferred Stock to
redemption value
by December 31, 2003 - - - - (268) - - (268)
Dividends earned on convertible,
redeemable Series B
Preferred Stock - - - - (23) - - (23)
Adjustment to accrete
convertible, redeemable
Series B preferred Stock to
redemption value
by December 31,2003 - - - - (84) - - (84)
Net Loss - - - - - (45,966) - (45,966)
--- ------ ------------ ------ ------- --------- ---- ---------
Balance at December 31,2000 - $ - 16,816,620 $ 168 42,927 (45,966) - (2,871)
Dividends earned on
convertible, redeemable
Series A Preferred Stock - - - - (474) - - (474)
Adjustment to accrete
convertible, redeemable
Series A preferred Stock to
redemption value
by December 31, 2003 - - - - (2,536) - - (2,536)
Dividends earned on
convertible, redeemable
Series A-2 Preferred Stock - - - - (940) - - (940)
Adjustment to accrete
convertible, redeemable
Series A-2 Preferred Stock to
redemption value
by December 31, 2003 - - - - (5,176) - - (5,176)
Dividends earned on
convertible, redeemable
Series B Preferred Stock - - - - (1,556) - - (1,556)
Adjustment to accrete
convertible, redeemable
Series B Preferred Stock to
redemption value
by December 31, 2003 - - - - (5,972) - - (5,972)
Net loss - - - - - (70,574) - (70,574)
--- ------ ------------ ------ ------- --------- ---- ---------
Balance at December 31, 2001 - $ - 16,816,620 $ 168 26,273 (116,540) - (90,099)
=== ====== ============ ====== ======= ========= ==== =========
bigchalk.com, inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000, and 1999
(dollars in thousands)
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net Loss $ (70,574) (45,966) (5,469)
Adjustments to reconcile net cash flows
from operating activities:
Charges for closure of facilities 3,675 - -
Impairment charge for goodwill and other intangible assets 30,282 - -
Depreciation and amortization 21,350 18,401 657
Loss on disposal of fixed assets 355 -
Provision for doubtful accounts 285 305 -
Non-cash compensation expense - 159 -
Deferred Income taxes (718) (3,279) -
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable 7,075 (4,574) 14
Prepaid expenses and other current assets 1,499 (1,368) (768)
Restricted investment 71 (900) -
Other non-current assets 178 (856) -
Accounts payable (3,358) 1,304 736
accrued expenses and royalties (1,019) 1,346 53
Due to members - (2,970) 2,970
Deferred revenue (4,630) 1,140 629
---------- ------- ------
Net cash flows used in operating activities (15,529) (37,258) (1,178)
---------- ------- ------
Cash flows from investing activities:
Deposit for acquisition - - (1,000)
Acquisition of business, less cash acquired - (23,286) (5,000)
Capital expenditures, net of minor disposals (1,277) (11,298) 10
Purchases of marketable securities (13,305) - -
Maturities of marketable securities 13,305 - -
Proceeds from sale of fixed assets 32 - -
Issuance of note receivable - (240) -
---------- ------- ------
Net cash flows used in investing activities (1,245) (34,824) (5,990)
---------- ------- ------
Cash flows from financing activities:
Contributions from ProQuest, net - - 2,252
Proceeds from issuance of members' interests - - 5,000
Proceeds from Common Stock subscribed - - 50
Principal payments on capital lease obligations (126) (304) -
Receipt of amount due from member for members' interests - 15,000 -
Proceeds from issuance of Series A Preferred Stock and Series B
Preferred Stock, net of issuance costs 22,397 73,089 -
Proceeds from issuance of Common Stock - 1,752 -
---------- ------- ------
Net cash flows provided by financing activities 22,271 89,537 7,302
---------- ------- ------
Net increase in cash and cash equivalents 5,497 17,455 134
Cash and cash equivalents at beginning of year 17,589 134 -
---------- ------- ------
Cash and cash equivalents at end of year $ 23,086 17,589 134
========= ======= ======
See accompanying notes to consolidated financial statements.
bigchalk.com, inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollars in thousands, except share and per share amounts)
(1) DESCRIPTION AND FORMATION OF BUSINESS
bigchalk.com, inc., including its subsidiaries, (the "Company") is a
leading online learning destination in the kindergarten through twelfth
grade ("K-12") domestic educational market, which includes teachers,
administrators, students, and parents of students of public and private
schools (the "K-12 Market") and publicly-owned and government-funded
libraries (the "Public Library Market"). The Company provides a
portfolio of products and services, including: research and reference
services consisting of an extensive collection of published material;
standards correlation services for educational resources;
standards-based curriculum solutions; and professional development
services for teachers. The Company currently operates in one segment.
On September 30, 1999, ProQuest Information and Learning Company
(formerly known as Bell & Howell Information and Learning Company)
("ProQuest") and Tucows Inc. (formerly known as Infonautics, Inc.)
("Tucows") (collectively, the "Members") entered into an Amended and
Restated Limited Liability Company Agreement (the "LLC Agreement") that
provided for the formation and capitalization of BHW/INFO/EDCO.COM, LLC
("LLC") under the Delaware Limited Liability Company Act. On December
15, 1999, ProQuest contributed the assets and liabilities that relate
exclusively to or arise from sales to the K-12 Market, $5,000 in cash,
and an obligation to pay $15,000 in cash on January 3, 2000 in exchange
for an equity investment in LLC. On that same date, Tucows contributed
the assets and liabilities that relate exclusively to or arise from
sales to the K-12 Market and Public Library Market in exchange for an
equity investment in LLC, $5,000 in cash, and the right to receive
$15,000 in cash on January 3, 2000. Subsequent to the contributions, the
equity interests owned by ProQuest and Tucows were approximately 73% and
27%, respectively. On January 10, 2000, pursuant to the Certificate of
Conversion, the LLC Agreement was terminated and the LLC was converted
to bigchalk.com, inc., a Delaware corporation.
For financial reporting purposes, the above transactions have been
accounted for as if the Company is a successor to the contributed
ProQuest business. The Tucows contribution has been accounted for as a
purchase business combination, and accordingly, the assets acquired and
liabilities assumed from Tucows have been reflected in these financial
statements at fair value as of the contribution date.
On January 10, 2000, the Company converted from a limited liability
company under the Delaware Limited Liability Company Act to a Delaware
corporation. The Certificate of Incorporation provided for the
authorization of 25,900,002 shares of Common Stock and 7,600,002 shares
of Series A Preferred Stock.
On December 19, 2000, the Company amended and restated its Certificate
of Incorporation. The Amended and Restated Certificate of Incorporation
provides for the authorization of 100,000,000 shares of Common Stock,
7,600,002 shares of Series A Preferred Stock, 7,600,002 shares of Series
A-2 Preferred Stock, 20,000,000 shares of Series B Preferred Stock, and
20,000,000 shares of Undesignated Preferred Stock.
On June 29, 2001, the Company amended and restated its Certificate of
Incorporation. The Second Amended and Restated Certificate of
Incorporation provides for the authorization of 100,000,000 shares of
Common Stock, 1,544,286 shares of Series A Preferred Stock, 6,055,716
shares of Series A-2 Preferred Stock, 20,000,000 shares of Series B
Preferred Stock, and 20,000,000 shares of Undesignated Preferred Stock.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
bigchalk.com, inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollars in thousands, except share and per share amounts)
(a) BASIS OF PRESENTATION
The consolidated financial statements have been prepared as if the
Company operated as a stand-alone entity prior to December 15,
1999. Accordingly, for periods prior to December 15, 1999, certain
expenses reflected in the consolidated financial statements
include allocations from ProQuest. These allocations take into
consideration related business volume, personnel, or other
appropriate bases, and generally include administrative expenses
related to general management, information management, and other
services provided to the Company by ProQuest. The allocations of
expenses are based on ProQuest's assessment of actual expenses
incurred by the Company and are reasonable in the opinion of
ProQuest's management.
The financial information for periods prior to December 15, 1999
may not necessarily reflect the financial position, results of
operations, or cash flows of the Company in the future, or what
the financial position, results of operations, or cash flows of
the Company would have been if it had been a separate, stand-alone
corporation during such periods.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
MediaSeek Technologies, Inc. ("MediaSeek") and
HomeworkCentral.com, Inc. ("HomeworkCentral"), the Company's
wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
(c) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. Subsequent
actual results may differ from those estimates.
(d) CASH EQUIVALENTS
Cash equivalents are comprised of investments in highly liquid
debt instruments, with original maturities of 90 days or less.
(e) RESTRICTED INVESTMENT
Restricted investments represent certificates of deposit that are
security for letters of credit for leases of the Company's office
space in Berwyn, Pennsylvania and New York, New York.
bigchalk.com, inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollars in thousands, except share and per share amounts)
(f) MARKETABLE SECURITIES
Management determines the appropriate classification of marketable
debt securities at the time of purchase and re-evaluates such
designation as of each balance sheet date.
(g) REVENUE/COMMISSION EXPENSE RECOGNITION
The Company principally derives its revenue from subscriptions.
Subscription sales are deferred as a liability and recognized
ratably as revenue in the periods the subscriptions are fulfilled,
normally over twelve months. Prepaid expenses and other current
assets includes commissions paid to sales representatives on
successful subscription sales, which are recorded as an asset and
recognized as expense over the periods the subscriptions are
fulfilled.
(h) CONTRIBUTIONS FROM (DISTRIBUTIONS TO) PROQUEST
Prior to December 15, 1999, ProQuest provided funding for working
capital. The Company participated in Bell & Howell Company's cash
management system, and accordingly, all cash generated from and
cash required to support the Company's operations was deposited
and received through ProQuest's cash accounts. The amounts
represented by the caption "Contributions from ProQuest, net" in
the Company's consolidated statements of cash flows and equity
(deficit) represent the net effect of all cash transactions
between the Company and ProQuest. No interest expense has been
charged on such activity. The average balance of the member's
deficit was $7,079 for the period from January 1, 1999 to December
15, 1999.
(i) INCOME TAXES
The consolidated financial statements of the Company have been
prepared assuming the Company was a limited liability company
prior to December 15, 1999. On December 15, 1999, the Company was
formed as a limited liability company in the state of Delaware. As
such, the net loss of the Company for the period from December 16,
1999 to December 31, 1999 was reportable in the members' tax
returns. As discussed in note 1, on January 10, 2000, the Company
converted from a limited liability company to a C corporation.
Accordingly, prior to January 10, 2000, the consolidated financial
statements contain no provision or benefit and no assets or
liabilities for Federal or state income taxes as the net loss
recorded prior to January 10, 2000 was reported in the members'
tax returns.
Beginning January 10, 2000, the Company accounts for income taxes
under the asset and liability method. Deferred tax assets and
liabilities are recognized for future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
bigchalk.com, inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollars in thousands, except share and per share amounts)
(j) BASIC AND DILUTED LOSS PER SHARE
The Company computes net loss per share in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS")
No. 128, Earnings per Share. Under the provisions of SFAS 128,
basic and diluted net loss per share is computed by dividing the
net loss for the period by the weighted-average number of common
shares outstanding for the period. All share and per share data
have been retroactively adjusted to January 1, 1999 to reflect the
incorporation of the Company as described in note 1 as if all
shares were outstanding for the periods presented.
The Company has equity securities that may have had a dilutive
effect on earnings per share had the Company generated income
during the years ended December 31, 2001 and 2000. There were no
equity securities that could have had a dilutive effect on
earnings per share for the year ended December 31, 1999. Shares
issuable from securities that could potentially dilute earnings
per share in the future that were not included in the computation
of loss per share because their effect was anti-dilutive were as
follows:
YEARS ENDED DECEMBER 31,
----------------------------
2001 2000
------------ --------------
Common stock options 3,217,006 2,651,256
Common stock warrants 61,432 61,432
Convertible preferred stock 23,751,804 14,276,848
============ ==============
(k) FINANCIAL INSTRUMENTS
The Company believes that the carrying amounts of its financial
instruments, consisting of cash and cash equivalents, accounts
receivable, note receivable, restricted investment, accounts
payable, accrued expenses, and capital lease obligations,
approximate the fair values of such items based on their short
maturities.
(l) PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated on a
straight-line basis over their estimated useful lives as follows:
Equipment 3 years
Furniture and fixtures 7 years
Leasehold improvements 3 years
Software 3 years
Web-site development costs 3 years
===============
Equipment held under capital leases is stated at the present value
of minimum lease payments at inception of the lease and is
depreciated on a straight-line basis over the estimated useful
life of the equipment or the lease term, whichever is shorter.
bigchalk.com, inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollars in thousands, except share and per share amounts)
(m) COMPUTER SOFTWARE AND WEB-SITE DEVELOPMENT COSTS
The Company has adopted the provisions of Statement of Position
98-1 ("SOP 98-1"), Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, and Emerging Issues Task
Force Issue No. 00-2 ("EITF 00-2"), Accounting for Web-site
Development Costs. During 2001 and 2000, the Company capitalized
costs incurred to purchase and install computer software in
accordance with SOP 98-1. In addition, during 2000, the Company
capitalized costs associated with acquiring and developing
technology to operate its website in accordance with EITF 00-2.
The Company has recorded these capitalized costs as property and
equipment in the accompanying consolidated balance sheet.
All costs incurred by the Company in the planning stage for the
development of its web-site and costs incurred in operating its
web-site were expensed.
(n) INTANGIBLE ASSETS
Intangible assets consist of the values assigned to customer
lists, technology, workforce, tradename, license agreements, and
non-compete agreements in connection with purchase business
combinations. Intangible assets also include goodwill, which
represents the excess of purchase price over fair value of net
assets acquired for such transactions. Goodwill is amortized on a
straight-line basis over five years. Other intangible assets are
amortized over their estimated useful lives, which range from two
to five years, on a straight-line basis. When events and
circumstances so indicate, the Company assesses the recoverability
of intangible assets by comparing the carrying amount of the asset
balances to undiscounted future net operating cash flows. The
amount of impairment, if any, is measured based on projected
discounted future operating cash flows expected to be generated by
the asset using a discount rate reflecting the Company's average
cost of funds and other available information. The assessment of
the recoverability of intangible assets will be impacted if
estimated future operating cash flows are not achieved.
(o) STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, the Company has elected to apply the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("Opinion No. 25"), in recognizing
compensation costs associated with its stock option plan. Under
Opinion No. 25, compensation is measured as the difference between
the stock option exercise price and the estimated fair value of
the stock at the measurement date. The measurement date is the
first date on which both the number of shares subject to the
option and the option exercise price are known. As required by
SFAS No. 123, the Company provides pro forma net loss information
as if compensation had been measured under the fair value based
method defined in SFAS No. 123. Under that method, compensation is
measured by the fair value of the stock option. Under both SFAS
No. 123 and Opinion No. 25, compensation is recognized using
straight-line and accelerated methods over the periods in which an
employee renders service to the Company, generally the vesting
period.
bigchalk.com, inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollars in thousands, except share and per share amounts)
(p) RETIREMENT SAVINGS PLAN
On February 1, 2000, the Company established the bigchalk.com
Retirement Savings Plan ("Retirement Savings Plan") which covers
substantially all full-time employees. Participants may make
tax-deferred contributions up to 20% of annual compensation
(subject to limitations specified by the Internal Revenue Code).
The Retirement Savings Plan provides for an annual Company match
dollar for dollar up to $1 after the employee has achieved one
year of service. During 2001 and 2000, the Company contributed
$210 and $161, respectively, to the Retirement Savings Plan on
behalf of employees of the Company.
(q) ADVERTISING COSTS
Advertising costs are recognized as incurred. During 2001 and
2000, advertising expense totaled $391 and $811, respectively.
(r) SUPPLEMENTAL CASH FLOW INFORMATION
In connection with the sale of the Series B Preferred Stock,
holders of Series A Preferred Stock who also invested in Series B
Preferred Stock exchanged their Series A Preferred Stock for
Series A-2 Preferred Stock. A total of 6,055,716 shares of Series
A Preferred Stock were exchanged for shares of Series A-2
Preferred Stock.
During 2000, the Company's investing activities included the
following non-cash transactions: (1) the Company acquired
equipment when it purchased MediaSeek and assumed a lease
obligation totaling $97 to acquire this equipment, (2) the
purchase price for HomeworkCentral included 1,516,622 shares of
Common Stock valued at $9,096, and (3) the Company acquired
equipment totaling $101 by incurring a lease obligation.
During 1999, the Company's investing activities included a
non-cash transaction whereby the Company acquired equipment
totaling $217 by incurring a lease obligation.
The Company paid interest of $10, $40, and $3, for 2001, 2000, and
1999, respectively.
(S) RECLASSIFICATIONS
Certain reclassifications have been made in the prior period
financial statements to conform to the current year presentation.
(3) BUSINESS COMBINATIONS
As described in note 1, on December 15, 1999, Tucows contributed the
assets and liabilities that relate exclusively to or arise from sales to
the K-12 Market and the Public Library Market to the Company, in
exchange for $5,055 in cash, the right to receive $15,000 in cash, and
an interest valued at $23,500.
The acquisition was accounted for in these consolidated financial
statements using the purchase method of accounting. The following
bigchalk.com, inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollars in thousands, except share and per share amounts)
allocation of the purchase price to the assets acquired and liabilities
assumed has been made using estimated fair values that include values
based on independent appraisals and management estimates:
Purchase price $ (43,555)
Long-term assets acquired 1,599
Long-term liabilities assumed (1,867)
Working capital (7,033)
Other intangible assets 20,799
Goodwill 30,057
===========
On January 27, 2000, the Company, MediaSeek, and the principal vendors
of MediaSeek entered into a Share Purchase Agreement whereby the Company
acquired all of the issued and outstanding shares of MediaSeek pursuant
to a purchase business combination. The Company provided aggregate
consideration of $8,004.
The acquisition was accounted for in these consolidated financial
statements using the purchase method of accounting. The following
allocation of the purchase price to the assets acquired and liabilities
assumed has been made using estimated fair values that include values
based on independent appraisals and management estimates:
Purchase price $ (8,004)
Long-term assets acquired 126
Long-term liabilities assumed (39)
Deferred income taxes (1,563)
Working capital (45)
Other intangible assets 4,597
Goodwill 4,928
==========
On April 1, 2000, the Company and HomeworkCentral completed an Agreement
and Plan of Reorganization whereby the Company acquired all of the
issued and outstanding shares of HomeworkCentral pursuant to a purchase
business combination. The shareholders of HomeworkCentral had the option
to receive either cash or shares of the Company's Common Stock.
Aggregate consideration was $11,472, comprised of $1,907 in cash,
1,516,622 shares of Common Stock valued at $9,096, and 122,506 Common
Stock options valued at $150 and 61,432 Common Stock warrants valued at
$319.
In connection with the acquisition of HomeworkCentral, employee stock
options for HomeworkCentral common stock were exchanged for 122,506 of
stock options for the Company's Common Stock. The exchange of these
options occurred in the same ratio as the exchange of HomeworkCentral
stock for the Company's Common Stock and the exercise prices of these
options were adjusted to reflect the change in the number of options
held by each employee as a result of the exchange.
Also in connection with the acquisition of HomeworkCentral, warrants to
purchase shares of HomeworkCentral common stock were exchanged for
61,432 warrants to purchase shares of the Company's Common Stock. The
exchange of these warrants occurred in the same ratio as the exchange of
bigchalk.com, inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollars in thousands, except share and per share amounts)
HomeworkCentral stock for the Company's Common Stock and the price at
which these warrants were exercisable was adjusted reflect the change in
the number of warrants outstanding as a result of the exchange. At
December 31, 2001, the Company had outstanding warrants to purchase
61,432 shares of the Company's Common Stock at an exercise price of
$8.79 per share, to be reduced upon certain conditions in the issuance
of Common Stock. The warrants are exercisable at any time and expire on
dates ranging from October 1, 2004 to December 22, 2004.
The acquisition was accounted for in these consolidated financial
statements using the purchase method of accounting. The following
allocation of the purchase price to the assets acquired and liabilities
assumed has been made using estimated fair values that include values
based on independent appraisals and management estimates:
Purchase price $ (11,472)
Long-term assets acquired 329
Deferred income taxes (2,586)
Working capital 132
Other intangible assets 6,466
Goodwill 7,131
==========
(4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
2001 2000
----------- -----------
Equipment $ 5,584 4,919
Equipment under capital lease - 326
Furniture and fixtures 1,326 1,329
Leasehold improvements 2,378 2,885
Software 2,542 2,241
Web-site development costs 1,594 1,594
----------- -----------
13,424 13,294
Less accumulated depreciation
and amortization (6,505) (2,448)
----------- -----------
$ 6,919 10,846
=========== ===========
bigchalk.com, inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollars in thousands, except share and per share amounts)
(5) IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS
During the year ended December 31, 2001, certain events and changes in
circumstances caused the Company to conduct a review of the carrying
value of its goodwill and intangible assets. These events included: (1)
the consolidation and integration of the operations of HomeworkCentral
and MediaSeek with the Company's core K-12 business, (2) workforce
reductions, initiated in May 2001, and (3) changes in the business
climate, which have generated the valuation declines of dot com
companies. Certain intangibles were determined to be impaired because
the carrying amount of the assets exceeded the undiscounted future cash
flows expected to be derived from the assets. These impairment losses
were measured as the amount by which the carrying amounts of the assets
exceeded the fair values of the assets, determined based on the
discounted future cash flows expected to be derived from the assets and
other available information. Accordingly, actual results could vary
significantly from such estimates.
The goodwill and certain intangible assets acquired in the purchase of
Tucows, HomeworkCentral, and MediaSeek were determined to be impaired.
The resulting impairment charge totaled $30,282 and was reported as a
component of operating expenses.
A summary of the asset impairment charge is outlined as follows:
IMPAIRMENT
CHARGE
----------------
Goodwill $ 25,486
Customer list 2,611
Technology 1,164
Workforce 552
Tradename 450
Non-compete agreements 19
----------------
$ 30,282
================
bigchalk.com, inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollars in thousands, except share and per share amounts)
(6) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following at
December 31:
ESTIMATED
2001 2000 USEFUL LIFE
--------- --------- ------------
Customer list $ 16,429 19,040 3-5 years
Technology 6,545 7,709 3-4 years
Workforce 2,014 2,625 4-5 years
Tradename 792 1,242 5 years
License agreements -- 1,023 2 years
Non-compete agreements 204 223 3 years
Goodwill -- 42,116 5 years
--------- --------- ============
25,984 73,978
Less accumulated amortization (15,561) (16,390)
--------- ---------
$ 10,423 57,588
========= =========
(7) LEASE OBLIGATIONS
The Company leases its facilities and certain equipment under
non-cancelable operating leases expiring at varying dates through June
2008. Rent expense was approximately $2,078, $1,639, and $504, for the
years ended December 31, 2001, 2000, and 1999.
Minimum lease payments as of December 31, 2001 are as follows:
OPERATING
LEASES
---------------
2002 $ 2,376
2003 1,985
2004 1,899
2005 1,615
2006 1,497
Thereafter 2,101
---------------
Total future minimum lease payments $ 11,473
===============
bigchalk.com, inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollars in thousands, except share and per share amounts)
During 2000, the Company moved its primary office space to a new
facility. In 2001, the Company entered into sublease arrangements for
its previous office spaces expiring at varying dates through March 2005.
Minimum lease payments to be received under non-cancelable subleases as
of December 31, 2001 are as follows:
2002 $ 324
2003 314
2004 300
2005 75
------------
Total future minimum lease payments
to be received $ 1,013
===========
The Company recorded a charge of $3,675 related to the reduction and
consolidation of office space. The charge includes the write-off of
leasehold improvements of $350 and the ongoing lease obligations and
related expenses of the unoccupied office space, net of estimated
sublease income, of $3,325. The accrued liability at December 31, 2001,
will be reduced as the Company makes lease payments in excess of
sublease income and may be adjusted in future periods when additional
information regarding subleases is available.
(8) INCOME TAXES
No provision for Federal or state income taxes was recorded prior to
January 10, 2000, as such liability (benefit) was the responsibility of
the Company's members, rather than of the Company. As a result of the
Company's change from a limited liability company to a C corporation on
January 10, 2000, the Company recorded initial deferred income taxes of
$4,687 to reflect the establishment of deferred tax assets and
liabilities. The provision for income taxes for the year then ended
relates to the period subsequent to January 10, 2000.
bigchalk.com, inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollars in thousands, except share and per share amounts)
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000
--------------- ---------------
Current taxes:
Federal $ -- --
State -- --
--------------- ---------------
Total -- --
--------------- ---------------
Deferred taxes:
Federal (718) (2,541)
State -- (738)
--------------- ---------------
Total (718) (3,279)
--------------- ---------------
Provision for income taxes $ (718) (3,279)
=============== ===============
Deferred taxes assets (liabilities) are comprised
of the following at December 31:
2001 2000
--------------- ---------------
Deferred tax assets:
Net operating loss carryforwards $ 21,515 12,711
Accrued facilities costs 1,470 --
Deferred revenue and accrued expenses 1,053 1,343
--------------- ---------------
Subtotal 24,038 14,054
Less valuation allowance (22,312) (8,166)
--------------- ---------------
Net deferred tax assets 1,726 5,888
--------------- ---------------
Deferred tax liabilities:
Intangible assets (1,010) (6,002)
Capitalized software costs and accrued expenses (868) (756)
--------------- ---------------
Subtotal (1,878) (6,758)
--------------- ---------------
Net deferred income taxes $ (152) (870)
=============== ===============
bigchalk.com, inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollars in thousands, except share and per share amounts)
The reconciliation of the expected income tax benefit using the Federal
statutory rate of 34% for the year ended December 31, 2001 and 2000 to
the Company's income tax expense is as follows:
2001 2000
----------- ---------
Federal income tax benefit at statutory rate (34.00)% (34.00)%
State income tax benefit, net of Federal taxes (2.94) (3.25)
Permanent differences 16.15 5.81
Establishment of deferred tax liabilities upon
conversion to C corporation -- 8.12
Increase in valuation allowance 19.85 16.64
Other (0.07) 0.02
----------- ---------
Total (1.01)% (6.66)%
=========== =========
bigchalk.com, inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollars in thousands, except share and per share amounts)
The Company has Federal net operating loss carryforwards aggregating
approximately $54,000 as of December 31, 2001, which can potentially be
carried forward twenty years and will expire at various dates through
2021. Under the Tax Reform Act of 1986, the utilization of a
corporation's net operating loss carryforward is limited following a
greater-than-50% change in ownership within a three year period. Due to
the Company's prior equity transactions, the Company's net operating
loss carryforwards may be subject to an annual limitation generally
determined by multiplying the value of the Company on the date of the
ownership change by the Federal long-term tax-exempt rate. Any unused
limitation can be carried forward to future years for the balance of the
net operating loss carryforward period. The Company has state net
operating loss carryforwards aggregating approximately $52,000 as of
December 31, 2001, which can potentially be carried forward for up to
twenty years. The majority of the state net operating loss carryforwards
relate to Pennsylvania which are subject to an annual utilization
limitation of $2,000.
During the years ended December 31, 2001 and 2000, the valuation
allowance increased by $14,146 and $8,166, respectively.
Although realization of the gross deferred tax assets is not assured,
management believes that it is more likely than not that the deferred
tax assets will be realized after considering the reversal of the
deferred tax liabilities.
(9) REDEEMABLE PREFERRED STOCK
On January 10, 2000, the Company completed the sale of 7,600,002 shares
of Series A Preferred Stock for proceeds of $53,200. On December 20,
2000, the Company completed the sale of 6,676,846 shares of Series B
Preferred Stock for proceeds of $20,231. On February 28, 2001, the
Company completed the sale of 7,625,577 shares of Series B Preferred
Stock for proceeds of $23,105. In connection with the sale of the Series
B Preferred Stock, holders of Series A Preferred Stock who also invested
in Series B Preferred Stock exchanged their Series A Preferred Stock for
Series A-2 Preferred Stock. A total of 6,055,716 shares of Series A
Preferred Stock were exchanged for shares of Series A-2 Preferred Stock.
As described in the Second Amended and Restated Certificates of
Incorporation, each share of Series A Preferred Stock, Series A-2
Preferred Stock, and Series B Preferred Stock (collectively, "Preferred
Stock") is convertible at the shareholder's option into such number of
shares of Common Stock as determined by the Series A Conversion Price,
the Series A-2 Conversion Price, and the Series B Conversion Price
(collectively, "Conversion Prices"), respectively, as defined in the
Second Amended and Restated Certificates of Incorporation (1.24-for-one,
1.24-for-one and one-for-one, for Series A Preferred Stock, Series A-2
Preferred Stock, and Series B Preferred Stock, respectively, at December
31, 2001). The Company reserved 23,751,804 shares of its Common Stock to
provide for the conversion of such Preferred Stock. Upon the closing of
a qualified public offering of the Company's Common Stock, the Preferred
Stock will automatically convert to a number of shares of Common Stock
as determined by the Conversion Prices.
Beginning January 1, 2002, the holders of Preferred Stock shall be
entitled to receive cumulative dividends of 6% per annum of the original
issue price of $7.00 per share for Series A and Series A-2 Preferred
Stock and of the original issue price of $3.03 per share for the Series
B Preferred Stock, payable in preference and priority to payment of
dividends on common stock. The holders of Preferred Stock shall also be
bigchalk.com, inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollars in thousands, except share and per share amounts)
entitled to receive, when and if declared, dividends in the same amount
per share as would be payable on the number of shares of Common Stock
into which the Preferred Stock is then convertible.
At the earliest of: (1) the redemption of the Series A Preferred Stock,
Series A-2 Preferred Stock and Series B Preferred Stock; (2) the
consummation of the sale of securities in the Corporation's initial
public offering of securities; or (3) a liquidation, dissolution or
winding up of the Corporation, any accrued and unpaid dividends shall be
paid to the holders of record of outstanding shares of Series A
Preferred Stock, Series A-2 Preferred Stock and Series B Preferred
Stock.
After December 31, 2003, and at the request of the holders of a majority
of the outstanding shares of preferred stock, the Company will redeem
all of the outstanding shares of Series A Preferred Stock, Series A-2
Preferred Stock and Series B Preferred Stock for $10.50, $10.50, and
$4.545 per share, respectively, plus accrued and unpaid dividends. The
Company is accreting the value of the redemption feature over the period
from the issuance through December 31, 2003.
Upon the liquidation, dissolution or winding up of the Company, holders
of Series A Preferred Stock, Series A-2 Preferred Stock and Series B
Preferred Stock shall be first entitled, before any distribution or
payment to holders of common stock, to a minimum amount of $10.50,
$10.50, and $4.545 per share, respectively, plus accrued and unpaid
dividends. As of December 31, 2001, the holders of Series A Preferred
Stock, Series A-2 Preferred Stock and Series B Preferred Stock would be
entitled to a minimum aggregate amount of $16,916, $66,331, and $66,584,
respectively, in the event of a liquidation.
(10) EQUITY INSTRUMENTS
On January 10, 2000, the Company's Board of Directors adopted the
bigchalk.com, inc. 2000 Stock Plan (the 2000 Plan), covering employees,
directors, and unaffiliated consultants. On July 30, 2001, the Company's
Board of Directors adopted the bigchalk.com, inc. 2001 Stock Plan (the
2001 Plan), covering employees, directors, and unaffiliated consultants.
Stock options are granted at an exercise price equal to the stock's fair
value on the date of grant. All stock options have a contractual life of
ten years and generally vest ratably over a period of four years;
however, certain options vested in part immediately upon grant and
ratably over a period of three years. The Company has reserved 3,000,000
shares of common stock for issuance under both the 2000 Plan and the
2001 Plan.
bigchalk.com, inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollars in thousands, except share and per share amounts)
Stock option transactions consisted of the following:
2001 2000
----------------------------- -----------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------------- ------------- -------------- ------------
Outstanding at beginning of year
Balance at January 10, 2000 2,651,256 $ 5.87 -- $ --
Granted 1,286,500 3.14 2,968,750 6.00
Granted in connection with HomeworkCentral
acquisition -- -- 122,506 3.19
Exercised -- -- (100) 6.00
Cancelled (720,750) 6.00 (439,900) 6.00
-------------- ------------ ------------- -------------
Outstanding at end of year 3,217,006 4.76 2,651,256 $ 5.87
============== ============ ============= =============
Weighted-average fair value of options
granted $ 0.53 $ 1.17
============ =============
Options exercisable at end of year 891,881 516,491
============== =============
The weighted-average contractual life of options outstanding at December
31, 2001 and 2000 is 8.4 years and 9.6 years. The exercise prices for
options outstanding at December 31, 2001 that were granted in connection
with the HomeworkCentral acquisition range from $.59 to $9.88. The
exercise prices for all other options outstanding at December 31, 2001
are either $3.03 or $6.00.
The Company applies Opinion No. 25 in accounting for the Plan and,
accordingly, no compensation expense has been recognized as the exercise
price of all grants equaled the fair value of the underlying stock on
the date of grant. The pro forma impact of recognizing the fair value of
granted options as expense is as follows for the years ended December
31, 2001 and 2000:
2001 2000
------------------------------
Net loss to common stockholders:
As reported $ (87,228) (48,373)
Pro forma (87,799) (49,443)
------------------------------
Loss per common share:
As reported $ (5.19) (2.95)
Pro forma (5.22) (3.01)
------------------------------
bigchalk.com, inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollars in thousands, except share and per share amounts)
For purposes of calculating pro forma compensation expense, the fair
value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model using the following weighted-average
assumptions for fiscal 2001 and 2000: nominal volatility; risk free
interest rate of 4.65% and 6.00%; no dividend yield; and expected life
of 4 years and 2.6 years.
During 2000, the Company granted 37,500 stock options in Common Stock
with an exercise price of $6.00 per share to a consultant and recorded
the related compensation expense of $159 in accordance with EITF Issue
No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services". At December 31, 2000, all of these options are exerciseable
and are outstanding.
(11) RELATED-PARTY TRANSACTIONS
The Company enters into various transactions with two of its significant
shareholders, ProQuest and Tucows.
The Company sells ProQuest's products and pays royalties to ProQuest
based on a percentage of revenue. The amounts paid to ProQuest are
recorded as costs of sales in the accompanying consolidated statements
of operations and amounted to $3,287 and $5,927 in fiscal 2001 and 2000,
respectively. At December 31, 2001 and 2000, the Company was obligated
to ProQuest for $449 and $2,343, respectively. These amounts were
included in accounts payable and accrued expenses at December 31, 2001
and 2000 in the accompanying consolidated balance sheets.
Tucows sells the Company's products and pays royalties to the Company
based on a percentage of revenue. The amounts received from Tucows are
recorded as sales in the accompanying consolidated statements of
operations and amounted to $2,027 and $3,472 in 2001 and 2000,
respectively. At December 31, 2001 and 2000, Tucows was obligated to the
Company for $293 and $655, respectively. This amount is included in
accounts receivable in the accompanying consolidated balance sheet.
(12) COMMITMENTS AND CONTINGENCIES
The Company is subject to pending and threatened legal actions that
arise in the normal course of business. In the opinion of management, no
such actions are known to have a material adverse impact on the
financial position of the Company.
The Company has entered into contracts with several partners to provide
content for the Company's portfolio of products and services. Under
these contracts, the Company is obligated to make minimum payments for
license fees of $2,229, $2,409, and $1,910 in 2002, 2003, and 2004,
respectively. In addition, under the terms of most of these contracts,
the Company is required to pay royalties based on various units of
measure related to the content provided the Company.
bigchalk.com, inc. and Subsidiaries
Consolidated Balance Sheet
Dollars in thousands
(unaudited)
SEPTEMBER 30,
ASSETS 2002
---------------
Current assets:
Cash and cash equivalents $ 17,850
Accounts receivable 7,198
Prepared expenses and other current assets 1,789
---------------
Total current assets 26,837
Property and equipment, net 4,297
Restricted investment 649
Goodwill and other intangible assets, net 6,257
Other 94
---------------
Total assets $ 38,134
===============
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 898
Accrued expenses 922
Accrued royalties 1,325
Accrued facilities cost 548
Deferred revenue 15,090
---------------
Total current liabilities 18,783
Long-term deferred revenue 727
Long-term accrued facilities costs 1,612
---------------
Total liabilities 21,122
Series A Preferred Stock 71,962
Series B Preferred Stock 57,043
Equity (deficit):
Common stock 168
Additional paid-in capital 11,815
Accumulated deficit (123,976)
---------------
Total equity (deficit) (111,993)
---------------
Total liabilities and equity (deficit) $ 38,134
===============
bigchalk.com, inc. and Subsidiaries
Consoldiated Statements of Operations
(Dollars in Thousands)
(unaudited)
Nine months Three months
ended ended
September 30, September 30,
2002 2002
(UNAUDITED) (UNAUDITED)
-------------------------------
Sales $ 19,952 5,958
Cost of Sales 6,100 1,726
-------------------------------
Gross Profit 13,852 4,232
Operating Expenses:
Sales and marketing 7,427 2,298
Product Development 2,611 907
Information and technology 1,955 713
General and administrative 2,424 758
-------------------------------
Depreciation and amortization 7,080 2,327
Loss on disposition of fixed assets 247 (6)
-------------------------------
Operating loss (7,893) (2,766)
Interest income (expense), net 303 111
-------------------------------
Loss before income taxes (7,590) (2,655)
Income tax benefit 152 -
-------------------------------
Net loss (7,438) (2,655)
Dividends on and accretion of preferred stock (14,458) (4,964)
-------------------------------
Net loss to common shareholders $ (21,896) (7,619)
===============================
ProQuest Company
Pro Forma Combined Condensed Financial Statements
(Unaudited)
This information should be read in conjunction with the previously filed form
8-K, dated January 14, 2003, the previously filed historical consolidated
financial statements and accompanying notes of ProQuest Company, contained in
its Annual Report on Form 10-K for the fiscal year ended December 29, 2001 and
in its 2002 Quarterly Report on Form 10-Q, and in conjunction with the
historical financial statements and accompanying notes of Bigchalk included
elsewhere in this Form 8-K.
The following unaudited pro forma combined condensed balance sheet as of
September 28, 2002, and the pro forma combined income statements for the fiscal
year ended December 29, 2001, and for the thirty-nine weeks ended September 28,
2002, give effect to the acquisition, by ProQuest Company (the Company), of all
the issued and outstanding common stock of Bigchalk, Inc. (Bigchalk), on
December 30, 2002, for total consideration of approximately $27 million. Under
the terms of the Merger Agreement, Merger Sub was merged with and into Bigchalk.
Pursuant to the terms of the Merger Agreement, all of the outstanding series A
Preferred Stock and Series B Preferred Stock of Bigchalk received in the
aggregate $55,375,000 less any consideration paid to the holders of Common Stock
of Bigchalk, subject to certain adjustments. Prior to the Merger, the Company
owned approximately 38% of the equity of Bigchalk on a fully diluted basis
(4,950,495 shares of Series B Preferred Stock and 10,632,303 shares of Common
Stock of Bigchalk) for which the Company would have received approximately $8.5
million. In addition, the Company received $20 million in cash that Bigchalk had
at the time of the acquisition.
The unaudited pro forma combined condensed balance sheet represents the
financial position of the Company and Bigchalk as of September 28, 2002,
assuming the acquisition occurred as of that date. The unaudited pro forma
combined condensed financial statements of operations have also been prepared
assuming the acquisition occurred as of the beginning of the periods presented.
The acquisition actually occurred on December 30, 2002.
The unaudited pro forma condensed financial statements are provided for
informational purposes only in response to Securities and Exchange Commission
("SEC") requirements and do not purport to represent what the Company's
financial position or results of operations would actually have been if the
transaction had in fact occurred at such dates, or to project the Company's
financial position or results of operations for any future date or period.
Furthermore, the unaudited pro forma condensed financial statements have been
prepared in accordance with rules prescribed by Article 11 of Regulation S-X.
For financial reporting purposes, Bigchalk's assets and liabilities have been
adjusted, on a preliminary basis, to reflect their fair values in the unaudited
pro forma condensed consolidated balance sheet as of September 28, 2002. The
estimated effects resulting from these adjustments have been reflected in the
unaudited pro forma condensed consolidated statements of operations.
Pro Forma Combined Condensed Balance Sheet
As of September 28, 2002
(In thousands)
(Unaudited)
ProQuest Bigchalk Pro Forma ProQuest
Historical Historical Adjustments Pro Forma
---------- ---------- ----------- ---------
Curent assets:
Cash and cash equivalents $1,110 $17,850 ($17,850)(1) $1,110
Accounts receivable, net 111,313 7,198 - 118,511
Inventory, net 4,127 - - 4,127
Other current assets 43,832 1,789 - 45,621
-------- ------- -------- -------
Total current assets 160,382 26,837 (17,850) 169,369
-------- ------- -------- -------
Net property, plant, equipment and product masters 165,917 4,297 (3,297) (2) 166,917
Restricted investment - 649 - 649
Long-term receivables 2,730 - - 2,730
Goodwill 243,209 6,257 32,383 (3) 281,849
Intangible assets, net - - 7,581 (4) 7,581
Other assets 102,489 94 4,783 (5) 107,366
-------- ------- -------- -------
Total assets $674,727 $38,134 $23,600 $736,461
======== ======= ======== ========
Current liabilities:
Notes payable 19 - - 19
Current maturities of long-term debt 138 - - 138
Accounts payable 39,728 898 - 40,626
Accrued expenses 45,004 2,795 9,100 (6) 56,899
Current portion of monetized future billings 27,223 - - 27,223
Deferred income 105,290 15,090 - 120,380
-------- ------- -------- -------
Total current liabilities $217,402 $18,783 $9,100 $245,285
-------- ------- -------- -------
Long-term liabilities:
Long-term debt, less current maturities 209,361 - 29,050 (7) 238,411
Long-term monetized future billings 51,711 - - 51,711
Other liabilities 86,134 2,339 2,000 (8) 90,473
-------- ------- -------- -------
Total long-term liabilties 347,206 2,339 31,050 380,595
-------- ------- -------- -------
Series A Preferred Stock - 71,962 (71,962) (9) -
Series B Preferred Stock - 57,043 (57,043) (9) -
Shareholder's equity:
Common stock 28 168 (168) (9) 28
Capital surplus 296,924 11,815 (11,815) (9) 296,924
Notes receivable from executives (674) - - (674)
Retained earnings (accumulated deficit) (171,460) (123,976) 124,438 (9) (170,998)
Treasury stock (11,529) - - (11,529)
Other comprehensive income (loss):
Accumulated foreign currency translation adjustment (2,220) - - (2,220)
Unrealized loss from derivatives (950) - - (950)
-------- ------- -------- -------
Accumlated other comprehensive loss (3,170) (3,170)
-------- ------- -------- -------
Total shareholders' equity (deficit) 110,119 (111,993) 112,455 110,581
-------- ------- -------- -------
Total liabilities and shareholders' equity $674,727 $38,134 $23,600 $736,461
======== ======= ======== ========
See accompanying notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements.
Pro Forma Combined Condensed Statement of Operations
For the fiscal year ended December 29, 2001
(In Thousands)
(Unaudited)
ProQuest Bigchalk Pro Forma ProQuest
Historical Historical Adjustments Pro Forma
---------- ---------- ----------- ---------
Net sales $ 401,628 $ 28,152 ($ 4,003) (1) $ 425,777
Cost of sales (186,963) (31,008) 20,359 (2) (197,612)
--------- --------- --------- ---------
Gross profit (loss) 214,665 (2,856) 16,356 228,165
--------- --------- --------- ---------
Research and development expense (21,381) (3,633) 2,010 (3) (23,004)
Selling and administrative (124,546) (31,513) 22,667 (4) (133,392)
expense
Loss on sales of assets (2,312) (355) 355 (5) (2,312)
Restructuring -- (3,675) 3,675 (6) --
Asset impairment -- (30,282) 30,282 (7) --
Earnings (loss) from continuing
operations before interest,
income taxes and equity in loss of
affiliate $ 66,426 ($ 72,314) $ 75,345 $ 69,457
Net interest expense:
Interest income 1,159 1,022 -- 2,181
Interest expense (26,198) -- (1,754) (8) (27,952)
Net interest expense (25,039) 1,022 (1,754) (25,771)
Earnings (loss) from continuing
operations before income taxes and
equity in loss of affiliate $ 41,387 ($ 71,292) $ 73,591 $ 43,686
Income tax expense (15,727) 718 5,686 (9) (9,323)
Equity in loss of affiliate (13,374) -- 13,374 (10) --
Earnings (loss) from continuing
operations $ 12,286 ($ 70,574) $ 92,651 $ 34,363
========= ========= ========= =========
See accompanying notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements.
Pro Forma Combined Condensed Statement of Operations
For the thirty-nine weeks ended September 28, 2002
(In Thousands)
(Unaudited)
ProQuest Bigchalk Pro Forma ProQuest
Historical Historical Adjustments Pro Forma
Net sales $318,102 $19,952 ($2,255) (1) $335,800
Cost of sales (151,464) (13,180) 5,022 (2) (159,622)
-------- ------- ------- --------
Gross profit (loss) 166,638 6,772 2,768 176,178
-------- ------- ------- --------
Research and development expense (14,853) (2,611) 1,306 (3) (16,159)
Selling and administrative expense (86,079) (11,807) 5,244 (4) (92,642)
Loss on sales of assets (247) 247 (5) -
-------- ------- ------- --------
Earnings (loss) from continuing operations
before interest, income
taxes and equity in loss of affiliate $65,706 ($7,893) $9,564 $67,377
Net interest expense:
Interest income 2,153 303 - 2,456
Interest expense (28,519) - (762) (6) (29,281)
-------- ------- ------- --------
Net interest expense (26,366) 303 (762) (26,825)
-------- ------- ------- --------
Earnings (loss) from continuing operations
before income taxes and equity in loss
of affiliate $39,340 ($7,590) $8,802 $40,552
-------- ------- ------- --------
Income tax expense (14,949) 152 (902) (7) (15,706)
Equity in loss of affiliate - - - -
Earnings (loss) from continuing operations $24,391 ($7,438) $7,900 $24,853
======= ======= ====== =======
See accompanying notes to the Unaudited Pro Forma Condensed Financial Statements.
Notes to Pro Forma Combined Condensed Financial Statements
----------------------------------------------------------
Balance Sheet
-------------
September 28, 2002 Adjustments:
(1) Adjustment (decrease) in cash necessary as the cash was utilized in
reducing the debt that was borrowed in conjunction with the Bigchalk
acquisition. The debt is stated net of this cash on the reduction
Balance Sheet (see note (7) for more details).
(2) Adjustment (decrease) in net property, plant, equipment, and product
masters necessary to recognize the fair value of the assets acquired.
As the fair market value of the assets purchased was less than the book
value of the assets, a reduction was necessary.
(3) Adjustment (increase) in goodwill represents the difference between the
purchase price and the book value of Bigchalk.
(4) Adjustment (increase) in intangible assets necessary primarily due to
additional value that was acquired from receiving Bigchalk's customer
list.
(5) Adjustment (increase) in other assets due to deferred taxes.
(6) Adjustment (increase) in accrued expenses represents certain
non-recurring costs (i.e., severance costs) associated with the
acquisition of Bigchalk.
(7) Adjustment (increase) in long-term debt represents ProQuest's need to
secure additional funds to help finance the acquisition of Bigchalk.
(8) Adjustment (increase) in other liabilities necessary due to a
non-recurring facilities charge related to Bigchalk's leases.
(9) Adjustments necessary to eliminate Bigchalk's stockholder's deficit.
Statement of Operations
-----------------------
Adjustments for the fiscal year ended December 29, 2001:
(1) Adjustment (decrease) to net sales necessary to eliminate sales of
ProQuest Company's content made by Bigchalk for the fiscal year 2001.
When the entities are combined, this revenue must be eliminated.
(2) Adjustment (decrease) to cost of sales necessary as royalties paid to
ProQuest by Bigchalk must be eliminated. In addition, amortization
expenses would decrease as a result of recording the fair market values
of purchased assets as part of purchase accounting.
(3) Adjustment (decrease) to research and development expense necessary to
reflect ProQuest's planned restructuring of Bigchalk's research and
development structure.
(4) Adjustment (decrease) to selling and administrative expense necessary
to reflect ProQuest's planned restructuring of Bigchalk's sales force
and corporate structure.
(5) Adjustment (decrease) necessary since assets would have been originally
recorded at fair market value and therefore, no loss on sales of assets
would have been necessary.
(6) Adjustment (decrease) necessary since assets would have been originally
recorded at fair market value and therefore, no restructuring charge
would have been necessary.
(7) Adjustment (decrease) necessary since assets would have been originally
recorded at fair market value and therefore, no impairment charge would
have been necessary.
(8) Adjustment (increase) in interest expense represents additional expense
that would be assumed due to ProQuest's need to secure additional funds
to help finance the acquisition of Bigchalk.
(9) Adjustment (decrease) in income tax expense necessary in conjunction
with ProQuest's deferred taxes analysis.
(10) Adjustment necessary to eliminate equity loss in affiliate that had
been recognized by ProQuest for it's 38% interest in Bigchalk.
Adjustments for the period ended September 28, 2002:
(1) Adjustment (decrease) to net sales necessary as ProQuest recognized
sales made by Bigchalk for the nine month's ended September 28, 2002.
When the entities are combined, this revenue must be eliminated.
(2) Adjustment (decrease) to cost of sales necessary as royalties paid to
ProQuest by Bigchalk must be eliminated. In addition, amortization
expenses would decrease as a result of recording the fair market values
of purchased assets as part of purchase accounting.
(3) Adjustment (decrease) to research and development expense necessary to
reflect ProQuest's planned restructuring of Bigchalk's research and
development structure.
(4) Adjustment (decrease) to selling and administrative expense necessary
to more closely approximate ProQuest Company's selling and
administrative current expense rate.
(5) Adjustment (decrease) necessary since assets would have been originally
recorded at fair market value and therefore, no loss on sales of assets
would have been necessary.
(6) Adjustment (increase) in interest expense represents additional expense
that would be assumed due to ProQuest's need to secure additional funds
to help finance the acquisition of Bigchalk.
(7) Adjustment (increase) in income tax expense necessary in conjunction
with ProQuest's deferred taxes analysis.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
PROQUEST COMPANY
DATE: March 17, 2003 /s/ Kevin G. Gregory
---------------------------------------------------
Kevin G. Gregory
Senior Vice President, Chief Financial Officer, and
Assistant Secretary