FEATURE
ProQuest: A Question of Financing
By
Phillip Britt
ProQuest Co.’s financial future came into question in May as the publisher of information and education resources reached an agreement with its bank lenders and with private placement note holders in which both parties granted the company a waiver from current defaults under its credit agreements.
Despite the company’s financial difficulties stemming from an accounting irregularity, at least one industry analyst said suppliers and customers have yet to see any negative results.
The news about the accounting problem arose in early February 2006, only 3 months before the company moved into a new $34 million facility in Ann Arbor, Mich.
The company plans to look at the potential sale of different assets, in particular the Business Solutions division, which, according to ProQuest chairman and CEO Alan Aldworth’s prepared statement, would “be attractive to potential buyers with a structure and resource base to invest in its full potential.”
The Business Solutions division’s reported unaudited revenue for 2005 was $183 million, while unaudited earnings before interest and taxes were $49.2 million.
The division provides management, technical, and e-commerce solutions to the automotive and power equipment markets. The division’s products are designed to turn complex technical and performance measurement data into easily accessed answers.
As part of the new financial agreements, ProQuest also granted a security interest in “substantially all of its and its domestic [subsidiaries’] assets and to provide guarantees from all of its subsidiaries with respect to the credit agreements,” reported the company in its 8-K filing with the Securities Exchange Commission in early May.
Addressing the Issues
In a letter to shareholders posted on the company’s Web site, company president David “Skip” Prichard reported: “While deeply disappointed about the accounting irregularities, I was heartened to know that we discovered them ourselves and acted immediately to address the issues.”
He also calls some reports about ProQuest “inaccurate” and says the company has chosen not to respond to such articles. ProQuest didn’t return multiple calls to Information Today for this article.
Prichard also reported that the company will “only comment publicly when we have facts to communicate—and then to communicate directly with our customers, partners and employees.”
According to Michael Meltz, securities analyst at Bear Stearns, New York, the latest agreement with creditors requires ProQuest to pay 175 basis points higher than existing interest rates. The company reportedly said this would produce an additional $42 million in interest expense. The company could also pay waiver fees of about $2 million.
The higher borrowing costs were expected to wipe out any earnings the company would have had this year and leave the firm at break-even or with a slight loss, according to Meltz and Chuck Richard, vice president and lead analyst of Outsell, Inc.
Meltz doesn’t expect ProQuest to post earnings this year and rates the company’s stock in the “underperform” category. The company’s stock price went from nearly $30 a share in early February to less than $11 a share by mid-May, putting the stock price near the level of its initial public offering in 1995. This is in sharp contrast to the $35-plus peak in 3Q 2005. Ever since the Enron scandal, investors have responded with severe punishment if accounting irregularities arise for any company, whether the irregularities are discovered through an internal investigation or from an outside source.
Restatements of Finances
The stock price was about $28 just before the company announced that it would be restating its financial statements for 2000 to 2004 and for the first three quarters of 2005. As a result of the restatements, the company’s profits for the last 2 years were essentially wiped out, breaking the covenants it had with its creditors, Richard said.
In a research note published shortly after the announcement, Meltz said he was surprised by the impact of the restatement of the reports.
The accounting irregularities reportedly stemmed from improper accounting for subscriptions, according to Richard. While payment for an annual or multiyear subscription may be received up-front, accounting rules dictate that these revenues be recognized on a monthly basis. In other words, the revenue for a $36,000, 3-year subscription must be recognized as $1,000 in each of the 36 months at the start of the subscription, not as $36,000 when the payment is received. This isn’t a complex accounting practice. As Richard said, “This is something taught in Accounting 101.”
ProQuest’s revelation spurred internal reviews as well as investigations by the Securities Exchange Commission, which are still ongoing.
According to Meltz, “Indications are that ProQuest is fully cooperating with the SEC.”
The company also revealed that it had reportedly placed a senior employee in the finance department of one of its three divisions “on administrative leave.”
The company also reported that it is looking into several different expense reduction strategies in addition to the possible sale of the Business Solutions division.
The new credit agreement runs through Nov. 30, 2006, and is subject to the company’s ongoing compliance with certain additional covenants, including the monthly reviews. Under terms of the agreement, the waiver would be extended to Jan. 31, 2007, if ProQuest meets certain conditions. The company’s new agreement with creditors also gives the firm financial breathing space, though creditors now have the right to review the company’s finances on a monthly basis, according to Richard. If those reviews turn up anything that violates the new agreement, they can impose even stricter financial and other requirements, Richard said.
The Reality for New Products and Services
While such a review can help ensure against accounting irregularities, it also can result in the micromanagement of potentially profitable new products and services, Richard said, pointing to the idea that most products and services result in expenses before producing any revenue, thereby taking even longer to become profitable. So creditors and the company alike could be less likely to take these business risks, even if they could be beneficial in the long term.
Meltz said this as well in his May 3 research note, explaining that ProQuest tends to incur expenses in the first half of the year, while much of the revenue generation is in the last 6 months of the year.
The new credit agreement also puts a $56 million cap on the funds available to ProQuest for working capital financing. This amount, again contingent on the company staying in compliance with the underlying terms and conditions of its credit agreements and waiver agreement, could also limit the company’s development of new products and services, according to Richard.
The company’s board “has determined that the company should explore strategic alternatives to reduce debt and enhance value. Initially, these efforts are expected to focus on a potential sale of or other transaction involving Business Solutions,” according to the released statement.
Richard said that the phrase “explore strategic alternatives” is often lawyer-speak for selling some or all assets of
a company.
Yet Prichard recently reported to shareholders and customers that the company is “planning exciting new products and services in 2006 that our sales force will be discussing with you shortly.”
“The company’s products and services are well regarded in the industry,” Richard said. “They haven’t had a history of bad accounting practices in terms of their suppliers or customers. The company has a history of good customer support. That doesn’t mean that the company isn’t under extreme pressure from competitors.”
Phil Britt, president and CEO of S&P Enterprises, Inc., is a business writer who covers key topics in the information technology field. His e-mail is spenterprises@wowway.com. Send your comments about this article to itletters@infotoday.com.
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