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Filed pursuant to Rule 424(b)(4)
Registration No. 333-46157
2,600,000 SHARES
[PROVANT CORPORATE LOGO]
COMMON STOCK
All of the 2,600,000 shares of Common Stock offered hereby are being sold
by PROVANT, Inc.
Prior to this offering (the "Offering"), there has been no public market
for the Common Stock of the Company. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price. The Common
Stock has been approved for quotation on the Nasdaq National Market ("Nasdaq")
under the symbol "POVT."
SEE "RISK FACTORS" COMMENCING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
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<S> <C> <C> <C>
Per Share......................... $13.00 $0.91 $12.09
Total (3)......................... $33,800,000 $2,366,000 $31,434,000
=======================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $2,750,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 390,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $38,870,000, the Underwriting Discount will
total $2,720,900 and the Proceeds to Company will total $36,149,100. See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the offices of NationsBanc Montgomery Securities LLC on or about May 4, 1998.
------------------------
NATIONSBANC MONTGOMERY SECURITIES LLC
SALOMON SMITH BARNEY
PIPER JAFFRAY INC.
APRIL 28, 1998
<PAGE> 2
[Left side of page has four square boxes that read, respectively, "Employee,
Selection, Recruitment & Retention; Employee Work Skills; Employee Management &
Leadership Skills; and Organizational Assessment, Direction & Change." Text
below the four square boxes reads "Web Site: www.provant.com." Right side of
page has a montage of photos with textual overlay that reads "Provant offers a
broad range of training and development services and products through multiple
delivery channels to corporate and government clients seeking to measurably
enhance employees' effectiveness."]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
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PROSPECTUS SUMMARY
Simultaneous with and as a condition to the consummation of the Offering
made by this Prospectus, PROVANT, Inc. will acquire in separate combination
transactions (collectively, the "Combination") seven providers of training and
development services and products (each, a "Founding Company," and collectively,
the "Founding Companies"). See "Combination." Unless otherwise indicated, all
references to the "Company" herein mean PROVANT, Inc. and the Founding
Companies, and references to "PROVANT" mean PROVANT, Inc. and its wholly-owned
subsidiaries prior to the consummation of the Combination. Investors should
carefully consider the information set forth under the heading "Risk Factors."
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
related notes appearing elsewhere in this Prospectus. Unless otherwise
indicated, (i) all share, per share and financial information in this
Prospectus: (a) has been adjusted to give effect to the Combination (excluding
the issuance of up to 969,218 shares of Common Stock as Additional Consideration
(as defined herein) for five of the Founding Companies, the issuance in Common
Stock of the J. Howard Contingent Consideration (as defined herein) for the
sixth Founding Company and the payment in Common Stock and cash of the Star
Mountain Contingent Consideration (as defined herein) for the seventh Founding
Company), (b) gives effect to a stock dividend of 979.0292-for-1 on Common Stock
outstanding as of April 28, 1998 and (c) assumes no exercise of the
Underwriters' over-allotment option; and (ii) all references to fiscal years
mean the Company's or a Founding Company's fiscal year ending on June 30 in the
same calendar year (e.g., "fiscal 1997" means the fiscal year ended June 30,
1997).
THE COMPANY
The Company provides a broad range of training and development services and
products to Fortune 1000 companies, other large and medium-sized corporations
and government entities. The Company's services and products are designed to
increase the productivity of organizations by improving employee selection,
recruitment and retention; enhancing employee work skills; developing employee
management and leadership skills; and facilitating organizational assessment,
direction and change. The Company offers both customized and "off-the-shelf"
services and products that are designed to provide measurable improvements in
employee performance and productivity. The Company delivers its services and
products through multiple delivery methods, including instructor-led classroom
training and seminars, certification of client employees as instructors
("train-the-trainer"), interactive multimedia software (such as CD-ROM) and
distance-based media (such as video conferencing, intranets and the Internet).
The seven Founding Companies are recognized leaders in their respective fields
and have developed a wide range of services and products, a substantial
knowledge base created from years of research and development, and a
well-established client base. The Company's objective is to become a leading
single source provider of high-quality training and development services and
products that are distributed through multiple delivery methods.
The Company provided training and development services and products to more
than 1,300 companies and 75 government entities in fiscal 1997, including Abbott
Laboratories, Bank of America, Conoco, Inc., Eli Lilly and Company, Federal
Express, Federated Department Stores, Inc., Hewlett-Packard Company,
Metropolitan Life Insurance Company, Mobil Corporation, the Department of
Defense, the Immigration and Naturalization Service and the Internal Revenue
Service. During this period, the Company generated revenues of more than
$100,000 from each of 75 different corporate clients and from over 15 different
federal government entities. For fiscal 1997, the Company had pro forma revenue
of $68.8 million and pro forma income from operations of $7.9 million. From
fiscal 1995 through fiscal 1997, the historical combined revenue of the Founding
Companies grew at a compound annual rate of 21.8%.
The Company believes that the corporate and government training and
development market is large and growing. According to Training Magazine,
domestic corporations with over 100 employees budgeted approximately $58.6
billion on training in 1997, compared to approximately $45.0 billion in 1992,
representing a compound annual growth rate of approximately 5.4%. The Department
of Defense's training and development budget alone was approximately $23.9
billion for its 1997 fiscal year. The portion of the market
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3
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devoted to external training is increasing, as corporations and government
agencies focus on their core competencies, shift fixed training costs to
variable costs, and obtain training and development services, products,
technology and expertise that may not be available internally. The Company
believes that corporations and government entities seek external providers that
can meet their overall training and development needs by: (i) providing a broad
range of high-quality services and products in both customized and off-the-shelf
formats; (ii) delivering training through multiple delivery methods capable of
reaching large and geographically dispersed work forces; and (iii) utilizing the
most current technology available.
The Company intends to capitalize on these industry trends and enhance its
position as a leading provider of training and development services and products
by pursuing a multi-faceted growth strategy. The Company intends to seek
internal growth by: (i) capitalizing on cross-selling opportunities among the
Founding Companies; (ii) implementing an aggressive sales and marketing
strategy; (iii) expanding its service and product offerings; and (iv) leveraging
investments in technology and deploying leading technologies. In addition, the
Company intends to pursue strategic acquisitions of providers of training and
development services and products in order to expand its service and product
offerings, delivery methods and client base. The Company believes that its
senior management team, particularly Paul M. Verrochi, its Chairman and Chief
Executive Officer and co-founder and former Chairman of American Medical
Response, Inc., and John H. Zenger, its President and former Chairman of Times
Mirror Training Group, one of the nation's largest training companies, will
provide the Company with a competitive advantage in implementing its growth
strategy.
PROVANT is a Delaware corporation. Its principal executive offices are
located at 67 Batterymarch Street, Suite 500, Boston, Massachusetts 02110, and
its telephone number at that location is (617) 261-1600. The Founding Companies'
principal offices are located in: Alexandria, Virginia; Lexington,
Massachusetts; Memphis, Tennessee; North Hollywood and San Francisco,
California; Provo, Utah; and Ridgewood, New Jersey. See "Combination -- The
Founding Companies."
4
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THE OFFERING
Common Stock offered by the Company......... 2,600,000 shares
Common Stock to be outstanding after the
Offering.................................... 9,405,558 shares (1)
Use of proceeds............................. To pay the cash portion of the
purchase price for the Founding
Companies and to repay certain
indebtedness. See "Use of
Proceeds."
Proposed Nasdaq Symbol...................... POVT
- ---------------
(1) Includes 3,459,341 shares of Common Stock to be issued to the stockholders
of the Founding Companies in connection with the Combination. Excludes: (i)
up to an aggregate of 969,218 shares of Common Stock that may be issued as
Additional Consideration to the stockholders of five of the Founding
Companies as well as shares of Common Stock that may be issued as J. Howard
Contingent Consideration and Star Mountain Contingent Consideration; (ii)
1,100,000 shares of Common Stock reserved for issuance under the Company's
1998 Equity Incentive Plan (of which options to purchase 868,983 shares will
be outstanding upon the consummation of the Offering at an exercise price of
$13.00 per share); (iii) 100,000 shares of Common Stock reserved for
issuance under the Company's Stock Plan for Non-Employee Directors (of which
options to purchase 15,000 shares will be outstanding upon the consummation
of the Offering at an exercise price of $13.00 per share); (iv) 500,000
shares of Common Stock reserved for issuance under the Company's 1998
Employee Stock Purchase Plan; (v) 10,000 shares of Common Stock reserved for
issuance upon the exercise of an outstanding option having an exercise price
of $5.00 per share; and (vi) an aggregate of 779,372 shares of Common Stock
reserved for issuance upon the exercise of warrants granted to two of the
Company's executive officers, as more fully described under "Certain
Transactions -- Other Transactions; American Business Partners LLC."
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5
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SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PROVANT has conducted operations to date only in connection with the
Combination and the Offering, and will acquire the Founding Companies
simultaneously with and as a condition to the consummation of this Offering. For
financial statement presentation purposes, PROVANT has been designated as the
accounting acquiror. The following table presents summary pro forma combined
financial data of the Company, as adjusted for: (i) the consummation of the
Combination; (ii) certain pro forma adjustments to the historical financial
statements of the Founding Companies; and (iii) the consummation of the Offering
and the application of the net proceeds. See the Company's Unaudited Pro Forma
Combined Financial Statements, each of the Founding Companies' financial
statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA COMBINED (1)
-----------------------------------
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1997 DECEMBER 31, 1997
------------- ------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................................... $68,846 $35,958
Cost of revenue........................................... 30,967 15,948
---------- -------------
Gross profit.............................................. 37,879 20,010
Selling, general and administrative expenses (2).......... 28,663 16,327
Goodwill amortization (3)................................. 1,282 641
---------- -------------
Income from operations.................................... 7,934 3,042
Interest and other income (expense), net.................. (73) (50)
---------- -------------
Income before income taxes................................ 7,861 2,992
Provision for income taxes (4)............................ 3,763 1,991
---------- -------------
Net income................................................ $4,098 $ 1,001
========== =============
Net income per share...................................... $ 0.51 $ 0.11
========== =============
Shares used in computing net income per share (5)......... 8,009,861 9,040,779
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------
PRO FORMA
COMBINED (6) AS ADJUSTED (7)
------------ ------------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (8)....................................... $(19,564) $ 8,967
Total assets.............................................. 76,654 78,301
Long-term debt, net of current maturities................. 1,276 1,276
Stockholders' equity...................................... 35,390 63,121
</TABLE>
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(1) The pro forma combined statement of operations data assumes that the
Combination and the Offering were consummated on July 1, 1996, and is not
necessarily indicative of the results the Company would have obtained if
these events actually then occurred or of the Company's future results. The
pro forma combined statement of operations data is based on preliminary
estimates, available information and assumptions that management deems
appropriate, and should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus.
(2) Reflects pro forma adjustments to salary, bonuses and benefits paid to
certain of the owners of the Founding Companies to which they have agreed
prospectively (the "Compensation Differential"). For the year ended June 30,
1997 and the six months ended December 31, 1997, the Compensation
Differential was approximately $5.6 million and $4.1 million, respectively.
Includes for the six months ended December 31, 1997 approximately $485,000
of non-cash compensation expense related to the issuance of Common Stock to
officers of and consultants to the Company.
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(3) Reflects amortization of the goodwill to be recorded as a result of the
Combination over a 40-year period and computed on the basis described in the
Notes to the Unaudited Pro Forma Combined Financial Statements.
(4) Assumes that all income is subject to an effective corporate income tax rate
of 40%, and all goodwill from the Combination is non-deductible.
(5) Consists of: (i) 3,459,341 shares to be issued to the stockholders of the
Founding Companies (without giving effect to the issuance of Additional
Consideration, the J. Howard Contingent Consideration or the Star Mountain
Contingent Consideration); (ii) the weighted average shares outstanding,
after giving effect to a stock split, of 1,950,520 shares during the period
ended June 30, 1997 and 2,981,438 shares during the period ended December
31, 1997; and (iii) 2,600,000 shares to be sold in the Offering.
(6) The pro forma combined balance sheet data assumes that the Combination was
consummated on December 31, 1997. The pro forma combined balance sheet data
is based upon preliminary estimates, available information and assumptions
that management deems appropriate and should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
Prospectus.
(7) Adjusted for the sale of 2,600,000 shares of Common Stock offered hereby and
the application of the net proceeds therefrom as described under "Use of
Proceeds."
(8) The pro forma combined data gives effect to $22.4 million representing the
cash portion of the consideration for the Combination to be paid from a
portion of the net proceeds of the Offering.
RECENT DEVELOPMENTS
For the nine months ended March 31, 1998, the Founding Companies had
combined revenue of $54.4 million and combined income from operations of $7.9
million, compared to combined revenue of $43.2 million and combined income from
operations of $6.2 million for the nine months ended March 31, 1997,
representing increases of 26.1% and 27.0%, respectively. This combined statement
of operations data does not reflect any pro forma adjustments, other than an
adjustment for the Compensation Differential, and otherwise has been prepared on
the same basis as the other combined results of operations data contained in
this Prospectus. The Compensation Differential was approximately $4.9 million
for each of the nine-month periods ended March 31, 1997 and 1998.
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7
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SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents summary data for each of the Founding
Companies on a historical (and, with respect to Star Mountain, consolidated)
basis for the periods indicated. (See "Combination" for the complete name of
each Founding Company.) Three of the Founding Companies, J. Howard, LSS and Star
Mountain, historically operated with fiscal years ending on dates other than
June 30. For purposes of the table below, their operating results have been
recast to reflect a June 30 fiscal year end, although they have been derived
from financial statements prepared on the same basis as the audited financial
statements. As a result of this presentation, the operating results for these
three companies do not conform with their audited financial statements contained
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
--------------------------- ----------------
1995 1996 1997 1996 1997
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
BTI:
Revenue......................................... $ 3,803 $ 5,685 $ 7,096 $3,439 $ 3,850
Gross profit.................................... 2,754 4,190 5,608 2,560 3,075
Income (loss) from operations................... 439 142 497 (656) (1,331)
Pro forma income from operations (1)............ 350 705 1,439 346 1,052
Basic net income (loss) per share............... 5,780 2,510 5,680 (5,980) (12,650)
DECKER:
Revenue......................................... $ 8,550 $ 8,620 $ 8,410 $4,047 $ 5,160
Gross profit.................................... 6,131 5,965 6,135 2,881 3,820
Income (loss) from operations (2)............... 461 249 (311) (525) 406
Pro forma income from operations (1)............ 653 441 854 420 626
Basic net income (loss) per share............... 2.53 1.63 (2.55) (3.55) 2.96
J. HOWARD:
Revenue......................................... $ 5,444 $ 7,388 $ 7,317 $3,157 $ 3,524
Gross profit.................................... 3,646 5,084 5,157 2,187 2,368
Income (loss) from operations................... 519 720 602 (397) (409)
Pro forma income from operations (1)............ 701 1,265 1,548 429 74
Basic net income (loss) per share............... 6.45 8.96 7.12 (4.36) (4.52)
LSS (3):
Revenue......................................... $ 2,983 $ 4,233 $ 5,599 $2,689 $ 2,771
Gross profit.................................... 1,903 2,549 3,671 1,842 1,650
Income (loss) from operations................... 209 381 610 (111) 532
Pro forma income from operations (1)............ 573 940 1,928 997 622
Basic net income (loss) per share............... 118 313 615 (110) 525
MOHR:
Revenue......................................... $ 1,459 $ 2,171 $ 3,015 $1,114 $ 1,534
Gross profit.................................... 1,288 1,494 2,190 762 1,011
Income (loss) from operations................... (26) 343 445 19 (39)
Pro forma income from operations (1)............ 47 487 779 111 120
Basic net income (loss) per share............... 280 3,390 4,410 210 (370)
NOVATIONS:
Revenue......................................... $ 7,175 $ 9,039 $ 9,018 $4,658 $ 5,256
Gross profit.................................... 3,290 4,306 4,179 2,155 2,579
Income from operations.......................... 123 212 864 487 517
Pro forma income from operations (1)............ 1,331 1,683 1,525 860 1,192
Basic net income per share...................... 3 74 292 396 230
STAR MOUNTAIN:
Revenue......................................... $11,875 $14,361 $20,790 $9,459 $12,444
Gross profit.................................... 4,507 5,704 8,188 4,061 5,144
Income from operations.......................... 1,286 292 1,127 748 995
Pro forma income from operations (1)............ 1,116 696 1,368 899 1,085
Basic and diluted net income per share.......... 0.14 0.02 0.08 0.05 0.06
</TABLE>
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(1) Reflects adjustments to the compensation of certain executives of the
Founding Company to reflect the portion of the Compensation Differential
attributable to such company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) Includes for the fiscal year ended June 30, 1997 approximately $825,000 of
non-cash compensation expense related to the repurchase of common stock from
a former officer of Decker.
(3) Includes 1995 data for LSS for the 12 months ended August 31, 1995.
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RISK FACTORS
The following factors should be considered, together with the other
information in this Prospectus, in evaluating an investment in the Company. This
Prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ significantly from the results discussed in the forward-looking
statements as a result of any number of factors, including the risk factors set
forth below and other factors discussed elsewhere in this Prospectus.
ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATION
PROVANT has conducted no operations and generated no revenues to date.
PROVANT has entered into definitive agreements to acquire the Founding Companies
simultaneously with, and as a condition to, the consummation of the Offering. To
date, the Founding Companies have operated independently of one another.
Currently, the Company has no centralized financial reporting system and
initially will rely on the existing reporting systems of the Founding Companies.
The Company's senior management group has been assembled only recently, and
there can be no assurance that this group will be successful in managing the
combined operations of the Founding Companies or in implementing the Company's
business and growth strategies. Any failure to do so could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management."
The Founding Companies offer different services and products, use different
capabilities and technologies, target different clients and have different
management styles. Although the Company believes that there are substantial
opportunities to cross-market and integrate the Founding Companies' businesses,
these differences increase the risk inherent in integration. There can be no
assurance that the Company will be able to integrate successfully the operations
of the Founding Companies or institute the necessary Company-wide systems and
procedures to manage successfully the combined enterprise on a profitable basis.
The Company intends to operate the Founding Companies and subsequently acquired
businesses on a decentralized basis. If proper overall business incentives and
controls are not implemented, this decentralized operating strategy could result
in inconsistent operating and financial practices and the Company's overall
profitability could be adversely affected. The failure of the Company to
integrate successfully the operations of the Founding Companies could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Business Strategy."
RISKS RELATED TO INTERNAL GROWTH STRATEGY
The central objective of the Company's growth strategy is to increase the
revenues and profitability of the Founding Companies. One of the key components
of this strategy is to cross-sell the services and products of each Founding
Company to other clients of the Company. There can be no assurance that the
Company will be able to expand its sales of services and products to its
existing clients and those of any subsequently acquired businesses. The
Company's growth strategy of broadening its service and product offerings,
implementing an aggressive marketing plan, pursuing strategic acquisitions and
deploying leading technologies has inherent risks and uncertainties. There can
be no assurance that the Company's growth strategy will be successful or that
the Company will be able to generate cash flow sufficient to fund its operations
and to support internal growth. The Company's inability to achieve internal
earnings growth or otherwise execute its growth strategy could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Growth Strategy."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
The Company intends to increase its revenues and its service and product
offerings in part through the acquisition of additional providers of training
and development services and products. There can be no assurance that the
Company will be able to identify and acquire additional businesses or integrate
and manage any acquired businesses without substantial costs, delays or other
operational or financial problems. Certain risks inherent in an acquisition
strategy, such as potentially increasing leverage and debt service requirements,
difficulties associated with combining disparate business systems and cultures,
and the failure to retain key
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personnel, could adversely affect the Company's operating results. The process
of integrating acquired companies may involve unforeseen difficulties and
require a disproportionate amount of management's attention and financial and
other resources. Moreover, increased competition for acquisition candidates may
develop, in which event fewer acquisition opportunities may be available to the
Company and acquisition costs may increase. There can be no assurance that any
business acquired in the future will achieve anticipated revenues and earnings.
In addition, the size, timing and integration of acquisitions may cause
substantial fluctuations in the Company's operating results from quarter to
quarter. The inability of the Company to acquire, integrate and manage
successfully providers of training and development services and products could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Growth Strategy."
MANAGEMENT OF GROWTH
The Company expects to grow internally and through acquisitions. The
Company expects to spend significant time and effort in expanding its existing
business and identifying, completing and integrating acquisitions. There can be
no assurance that the Company's systems, procedures and controls will be
adequate to support the Company's operations as they expand. Any future growth
also will impose significant added responsibilities on members of senior
management, including the need to identify, recruit and integrate new senior
level managers and executives. There can be no assurance that such additional
management can be identified and retained by the Company. The inability of the
Company to manage its growth or recruit and retain additional qualified
management could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Growth Strategy"
and "Management."
DEPENDENCE ON KEY PERSONNEL
The Company's operations will depend on the continuing efforts of its
executive officers and the senior management of the Founding Companies. In
particular, the Company will depend on: Paul M. Verrochi, Chairman and Chief
Executive Officer; John H. Zenger, President; and Dominic J. Puopolo, Executive
Vice President and Chief Financial Officer. In addition, the Company relies on
many of the executives of the Founding Companies, whose reputations and client
relationships have contributed in large part to those companies' success. While
the Company will enter into employment agreements with most of these
individuals, there can be no assurance that the Company will be able to retain
the services of any of them. A loss of the services of any of these individuals
following the Offering could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management."
DEPENDENCE ON AVAILABILITY OF QUALIFIED PERSONNEL
A significant portion of the Company's revenue is derived from services and
products that are delivered by instructors and consultants. The Company's
success depends upon its ability to continue to attract and retain instructors
and consultants who possess the skills and experience required to meet the
staffing needs of its clients. In order to initiate and develop client
relationships and execute its growth strategy, the Company must maintain and
continue to hire qualified salespeople. There can be no assurance that qualified
personnel will continue to be available to the Company in sufficient numbers,
and any failure to attract or retain qualified instructors, consultants and
salespeople in sufficient numbers could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH CHANGING ECONOMIC CONDITIONS
The Company's revenues and profitability are related to general levels of
economic activity and employment in the United States. As a result, any
significant economic downturn or recession in the United States could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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FLUCTUATIONS IN OPERATING RESULTS
The Founding Companies have experienced and expect to continue to
experience fluctuations in quarterly operating results. Results for any quarter
therefore are not necessarily indicative of the results that the Company may
achieve for any subsequent quarter or a full fiscal year. Quarterly results may
vary materially as a result of, among other factors, the level of training and
development services and products sold, the gain or loss of material client
relationships, the timing, structure and magnitude of acquisitions, or the
utilization rates of the Company's salaried trainers, consultants and certain
other employees. The timing or completion of client engagements or custom
services and products also could result in fluctuations in the Company's results
of operations for particular quarterly periods. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RELIANCE ON FEDERAL GOVERNMENT CONTRACTING
Approximately 31% of the Company's pro forma revenue in the six months
ended December 31, 1997 was generated from services and products provided to
over 75 federal government entities. A general reduction in expenditures by the
federal government for training and development, a Congressional budget impasse,
a reduction or elimination of the use of third party contractors by the federal
government, or an inability of the Company to maintain its relationship with
these government entities could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
government typically shares equally in the ownership of courseware and materials
that the Company develops with government funds, and may share such courseware
or materials with other entities including the Company's competitors. Risks
unique to contracts with federal government entities including potential
government audits and retroactive downward repricing of sales could, if
realized, have a material adverse effect on the Company's business, financial
condition and results of operations.
Some of the Company's contracts require a security clearance from the
federal government. Foreign beneficial ownership of Common Stock following the
Offering in excess of 5% of outstanding amounts may require the Company to place
restrictions on foreign ownership, control, or influence over these contracts.
If the government deems such controls to be inadequate to prevent foreign
control or influence and terminates the classified contracts, there could be a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY
The Company regards many of its training and development services and
products as proprietary and relies primarily on a combination of statutory and
common law copyright, trademark, service mark and trade secret laws, customer
licensing agreements, employee and third-party nondisclosure agreements and
other methods to protect its proprietary rights. Notwithstanding the foregoing,
a third party or parties could copy or otherwise obtain and use the Company's
products, services or training methodologies in an unauthorized manner or use
these products, services or methodologies to develop training and development
processes that are substantially similar to those of the Company. The Company's
products generally do not include any mechanisms to prohibit or prevent
unauthorized use by third parties. If substantial unauthorized use of the
Company's products, services or methodologies were to occur, there could be a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar training products and
delivery methods. Additionally, there can be no assurance that third parties
will not claim that the Company's current or future products or services
infringe on the proprietary rights of others. The Company expects that it will
be increasingly subject to such claims as the number of products and competitors
increases in the future. Any such claim could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Intellectual Property."
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TECHNOLOGICAL RISK
Traditionally, most of the Company's training and development services and
products have been delivered through instructors, written materials or video.
The Company intends to deliver many of its training and development services and
products, including certain services and products previously delivered in
"traditional" formats, via interactive multimedia software (such as CD-ROM) and
distance-based media (such as video conferencing, intranets and the Internet).
There can be no assurance that the Company will be successful in marketing its
services and products in multimedia software and distance-based media formats,
nor can there be assurance that services and products delivered in the newer
formats will provide comparable training results. In addition, there can be no
assurance that any successful expansion of the methods of distribution of the
Company's services and products will not be rendered moot by subsequent
technological advances. Adding new distribution channels for its services and
products also may entail significant costs, and the new formats may be more
susceptible to unauthorized use. The inability of the Company to develop new
distribution channels due to capital, personnel, technological or other
constraints could result in a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Growth
Strategy."
RISKS RELATED TO ACQUISITION FINANCING
The Company may choose to finance future acquisitions by issuing shares of
Common Stock for all or a portion of the consideration to be paid. In the event
that the Common Stock does not maintain a sufficient market value, or potential
acquisition candidates otherwise are unwilling to accept Common Stock as part of
the consideration for the sale of their businesses, the Company might not be
able to utilize Common Stock as consideration for acquisitions and would be
required to utilize more of its cash resources, if available, in order to
maintain its acquisition program. If the Company does not have sufficient cash
resources, its growth could be limited unless it could obtain additional capital
through debt or equity financings. The inability of the Company to use its
Common Stock as consideration for future acquisitions or to obtain additional
financing for acquisitions could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, there can
be no assurance that future issuances of Common Stock in connection with
acquisitions will not be dilutive to the Company's stockholders.
INDEPENDENT CONTRACTOR STATUS
The Company uses many contract instructors who are not employees of the
Company. As a result, the Company does not pay federal employment taxes or
withhold income taxes on behalf of such individuals, or include them in its
employee benefit plans. If state or federal taxing authorities were to require
the Company to treat some or all of its contract instructors as employees, the
Company would become responsible for the taxes required to be paid or withheld
and could incur additional costs associated with employee benefits and other
employee costs on both a current and retroactive basis. The aggregate impact of
such costs could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Independent
Contractors."
COMPETITION
The training and development industry is highly fragmented and competitive,
with low barriers to entry and no single competitor accounting for a significant
market share. The Company's competitors include several large publicly traded
and privately held companies, and thousands of small privately held training
providers and individuals. In addition, many of the Company's clients maintain
internal training departments. Some of the Company's competitors offer services
and products that are similar to those of the Company at lower prices, and some
competitors have significantly greater financial, managerial, technical,
marketing and other resources than the Company. Moreover, the Company expects
that it will face additional competition from new entrants into the training and
development market due, in part, to the evolving nature of the market and the
relatively low barriers to entry. There can be no assurance that the Company
will be successful against such competition. See "Business -- Competition."
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<PAGE> 13
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND PROMOTERS
Upon completion of the Offering, the Company's directors, executive
officers and promoters will beneficially own approximately 51.9% of the
Company's outstanding shares of Common Stock (approximately 49.9% if the
Underwriters exercise their over-allotment option in full). If all of the
Additional Consideration is paid, then, assuming such payment had taken place
immediately upon the completion of the Offering, the Company's directors,
executive officers and promoters would have beneficially owned on such date
approximately 51.1% of the Company's outstanding shares of Common Stock
(approximately 49.2% if the Underwriters exercise their over-allotment option in
full). As a result, these stockholders, if they were to act together, would have
the ability as a practical matter to determine the outcome of corporate actions
requiring stockholder approval, including the election of directors and the
approval of significant corporate transactions, such as a merger or sale of
substantially all of the Company's assets, regardless of how other stockholders
of the Company may vote. This concentration of ownership may have the effect of
delaying or preventing a change in control of the Company. See "Management" and
"Principal Stockholders."
POSSIBLE FUTURE SALES OF SHARES
Sales of substantial amounts of Common Stock in the public market after the
Offering under Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), or otherwise, or the perception that such sales could occur,
may adversely affect prevailing market prices of the Common Stock and could
impair the future ability of the Company to raise capital through an offering of
its equity securities or to effect acquisitions using shares of its Common
Stock. The shares of Common Stock outstanding prior to the Offering and the
shares to be issued in the Combination will be "restricted securities" within
the meaning of Rule 144. Unless the resale of the shares is registered under the
Securities Act, these shares may not be sold in the open market until after the
first anniversary of the transaction in which they were acquired, and then only
in compliance with the applicable requirements of Rule 144. See "Shares Eligible
for Future Sale." Notwithstanding their right under the Securities Act to sell
shares pursuant to Rule 144, the stockholders of the Founding Companies and the
holders of PROVANT's Common Stock prior to the Combination and the Offering have
agreed with the Company to certain transfer restrictions for a two-year period
following the Offering on the Common Stock held by them as of the closing of the
Offering and on the Common Stock that may be purchased by them under options and
warrants outstanding as of the closing of the Offering. See "Certain
Transactions -- Organization of the Company" and "-- Other Transactions
Involving Officers and Directors."
The Company, the holders of all shares outstanding prior to the Offering
and substantially all of the stockholders of the Founding Companies have agreed
with the Representatives of the Underwriters not to sell or otherwise dispose of
any shares of Common Stock, or any securities convertible into or exercisable or
exchangeable for shares of Common Stock, for a period of 180 days after the date
of this Prospectus without the written consent of the Representatives, except
for: (i) in the case of the Company, the grant of options under the Company's
benefit plans or in connection with acquisitions and (ii) in the case of all
such holders, the exercise of stock options pursuant to benefit plans described
herein and shares of Common Stock disposed of as bona fide gifts, subject, in
each case, to any remaining portion of the 180-day period applying to any shares
so issued or transferred. See "Shares Eligible for Future Sale" and
"Underwriting."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation requires that any action
required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of stockholders and may not
be effected by any consent in writing. Special meetings of stockholders may be
called only by the Chairman of the Board or President of the Company or by the
Board of Directors. In addition, the Board of Directors has the authority,
without further action by the stockholders, to fix the rights and preferences
and issue up to 5,000,000 shares of Preferred Stock. These provisions and other
provisions of the Certificate of Incorporation and By-laws may have the effect
of deterring unsolicited acquisition proposals or hostile takeovers or delaying
or preventing changes in control or management of the Company, including
transactions in which stockholders might otherwise receive a premium over the
then current market price for their shares
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<PAGE> 14
of Common Stock. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interests. The Company also is subject to Section 203 of the Delaware General
Corporation Law (the "DGCL"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder. See
"Description of Capital Stock."
NO PRIOR MARKET FOR COMMON STOCK AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or continue after the Offering. The initial public offering
price of the Common Stock will be determined by negotiations between the Company
and the Representatives of the Underwriters, and may not be indicative of the
market price for the Common Stock after the Offering. See "Underwriting" for a
description of the factors to be considered in determining the initial public
offering price. After the Offering, the market price of the Common Stock may be
subject to significant fluctuations in response to numerous factors, including
variations in the annual or quarterly financial results of the Company or its
competitors, changes by financial research analysts in their estimates of the
earnings of the Company or the failure of the Company to meet such estimates,
conditions in the economy in general or the training and development industry in
particular, or unfavorable publicity affecting the Company or the industry. The
equity markets have, on occasion, experienced significant price and volume
fluctuations that have affected the market prices for many companies' securities
and have been unrelated to the operating performance of those companies. Any
such fluctuations following completion of the Offering may adversely affect the
prevailing market price of the Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
shares of Common Stock in the amount of $11.74 per share, and may experience
further dilution in that value from issuances of Common Stock in connection with
future acquisitions. See "Dilution."
ABSENCE OF DIVIDENDS
PROVANT has never paid dividends on the Common Stock and does not
anticipate paying any dividends in the foreseeable future. Declarations of
dividends on the Common Stock will depend upon, among other things, future
earnings, if any, the operating and financial condition of the Company, its
capital requirements and general business conditions. The Company anticipates
that its proposed credit facility will prohibit dividend payments. See "Dividend
Policy."
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<PAGE> 15
COMBINATION
PROVANT's objective is to become a leading provider of training and
development services and products. Although PROVANT has conducted no operations
to date, it has entered into agreements to acquire the Founding Companies
simultaneously with, and as a condition to, the consummation of the Offering.
For a description of the transactions pursuant to which the Founding Companies
will be acquired by PROVANT, see "Certain Transactions -- Organization of the
Company."
THE FOUNDING COMPANIES
The seven Founding Companies are recognized leaders in their respective
fields and have developed a broad array of services and products, a substantial
knowledge base created from years of research and development, and a
well-established client base. Set forth below is a brief description of each of
the Founding Companies.
Behavioral Technology, Inc.: Behavioral Technology, Inc. ("BTI") was
founded by Paul C. Green, Ph.D. in 1978. BTI helps clients improve employee
selection and provides managers with a methodology for assessing strengths and
weaknesses of current employees. BTI trains clients to use candidates' and
employees' past actions both as indicators of future performance and as a basis
for discussion regarding improvement in performance. BTI's training services are
delivered through instructor-led training and train-the-trainer programs. The
company's lead product, Behavioral Interviewing(R), accounted for approximately
90% of the company's revenue in fiscal 1997. Dr. Green is credited with
developing the concepts behind behavioral-based interviewing and is widely
acknowledged as a leader in the field. BTI's clients include Hewlett-Packard
Company, Federal Express and Royal Bank of Canada. BTI is headquartered in
Memphis, Tennessee. In its most recent fiscal year, BTI generated revenue of
approximately $7.1 million.
Decker Communications, Inc.: Decker Communications, Inc. ("Decker") was
founded by Bert Decker in 1979. Decker provides training to improve employees'
business communication skills and communications between management and
employees. Decker's services range from helping senior management to communicate
corporate change to working with employees to improve the effectiveness of their
communication skills. Decker's training services are delivered primarily through
instructor-led workshops, some of which are tailored to meet specific client
objectives. Decker's flagship program, Effective Communicating(TM), and its
custom versions of the same product, accounted for approximately 77% of the
company's revenue in fiscal 1997. Decker's clients include Bank of America,
Coopers & Lybrand L.L.P. and Hewlett-Packard Company. Decker is located in San
Francisco, California and has regional offices in New York, Los Angeles and
Chicago. In its most recent fiscal year, Decker generated revenue of
approximately $8.4 million.
J. Howard & Associates, Inc.: J. Howard & Associates, Inc. ("J. Howard")
was founded by Jeffrey P. Howard, Ph.D. in 1977. Marc S. Wallace joined the
company in 1983, and became its President in 1991. J. Howard assists clients in
identifying and addressing potential obstacles to improving workplace
productivity, including race and gender issues, sexual harassment and failure of
employees to take measured risks. J. Howard's training services are delivered
primarily through instructor-led seminars that incorporate small and large group
discussions and self-assessment and skills-building exercises. The company's
lead product, Managing Inclusion, which accounted for approximately 57% of the
company's revenue in its fiscal year ended December 31, 1996, is a two-day
program designed to help individual managers and client companies understand the
ways in which diversity in the work force contributes to the productivity of an
organization. Other related programs include Risk Taking for Professional
Development, Efficacy for Professionals of Color, Efficacy for Women and
Exploring Diversity. J. Howard's clients include Abbott Laboratories, Bank of
America and Northwest Airlines, Inc. J. Howard is located in Lexington,
Massachusetts. In its fiscal year ended December 31, 1997, J. Howard generated
revenue of approximately $7.7 million.
Learning Systems Sciences: Robert Steinmetz, Ph.D., and Associates, Inc.,
d/b/a Learning Systems Sciences ("LSS"), was founded in 1979 by Robert A.
Steinmetz, Ph.D. In 1990, John F. King joined the company as President and a 50%
stockholder. LSS designs custom training products primarily for retailers using
multimedia, computer-based formats. LSS's products are designed to facilitate
faster learning of customer interface devices and higher productivity of retail
associates. LSS's training products are delivered
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<PAGE> 16
primarily through interactive multimedia software and distance-based media.
LSS's clients include Federated Department Stores, Inc., J.C. Penney Company,
Inc. and The Kroger Co. LSS is located in North Hollywood, California. In its
fiscal year ended December 31, 1997, LSS generated revenue of approximately $5.7
million.
MOHR Retail Learning Systems, Inc.: MOHR Retail Learning Systems, Inc.
("MOHR") was the retail training division of MOHR Development, Inc. ("MOHR
Development") from 1981 to 1991, when the division was purchased by Michael
Patrick and one of MOHR Development's founders, Herbert Cohen. MOHR's services
and products are designed to help clients in the retail industry improve
productivity by fostering a customer-oriented focus at the sales management and
sales associate levels. MOHR offers its services and products through
train-the-trainer seminars and by licensing its text-based and video-based
materials to its clients. MOHR's Retail Management Series III and Creating Loyal
Customers programs, which together accounted for more than 60% of the company's
revenue in fiscal 1997, utilize well-established learning designs, instructional
systems and feedback mechanisms to train clients' employees to provide superior
customer service. In addition, the company's Bottom-Line Buying Plus program
provides negotiation skills training for buyers at retail organizations. MOHR's
clients include Eckerd Corporation, Victoria's Secret Stores and The Sports
Authority, Inc. MOHR is headquartered in Ridgewood, New Jersey. In its most
recent fiscal year, MOHR generated revenue of approximately $3.0 million.
Novations Group, Inc.: Novations Group, Inc. ("Novations") was founded in
1986 by Norman Smallwood, Jonathan Younger, Joe Folkman and Randy Stott. Joe
Hanson joined the company in 1989 and became a Managing Director in 1997.
Novations assists clients in, among other things, clarifying and communicating
their business strategies and re-designing their organizations and business
processes. Novations also provides its clients with a variety of organizational
assessment tools that are designed to gather and analyze feedback on either an
organizational or individual basis and to initiate change in response to such
feedback. In its most recent fiscal year, approximately 60% of Novations'
revenue was derived from strategic consulting services provided to organizations
in industries such as the petrochemical, financial services, consumer products,
transportation and telecommunications industries. The balance of the company's
revenue resulted from sales to clients of organizational assessment tools
including the Organizational Analysis Survey, the Strategic Alignment Survey,
Total Quality Survey, Customer Service Survey and Leadership and Managerial
Profiles. Novations' clients include Eli Lilly and Company, Motorola, Inc. and
Yellow Corporation. Novations is headquartered in Provo, Utah, and has offices
in New York and Dallas. In its most recent fiscal year, Novations generated
revenue of approximately $9.0 million.
Star Mountain, Inc.: Star Mountain, Inc. (together with its subsidiaries,
"Star Mountain") was founded by A. Carl von Sternberg in 1987. Star Mountain's
core business consists of providing customized training services and products to
individuals within federal, state and local government entities and
corporations. In addition, Star Mountain provides a limited amount of computer
network design, sales, installation and support, and computer network security
research and development. Star Mountain delivers its training courseware to
clients in a variety of formats (including written materials and interactive
multimedia software), but typically does not directly train its clients. More
than two-thirds of Star Mountain's revenue in its fiscal year ended December 31,
1996 was derived from the federal government, and its largest client was the
Department of Defense. Star Mountain's other largest government clients include
the Internal Revenue Service and the Immigration and Naturalization Service.
Star Mountain is headquartered in Alexandria, Virginia and has 17 branch offices
located throughout the United States. In its fiscal year ended December 31,
1997, Star Mountain generated revenue of approximately $23.8 million. In
addition, Star Mountain acquired three businesses during 1997 that, had they
been acquired on January 1, 1997, would have contributed an additional $4.6
million to Star Mountain's revenue in the 1997 calendar year.
MERGER CONSIDERATION
The aggregate consideration to be paid by PROVANT at the closing of the
Combination is $67.4 million, consisting of $22.4 million in cash (representing
approximately 78.1% of the net proceeds of the Offering) and 3,459,341 shares of
Common Stock.
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<PAGE> 17
Each of the mergers in the Combination is conditioned upon the applicable
Founding Company meeting certain specified financial standards (which vary among
the Founding Companies) as of the closing, including a specified minimum net
worth. If a Founding Company's net worth as of the closing is higher than the
specified minimum, then the cash portion of the purchase price set forth above
will be increased by a dollar amount equal to the excess. If a Founding
Company's net worth as of the closing is lower than the specified minimum, then
all or a portion of the shortfall will be repaid to the Company by certain
stockholders of such Founding Company through an indemnification payment based
upon their percentage of stock ownership in the Founding Company. As of December
31, 1997, the Founding Companies had an aggregate net worth shortfall of $2.5
million.
In addition to the consideration described above, the former stockholders
of five of the Founding Companies will be eligible to receive up to an aggregate
of 969,218 additional shares of Common Stock (the "Additional Consideration"),
and the former stockholders of a sixth Founding Company, J. Howard, will be
eligible to receive up to an aggregate of $4.3 million of Common Stock (the "J.
Howard Contingent Consideration"), if specified levels of earnings before
interest and taxes ("EBIT") are reached by their respective companies. Each
merger agreement with a Founding Company (other than Star Mountain) contains a
targeted pro forma EBIT amount for fiscal 1998 (fiscal 1999 in the case of J.
Howard) in excess of a baseline figure which, if achieved by the Founding
Company, will result in the payment by the Company to the former stockholders of
the Founding Company of the maximum Additional Consideration or J. Howard
Contingent Consideration (consisting of a multiple of the excess EBIT amount).
To the extent the Founding Company does not achieve the targeted amount, its
former stockholders will receive a lesser amount of Additional Consideration or
J. Howard Contingent Consideration proportionately related to the excess above
the baseline figure. Shares of Common Stock issued as Additional Consideration
will be valued at the initial public offering price of $13.00 per share, and
shares issued as J. Howard Contingent Consideration will be valued based on the
average of the last sale prices of the Common Stock on Nasdaq during the 20
business days immediately following PROVANT's first public announcement of its
financial results for fiscal 1999.
In the case of the seventh Founding Company, Star Mountain, PROVANT has
agreed to make a future payment in cash or shares of Common Stock based on Star
Mountain's EBIT for fiscal 1999 (the "Star Mountain Contingent Consideration").
In particular, if Star Mountain's EBIT for fiscal 1999 exceeds a specified base,
then (i) Star Mountain's former non-voting stockholders will receive cash equal
to a multiple of the excess EBIT and (ii) Star Mountain's former voting
stockholders will receive, at their election, either cash equal to a multiple of
the excess EBIT or a number of shares of Common Stock equal to a multiple of the
excess EBIT divided by 80% of the average of the last sale prices of the Common
Stock on Nasdaq during the month of July 1999.
In connection with the Combination, PROVANT will assume indebtedness of the
Founding Companies aggregating approximately $6.4 million as of December 31,
1997. The consideration to be paid by PROVANT for each Founding Company was
determined by arm's length negotiations between PROVANT and representatives of
each Founding Company and was based primarily on the pro forma EBIT of each
Founding Company. Additional Consideration paid for a Founding Company, the J.
Howard Contingent Consideration and the Star Mountain Contingent Consideration
represent, in effect, an upward adjustment in purchase price. For a more
detailed description of these transactions, see "Certain
Transactions -- Organization of the Company."
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<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,600,000 shares of
Common Stock offered hereby, after deducting the underwriting discount and
estimated Offering expenses, are estimated to be approximately $28.7 million
($33.4 million if the Underwriters' over-allotment option is exercised in full).
Of the net proceeds, approximately $22.4 million will be used to pay the cash
portion of the purchase price for the Founding Companies. In addition, the
Company currently intends to use approximately $2.9 million of the net proceeds
to repay certain indebtedness of the Founding Companies assumed in connection
with the Combination (which indebtedness bears interest at a weighted average
interest rate of 9.0% and matures at various dates through February 2001). The
Company also intends to use $750,000 to pay a fee due upon the closing of the
Offering to a third party for information provided to PROVANT relating to the
training and development industry.
The Company intends to repay a note to Paul M. Verrochi and Dominic J.
Puopolo that currently is outstanding in the amount of approximately $1.5
million. See "Certain Transactions -- Other Transactions; American Business
Partners LLC." Of this amount, approximately $800,000 is attributable to
expenses relating to the Offering.
The balance of the net proceeds from this Offering, approximately $1.9
million, will be used for acquisitions and general corporate purposes, including
working capital. The Company currently has no existing commitment or agreement
with respect to any acquisition. The Company regularly reviews potential
acquisition candidates and has held preliminary discussions with a number of
such candidates.
Pending the use of the net proceeds of the Offering for the purposes
described above, the Company will invest such proceeds in short-term,
interest-bearing, investment grade securities.
DIVIDEND POLICY
The Company intends to retain all of its earnings, if any, to finance the
expansion of its business and for general corporate purposes, including future
acquisitions, and does not anticipate paying cash dividends on its Common Stock
in the foreseeable future. Any future determination as to the payment of
dividends on the Common Stock will be at the discretion of the Board of
Directors and will depend upon, among other things, the Company's future
earnings, if any, the operating and financial condition of the Company, its
capital requirements, general business conditions and any other factors the
Board of Directors of the Company may consider. In addition, the Company's
proposed credit facility includes restrictions on the Company's ability to pay
dividends without the consent of the lender.
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CAPITALIZATION
The following table sets forth the short-term debt, including the current
maturities of long-term debt, and capitalization of the Company at December 31,
1997: (i) on a pro forma combined basis to give effect to the Combination, the
increase in the Company's authorized shares of Common Stock, the authorization
of a class of preferred stock and the declaration of a stock dividend; and (ii)
as further adjusted to give effect to the issuance of the 2,600,000 shares of
Common Stock offered hereby and the application of the estimated net proceeds.
See "Use of Proceeds." This table should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements of the Company and the related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
PRO FORMA
COMBINED (1) AS ADJUSTED
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current maturities of long-term
debt (2).................................................. $ 5,096 $ 2,196
======= =======
Long-term debt, less current maturities (2)................. $ 1,276 $ 1,276
Notes payable to stockholders (3)........................... $23,184 $ --
Stockholders' Equity:
Preferred Stock, $0.01 par value; 5,000,000 shares
authorized, none issued or outstanding, pro forma and
as adjusted............................................ -- --
Common Stock, $0.01 par value; 40,000,000 shares
authorized, 6,805,558 shares issued and outstanding,
pro forma; and 9,405,558 shares issued and outstanding,
as adjusted (4)........................................ 68 94
Additional paid-in capital................................ 36,618 65,276
Retained earnings (deficit)............................... (1,296) (2,249)
------- -------
Total stockholders' equity............................. 35,390 63,121
------- -------
Total capitalization.............................. $59,850 $64,397
======= =======
</TABLE>
- ---------------
(1) Combines the respective accounts of PROVANT and the Founding Companies at
December 31, 1997 and gives effect to the reclassification of the Founding
Companies' common stock as additional paid-in capital.
(2) For a description of the Company's debt, see the notes to the financial
statements of each of the Founding Companies.
(3) Consists of $22.4 million to be paid to the stockholders of the Founding
Companies in the Combination and approximately $768,000 (net of discount of
approximately $203,000) due under a note to Paul M. Verrochi and Dominic J.
Puopolo. See "Certain Transactions."
(4) Excludes: (i) up to an aggregate of 969,218 shares of Common Stock that may
be issued as Additional Consideration to the former stockholders of five of
the Founding Companies as well as shares of Common Stock that may be issued
as J. Howard Contingent Consideration and Star Mountain Contingent
Consideration; (ii) 1,100,000 shares of Common Stock reserved for issuance
under the Company's 1998 Equity Incentive Plan (of which options to purchase
868,983 shares will be outstanding upon the consummation of the Offering at
an exercise price of $13.00 per share); (iii) 100,000 shares of Common Stock
reserved for issuance under the Company's Stock Plan for Non-Employee
Directors (of which options to purchase 15,000 shares will be outstanding
upon the consummation of the Offering at an exercise price of $13.00 per
share); (iv) 500,000 shares of Common Stock reserved for issuance under the
Company's 1998 Employee Stock Purchase Plan; (v) 10,000 shares of Common
Stock reserved for issuance upon the exercise of an outstanding option
having an exercise price of $5.00 per share; and (vi) an aggregate of
779,372 shares of Common Stock reserved for issuance upon the exercise of
warrants granted to certain of the Company's executive officers, as more
fully described under "Certain Transactions -- Other Transactions; American
Business Partners LLC."
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DILUTION
The pro forma net tangible book value of the Company as of December 31,
1997 was approximately $(15.9) million, or $(2.34) per share. Net tangible book
value per share represents the book value of the Company's pro forma net
tangible assets less total liabilities divided by the number of shares of Common
Stock outstanding (after giving effect to the Combination). After giving effect
to the sale by the Company of 2,600,000 shares of Common Stock in the Offering
(after deducting the underwriting discount and estimated Offering expenses) and
the application of the net proceeds therefrom, the pro forma net tangible book
value at December 31, 1997 would have been approximately $11.8 million, or $1.26
per share. This represents an immediate increase in pro forma net tangible book
value per share of $3.60 to stockholders as of December 31, 1997, and an
immediate dilution in pro forma net tangible book value per share of $11.74 to
new investors purchasing shares of Common Stock in the Offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price............................... $13.00
------
Pro forma net tangible book value per share before
Offering............................................... $(2.34)
Increase in pro forma net tangible book value per share
attributable to new investors............................. 3.60
------
Pro forma net tangible book value per share after
Offering............................................... 1.26
------
Dilution per share to new investors....................... $11.74
======
</TABLE>
The following table sets forth, on a pro forma basis to give effect to the
Combination, the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid by the
Company's existing stockholders and by investors purchasing shares of Common
Stock offered hereby:
<TABLE>
<CAPTION>
SHARES PURCHASED AVERAGE
--------------------- TOTAL PRICE
NUMBER PERCENT CONSIDERATION (1) PER SHARE
---------- ------- ----------------- ---------
<S> <C> <C> <C> <C>
Existing stockholders....... 6,805,558 72.4% $(15,896,000) $(2.34)
New investors............... 2,600,000 27.6 33,800,000 13.00
---------- ----- ------------
Total............. 9,405,558 100.0% $ 17,904,000
========== ===== ============
</TABLE>
- ---------------
(1) Total consideration paid by existing stockholders represents the combined
stockholders' equity of the Founding Companies before the Offering, adjusted
to reflect: (i) the cash portion of the consideration payable to the
stockholders of the Founding Companies in connection with the Combination;
and (ii) the payment of distributions estimated at approximately $560,000
which certain of the Founding Companies are expected to make to their
stockholders prior to the closing of the Combination. See "Use of Proceeds"
and "Capitalization."
20
<PAGE> 21
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PROVANT will acquire the Founding Companies simultaneously with and as a
condition to the consummation of the Offering. For financial reporting purposes,
PROVANT has been designated as the accounting acquiror. To date, PROVANT has
conducted operations only in connection with the Combination and the Offering.
As a result, PROVANT has generated no revenue. The following data presents
selected historical financial data for PROVANT as well as selected unaudited pro
forma combined financial data for the Company that is adjusted for: (i) the
consummation of the Combination; (ii) certain pro forma adjustments to the
historical financial statements of the Founding Companies; and (iii) the
consummation of the Offering and the application of the net proceeds. See
PROVANT's financial statements, the Company's Unaudited Pro Forma Combined
Financial Statements, each of the Founding Companies' financial statements and
the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PROVANT HISTORICAL PRO FORMA COMBINED (1)
--------------------------------------- ------------------------------
PERIOD FROM SIX MONTHS
NOVEMBER 16, 1996 ENDED
(DATE OF INCEPTION) SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
TO JUNE 30, 1997 DECEMBER 31, 1997 JUNE 30, 1997 1997
------------------- ----------------- ------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.......................... $ -- $ -- $68,846 $35,958
Cost of revenue.................. -- -- 30,967 15,948
-------------- -------------- ---------- -----------
Gross profit..................... -- -- 37,879 20,010
Selling, general and
administrative expenses (2)... 149 1,099 28,663 16,327
Goodwill amortization (3)........ -- -- 1,282 641
-------------- -------------- ---------- -----------
Income (loss) from operations.... (149) (1,099) 7,934 3,042
Interest and other income
(expense), net................ -- (48) (73) (50)
-------------- -------------- ---------- -----------
Income (loss) before provision
for income taxes.............. (149) (1,147) 7,861 2,992
Provision for income taxes (4)... -- -- 3,763 1,991
-------------- -------------- ---------- -----------
Net income (loss)................ $ (149) $ (1,147) $ 4,098 $ 1,001
============== ============== ========== ===========
Net income (loss) per share...... $(74.79) $(376.65) $ 0.51 $ 0.11
============== ============== ========== ===========
Shares used in computing net
income per share (5).......... 1,992.3 3,045.3 8,009,861 9,040,779
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------
PRO FORMA
ACTUAL COMBINED (6) AS ADJUSTED (7)
------- ------------ ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (8)................................... $(1,535) $(19,564) $ 8,967
Total assets.......................................... 951 76,654 78,301
Long-term debt, net of current maturities............. -- 1,276 1,276
Stockholders' equity (deficit)........................ (587) 35,390 63,121
</TABLE>
- ---------------
(1) The pro forma combined statement of operations data assumes that the
Combination and the Offering were consummated on July 1, 1996, and is not
necessarily indicative of the results the Company would have obtained if
these events actually then occurred or of the Company's future results. The
pro forma combined statement of operations data is based on preliminary
estimates, available information and assumptions that management deems
appropriate, and should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus.
(2) Reflects in the pro forma data adjustments to salary, bonuses and benefits
paid to certain of the owners of the Founding Companies for the Compensation
Differential, which for the year ended June 30, 1997 and the six months
ended December 31, 1997 was approximately $5.6 million and $4.1 million,
respectively. Includes for the six months
21
<PAGE> 22
ended December 31, 1997 approximately $485,000 of non-cash compensation
expense related to the issuance of Common Stock to officers of and
consultants to the Company.
(3) Reflects in the pro forma data amortization of the goodwill to be recorded
as a result of the Combination over a 40-year period and computed on the
basis described in the Notes to the Unaudited Pro Forma Combined Financial
Statements.
(4) Assumes in the pro forma data that all income is subject to an effective
corporate income tax rate of 40%, and all goodwill from the Combination is
non-deductible.
(5) The pro forma data consists of: (i) 3,459,341 shares to be issued to the
stockholders of the Founding Companies (without giving effect to the
issuance of Additional Consideration, the J. Howard Contingent Consideration
or the Star Mountain Contingent Consideration); (ii) the weighted average
shares outstanding, after giving effect to a stock split, of 1,950,520
shares during the period ended June 30, 1997 and 2,981,438 shares during the
period ended December 31, 1997; and (iii) 2,600,000 shares to be sold in the
Offering.
(6) The pro forma combined balance sheet data assumes that the Combination was
consummated on December 31, 1997. The pro forma combined balance sheet data
is based upon preliminary estimates, available information and assumptions
that management deems appropriate and should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
Prospectus.
(7) Adjusted for the sale of 2,600,000 shares of Common Stock offered hereby and
the application of the net proceeds therefrom as described under "Use of
Proceeds."
(8) The pro forma combined data gives effect to $22.4 million representing the
cash portion of the consideration for the Combination to be paid from a
portion of the net proceeds of the Offering.
22
<PAGE> 23
STAR MOUNTAIN SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PROVANT reports operating results commencing with its inception on November
16, 1996. For the purpose of providing five full years of selected historical
financial data, as required under the Securities Act, the following historical
selected financial data for Star Mountain is presented. The selected data for
the years ended December 31, 1995, 1996 and 1997 are derived from, and should be
read in conjunction with, Star Mountain's audited financial statements (and the
notes thereto) appearing elsewhere in this Prospectus. The selected data for the
years ended December 31, 1993 and 1994 are derived from Star Mountain's audited
financial statements for those years. The data presented below is neither
comparable to nor indicative of the Company's post-Combination financial
position or results of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.......................................... $8,293 $9,731 $14,306 $16,313 $23,775
Cost of revenue.................................. 5,418 6,350 8,668 9,457 14,504
------ ------ ------- ------- -------
Gross profit..................................... 2,875 3,381 5,638 6,856 9,271
Selling, general and administrative expenses..... 2,619 2,973 4,411 5,476 7,591
------ ------ ------- ------- -------
Income from operations........................... 256 408 1,227 1,380 1,680
Interest and other income (expense), net (150) (194) (235) (379) (406)
------ ------ ------- ------- -------
Income before provision for income taxes......... 106 214 992 1,001 1,274
Provision for income taxes(1).................... -- -- -- 397 546
------ ------ ------- ------- -------
Net income....................................... $ 106 $ 214 $ 992 $ 604 $ 728
====== ====== ======= ======= =======
Weighted average shares outstanding.............. 8,443 8,821 8,825 8,422 8,078
Weighted average shares and potentially dilutive
shares outstanding............................ 9,271 9,058 8,963 8,565 8,823
Basic income per share........................... $ 0.01 $ 0.02 $ 0.11 $ 0.07 $ 0.09
====== ====== ======= ======= =======
Diluted income per share......................... $ 0.01 $ 0.02 $ 0.11 $ 0.07 $ 0.08
====== ====== ======= ======= =======
BALANCE SHEET DATA:
Working capital.................................. $ 583 $ 847 $ 942 $ 871 $ 64
Total assets..................................... 3,231 3,507 4,775 5,983 10,677
Long term debt, net of current maturities........ -- -- -- -- 304
Stockholders' equity............................. 1,021 1,274 1,859 2,010 2,778
</TABLE>
- ---------------
(1) Through December 31, 1995, Star Mountain had elected to be treated as an S
corporation and, accordingly, there was no provision for income taxes for
periods ending on or prior to that date.
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated or the context otherwise requires in this
section, each reference to a year is to the Company's or a Founding Company's
fiscal year which (with the exception of J. Howard, LSS and Star Mountain) ends
on June 30 of the same calendar year (e.g., "1997" means the fiscal year ended
June 30, 1997). The following discussion should be read in conjunction with the
Company's Unaudited Pro Forma Combined Financial Statements and the Founding
Companies' Financial Statements and the related notes thereto appearing
elsewhere in this Prospectus.
INTRODUCTION
The Company provides a broad range of training and development services and
products to Fortune 1000 companies, other large and medium-sized corporations
and government entities. The Company's services and products are designed to
increase the productivity of organizations by improving employee selection,
recruitment and retention; enhancing employee work skills; developing employee
management and leadership skills; and facilitating organizational assessment,
direction and change. The Company offers both customized and off-the-shelf
services and products that are designed to provide measurable improvements in
employee performance and productivity. The Company delivers its services and
products through multiple delivery methods, including instructor-led and
train-the-trainer seminars, interactive multimedia software (such as CD-ROM) and
distance-based media (such as video conferencing, intranets and the Internet).
See "Business -- Delivery Methods."
The Company receives revenue from five main areas: (i) instructor-led and
train-the-trainer seminars; (ii) license fees; (iii) custom services and
products; (iv) consulting services; and (v) off-the-shelf products. The Company
recognizes revenue from instructor-led training and train-the-trainer seminars,
usually on a participant basis, when the training is delivered. From its
train-the-trainer arrangements, the Company also recognizes license fees on a
per-participant basis when a certified client trainer delivers the Company's
courses and materials to other employees of the client. The Company recognizes
revenue from a site license at the time the license is granted. The Company
generally recognizes revenue from its custom services and products based on the
percentage-of-completion method. The Company recognizes revenue from fees for
its consulting services, for which it charges an hourly or per diem rate, when
the consulting is provided. The Company also recognizes revenue for its
off-the-shelf products, such as books or videotapes, when the products are
delivered.
Cost of revenue primarily consists of: (i) salaries and benefits for the
Company's instructors, consultants and course designers and costs of independent
contractors; and (ii) the cost of developing, designing and producing training
courses and materials, including materials costs. As a result, the Company's
gross margins are affected by the number of instructors, consultants and course
designers and the utilization of such employees during any given period.
Selling, general and administrative expenses consist primarily of salaries,
benefits and bonuses for the Company's corporate, sales, marketing and
administrative personnel, and marketing and advertising expenses for the
Company's services and products. Selling, general and administrative expenses
also include incentive and discretionary bonuses paid to owners and other key
employees. Other selling, general and administrative expenses include travel
expenses, rent, depreciation, telecommunication costs, postage and other
operating costs.
The Founding Companies have operated throughout the periods presented as
independent, privately-owned entities, and their results of operations reflect
varying tax structures (S corporations or C corporations) which have influenced
the historical level of owners' compensation. The owners and key employees of
the Founding Companies have agreed to certain adjustments in their annual
historical salaries, bonuses and benefits in connection with the Combination.
The difference (positive or negative) between the base salary of the owners and
key employees of the Founding Companies immediately after the Combination and
their salaries, bonuses and benefits during any comparable period is referred to
as the "Compensation Differential." The aggregate Compensation Differentials for
1995, 1996 and 1997 and for the six months ended December 31, 1996 and 1997 were
$1.8 million, $3.9 million, $5.6 million, $3.7 million and $4.1 million,
respectively, and have been reflected as a pro forma adjustment in the Unaudited
Pro Forma Combined
24
<PAGE> 25
Statements of Operations. The Unaudited Pro Forma Combined Statements of
Operations include a provision for income tax as if the Company was taxed as a C
corporation.
Following the Combination, the Company expects to realize certain savings
as a result of: (i) consolidation of certain expenses, such as travel and
lodging, advertising, employee benefits, communications, insurance and other
general and administrative expenses; and (ii) the Company's ability to borrow at
lower interest rates than most of the Founding Companies. The Company cannot
quantify these savings until the completion of the Combination. It is
anticipated that these savings will be offset partially by the costs of being a
publicly held company and the incremental increase in costs related to the
Company's new management. However, these costs, like the savings that they
offset, cannot be quantified accurately. Neither the anticipated savings nor the
anticipated costs have been included in the pro forma financial information of
the Company.
In July 1996, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 97 ("SAB 97"), relating to business combinations
immediately prior to an initial public offering, which required that business
combinations like the Combination be accounted for using the purchase method of
acquisition accounting. Under the purchase method, PROVANT has been designated
as the accounting acquiror. Approximately $51.3 million, representing the excess
of the fair value of the consideration received in the Combination over the fair
value of the net assets to be acquired, will be recorded as goodwill on the
Company's balance sheet. Goodwill will be amortized as a non-cash charge to the
Company's income statement over a 40-year period. The pro forma impact of this
amortization expense is approximately $1.3 million per year. The amount
amortized, however, will not be deductible for tax purposes. See "Certain
Transactions -- Organization of the Company."
RESULTS OF OPERATIONS -- COMBINED
The summary combined statement of operations data for 1995, 1996 and 1997
and the six months ended December 31, 1996 and 1997 set forth in the table below
do not purport to present the combined Founding Companies and PROVANT in
accordance with generally accepted accounting principles, but represent merely a
summation of the data of the individual Founding Companies and PROVANT on a
historical basis and do not include the effects of pro forma adjustments. This
data will not be comparable to and may not be indicative of the Company's
post-Combination results of operations because (i) the Founding Companies
historically were not under common control or management and had different tax
structures during the periods presented; (ii) the Company used the purchase
method of accounting to reflect the Combination, resulting in the recording of
goodwill which will be amortized over 40 years; (iii) the Company will incur
incremental costs related to its new corporate management and the costs of being
a public company; and (iv) the combined data does not reflect potential benefits
and cost savings the Company expects to realize when operating as a combined
entity.
25
<PAGE> 26
The following table sets forth certain unaudited combined statement of
operations data of the Founding Companies and PROVANT on a historical basis and
as a percentage of revenue and excludes the effects of pro forma adjustments for
the periods indicated. Three of the Founding Companies, J. Howard, LSS and Star
Mountain, historically operated with fiscal years ending on dates other than
June 30. For purposes of the table below, their operating results have been
recast to reflect a June 30 fiscal year end, although they have been derived
from financial statements prepared on the same basis as the audited financial
statements. As a result of this presentation, the operating results for these
three companies do not conform with their audited financial statements contained
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED DECEMBER 31,
----------------------------------------------------- ----------------------------------
1995 (1) 1996 1997 1996 1997
--------------- --------------- --------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.............. $41,289 100.0% $51,497 100.0% $61,245 100.0% $28,563 100.0% $34,539 100.0%
Cost of revenue...... 17,770 43.0 22,205 43.1 26,117 42.6 12,115 42.4 14,892 43.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross profit......... 23,519 57.0 29,292 56.9 35,128 57.4 16,448 57.6 19,647 56.9
Selling, general and
administrative
expenses........... 20,508 49.7 26,953 52.3 31,443 51.3 16,883 59.1 20,075 58.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income (loss) from
operations......... $ 3,011 7.3% $ 2,339 4.6% $ 3,685 6.0% $ (435) (1.5)% $ (428) (1.2)%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Compensation
differential....... $ 1,760 4.3% $ 3,878 7.5% $ 5,607 9.2% $ 4,497 15.7% $ 4,100 11.9%
</TABLE>
- ---------------
(1) Includes 1995 data for LSS for the 12 months ended August 31, 1995.
COMBINED RESULTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 (THE "1998 PERIOD")
COMPARED TO THE SIX MONTHS ENDED DECEMBER 31, 1996 (THE "1997 PERIOD")
Revenue. Revenue increased $6.0 million, or 20.9%, from $28.6 million in
the 1997 Period to $34.5 million in the 1998 Period. This increase primarily was
attributable to an increased number of government contracts and acquired
businesses at Star Mountain and an increase in the number of seminars delivered
by Decker.
Cost of Revenue. Cost of revenue increased $2.8 million, or 22.9%, from
$12.1 million in the 1997 Period to $14.9 million in the 1998 Period. As a
percentage of revenue, cost of revenue increased from 42.4% in the 1997 Period
to 43.1% in the 1998 Period, primarily due to the increased use of
subcontractors at Star Mountain and increased video production costs at LSS.
Gross Profit. Gross profit increased $3.2 million, or 19.4%, from $16.4
million in the 1997 Period to $19.6 million in the 1998 Period. As a percentage
of revenue, gross profit decreased from 57.6% in the 1997 Period to 56.9% in the
1998 Period, primarily due to the increased costs described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.2 million, or 18.9%, from $16.9 million in
the 1997 Period to $20.1 million in the 1998 Period. Excluding the Compensation
Differential of $4.5 million and $4.1 million in the 1997 Period and the 1998
Period, respectively, selling, general and administrative expenses would have
increased $3.6 million, or 29.0%, from $12.4 million in the 1997 Period to $16.0
million in the 1998 Period. As a percentage of revenue, selling, general and
administrative expenses would have increased on an adjusted basis from 43.4% in
the 1997 Period to 46.3% in the 1998 Period. The increase as a percentage of
revenue on an adjusted basis was primarily due to an increase in operating
expenses associated with PROVANT of $1.1 million.
COMBINED RESULTS FOR 1997 COMPARED TO 1996
Revenue. Revenue increased $9.7 million, or 18.9%, from $51.5 million in
1996 to $61.2 million in 1997. This increase primarily was attributable to
increased revenues from acquired businesses at Star Mountain and expanded sales
forces at BTI, LSS and MOHR.
Cost of Revenue. Cost of revenue increased $3.9 million, or 17.6%, from
$22.2 million in 1996 to $26.1 million in 1997. As a percentage of revenue, cost
of revenue decreased from 43.1% in 1996 to 42.6% in 1997, primarily due to a
decrease in the unit cost of participant materials at BTI, a reduction in the
number of
26
<PAGE> 27
trainers and improved utilization of trainers at Decker, and an increase in
repeat or follow-on engagements (which generally are less costly) at LSS.
Gross Profit. Gross profit increased $5.8 million, or 19.9%, from $29.3 in
1996 to $35.1 million in 1997. As a percentage of revenue, gross profit
increased slightly from 56.9% in 1996 to 57.4% in 1997, primarily due to a
decrease in the unit cost of participant materials at BTI, a reduction in the
number of trainers and improved utilization of trainers at Decker, and an
increase in repeat or follow-on engagements (which generally are less costly) at
LSS.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $4.5 million, or 16.7%, from $26.9 million in
1996 to $31.4 million in 1997. Excluding the Compensation Differential of $3.9
million and $5.6 million in 1996 and 1997, respectively, selling, general and
administrative expenses would have increased $2.8 million, or 12.0%, from $23.1
million in 1996 to $25.8 million in 1997. As a percentage of revenue, selling,
general and administrative expenses would have decreased on an adjusted basis
from 44.8% in 1996 to 42.2 % in 1997. The decrease as a percentage of revenue on
an adjusted basis was primarily due to the larger aggregate revenue base.
COMBINED RESULTS FOR 1996 COMPARED TO 1995
Revenue. Revenue increased $10.2 million, or 24.7%, from $41.3 million in
1995 to $51.5 million in 1996. This increase primarily was attributable to
increased revenues from acquired businesses at Star Mountain, an increase in the
number of client engagements at J. Howard, an expansion of the sales force at
BTI and the introduction of new services and the hiring of additional
consultants at Novations.
Cost of Revenue. Cost of revenue increased $4.4 million, or 25.0%, from
$17.8 million in 1995 to $22.2 million in 1996. As a percentage of revenue, cost
of revenue increased slightly from 43.0% in 1995 to 43.1% in 1996, primarily due
to higher salaries paid to trainers at Decker and increased production and
delivery costs at MOHR and LSS.
Gross Profit. Gross profit increased $5.8 million, or 24.5%, from $23.5
million in 1995 to $29.3 million in 1996. As a percentage of revenue, gross
profit decreased slightly from 57.0% in 1995 to 56.9% in 1996, primarily due to
the increases in the costs of revenue at Decker, MOHR and LSS described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $6.4 million, or 31.4%, from $20.5 million in
1995 to $27.0 million in 1996. Excluding the Compensation Differential of $1.8
million and $3.9 million in 1995 and 1996, respectively, selling, general and
administrative expenses would have increased $4.3 million, or 23.1%, from $18.7
million in 1995 to $23.1 million in 1996. As a percentage of revenue, selling,
general and administrative expenses would have decreased on an adjusted basis
from 45.4% in 1995 to 44.8 % in 1996. The decrease as a percentage of revenue on
an adjusted basis was primarily due to the larger aggregate revenue base.
COMBINED LIQUIDITY AND CAPITAL RESOURCES
The Company has received a commitment letter from a bank for a revolving
credit facility, the material terms of which are summarized as follows. The
facility will provide the Company with a revolving line of credit of up to $40.0
million, guaranteed by all of the Company's wholly-owned operating subsidiaries
and secured by a pledge of the capital stock of the Company's significant
wholly-owned operating subsidiaries. The credit facility may be used for
refinancing of existing indebtedness, post-Offering acquisitions and working
capital. Loans made under the credit facility will bear interest, at the
Company's option, at a rate based on either a LIBOR rate or the bank's prime
rate. In addition, a commitment fee will be payable on the unused portion of the
revolving line of credit at a rate of between 0.15% and 0.375% depending on the
ratio of the Company's debt to earnings before interest, taxes, depreciation and
amortization. The credit facility will terminate three years following the
closing of the Offering, and all amounts outstanding thereunder (if any) will be
due at such time. The credit facility (i) will prohibit the payment of dividends
and other distributions by the Company, (ii) generally will not permit the
Company to incur or assume other indebtedness, and (iii) will require the
Company to comply with certain financial covenants. The ability of the Company
to obtain the credit facility is subject to the completion of negotiations with
the bank as well as the satisfaction of certain
27
<PAGE> 28
conditions, including the closing of the Offering and the execution of
appropriate loan documentation. In the event that the Company is unable to
obtain the credit facility, the Company believes that sufficient alternative
sources of financing will be available on reasonable terms.
The Company anticipates that its cash flow from operations, the net
proceeds from this Offering and borrowings under the proposed credit facility
will provide cash sufficient to satisfy the Company's working capital needs,
debt service requirements and planned capital expenditures for the next 12
months. The Company made capital expenditures of approximately $813,000 in 1997
and approximately $586,000 in the six months ended December 31, 1997 and
currently intends to make capital expenditures aggregating $1.5 million in 1998,
principally for information systems, facilities, furnishings and equipment.
After the Combination, the Company intends to study the feasibility of upgrading
and integrating certain systems of the Founding Companies. Consequently, the
Company has not yet established its capital needs for such integration and
upgrades. The Company has assessed its various information and technology
systems and does not believe that it will be required to incur significant costs
to correct any Year 2000 deficiencies. To the extent that the Company is
incorrect in this assessment and significant costs will be incurred, the
Company's business, financial condition and results of operations could be
materially adversely affected.
The Company intends to pursue selected acquisition opportunities. The
timing, size or success of any acquisition and the associated potential capital
commitments are unpredictable. The Company expects to fund future acquisitions
primarily through a combination of cash flow from operations and borrowings, as
well as issuances of additional equity. The Company plans to register an
additional 3,000,000 shares of its Common Stock under the Securities Act after
completion of the Offering for use as consideration for future acquisitions.
RESULTS OF OPERATIONS -- BTI
BTI primarily provides train-the-trainer programs designed to help its
clients improve employee selection and to provide managers with a methodology
for assessing strengths and weaknesses of current employees. BTI's revenue is
derived primarily from the licensing to clients of the right to use its training
materials.
The following table sets forth certain selected financial data for BTI on a
historical basis and as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED DECEMBER 31,
-------------------------------------------------- ---------------------------------
1995 1996 1997 1996 1997
-------------- -------------- -------------- -------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................ $3,803 100.0% $5,685 100.0% $7,096 100.0% $3,439 100.0% $ 3,850 100.0%
Cost of revenue........ 1,049 27.6 1,495 26.3 1,488 21.0 879 25.6 775 20.1
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
Gross profit........... 2,754 72.4 4,190 73.7 5,608 79.0 2,560 74.4 3,075 79.9
Selling, general and
administrative
expenses............. 2,315 60.9 4,048 71.2 5,111 72.0 3,216 93.5 4,406 114.4
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
Income (loss) from
operations........... $ 439 11.5% $ 142 2.5% $ 497 7.0% $ (656) (19.1)% $(1,331) (34.5)%
====== ===== ====== ===== ====== ===== ====== ===== ======= =====
Compensation
differential......... $ (89) (2.3)% $ 563 9.9% $ 942 13.3% $1,002 29.1% $ 2,383 61.9%
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1997 (THE "1998 PERIOD") COMPARED TO SIX MONTHS
ENDED DECEMBER 31, 1996 (THE "1997 PERIOD") -- BTI
Revenue. Revenue increased approximately $411,000, or 12.0%, from $3.4
million in the 1997 Period to $3.9 million in the 1998 Period, primarily due to
increased sales of existing products as a result of the expansion of the sales
force and an increase in participant fees as a result of an increased base of
certified trainers at the company's clients.
Cost of Revenue. Cost of revenue decreased approximately $104,000, or
11.8%, from approximately $879,000 in the 1997 Period to approximately $775,000
in the 1998 Period. As a percentage of revenue, cost of
28
<PAGE> 29
revenue decreased from 25.6% in the 1997 Period to 20.1% in the 1998 Period,
primarily due to a decrease in the average unit cost of participant materials.
Gross Profit. Gross profit increased approximately $515,000, or 20.1%,
from $2.6 million in the 1997 Period to $3.1 million in the 1998 Period. As a
percentage of revenue, gross profit increased from 74.4% in the 1997 Period to
79.9% in the 1998 Period, primarily due to the cost savings described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.2 million, or 37.0%, from $3.2 million in
the 1997 Period to $4.4 million in the 1998 Period. Excluding the Compensation
Differential attributable to BTI of $1.0 million and $2.4 million in the 1997
Period and 1998 Period, respectively, selling, general and administrative
expenses would have decreased approximately $191,000, or 8.6%, from $2.2 million
in the 1997 Period to $2.0 million in the 1998 Period. As a percentage of
revenue, selling, general and administrative expenses would have decreased on an
adjusted basis from 64.4% in the 1997 Period to 52.5% in the 1998 Period,
primarily due to the company's larger revenue base.
RESULTS FOR 1997 COMPARED TO 1996 -- BTI
Revenue. Revenue increased $1.4 million, or 24.8%, from $5.7 million in
1996 to $7.1 million in 1997, primarily due to increased sales of existing
products as a result of the expansion of the sales force and an increase in
participant fees as a result of an increased base of certified trainers at the
company's clients.
Cost of Revenue. Cost of revenue remained relatively constant at $1.5
million in 1996 and 1997. As a percentage of revenue, cost of revenue decreased
from 26.3% in 1996 to 21.0% in 1997, primarily due to a decrease in the average
unit cost of participant materials.
Gross Profit. Gross profit increased $1.4 million, or 33.8%, from $4.2
million in 1996 to $5.6 million in 1997. As a percentage of revenue, gross
profit increased from 73.7% in 1996 to 79.0% in 1997, primarily due to the
increase in revenue combined with the decrease in the average unit cost of
participant materials.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.1 million, or 26.3%, from $4.0 million in
1996 to $5.1 million in 1997. Excluding the Compensation Differential
attributable to BTI of approximately $563,000 and approximately $942,000 in 1996
and 1997, respectively, selling, general and administrative expenses would have
increased approximately $684,000, or 19.6%, from $3.5 million in 1996 to $4.2
million in 1997. As a percentage of revenue, selling, general and administrative
expenses would have decreased on an adjusted basis from 61.3% in 1996 to 58.8%
in 1997. The decrease as a percentage of revenue on an adjusted basis primarily
was due to the company's larger revenue base.
RESULTS FOR 1996 COMPARED TO 1995 -- BTI
Revenue. Revenue increased $1.9 million, or 49.5%, from $3.8 million in
1995 to $5.7 million in 1996, primarily due to increased sales of existing
products as a result of the expansion of the sales force and an increase in
participant fees as a result of an increased base of certified trainers at the
company's clients.
Cost of Revenue. Cost of revenue increased approximately $446,000, or
42.5%, from $1.0 million in 1995 to $1.5 million in 1996. As a percentage of
revenue, cost of revenue decreased slightly from 27.6% in 1995 to 26.3% in 1996.
Gross Profit. Gross profit increased $1.4 million, or 52.1%, from $2.8
million in 1995 to $4.2 million in 1996. As a percentage of revenue, gross
profit increased from 72.4% in 1995 to 73.7% in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.7 million, or 74.9%, from $2.3 million in
1995 to $4.0 million in 1996. Excluding the Compensation Differential
attributable to BTI of approximately $(89,000) and approximately $563,000 in
1995 and 1996, selling, general and administrative expenses would have increased
$1.1 million, or 45.0%, from $2.4 million in 1995 to $3.5 million in 1996. As a
percentage of revenue, selling, general and administrative expenses would have
decreased slightly on an adjusted basis from 63.2% in 1995 to 61.3% in 1996.
29
<PAGE> 30
LIQUIDITY AND CAPITAL RESOURCES -- BTI
BTI generated net cash from operating activities of approximately $641,000
in 1997. In the 1998 Period, BTI used $1.2 million in operating activities,
primarily for the payment of bonuses to key employees. Net cash used in
investing activities was approximately $33,000 in 1997 and approximately $61,000
in the 1998 Period for purchases of property and equipment. At December 31,
1997, BTI had working capital of approximately $456,000.
RESULTS OF OPERATIONS -- DECKER
Decker provides instructor-led training to businesses to improve employees'
business communication skills and communications between management and
employees. Decker's revenue is derived primarily from fees charged to
participants in its instructor-led training programs.
The following table sets forth certain selected financial data for Decker
on a historical basis and as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED DECEMBER 31,
-------------------------------------------------- --------------------------------
1995 1996 1997 1996 1997
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $8,550 100.0% $8,620 100.0% $8,410 100.0% $4,047 100.0% $5,160 100.0%
Cost of revenue......... 2,419 28.3 2,655 30.8 2,275 27.1 1,166 28.8 1,340 26.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit............ 6,131 71.7 5,965 69.2 6,135 72.9 2,881 71.2 3,820 74.0
Selling, general and
administrative
expenses.............. 5,670 66.3 5,716 66.3 6,446 76.6 3,406 84.2 3,414 66.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from
operations............ $ 461 5.4% $ 249 2.9% $ (311) (3.7)% $ (525) (13.0)% $ 406 7.9%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Compensation
differential.......... $ 192 2.2% $ 192 2.2% $1,165 13.9% $ 945 23.4% $ 220 4.3%
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1997 (THE "1998 PERIOD") COMPARED TO SIX MONTHS
ENDED DECEMBER 31, 1996 (THE "1997 PERIOD") -- DECKER
Revenue. Revenue increased $1.1 million, or 27.5%, from $4.0 million in
the 1997 Period to $5.2 million in the 1998 Period, primarily due to an increase
in the sales force and organizational initiatives undertaken in 1997 as
described below, which resulted in an increase in the number of seminars
delivered during the 1998 Period compared to the 1997 Period.
Cost of Revenue. Cost of revenue increased approximately $174,000, or
14.9%, from $1.2 million in the 1997 Period to $1.3 million in the 1998 Period.
As a percentage of revenue, cost of revenue decreased from 28.8% in the 1997
Period to 26.0% in the 1998 Period due primarily to increased utilization of
trainers.
Gross Profit. Gross profit increased approximately $939,000, or 32.6%,
from $2.9 million in the 1997 Period to $3.8 million in the 1998 Period. As a
percentage of revenue, gross profit increased from 71.2% in the 1997 Period to
74.0% in the 1998 Period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses remained relatively constant at $3.4 million in the 1997
and 1998 Periods. Excluding the Compensation Differential of approximately
$945,000 and approximately $220,000 attributable to Decker in the 1997 Period
and 1998 Period, respectively, selling, general and administrative expenses
would have increased approximately $733,000, or 29.8%, from $2.5 million in the
1997 Period to $3.2 million in the 1998 Period. As a percentage of revenue,
selling, general and administrative expenses would have increased on an adjusted
basis from 60.8% in the 1997 Period to 61.9% in the 1998 Period.
RESULTS FOR 1997 COMPARED TO 1996 -- DECKER
Revenue. Revenue decreased approximately $210,000, or 2.4%, from $8.6
million in 1996 to $8.4 million in 1997, primarily due to a temporary shift in
the focus of Decker's business. During the first six months of 1997, Decker
increased its focus on providing consulting services rather than its traditional
training. This shift
30
<PAGE> 31
in focus resulted in a decline in training revenue and a high degree of sales
force turnover. During the second half of 1997, the company returned to a
business model focused on instructor-led training, and launched several
organizational initiatives, including the hiring of a new president and the
implementation of a new salary structure for its sales force.
Cost of Revenue. Cost of revenue decreased approximately $380,000, or
14.3%, from $2.7 million in 1996 to $2.3 million in 1997. As a percentage of
revenue, cost of revenue decreased from 30.8% in 1996 to 27.1% in 1997,
primarily due to a reduction in the number of trainers and increased utilization
of trainers.
Gross Profit. Gross profit increased approximately $170,000, or 2.8%, from
$6.0 million in 1996 to $6.1 million in 1997. As a percentage of revenue, gross
profit increased from 69.2% in 1996 to 72.9% in 1997, primarily due to increased
utilization of trainers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $730,000, or 12.8%, from $5.7
million in 1996 to $6.4 million in 1997. Excluding the Compensation Differential
attributable to Decker of approximately $192,000 and $1.2 million in 1996 and
1997, respectively, selling, general and administrative expenses would have
decreased approximately $243,000, or 4.4%, from $5.5 million in 1996 to $5.3
million in 1997. As a percentage of revenue, selling, general and administrative
expenses would have decreased on an adjusted basis from 64.1% in 1996 to 62.8%
in 1997.
RESULTS FOR 1996 COMPARED TO 1995 -- DECKER
Revenue. Revenue increased approximately $70,000, or 0.8%, from $8.5
million in 1995 to $8.6 million in 1996.
Cost of Revenue. Cost of revenue increased approximately $236,000, or
9.8%, from $2.4 million in 1995 to $2.7 million in 1996. As a percentage of
revenue, cost of revenue increased from 28.3% in 1995 to 30.8% in 1996,
primarily due to higher salaries paid to the company's trainers in 1996.
Gross Profit. Gross profit decreased approximately $166,000, or 2.7%, from
$6.1 million in 1995 to $6.0 million in 1996. As a percentage of revenue, gross
profit decreased from 71.7% in 1995 to 69.2% in 1996, primarily due to the
higher salaries discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses remained relatively constant at $5.7 million 1995 and
1996. Excluding the Compensation Differential attributable to Decker of
approximately $192,000 in both 1995 and 1996, selling, general and
administrative expenses would have remained relatively constant at $5.5 million
in 1995 and 1996. As a percentage of revenue, selling, general and
administrative expenses would have remained constant on an adjusted basis at
64.1% in 1995 and 1996.
LIQUIDITY AND CAPITAL RESOURCES -- DECKER
Decker generated net cash from operating activities of approximately
$446,000 in 1997 and approximately $467,000 in the 1998 Period. Net cash used in
investing activities was approximately $11,000 in 1997, primarily for purchases
of property and equipment, and approximately $298,000 in the 1998 Period,
primarily for the purchase of marketable securities. Net cash used in financing
activities was approximately $241,000 in 1997, primarily for the payment of
dividends, and approximately $27,000 in the 1998 Period for payments on notes
payable. At December 31, 1997, Decker had working capital of $1.5 million and
approximately $607,000 of long-term debt.
RESULTS OF OPERATIONS -- J. HOWARD
J. Howard provides instructor-led training to individual managers and
client companies to identify and address potential obstacles to improving
workplace productivity, including race and gender issues, sexual harassment and
failure of employees to take measured risks. J. Howard's revenue is derived
primarily from fees from instructor-led seminars and, to a lesser extent, from
the rendering of consulting services. J. Howard
31
<PAGE> 32
also occasionally enters into license agreements and then delivers its programs
in the train-the-trainer format; in these instances, revenue from the license
agreements is recognized when the license is signed. Revenue from the trainer
certifications is recognized on a per event basis when the training is
delivered.
The following table sets forth certain selected financial data for J.
Howard on a historical basis and as a percentage of revenue for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue.................................... $6,251 100.0% $7,110 100.0% $7,684 100.0%
Cost of revenue............................ 1,964 31.4 2,166 30.5 2,346 30.5
------ ----- ------ ----- ------ -----
Gross profit............................... 4,287 68.6 4,944 69.5 5,338 69.5
Selling, general and administrative
expenses................................. 4,158 66.5 4,559 64.1 4,748 61.8
------ ----- ------ ----- ------ -----
Income from operations..................... $ 129 2.1% $ 385 5.4% $ 590 7.7%
====== ===== ====== ===== ====== =====
Compensation differential.................. $ 522 8.4% $ 944 13.3% $ 603 7.8%
</TABLE>
RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER
31, 1996 -- J. HOWARD
Revenue. Revenue increased approximately $574,000, or 8.1%, from $7.1
million in the year ended December 31, 1996 to $7.7 million in the year ended
December 31, 1997, primarily due to increased license revenue generated from one
of the company's clients during the year ended December 31, 1997.
Cost of Revenue. Cost of revenue increased approximately $180,000, or
8.3%, from $2.2 million in the year ended December 31, 1996 to $2.3 million in
the year ended December 31, 1997. As a percentage of revenue, cost of revenue
remained constant at 30.5% in both periods.
Gross Profit. Gross profit increased approximately $394,000, or 8.0%, from
$4.9 million in the year ended December 31, 1996 to $5.3 million in the year
ended December 31, 1997. As a percentage of revenue, gross profit remained
constant at approximately 69.5% in both periods.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $189,000, or 4.1%, from $4.6
million in the year ended December 31, 1996 to $4.7 million in the year ended
December 31, 1997. Excluding the Compensation Differential of approximately
$944,000 and approximately $603,000 attributable to J. Howard in the year ended
December 31, 1996 and the year ended December 31, 1997, respectively, selling,
general and administrative expenses would have increased approximately $530,000,
or 14.7%, from $3.6 million in the year ended December 31, 1996 to $4.1 million
in the year ended December 31, 1997. As a percentage of revenue, selling,
general and administrative expenses would have increased on an adjusted basis
from 50.8% in the year ended December 31, 1996 to 53.9% in the year ended
December 31, 1997, primarily due to compensation paid to additional salespeople
hired during the year ended December 31, 1997 who did not generate material
revenue during that year.
RESULTS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER
31, 1995 -- J. HOWARD
Revenue. Revenue increased approximately $859,000, or 13.7%, from $6.3
million in the year ended December 31, 1995 to $7.1 million in the year ended
December 31, 1996, primarily due to a general increase in the number of client
engagements.
Cost of Revenue. Cost of revenue increased approximately $202,000, or
10.3%, from $2.0 million in the year ended December 31, 1995 to $2.2 million in
the year ended December 31, 1996. As a percentage of revenue, cost of revenue
decreased slightly from 31.4% in the year ended December 31, 1995 to 30.5% in
the year ended December 31, 1996.
32
<PAGE> 33
Gross Profit. Gross profit increased approximately $657,000, or 15.3%,
from $4.3 million in the year ended December 31, 1995 to $4.9 million in the
year ended December 31, 1996. As a percentage of revenue, gross profit increased
slightly, from 68.6% in the year ended December 31, 1995 to 69.5% in the year
ended December 31, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $401,000, or 9.6%, from $4.2
million in the year ended December 31, 1995 to $4.6 million in the year ended
December 31, 1996. Excluding the Compensation Differential attributable to J.
Howard of approximately $522,000 and approximately $944,000 in the year ended
December 31, 1995 and the year ended December 31, 1996, respectively, selling,
general and administrative expenses would have remained relatively constant at
$3.6 million. As a percentage of revenue, selling, general and administrative
expenses would have decreased on an adjusted basis from 58.2% in the year ended
December 31, 1995 to 50.8% in the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES -- J. HOWARD
J. Howard generated net cash from operating activities of approximately
$464,000 in the year ended December 31, 1996 and approximately $402,000 in the
year ended December 31, 1997. Net cash used in investing activities was
approximately $248,000 in the year ended December 31, 1996 and approximately
$287,000 in the year ended December 31 1997, primarily for purchases of property
and equipment and advances to related parties. Net cash used in financing
activities was approximately $481,000 in the year ended December 31, 1996 and
approximately $108,000 in the year ended December 31, 1997, for distributions to
stockholders. At December 31, 1997, J. Howard had working capital of $1.1
million.
RESULTS OF OPERATIONS -- LSS
LSS creates customized training products that generally are designed to
facilitate faster learning of customer interface devices and higher productivity
of retail associates. LSS's training products are delivered to clients primarily
through interactive multimedia software and, to a lesser extent, through
distance-based media. LSS derives revenue from the design, development and
delivery of its products.
The following table sets forth certain selected financial data for LSS on a
historical basis and as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue....................................... $3,332 100.0% $5,123 100.0% $5,681 100.0%
Cost of revenue............................... 1,390 41.7 1,696 33.1 2,202 38.8
------ ----- ------ ----- ------ -----
Gross profit.................................. 1,942 58.3 3,427 66.9 3,479 61.2
Selling, general and administrative
expenses.................................... 1,767 53.0 3,079 60.1 2,226 39.2
------ ----- ------ ----- ------ -----
Income from operations........................ $ 175 5.3% $ 348 6.8% $1,253 22.0%
====== ===== ====== ===== ====== =====
Compensation differential..................... $ 415 12.5% $1,379 26.9% $ 300 5.3%
</TABLE>
RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER
31, 1996 -- LSS
Revenue. Revenue increased approximately $558,000, or 10.9%, from $5.1
million in the year ended December 31, 1996 to $5.7 million in the year ended
December 31, 1997, primarily due to the expansion of the sales force.
Cost of Revenue. Cost of revenue increased approximately $506,000, or
29.8%, from $1.7 million in the year ended December 31, 1996 to $2.2 million in
the year ended December 31, 1997. As a percentage of revenue, cost of revenue
increased from 33.1% in the year ended December 31, 1996 to 38.8% in the year
ended December 31, 1997, primarily due to increased video production costs
associated with certain of the company's products during the year ended December
31, 1997.
33
<PAGE> 34
Gross Profit. Gross profit increased approximately $52,000, or 1.5%, from
$3.4 million in the year ended December 31, 1996 to $3.5 million in the year
ended December 31, 1997. As a percentage of revenue, gross profit decreased from
66.9% in the year ended December 31, 1996 to 61.2% in the year ended December
31, 1997, primarily due to the increased video production costs described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased approximately $853,000, or 27.7%, from $3.1
million in the year ended December 31, 1996 to $2.2 million in the year ended
December 31, 1997. Excluding the Compensation Differential of $1.4 million and
approximately $300,000 attributable to LSS in the year ended December 31, 1996
and the year ended December 31, 1997, respectively, selling, general and
administrative expenses would have increased approximately $226,000, or 13.3%,
from $1.7 million in the year ended December 31, 1996 to $1.9 million in the
year ended December 31, 1997. As a percentage of revenue, selling, general and
administrative expenses would have increased slightly on an adjusted basis from
33.2% in the year ended December 31, 1996 to 33.9% in the year ended December
31, 1997.
RESULTS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER
31, 1995 -- LSS
Revenue. Revenue increased $1.8 million, or 53.8%, from $3.3 million in
the year ended December 31, 1995 to $5.1 million in the year ended December 31,
1996, primarily due to increased productivity from the company's expanded sales
force.
Cost of Revenue. Cost of revenue increased approximately $306,000, or
22.0%, from $1.4 million in the year ended December 31, 1995 to $1.7 million in
the year ended December 31, 1996. As a percentage of revenue, cost of revenue
decreased from 41.7% in the year ended December 31, 1995 to 33.1% in the year
ended December 31, 1996, primarily due to several follow-on client engagements
which generally result in lower production costs.
Gross Profit. Gross profit increased $1.5 million, or 76.5%, from $1.9 in
the year ended December 31, 1995 to $3.4 million in the year ended December 31,
1996. As a percentage of revenue, gross profit increased from 58.3% in the year
ended December 31, 1995 to 66.9% in the year ended December 31, 1996, primarily
due to the lower production costs described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.3 million, or 74.3%, from $1.8 million in
the year ended December 31, 1995 to $3.1 million in the year ended December 31,
1996. Excluding the Compensation Differential attributable to LSS of
approximately $415,000 and $1.4 million in the year ended December 31, 1995 and
the year ended December 31, 1996, respectively, selling, general and
administrative expenses would have increased approximately $348,000, or 25.7%,
from $1.4 million in the year ended December 31, 1995 to $1.7 million in the
year ended December 31, 1996. As a percentage of revenue, selling, general and
administrative expenses would have decreased on an adjusted basis from 40.6% in
the year ended December 31, 1995 to 33.2% in the year ended December 31, 1996,
primarily due to the company's larger revenue base.
LIQUIDITY AND CAPITAL RESOURCES -- LSS
LSS generated net cash from operating activities of approximately $315,000
and $482,000 in the years ended December 31, 1996 and 1997, respectively. Net
cash used in investing activities was approximately $85,000 and $86,000 in the
years ended December 31, 1996 and 1997, respectively, for purchases of property
and equipment. Cash used in financing activities was approximately $496,000
during the year ended December 31, 1997 for dividends paid to stockholders. At
December 31, 1997, LSS had working capital of approximately $962,000.
RESULTS OF OPERATIONS -- MOHR
MOHR offers train-the-trainer seminars to help clients in the retail
industry primarily to improve productivity by fostering a customer-oriented
focus at the sales management and sales associate levels. In some of its
programs, MOHR trains employees directly through instructor-led seminars. MOHR's
revenue is
34
<PAGE> 35
derived primarily from the licensing to clients of the right to use its training
programs on a participant or site basis.
The following table sets forth certain selected financial data for MOHR on
a historical basis and as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED DECEMBER 31,
-------------------------------- --------------------------------
1996 1997 1996 1997
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue....................... $2,171 100.0% $3,015 100.0% $1,114 100.0% $1,534 100.0%
Cost of revenue............... 677 31.2 825 27.4 352 31.6 523 34.1
------ ----- ------ ----- ------ ----- ------ -----
Gross profit.................. 1,494 68.8 2,190 72.6 762 68.4 1,011 65.9
Selling, general and
administrative expenses..... 1,151 53.0 1,745 57.9 743 66.7 1,050 68.4
------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from
operations.................. $ 343 15.8% $ 445 14.7% $ 19 1.7% $ (39) (2.5)%
====== ===== ====== ===== ====== ===== ====== =====
Compensation differential..... $ 144 6.6% $ 334 11.1% $ 92 8.3% $ 159 10.4%
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1997 (THE "1998 PERIOD") COMPARED TO SIX MONTHS
ENDED DECEMBER 31, 1996 (THE "1997 PERIOD") -- MOHR
Revenue. Revenue increased approximately $420,000, or 37.7%, from $1.1
million in the 1997 Period to $1.5 million in the 1998 Period, primarily due to
an increase in the number of salespeople and an increase in license fees
received during the 1998 Period.
Cost of Revenue. Cost of revenue increased approximately $171,000, or
48.6%, from approximately $352,000 in the 1997 Period to approximately $523,000
in the 1998 Period. As a percentage of revenue, cost of revenue increased from
31.6% in the 1997 Period to 34.1% in the 1998 Period, primarily due to increased
new product development costs.
Gross Profit. Gross profit increased approximately $249,000, or 32.7%,
from approximately $762,000 in the 1997 Period to $1.0 million in the 1998
Period. As a percentage of revenue, gross profit decreased from 68.4% in the
1997 Period to 65.9% in the 1998 Period, primarily due to the new product
development costs described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $307,000, or 41.3%, from
approximately $743,000 in the 1997 Period to $1.1 million in the 1998 Period.
Excluding the Compensation Differential of approximately $92,000 and
approximately $159,000 attributable to MOHR in the 1997 Period and 1998 Period,
respectively, selling, general and administrative expenses would have increased
approximately $240,000, or 36.9%, from approximately $651,000 in the 1997 Period
to approximately $891,000 in the 1998 Period. As a percentage of revenue,
selling, general and administrative expenses would have decreased slightly on an
adjusted basis from 58.4% in the 1997 Period to 58.1% in the 1998 Period,
primarily due to the Company's larger revenue base partially offset by
compensation paid to additional salespeople during the 1998 Period.
RESULTS FOR 1997 COMPARED TO 1996 -- MOHR
Revenue. Revenue increased approximately $844,000, or 38.9%, from $2.2
million in 1996 to $3.0 million in 1997, primarily due to the hiring of two
additional salespeople and the increase in license fees during 1997.
Cost of Revenue. Cost of revenue increased approximately $148,000, or
21.9%, from approximately $677,000 in 1996 to approximately $825,000 in 1997. As
a percentage of revenue, cost of revenue decreased from 31.2% in 1996 to 27.4%
in 1997, primarily due to the increase in license fees, which result in higher
margins than train-the-trainer seminars.
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<PAGE> 36
Gross Profit. Gross profit increased approximately $696,000, or 46.6%,
from $1.5 million in 1996 to $2.2 million in 1997. As a percentage of revenue,
gross profit increased from 68.8% in 1996 to 72.6% in 1997, primarily due to
increased license fees.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $594,000, or 51.6%, from $1.2
million in 1996 to $1.7 million in 1997. Excluding the Compensation Differential
attributable to MOHR of approximately $144,000 and approximately $334,000 in
1996 and 1997, respectively, selling, general and administrative expenses would
have increased approximately $404,000, or 40.1%, from $1.0 million in 1996 to
$1.4 million in 1997. As a percentage of revenue, selling, general and
administrative expenses would have increased slightly from 46.4% in 1996 to
46.8% in 1997.
LIQUIDITY AND CAPITAL RESOURCES -- MOHR
MOHR generated net cash from operating activities of approximately $80,000
in 1997. In the 1998 Period, MOHR used approximately $247,000 in operating
activities. Net cash used in investing activities was approximately $41,000 in
1997 and approximately $13,000 in the 1998 Period, for purchases of property and
equipment. At December 31, 1997, MOHR had working capital of approximately
$420,000.
RESULTS OF OPERATIONS -- NOVATIONS
Novations assists clients in, among other things, clarifying and
communicating their business strategies and re-designing their organizations and
work systems. Novations also provides its clients with a variety of
organizational assessment tools that are designed to gather and analyze feedback
on either an organizational or individual basis and to initiate change within
the client's organization in response to such feedback. Novations' revenue is
derived primarily from fees from professional services and, to a lesser extent,
from the sale of services and products to support human resource management.
The following table sets forth certain selected financial data for
Novations on a historical basis and as a percentage of revenue for the periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------------------------ -------------------------------
1995 1996 1997 1996 1997
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.................. $7,175 100.0% $9,039 100.0% $9,018 100.0% $4,658 100.0% $5,256 100.0%
Cost of revenue.......... 3,885 54.1 4,733 52.4 4,839 53.7 2,503 53.7 2,677 50.9
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit............. 3,290 45.9 4,306 47.6 4,179 46.3 2,155 46.3 2,579 49.1
Selling, general and
administrative
expenses............... 3,167 44.2 4,094 45.3 3,315 36.7 1,668 35.8 2,062 39.2
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from operations... $ 123 1.7% $ 212 2.3% $ 864 9.6% $ 487 10.5% $ 517 9.9%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Compensation
differential........... $1,208 16.8% $1,471 16.3% $ 661 7.3% $ 373 8.0% $ 675 12.8%
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1997 (THE "1998 PERIOD") COMPARED TO SIX MONTHS
ENDED DECEMBER 31, 1996 (THE "1997 PERIOD") -- NOVATIONS
Revenue. Revenue increased approximately $598,000, or 12.8%, from $4.7
million in the 1997 Period to $5.3 million in the 1998 Period, primarily due to
an increase in organizational assessment revenues in the 1998 Period.
Cost of Revenue. Cost of revenue increased approximately $174,000, or 7.0%
from $2.5 million in the 1997 Period to $2.7 million in the 1998 Period. As a
percentage of revenue, cost of revenue decreased from 53.7% in the 1997 Period
to 50.9% in the 1998 Period, primarily due to the increased utilization of the
company's consultants.
Gross Profit. Gross profit increased approximately $424,000, or 19.7%,
from $2.2 million in the 1997 Period to $2.6 million in the 1998 Period. As a
percentage of revenue, gross profit increased from 46.3% in the 1997 Period to
49.1% in the 1998 Period, primarily due to the increased utilization rate
described above.
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<PAGE> 37
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $394,000, or 23.6%, from $1.7
million in the 1997 Period to $2.1 million in the 1998 Period. Excluding the
Compensation Differential attributable to Novations of approximately $373,000
and approximately $675,000 in the 1997 Period and 1998 Period, respectively,
selling, general and administrative expenses would have increased approximately
$92,000, or 7.1%, from $1.3 million in the 1997 Period to $1.4 million in the
1998 Period. As a percentage of revenue, selling, general and administrative
expenses would have decreased on an adjusted basis from 27.8% in the 1997 Period
to 26.4% in the 1998 Period, primarily due to the company's larger revenue base.
RESULTS FOR 1997 COMPARED TO 1996 -- NOVATIONS
Revenue. Revenue remained relatively constant at $9.0 million in 1996 and
1997.
Cost of Revenue. Cost of revenue increased approximately $106,000, or
2.2%, from $4.7 million in 1996 to $4.8 million in 1997. As a percentage of
revenue, cost of revenue increased from 52.4% in 1996 to 53.7% in 1997,
primarily due to an increase in the size of the consulting staff.
Gross Profit. Gross profit decreased approximately $127,000, or 2.9%, from
$4.3 million in 1996 to $4.2 million in 1997. As a percentage of revenue, gross
profit decreased from 47.6% in 1996 to 46.3% in 1997, primarily due to the staff
increase described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased approximately $779,000 or 19.0%, from $4.1
million in 1996 to $3.3 million in 1997. Excluding the Compensation Differential
attributable to Novations of $1.5 million and approximately $661,000 in 1996 and
1997, respectively, selling, general and administrative expenses would have
increased slightly from $2.6 million in 1996 to $2.7 million in 1997. As a
percentage of revenue, selling, general and administrative expenses would have
increased slightly on an adjusted basis from 29.0% in 1996 to 29.4% in 1997.
RESULTS FOR 1996 COMPARED TO 1995 -- NOVATIONS
Revenue. Revenue increased $1.9 million, or 26.0%, from $7.2 million in
1995 to $9.0 million in 1996, primarily due to the introduction and marketing of
new services and the hiring of additional consultants.
Cost of Revenue. Cost of revenue increased approximately $848,000, or
21.8%, from $3.9 million in 1995 to $4.7 million in 1996. As a percentage of
revenue, cost of revenue decreased slightly from 54.1% in 1995 to 52.4% in 1996.
Gross Profit. Gross profit increased $1.0 million, or 30.9%, from $3.3
million in 1995 to $4.3 million in 1996. As a percentage of revenue, gross
profit increased from 45.9% in 1995 to 47.6% in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $927,000, or 29.3%, from $3.2
million in 1995 to $4.1 million in 1996. Excluding the Compensation Differential
attributable to Novations of $1.2 million and $1.5 million in 1995 and 1996,
respectively, selling, general and administrative expenses would have increased
approximately $664,000, or 33.9%, from $2.0 million in 1995 to $2.6 million in
1996. As a percentage of revenue, selling, general and administrative expenses
would have increased on an adjusted basis from 27.3% in 1995 to 29.0%, primarily
due to an expansion of the company's infrastructure to support revenue growth.
LIQUIDITY AND CAPITAL RESOURCES -- NOVATIONS
Novations generated net cash from operating activities of approximately
$153,000 in 1997. Net cash used by operating activities was approximately
$114,000 in the 1998 Period due to an increase in accounts receivable. Net cash
used in investing activities was approximately $137,000 and approximately
$35,000 in 1997 and the 1998 Period, respectively, for purchases of property and
equipment. Net cash provided by financing activities was approximately $55,000
in 1997, from net proceeds of long-term debt partially offset by distributions
to stockholders. Net cash provided by financing activities was approximately
$84,000 in the 1998 Period, from net proceeds of long-term debt. At December 31,
1997, Novations had working capital of approximately $197,000 and approximately
$365,000 of long term debt.
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<PAGE> 38
RESULTS OF OPERATIONS -- STAR MOUNTAIN
Star Mountain provides customized training and development services and
products to train individuals primarily within agencies of federal, state and
local government. Star Mountain delivers its courseware to clients in a variety
of formats (including written materials and interactive multimedia software),
but typically does not directly train its clients. Star Mountain's revenue is
derived primarily from fees received from the provision of training services as
a contractor or subcontractor under government contracts.
The following table sets forth certain selected financial data for Star
Mountain on a historical basis and as a percentage of revenue for the periods
indicated. For all periods presented below, selling, general and administrative
expenses include amounts classified as "Other, net" in Star Mountain's
historical financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1996 1997
--------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue.................................. $14,306 100.0% $16,313 100.0% $23,775 100.0%
Cost of revenue.......................... 8,668 60.6 9,457 58.0 14,504 61.0
------- ----- ------- ----- ------- -----
Gross profit............................. 5,638 39.4 6,856 42.0 9,271 39.0
Selling, general and administrative
expenses............................... 4,611 32.2 5,815 35.6 7,897 33.2
------- ----- ------- ----- ------- -----
Income from operations................... $ 1,027 7.2% $ 1,041 6.4% $ 1,374 5.8%
======= ===== ======= ===== ======= =====
Compensation differential................ $ 64 0.4% $ 304 1.9% $ 180 0.8%
</TABLE>
RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER
31, 1996 -- STAR MOUNTAIN
Revenue. Revenue increased $7.5 million, or 45.7%, from $16.3 million in
the year ended December 31, 1996 to $23.8 million in the year ended December 31,
1997, primarily due to an increase in the number of federal government contracts
undertaken, as well as revenue of $5.6 million contributed by businesses
acquired during the third quarter of the year ended December 31, 1996 and the
first and fourth quarters of the year ended December 31, 1997. Revenue was
significantly lower during the first half of the year ended December 31, 1996 as
a result of a decline in new client engagements due to prolonged Congressional
budget negotiations.
Cost of Revenue. Cost of revenue increased $5.0 million, or 53.4%, from
$9.5 million in the year ended December 31, 1996 to $14.5 million in the year
ended December 31, 1997. As a percentage of revenue, cost of revenue increased
from 58.0% in the year ended December 31, 1996 to 61.0% in the year ended
December 31, 1997, primarily due to the increased use of subcontractors during
the year ended December 31, 1997.
Gross Profit. Gross profit increased $2.4 million, or 35.2%, from $6.9
million in the year ended December 31, 1996 to $9.3 million in the year ended
December 31, 1997. As a percentage of revenue, gross profit decreased from 42.0%
in the year ended December 31, 1996 to 39.0% in the year ended December 31,
1997, primarily due to increased subcontracting costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.1 million, or 35.8%, from $5.8 million in
the year ended December 31, 1996 to $7.9 million in the year ended December 31,
1997. Excluding the Compensation Differential of approximately $304,000 and
approximately $180,000 attributable to Star Mountain in the year ended December
31, 1996 and the year ended December 31, 1997, respectively, selling, general
and administrative expenses would have increased $2.2 million, or 40.0%, from
$5.5 million in the year ended December 31, 1996 to $7.7 million in the year
ended December 31, 1997. As a percentage of revenue, selling, general and
administrative expenses would have decreased on an adjusted basis from 33.8% in
the year ended December 31, 1996 to 32.5% in the year ended December 31, 1997,
primarily due to the company's larger revenue base.
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<PAGE> 39
RESULTS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER
31, 1995 -- STAR MOUNTAIN
Revenue. Revenue increased $2.0 million, or 14.0%, from $14.3 million in
the year ended December 31, 1995 to $16.3 million in the year ended December 31,
1996, due to revenue of $3.6 million contributed by businesses acquired by Star
Mountain in the third quarters of the years ended December 31, 1995 and 1996.
The revenue from the acquired businesses was offset partially by the decline in
business generated from federal government entities as a result of the
Congressional budget negotiations described above.
Cost of Revenue. Cost of revenue increased approximately $789,000, or
9.1%, from $8.7 million in the year ended December 31, 1995 to $9.5 million in
the year ended December 31, 1996. As a percentage of revenue, cost of revenue
decreased from 60.6% in the year ended December 31, 1995 to 58.0% in the year
ended December 31, 1996, primarily due to the acquisition in the third quarter
of the year ended December 31, 1996 of a business with higher gross profit
margins than Star Mountain's core business.
Gross Profit. Gross profit increased $1.2 million, or 21.6%, from $5.6
million in the year ended December 31, 1995 to $6.9 million in the year ended
December 31, 1996. As a percentage of revenue, gross profit increased from 39.4%
in the year ended December 31, 1995 to 42.0% in the year ended December 31,
1996, primarily due to the acquisition in the third quarter of the year ended
December 31, 1996 of a business with higher gross profit margins than Star
Mountain's core business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.2 million, or 26.1%, from $4.6 million in
the year ended December 31, 1995 to $5.8 million in the year ended December 31,
1996. Excluding the Compensation Differential attributable to Star Mountain of
approximately $64,000 and approximately $304,000 in the years ended December 31,
1995 and 1996, respectively, selling, general and administrative expenses would
have increased approximately $964,000, or 21.2%, from $4.5 million in the year
ended December 31, 1995 to $5.5 million in the year ended December 31, 1996. As
a percentage of revenue, selling, general and administrative expenses would have
increased on an adjusted basis from 31.8% in the year ended December 31, 1995 to
33.8% in the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES -- STAR MOUNTAIN
Star Mountain generated net cash from operating activities of $1.1 million
and approximately $864,000 in the years ended December 31, 1996 and 1997,
respectively. Net cash used in investing activities was approximately $565,000
and $2.3 million in the years ended December 31, 1996 and 1997, respectively,
primarily for acquisitions. Net cash used in financing activities was
approximately $478,000 in the year ended December 31, 1996, primarily for
purchases of treasury stock. Net cash provided by financing activities was $1.8
million in the year ended December 31, 1997, primarily from borrowings on the
company's line of credit. At December 31, 1997, Star Mountain had working
capital of approximately $64,000, and long-term debt of approximately $304,000.
39
<PAGE> 40
BUSINESS
COMPANY OVERVIEW
The Company provides a broad range of training and development services and
products to Fortune 1000 companies, other large and medium-sized corporations
and government entities. The Company's services and products are designed to
increase the productivity of organizations by improving employee selection,
recruitment and retention; enhancing employee work skills; developing employee
management and leadership skills; and facilitating organizational assessment,
direction and change. The Company offers both customized and off-the-shelf
services and products that are designed to provide measurable improvements in
employee performance and productivity. The Company delivers its services and
products through multiple delivery methods, including instructor-led classroom
training and seminars, certification of client employees as instructors
("train-the-trainer"), interactive multimedia software (such as CD-ROM) and
distance-based media (such as video conferencing, intranets and the Internet).
The seven Founding Companies are recognized leaders in their respective fields
and have developed a wide range of services and products, a substantial
knowledge base created from years of research and development, and a
well-established client base. The Company's objective is to become a leading
single source provider of high-quality training and development services and
products that are distributed through multiple delivery methods.
The Company provided training and development services and products to more
than 1,300 companies and 75 government entities in fiscal 1997, including Abbott
Laboratories, Bank of America, Conoco, Inc., Eli Lilly and Company, Federal
Express, Federated Department Stores, Inc., Hewlett-Packard Company,
Metropolitan Life Insurance Company, Mobil Corporation, the Department of
Defense, the Immigration and Naturalization Service and the Internal Revenue
Service. During this period, the Company generated revenues of more than
$100,000 from each of 75 different corporate clients and from over 15 different
federal government entities. For fiscal 1997, the Company had pro forma revenue
of $68.8 million and pro forma income from operations of $7.9 million. From
fiscal 1995 through fiscal 1997, the historical combined revenue of the Founding
Companies grew at a compound annual rate of 21.8%.
MARKET OVERVIEW
The Company believes that the corporate and government training and
development market is large and growing. According to Training Magazine,
domestic corporations with over 100 employees budgeted approximately $58.6
billion on training in 1997, compared to approximately $45.0 billion in 1992,
representing a compound annual growth rate of approximately 5.4%. The Department
of Defense's training and development budget alone was approximately $23.9
billion for its 1997 fiscal year. The Company believes that growth in the
training and development market has been and will continue to be driven by: (i)
the evolution from a manufacturing-based to a service-based economy; (ii) the
increasing recognition by businesses that education, training and effective
human resource management are competitive necessities rather than optional
expenses; and (iii) the expanding use of technology throughout all levels of
organizations, which has increased the overall amount of training required and
the number of employees participating in such training.
Corporations and government entities increasingly are utilizing external
providers to meet their training and development needs. Expenditures on external
training and development by domestic corporations with over 100 employees have
increased from approximately $8.8 billion in 1992 to a budgeted $13.6 billion in
1997, representing a compound annual growth rate of 9.1%, and have increased as
a percentage of the total training budgets of such corporations from
approximately 19.6% in 1992 to 23.2% in 1997. The Department of Defense's budget
for external training and development was approximately $3.1 billion in its 1997
fiscal year. The Company believes that the growth in the external training and
development market has been driven by the desire of organizations to: (i) focus
on their core competencies; (ii) shift fixed training costs to variable costs;
and (iii) obtain training and development services, products, technology and
expertise that may not be available internally.
As a result of significant advances in computer and communications
technology, the training and development industry is experiencing rapid change
in the delivery of services and products. Historically, training and development
organizations delivered services and products primarily through instructor-led
seminars. Technological advances, however, now permit organizations to provide
training at distant and
40
<PAGE> 41
multiple locations as well as self-paced training, allowing a far greater number
of participants to learn conveniently and efficiently. Interactive multimedia
software (such as CD-ROM) and distance-based learning media (such as video
conferencing, intranets and the Internet) overcome many of the cost and space
constraints of traditional instructor-led training. The Company believes that
corporations increasingly are using technology-driven alternatives due to their
ability to: (i) increase learning and retention; (ii) minimize the opportunity
costs of time spent away from the job by employees; (iii) provide access to
training and development services and products "on demand"; (iv) lower overall
training and development costs, including travel expenses of employees; and (v)
measure and track employees' progress. Although instructor-led training
currently is the primary means of delivery of training and development services
and products, the Company believes that technology-based delivery increasingly
will be used to both supplement and, in some cases, replace instructor-led
training.
The training and development industry is highly fragmented. The Company
believes that no company in the industry has more than a one percent share of
the external training market. Many companies in the industry provide a narrow
range of services and products through limited delivery methods. The Company
believes that these companies generally have made limited investments in content
development, marketing and the technology necessary to develop or utilize
alternative delivery methods. As corporations and government entities
increasingly use external training providers, the Company believes that they
will seek providers that can meet their overall training and development needs
by: (i) providing a broad range of high-quality services and products in both
customized and off-the-shelf formats; (ii) delivering training through multiple
delivery methods capable of reaching large and geographically dispersed work
forces; and (iii) utilizing the most current technology available. As a result,
the Company believes that significant opportunities are available for
well-capitalized companies capable of meeting these needs on a national and
international basis.
BUSINESS STRATEGY
The Company's objective is to meet a significant portion of the training
and development needs of Fortune 1000 companies, other large and medium-sized
corporations and government entities. To achieve this objective, the Company
intends to pursue a business strategy with the following key elements:
OFFER VALUE-ADDED, HIGH-QUALITY TRAINING. The Company is committed to
providing value-added training and development services and products that result
in measurable improvement in the workplace performance of employees. The
Company's services and products are based upon well-researched methodologies,
processes and content, and typically have been developed, refined and used
successfully over many years. Most of the Founding Companies' executives have
advanced degrees and are regarded as leaders in their respective areas. The
Company strives to offer high-quality training by continually updating its
content to reflect changing industry trends and client preferences.
PROVIDE A BROAD RANGE OF SERVICES AND PRODUCTS. The Company seeks to
provide its clients with a broad range of high-quality training and development
services and products in both customized and off-the-shelf formats. These
services and products cover: employee selection, recruitment and retention;
employee work skills enhancement; employee management and leadership skills; and
organizational assessment, direction and change. Specifically, the Company
assists organizations and their employees in, among other things, determining
and implementing hiring criteria, increasing workplace diversity awareness,
improving communication skills, increasing point-of-sale efficiencies, working
in a team environment and soliciting and analyzing employee feedback. In
addition, the Company provides strategic consulting services to its clients,
which are enhanced by the Company's ability to offer complementary training and
development services and products.
UTILIZE MULTIPLE DELIVERY METHODS. The Company offers multiple delivery
methods for its services and products, including instructor-led seminars,
train-the-trainer, interactive multimedia software (such as CD-ROM) and
distance-based media (such as video conferencing, intranets and the Internet).
Two of the Founding Companies, LSS and Star Mountain, have substantial expertise
in delivery technology which the Company intends to apply to many of the
services and products of the other Founding Companies. By offering
41
<PAGE> 42
multiple delivery methods, the Company believes that it can better serve the
needs, resource constraints and cost requirements of its clients.
DEVELOP LONG-TERM CLIENT RELATIONSHIPS. The Company seeks to develop
long-term relationships with clients to whom it can provide a full complement of
services and products on a recurring basis. Many of the Company's long-term
clients purchase its services and products on an on-going basis after the
initial delivery of services and products. For example, after a
train-the-trainer seminar where the Company certifies a client's instructors,
the Company continues to receive a fee on a participant or site basis as the
certified instructors continue to train the client's employees. The Company also
offers updated, related or new services and products to its clients in order to
generate recurring revenue.
EMPLOY A DECENTRALIZED MANAGEMENT STRUCTURE. The Company believes that the
experienced management teams of the Founding Companies have a valuable
understanding of their respective training and development markets and have
established strong client relationships. The Company intends to operate with a
decentralized management structure under which management at each of the
Founding Companies will make most of the day-to-day operating decisions and will
have primary responsibility for the profitability and growth of their business.
The Company intends to utilize stock ownership as well as appropriate incentive
compensation to ensure that management's objectives at each of the Founding
Companies are aligned with those of the Company.
IMPLEMENT BEST PRACTICES AND ACHIEVE OPERATING EFFICIENCIES. The Company
intends to evaluate the operating policies and procedures of the Founding
Companies in order to identify and implement Company-wide best practices in
areas such as marketing, sales, product development, human resource policies and
recruiting. In addition, the Company believes that it can achieve operating
efficiencies and cost savings by more efficiently utilizing the Company's
facilities and gaining greater purchasing power in areas such as travel,
employee benefits and communications.
GROWTH STRATEGY
The Company's objective is to become the leading single source provider of
high-quality training and development services and products to Fortune 1000
companies, other large and medium-sized corporations and government entities.
Key elements of the Company's growth strategy include:
CAPITALIZE ON CROSS-SELLING OPPORTUNITIES. The Company believes that
significant opportunities exist for each Founding Company to cross-sell its
services and products to clients of the other Founding Companies. Each of the
Founding Companies has established strong relationships with its clients but
historically has offered its clients only a limited selection of training and
development services and products. The Company provided training and development
services to more than 1,300 companies and more than 75 government entities in
fiscal 1997, and during that period generated revenue of more than $100,000 from
each of 75 different companies and over 15 different federal government
agencies. The Company intends to capitalize on the services and products of each
of the Founding Companies by emphasizing and aggressively cross-selling its
broad range of training and development services and products to its collective
client base.
IMPLEMENT AGGRESSIVE SALES AND MARKETING STRATEGY. The Company intends to
pursue an aggressive sales and marketing strategy designed to establish new
client relationships and expand existing relationships. Specifically, the
Company intends to: (i) hire additional salespeople to supplement the existing
sales efforts of the Founding Companies; (ii) establish a nationwide
telemarketing program focusing primarily on medium-sized corporations; and (iii)
participate in a greater number of conferences and trade shows. The Company
intends to direct its centralized marketing campaign to both new clients and
additional contacts within existing clients (e.g., targeting upper levels of
management if previous services provided by a Founding Company were marketed to
middle management). In addition, the Company intends to pursue relationships
with regional colleges and vocational/technical schools in order to market its
services and products to small and medium-sized companies and their employees.
The Company also intends to establish a national brand identification under the
PROVANT name, while preserving the value of the established names, trademarks
and client relationships of the Founding Companies.
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<PAGE> 43
EXPAND SERVICE AND PRODUCT OFFERINGS. The Company intends to broaden its
offerings of training and development services and products by developing or
acquiring new or complementary services and products. For example, the Company
currently is introducing a new employee recruitment product, based upon its
Behavioral Interviewing(R) process, that teaches clients how to recruit in a
tight labor market. In addition, the Company intends to capitalize on its
expertise in certain industries, such as the retail industry, by customizing
services and products for other similar industries, such as the hospitality,
transportation and healthcare industries.
PURSUE STRATEGIC ACQUISITIONS. The Company intends to pursue strategic
acquisitions in order to: (i) offer services or products complementary to those
it currently offers; (ii) gain expertise in new areas of training and
development; (iii) access new technology to expand the scope and quality of
delivery methods; and (iv) establish or enhance client relationships. The
Company seeks to acquire companies with strong management, profitable operating
results and leading positions within their respective markets. The Company
believes that acquisitions of this nature will improve its ability to be a
single source provider of high-quality training and development services and
products.
LEVERAGE INVESTMENTS IN TECHNOLOGY AND DEPLOY LEADING TECHNOLOGIES. A key
element of the Company's strategy is to capitalize on the technology investments
of the Founding Companies in order to deliver training and development services
and products to its clients in the most effective manner. For example, the
Company intends to apply the technical expertise of LSS and Star Mountain, which
provide training through interactive multimedia software, to convert certain
products of other Founding Companies to interactive multimedia software formats,
such as CD-ROM. The Company expects to deploy leading technologies in the
delivery of many of its services and products, including delivery through
distance-based media, such as video conferencing, intranets and the Internet,
that can provide interactive training to employees at multiple locations.
TRAINING AND DEVELOPMENT SERVICES AND PRODUCTS
The Company's training and development services and products assist
organizations in four principal areas: (i) employee recruitment, selection and
retention; (ii) employee work skills; (iii) employee management and leadership
skills; and (iv) organizational assessment, direction and change. Through these
services and products, the Company's clients can improve the quality of
employees entering the organization, the performance of employees within the
organization, and the ability of the organization as a whole to undergo change.
The Company offers services and products which are off-the-shelf as well as
customized to meet the specialized needs of particular clients. The following
table illustrates the principal training and development areas covered by the
Company's services and products:
<TABLE>
<CAPTION>
EMPLOYEE RECRUITMENT, EMPLOYEE MANAGEMENT ORGANIZATIONAL ASSESSMENT,
SELECTION AND RETENTION EMPLOYEE WORK SKILLS AND LEADERSHIP SKILLS DIRECTION AND CHANGE
- ----------------------- ----------------------- ----------------------- --------------------------
<S> <C> <C> <C>
Interviewing candidates Customer service Analyzing employee Strategic consulting
Identifying specific training feedback Understanding employee
job competencies Public speaking Presentation skills perceptions
Retaining employees Spoken communication training Assessing organizational
Addressing sexual training Coaching peers and abilities and direction
harassment Buyer negotiating colleagues Measuring customer
Facilitating diversity Point-of-sale training Managing retail stores satisfaction
General retail sales Communicating with Designing quality control
training subordinates processes
Specialized government Understanding diversity Changing corporate
job training issues culture
Industrial skills
training
</TABLE>
EMPLOYEE RECRUITMENT, SELECTION AND RETENTION. The Company offers services
and products designed to assist clients in hiring and retaining effective
employees. In particular, the Company helps clients understand the skills
required of their employees, implement more effective recruitment, selection and
retention processes to maximize employee productivity, and reduce turnover
rates. Through one of the Company's products,
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Behavioral Interviewing(R), managers learn how to identify specific job
competencies required for success, interview prospective candidates and evaluate
their skills. For example, when the Behavioral Interviewing(R) process was
implemented at a large accounting firm seeking to refine its employee selection
process, the Company worked with the firm to determine critical skills and
competencies required of candidates and to develop interview forms designed to
elicit information pertaining to those skills and competencies. Client
recruiting directors were certified, and those certified instructors then taught
the Behavioral Interviewing(R) process to the client's interviewers nationwide.
In the year following the implementation of Behavioral Interviewing(R), the
number of candidates invited for office visits who received offers of employment
increased by approximately 10%, reflecting an increase in the effectiveness and
efficiency of the screening and evaluation process. SkilMatch(R), a related
product, is an interactive software program designed to streamline the process
of developing structured interviews and ensure a consistent selection process.
Complementing these products are the Company's outplacement services, which it
provides to several federal government agencies to assist in work force
restructuring, and its diversity enhancement services, which facilitate employee
retention and development.
EMPLOYEE WORK SKILLS. The Company offers services and products designed to
provide or improve the skills necessary to perform a particular task or job.
These skills include public speaking/presentation, negotiation, general retail
sales, point-of-sale device operation, direct store delivery (receiving) and
customer service. Several of the Company's products, including The POS
Simulator, Direct Store Delivery Simulator, Cashier Ready and Produce
Identification Trainer, are designed to increase employee productivity in the
retail workplace by simulating important retail situations and environments in
interactive multimedia formats. Many of these products allow clients to measure
the effectiveness of the training. For example, a large grocery chain that used
The POS Simulator to improve the efficiency of its cashier training program
reduced the average number of hours required to train cashiers in certain key
competencies from 16 hours of traditional classroom training to six hours with
The POS Simulator. Another Company product, Effective Communicating(TM), is a
two-day workshop designed to enable clients' key staff members to become more
effective in public speaking, sales and other types of oral communication. The
Company also offers specialized industrial skills training for government and
corporate clients.
The Company provides customized work skills training to numerous federal
government entities and various state and local government entities. Most of the
services and products offered in this area involve the training of employees to
perform tasks that are unique to certain government jobs. For instance, the
Company has prepared courses for the Department of Defense covering topics from
technology applications for military aircrews to basic medical care and medical
management information systems for Army and Navy healthcare personnel. Courses
prepared for other federal agencies include Reengineering and Process Mapping
for the Department of Education, Principles of Purchasing for the Postal
Service, Introductory Correctional Training for the Bureau of Prisons, and
Training in the Use of Traffic Records for Problem Identification for the
National Highway Traffic Safety Administration. Typically, these training
courses and course materials are custom-designed by experts from the Company
working closely with members of the respective government entities.
EMPLOYEE MANAGEMENT AND LEADERSHIP SKILLS. The Company offers services and
products that are designed to improve employees' operational management,
supervisory and leadership skills. In particular, the Company helps managers to
create constructive feedback processes, operate retail stores, monitor, motivate
and communicate with subordinates and understand diversity issues. Managing
Individual and Team Effectiveness (MITE(R)), one of the Company's products, is
designed to provide managers in complex work environments with "360-degree"
feedback on their management skills. Another product, Retail Management Series
III (RMSIII), is a multi-component and highly adaptable program designed to
enhance their retail communication and coaching skills in order to improve the
productivity and profitability of managers' salespeople. For example, RMSIII was
used by a national specialty retailer seeking to increase the productivity of
its sales associates by focusing on its sales managers. The Company tailored
RMSIII to cover the sales management skills important to the retailer's
business, including sales management standards, commitment to goals and coaching
skills. The Company trained and certified district managers of the client to
teach RMSIII, and those certified instructors trained sales managers and
assistant managers in over 200 of the client's stores.
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<PAGE> 45
Three months following the introduction of the Company's RMSIII product, stores
using RMSIII reported an average increase in sales of 27%, as compared to 14% in
stores not using RMSIII. A third product, Managing Inclusion, is a multi-day
session designed to help individual managers and client companies enhance
understanding of workplace diversity, build morale and satisfaction in the work
force, and increase productivity through more effective team relationships.
ORGANIZATIONAL ASSESSMENT, DIRECTION AND CHANGE. The Company provides
services and products designed to help organizations assess their strategic
direction and implement and manage change. The Company provides strategic
consulting services that help improve overall workplace performance by assisting
clients in, among other things, clarifying and communicating their business
strategies and redesigning their organizations and business processes. For
example, the Company assisted a large trucking company in developing alternative
organization designs and cost reduction initiatives. By using the Company's
recommendations to clarify its operating strategy and determine the core work of
its business, the trucking company was able to undertake significant structural
changes and implement cost-cutting measures that were responsible for
significantly increasing overall efficiency. The Company also provides its
clients with a variety of survey tools by which feedback can be gathered and
analyzed on either an organizational or individual basis. The Company develops
the survey forms and methodologies, conducts the surveys, and collects and
analyzes the data for its corporate clients.
DELIVERY METHODS
The Company offers multiple delivery methods for its training services and
products. By doing so, the Company believes that it can better serve the
particular needs, resource constraints, cost requirements and cultures of its
clients. Most of the Company's services and products currently are delivered
through instructor-led and train-the-trainer seminars; however, the Company also
delivers certain of its products on interactive multimedia software or through
distance-based methods. The Company's primary delivery methods are described
below.
INSTRUCTOR-LED TRAINING AND SEMINARS. The Company delivers its programs to
clients' employees primarily through the use of either dedicated Company
instructors or certified contract instructors. Most of the Company's
instructor-led training is delivered at clients' facilities, although the
Company also delivers certain programs at its own training facilities. In some
cases, the Company's programs are delivered in a public seminar format to a
small group of individuals from multiple client companies. The Company provides
textual materials and, in some cases, video tapes as a part of its
instructor-led programs. In addition, the Company sells related published
materials in connection with these programs. The Company also develops custom
courseware that ultimately is delivered by instructors (often client employees)
who are not certified by or otherwise affiliated with the Company. The Company's
courses and programs generally range in length from a few hours to several days
and include from one to hundreds of participants.
TRAIN-THE-TRAINER. For several of its services and products, the Company's
instructors train and certify qualified employees of clients in an
instructor-led program. The certified client employees then are licensed to use
the Company's methodologies and materials to train other employees of the client
in instructor-led classes at client sites. The Company supplies training
materials for these classes and on-going training for the certified trainers.
The Company receives fees for the employee-led classes on either a participant
or site basis.
INTERACTIVE MULTIMEDIA SOFTWARE. The Company delivers several of its
products on interactive multimedia software, such as CD-ROMs. Because of the
demonstrated higher rates of learning and retention achieved through interactive
multimedia training, the Company plans to convert to CD-ROM and other
interactive multimedia software several of its products that to date have been
offered only in the instructor-led or train-the-trainer formats.
DISTANCE-BASED MEDIA. The Company currently delivers a limited number of
its products through distance-based media, such as satellite or other video
conferencing, intranets and the Internet. The Company intends to seek new
technologies that will allow it to deliver its product offerings to clients more
effectively. In particular, the Company believes that more of its products will
be offered through the Internet and more clients will seek Internet-delivered
training as the bandwidth of Internet access increases.
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OTHER SERVICES AND PRODUCTS
In addition to the Company's training and development services and
products, one of the Founding Companies, Star Mountain, also provides certain
other services and products including computer network security research and
development (primarily for federal government entities) and computer network
design, sales, installation and support (primarily for corporations). These
services and products contributed 7.3% of pro forma revenue and had a slightly
negative effect on pro forma income from operations for fiscal 1997. The Company
does not anticipate that sales of these services and products will have a
material impact on its future operating results.
CLIENTS
The Company seeks to establish long-term relationships with Fortune 1000
companies, other large and medium-sized corporations and government entities
with substantial training and development needs. The Company has developed a
broad client base of over 1,300 corporations, with no corporate client
accounting for more than 5% of the Company's pro forma revenue during fiscal
1997 or the six months ended December 31, 1997. The Company generated revenue of
more than $100,000 from each of 75 different corporate clients during fiscal
1997. The top corporate clients of the Founding Companies by revenue generated
during fiscal 1997 include those presented below.
<TABLE>
<S> <C> <C>
Abbott Laboratories Exxon Corporation Motorola, Inc.
Ameritech Corporation Federal Express Northwest Airlines, Inc.
Amoco Corporation Federated Department Stores, Norwest Mortgage Inc.
Bank of America Inc. PepsiCo., Inc.
BOC Gases Flexsys Royal Bank of Canada
Canadian-Hunter Exploration Ltd. Fujitsu Business Communication Siemens Business
Canadian Imperial Bank of Systems, Inc. Communication Systems, Inc.
Commerce Hewlett-Packard Company U.S. West, Inc.
Conoco, Inc. J.C. Penney Company, Inc. Victoria's Secret Stores
Consolidated Rail Corporation The Kroger Co. Wakefern Food Corporation
Coopers & Lybrand L.L.P. Lukens Steel Company Yellow Corporation
Dayton Hudson Corporation McDonnell-Douglas Corporation
Deloitte & Touche LLP Metropolitan Life Insurance
Eli Lilly and Company Company
Mobil Corporation
</TABLE>
Star Mountain derives a substantial majority of its revenues from
customized training and development services and products delivered to entities
affiliated with the federal government. During the six months ended December 31,
1997, Star Mountain's training and development work for federal government
clients generated approximately 31% of the Company's pro forma combined revenue.
Star Mountain also provides services and products to state and local government
entities. The Company's top federal government clients by revenue generated
during fiscal 1997 include the following:
<TABLE>
<S> <C>
Defense Commissary Agency Food Safety and Inspection
Defense Logistics Agency General Accounting Office
Department of Army General Services Office
Department of Energy Immigration and Naturalization Service
Department of Navy Indian Health Service
Drug Enforcement Administration Internal Revenue Service
Federal Aviation Administration Pension Benefit Guarantee Corporation
Federal Highway Administration United States Marshals Service
Federal Law Enforcement Training Center United States Postal Service
</TABLE>
SALES AND MARKETING
Historically, the Founding Companies have used a variety of sales
strategies. The majority of the Founding Companies maintain dedicated
salespersons who seek to identify leads, qualify prospects and close sales
related to their specific training services and products. In some instances, the
salespersons also serve as the instructors or consultants for such services and
products. Generally, each of the Founding Companies
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<PAGE> 47
targets its prospects primarily through direct sales, public seminars, client
referrals and a variety of media, including direct mailings, the Founding
Companies' web sites and trade publications. In addition, several of the
Founding Companies are able to obtain clients as a result of the visibility of
their principals, who have published articles and books, appeared on television
news shows or otherwise created a strong reputation in their various fields of
training. The Company currently markets its services and products to its clients
mainly through their human resources personnel, business unit managers or
regional managers and, to a lesser extent, through senior executives. However,
the Company intends to focus increasingly on marketing to senior executives of
both existing and targeted clients through initial contacts made by members of
the Company's Board of Directors and senior management, as well as by the
principals of the Founding Companies.
The Company generates significant revenues through sales of services and
products to government entities. Typically, these sales occur through a
competitive bidding process started by a government entity's issuance of a
request for proposal ("RFP") for a contemplated project. The Company may submit
a proposal on its own behalf or as a subcontractor to another company. Many
services and products delivered to federal government agencies are provided
through orders placed under a General Services Administration ("GSA") Supply
Schedule contract and under Office of Personnel Management/Training Management
Assistance ("OPM"). The Company is one of only a few training providers
authorized under both funding mechanisms. The Company (through Star Mountain)
benefits from its status as a preferred provider under certain funding
mechanisms (including the GSA and OPM vehicles) which allow it to negotiate
contracts without an RFP.
Following the consummation of the Offering, the Company expects to
capitalize on cross-selling opportunities among the clients of the Founding
Companies. The Company intends to hire additional salespeople to supplement the
existing sales efforts of the Founding Companies and establish a nationwide
telemarketing program focusing on medium-sized corporations. In addition, the
Company is developing a marketing and advertising program to establish a
national brand identification under the PROVANT name, while preserving the value
of the established names, trademarks and customer relationships of the Founding
Companies.
COMPETITION
The training and development industry is highly fragmented and competitive,
and the Company expects this competition to increase. The Company believes the
principal competitive factors in the industry are the strength of client
relationships, quality, price and breadth of service and product offerings,
quality and number of delivery methods, reputation, and the ability to provide
customized services and products. Some of the Company's competitors have
significantly greater financial, managerial, technical, marketing and other
resources than the Company. Moreover, the Company expects that it will face
additional competition from new entrants into the training and development
market due, in part, to the evolving nature of the market and the relatively low
barriers to entry.
The Company competes with thousands of privately-held training companies,
most of which provide a limited range of services and products. In addition to
these small competitors, a number of larger companies are engaged in the
business of providing training and development services and products, including
Times Mirror Training Group (a subsidiary of the Times Mirror Company), The
Forum Corporation, Development Dimensions International, Wilson Learning
Corporation and several large publishers of professional reference materials who
recently have entered the industry. The Company also competes with large
professional service companies such as Andersen Consulting, Ernst & Young LLP,
Towers Perrin and others that generally offer training services in conjunction
with strategic consulting and other client assignments of larger scope. In
addition, many of the Company's clients and potential clients have internal
training departments. See "Business -- Market Overview."
The Company's competitors for government contracts include service
companies such as Booz Allen, as well as contract suppliers of equipment to the
government such as Raytheon Company, McDonnell-Douglas Corporation and Lockheed
Martin Corporation.
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INTELLECTUAL PROPERTY
The Company regards many of its training and development services and
products as proprietary and relies primarily on a combination of statutory and
common law copyright, trademark, service mark and trade secret laws, customer
licensing agreements, employee and third-party nondisclosure agreements and
other methods to protect its proprietary rights. Notwithstanding this, a third
party or parties could copy or otherwise obtain and use the Company's products
in an unauthorized manner or use these products to develop training and
development processes that are substantially similar to those of the Company.
The Company's products generally do not include any mechanisms to prohibit or
prevent unauthorized use by third parties. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar training
products and delivery methods. Additionally, there can be no assurance that
third parties will not claim that the Company's current or future products
and/or services infringe on the proprietary rights of others. See "Risk
Factors -- Risks Associated with Intellectual Property."
EMPLOYEES
The Company currently employs approximately 675 full-time and part-time
employees and believes that its relationships with its employees are good.
INDEPENDENT CONTRACTORS
The Company provides certain of its services and products through
approximately 200 independent contractors. The Company does not pay federal
employment taxes or withhold income taxes with respect to these independent
contractors or include them in the Company's employee benefit plans. See "Risk
Factors -- Independent Contractor Status."
FACILITIES
The Company leases its principal executive office located in Boston,
Massachusetts, and maintains 23 additional leased office locations in 12 states
and one in Canada. The remaining terms of the Company's leases are less than
eight years. The Founding Companies' principal offices are located in:
Alexandria, Virginia; Lexington, Massachusetts; Memphis, Tennessee; North
Hollywood and San Francisco, California; Provo, Utah; and Ridgewood, New Jersey.
Certain of the Founding Companies also maintain branch offices. The Company
believes that its facilities are adequate to serve its current level of
operations. If additional facilities are required, the Company believes that
suitable additional or alternative space will be available as needed on
commercially reasonable terms.
LEGAL PROCEEDINGS
The Company is from time to time a party to litigation arising in the
ordinary course of business. Management believes that no pending legal
proceeding will have a material adverse effect on the business, financial
condition or results of operations of the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors and executive officers, and those persons who will become directors
and executive officers upon or immediately following the consummation of the
Offering.
<TABLE>
<CAPTION>
NAME AGE POST-OFFERING POSITION
- ------------------------------------- --- --------------------------------------------------------
<S> <C> <C>
Paul M. Verrochi..................... 49 Chairman and Chief Executive Officer
John H. Zenger....................... 66 President and Director
Dominic J. Puopolo................... 54 Executive Vice President, Chief Financial Officer and
Director
Rajiv Bhatt.......................... 40 Senior Vice President, Treasurer and Chief Accounting
Officer
Philip Gardner....................... 35 Vice President
Herbert A. Cohen..................... 61 Chairman - MOHR, Director
Bert Decker.......................... 58 Chairman - Decker, Director
Paul C. Green........................ 56 Chairman and CEO - BTI, Director
Joe Hanson........................... 41 Managing Director - Novations, Director
John F. King......................... 43 Chairman - LSS, Director
A. Carl von Sternberg................ 69 Chairman and President - Star Mountain, Director
Marc S. Wallace...................... 51 President - J. Howard, Director
Michael J. Davies.................... 53 Director
David B. Hammond..................... 53 Director
John R. Murphy....................... 64 Director
Esther T. Smith...................... 59 Director
</TABLE>
Paul M. Verrochi will become Chairman of the Board and Chief Executive
Officer of the Company upon the consummation of the Offering. Prior to the
Offering, Mr. Verrochi has been President and a director of PROVANT. Mr.
Verrochi also is Chairman, co-founder and a principal of American Business
Partners LLC ("ABP"). In 1992, Mr. Verrochi co-founded American Medical
Response, Inc. ("AMR"), which prior to its acquisition by Laidlaw Inc. in
January 1997 was the largest provider of ambulance services in the United
States. From August 1992 to January 1996, Mr. Verrochi served as AMR's President
and Chief Executive Officer, and until January 1997 he also served as the
Chairman of the Board of Directors. Mr. Verrochi was selected as the 1995
National Entrepreneur of the Year for Emerging Growth Companies by Inc.
Magazine. Mr. Verrochi serves as an advisory board member to numerous charitable
foundations, including the New England Aquarium and the Boston Symphony
Orchestra. Mr. Verrochi is Chairman of BridgeStreet Accommodations, Inc. and a
director of Coach USA, Inc. Mr. Verrochi received his Bachelor of Science degree
from the United States Merchant Marine Academy at Kings Point, New York.
John H. Zenger will become President and a director of the Company upon the
consummation of the Offering. Prior to the Offering, since May 1997, Mr. Zenger
has been a consultant to PROVANT. From April 1992 to November 1996, Mr. Zenger
was employed in various capacities, including Vice President and Chairman, by
the Times Mirror Training Group, one of the nation's largest training companies,
consisting of Kaset, Learning International and Zenger Miller, the company that
he founded in 1977. Mr. Zenger has taught at the University of Southern
California School of Business and the Stanford Graduate School of Business. Mr.
Zenger received his Doctorate degree in Business Administration from the
University of Southern California, his Masters in Business Administration from
the University of California, Los Angeles and his Bachelor of Science degree
from Brigham Young University.
Dominic J. Puopolo will become Executive Vice President and Chief Financial
Officer of the Company upon the consummation of the Offering. Prior to the
Offering, Mr. Puopolo has been Treasurer and a director of PROVANT. Mr. Puopolo
is a co-founder and principal of ABP. In 1992, Mr. Puopolo co-founded AMR. From
August 1992 to January 1996, Mr. Puopolo served as Executive Vice President,
Chief Financial Officer, Treasurer and a member of the Board of Directors of
AMR. Mr. Puopolo serves as a member of the Board of
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<PAGE> 50
Trustees of Emerson College of Communications and is Chairman of its Resource
Development Committee. Mr. Puopolo also serves on the Executive Committee of the
Boston University School of Medicine and is a member of the Board of Trustees of
Northeastern University. Mr. Puopolo, a Certified Public Accountant, is a member
of the Massachusetts Society of Certified Public Accountants, The American
Institute of Certified Public Accountants and the National Association of
Accountants. Mr. Puopolo received his Masters in Business Administration degree
from Suffolk University and his Bachelor of Science degree in Business
Administration from Northeastern University.
Rajiv Bhatt will become Senior Vice President, Treasurer and Chief
Accounting Officer of the Company upon the consummation of the Offering. Prior
to the Offering, since August 1997, Mr. Bhatt has been a consultant to PROVANT.
From September 1994 to August 1997, Mr. Bhatt was Executive Vice President,
Chief Financial Officer and Treasurer of Summit Technology, Inc., a
publicly-traded manufacturer of ophthalmic laser systems. From September 1988 to
September 1994, Mr. Bhatt was Chief Financial Officer, Secretary and a member of
the Board of Directors of Carlisle Plastics, Inc., a publicly-traded plastics
manufacturer. Also from September 1988 to September 1994, Mr. Bhatt was Chief
Financial Officer of Carlisle Capital Corporation, a privately held mergers and
acquisitions company. Mr. Bhatt serves as a director of Big Brothers Association
of Boston. Mr. Bhatt, a Certified Public Accountant, received his Masters in
Business Administration degree from the University of Michigan and his Bachelor
of Commerce degree from the University of Bombay.
Philip Gardner will become Vice President of the Company upon the
consummation of the Offering. Prior to the Offering, since February 1997, Mr.
Gardner has been a consultant to PROVANT. From August 1994 to December 1996, Mr.
Gardner was a consultant for McKinsey & Company ("McKinsey"), a management
consulting firm. Prior to joining McKinsey, from 1985 to 1992, Mr. Gardner was
an officer and a highly decorated strike fighter pilot in the United States
Navy. Mr. Gardner received his Masters in Business Administration degree from
Harvard Graduate School of Business Administration and his Bachelor of Arts
degree in Government from Harvard College.
Herbert A. Cohen will become a director of the Company immediately
following the consummation of the Offering. Mr. Cohen has been Chief Executive
Officer of MOHR since February 1991. From September 1978 to January 1991, Mr.
Cohen was a partner and one of the original principals of MOHR Development,
Inc., a training and consulting company. Mr. Cohen has served as President and
Director of the Instructional Systems Association, an association of over 150
training companies dedicated to improving performance through training. Mr.
Cohen received his Bachelor of Science degree in Psychology from the University
of Maine.
Bert Decker will become a director of the Company immediately following the
consummation of the Offering. Mr. Decker has been Chairman and Chief Executive
Officer of Decker since October 1979. Mr. Decker is the author of the
best-selling books You've Got to be Believed to be Heard and Creating Messages
That Motivate. Mr. Decker also is the personal communications trainer for
Charles Schwab and Olympic gold medalist Bonnie Blair. Mr. Decker has appeared
on several national television programs, including The Today Show and 20/20. Mr.
Decker received his Bachelor of Arts degree in Psychology from Yale University.
Paul C. Green, Ph.D. will become a director of the Company immediately
following the consummation of the Offering. Dr. Green has been Chief Executive
Officer of BTI since May 1979. Dr. Green developed the Behavioral
Interviewing(R) seminar, which has been attended by several hundred thousand
managers worldwide. Dr. Green has also served as Assistant Professor in the
Marketing Department at Memphis State University, where he taught courses in
salesmanship, sales promotion, sales management and consumer behavior. Dr. Green
received his Doctorate degree in Industrial-Organizational Psychology from
Memphis State University, his Master of Science degree in Psychology from
Memphis State University and his Bachelor of Arts degree from Lambuth College.
Joe Hanson will become a director of the Company immediately following the
consummation of the Offering. Mr. Hanson has been a Managing Director of
Novations since May 1997. Previously, from May 1989 to April 1997, Mr. Hanson
was employed by Novations in a variety of capacities including consultant,
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Director and Chief Financial Officer. From September 1983 to March 1987, Mr.
Hanson was a consultant for KPMG Peat Marwick LLP. Mr. Hanson is a Certified
Public Accountant. Mr. Hanson received his Masters in Business Administration
degree from Brigham Young University and his Bachelor of Science degree in
Accounting from Brigham Young University.
John F. King will become a director of the Company immediately following
the consummation of the Offering. Mr. King has been Chief Executive Officer of
LSS since December 1990. From October 1981 to November 1988, Mr. King was
employed by Wilson Learning where he served in various capacities including
Regional Sales Manager, Account Executive, and Performance Consultant. Mr. King
previously served as Professor of Communications Studies at McKendree College.
Mr. King received his Master of Arts degree in Communication Studies, Mass
Communications from Purdue University and his Bachelor of Arts degree from
California State University, Long Beach.
A. Carl von Sternberg will become a director of the Company immediately
following the consummation of the Offering. Mr. von Sternberg has been President
of Star Mountain since September 1987. In 1975, Mr. von Sternberg founded Allen
Corporation of America ("Allen") a firm specializing in training, human factors,
engineering and logistics services. From October 1975 to May 1986, Mr. von
Sternberg was President and Chairman of Allen, which was selected in 1982 by
Inc. Magazine as one of America's 500 fastest growing private companies. Prior
to founding Allen, Mr. von Sternberg served as Executive Vice President and
Chief Operating Officer of Essex Corporation, a behavioral science research
company, which he co-founded in 1969. Mr. von Sternberg received his Bachelor of
Science degree in Industrial Administration from Yale University.
Marc S. Wallace will become a director of the Company immediately following
the consummation of the Offering. Mr. Wallace has been President of J. Howard
since January 1991 and Treasurer since April 1983. Mr. Wallace serves on the
Boards of Directors of Belmont Hill School and the Berklee School of Music, on
the Board of Advisors of First Community Bank in Boston and as a member of the
Northeastern University Corporation. Mr. Wallace also is a member of the Boston
Chamber of Commerce. Mr. Wallace received his Masters in Business Administration
degree with a concentration in Finance from Central Michigan University and his
Bachelor of Arts degree from Adams State College.
Michael J. Davies will become a director of the Company upon the
consummation of the Offering. Mr. Davies has been a consultant to PROVANT since
February 1997, and will continue to be a consultant following the Offering. From
April 1994 to June 1997, Mr. Davies was a Managing Director of Legg Mason Wood
Walker, Incorporated, specializing in media and communications. From September
1990 to March 1993, Mr. Davies was publisher of The Baltimore Sun. Mr. Davies is
a member of the Board of Directors of Mecklermedia Corporation, a provider of
Internet news, information and analysis through its magazines, trade shows and
web site. Mr. Davies received his Master of Science degree in Journalism from
the Medill School of Journalism at Northwestern University and his Bachelor of
Science degree from Georgia State University.
David B. Hammond will become a director of the Company upon the
consummation of the Offering. Mr. Hammond has been Chairman of Integrated
Transport Systems Limited, a European vehicle auctioneer, since December 1995.
Previously, from 1988 until April 1996, he served as Deputy Chairman of ADT
Limited, an electronic security company. Mr. Hammond is a Fellow of the
Institute of Chartered Accountants in England. Mr. Hammond is a director of BHI
Corporation, and served as a director and Chairman of the Audit Committee of AMR
from 1993 until 1997.
John R. Murphy will become a director of the Company upon the consummation
of the Offering. Since March 1998, Mr. Murphy has served as Vice Chairman of the
National Geographic Society ("National Geographic"). Mr. Murphy has served
National Geographic in several capacities, including as its President and Chief
Executive Officer from May 1995 until March 1998, and as its Executive Vice
President from May 1993 until May 1995. Previously, from July 1981 until January
1991, Mr. Murphy served as President and publisher of The Baltimore Sun. Mr.
Murphy is a past President of the United States Golf Association, and currently
serves as a director of Omnicom Group and MSD&T Mutual Funds.
Esther T. Smith will become a director of the Company upon the consummation
of the Offering. Since October 1996, Ms. Smith has been a management consultant
in corporate positioning and internet enterprise
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development. From October 1996 to December 1997, she was Editor-at-Large of
TechNews Inc. ("TechNews"). Previously, from September 1985 to September 1996
she was President and a director of TechNews. From January 1995 to September
1996, she also served as that company's Chief Executive Officer. Now
Post-Newsweek Business Information, Inc., TechNews was acquired by The
Washington Post Co. in 1996. Ms. Smith is an advisor to the Netpreneur Program
of the Morino Institute, Reston, Virginia, and is a member of the Board of
Directors of Women's Connection Online Inc. and of a number of technology
industry associations.
MANAGEMENT OF THE COMPANY FOLLOWING THE COMBINATION
Upon the consummation of the Offering, the Company intends to operate with
a decentralized management structure. Messrs. Verrochi, Zenger, Puopolo, Bhatt
and Gardner will manage the Company's operations and be responsible for areas
including strategic planning, acquisitions, resource allocation, capital
financing, financial reporting, marketing efforts and human resources. They will
work closely with the Founding Companies to coordinate, integrate and expand
their service and product offerings. Messrs. Cohen, Decker, Green, Hanson, King,
von Sternberg and Wallace (together with the other key executives of the
Founding Companies) will continue to make day-to-day operating decisions and be
primarily responsible for the operations of their respective Founding Companies.
BOARD OF DIRECTORS
After consummation of the Combination and the Offering, the Board of
Directors will consist of 14 directors. The term of office of each director of
the Company ends at the next annual meeting of the Company's stockholders and
when his or her successor is elected and qualified. Following the Offering, the
Board of Directors will establish an Audit Committee, a Compensation Committee
and such other committees as the Board may determine. The Audit Committee, a
majority of which will be outside directors, will make recommendations
concerning the engagement of independent public accountants, review with the
independent public accountants the plans for and results of the Company's annual
audit, approve professional services provided by and the independence of the
independent public accountants, consider the range of audit and non-audit fees,
and review the adequacy of the Company's internal accounting controls. The
Compensation Committee, all of which will be outside directors, will establish a
general compensation policy for the Company, approve increases in directors'
fees and salaries paid to officers and senior employees of the Company,
administer the Company's 1998 Equity Incentive Plan, Stock Plan for Non-Employee
Directors and 1998 Employee Stock Purchase Plan, and determine, subject to the
provisions of the Company's employee benefit plans, the directors, officers and
employees of the Company eligible to participate in any of the plans, the extent
of such participation and the terms and conditions under which benefits may be
vested, received or exercised.
Officers of the Company serve at the pleasure of the Board of Directors,
subject to the terms of any employment agreements with the Company.
DIRECTOR COMPENSATION
Members of the Board of Directors who also serve as officers of or
full-time consultants to the Company or its subsidiaries do not receive
compensation for serving on the Board. Each other member of the Board will
receive a fee of $3,000 for each Board of Directors meeting attended and an
additional fee of $500 for each committee meeting attended. All directors will
receive reimbursement of reasonable expenses incurred in attending Board and
committee meetings and otherwise carrying out their duties. Non-employee
directors also are entitled to receive an option grant as described in "-- Stock
Plan for Non-Employee Directors."
EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS
The Company was incorporated in 1996 and has conducted no operations and
paid no compensation to its officers in fiscal 1997. The Company has entered
into employment agreements, the terms of which are effective upon the closing of
the Offering, with its executive officers. The material terms of these
agreements are summarized below.
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<PAGE> 53
The Company's employment agreement with each of Messrs. Verrochi, Zenger,
Puopolo, Bhatt and Gardner has a term of three years, and provides for an
initial base salary (subject to upward adjustment in the sole discretion of the
Company's Board of Directors) and participation in the Company's bonus and
benefit plans. The initial base salaries for Messrs. Verrochi, Zenger, Puopolo,
Bhatt and Gardner are $50,000, $150,000, $50,000, $200,000 and $125,000,
respectively. The salaries to be paid to Messrs. Verrochi and Puopolo after the
first year of the term of their employment agreements will be determined by the
Company's Board of Directors. Each of the five agreements may be terminated
prior to the expiration of the three-year term either in the event of disability
or for cause (as defined). If any of the individuals does not continue to be
employed by the Company upon the expiration of the agreement, the individual is
entitled to receive six months' severance at his base salary as in effect at the
time of expiration. Each of Messrs. Verrochi, Zenger, Puopolo, Bhatt and Gardner
has agreed not to compete with the Company for a period of five years from the
closing date of the Offering. Under their employment agreements, Messrs.
Verrochi and Puopolo are entitled to receive options to purchase 43,298 shares
of Common Stock each. See "-- Equity Incentive Plan."
The principals of the Founding Companies who will become directors of the
Company immediately following the closing of the Combination will enter into
three-year employment agreements with the Company or a subsidiary of the
Company, the material terms of which are described in "Certain Transactions --
Organization of the Company."
EQUITY INCENTIVE PLAN
The Company has adopted the 1998 Equity Incentive Plan (the "Equity
Incentive Plan"), which provides for the award of up to 1,100,000 shares of
Common Stock in the form of incentive stock options ("ISOs"), non-qualified
stock options, stock appreciation rights, performance shares, restricted stock
or stock units (each, an "Award"). All directors and employees of, and all
consultants and advisors to, the Company (including its subsidiaries) are
eligible to participate in the Equity Incentive Plan.
The Equity Incentive Plan will be administered by the Compensation
Committee (the "Committee"), which determines who shall receive Awards from
those individuals eligible to participate in the Equity Incentive Plan, the type
of Award to be made, the number of shares of Common Stock that may be acquired
pursuant to the Award and the specific terms and conditions of each Award,
including the purchase price, term, vesting schedule, restrictions on transfer
and any other conditions and limitations applicable to the Awards or their
exercise. Options that are ISOs may be exercisable for not more than 10 years
after the date the option is awarded. The Committee may at any time accelerate
the exercisability of all or any portion of an option.
In the event a transaction occurs that results in the Common Stock not
being registered under Section 12 of the Exchange Act, all Awards shall
terminate upon the completion of the transaction. If the transaction is intended
to be treated as a pooling-of-interests for accounting purposes, then the
Committee or the Board of Directors shall cause the acquiring or surviving
corporation or one of its affiliates to grant replacement Awards to
participants. Otherwise, the Committee or the Board of Directors may either
accelerate the exercisability of all outstanding Awards (subject to completion
of the transaction) or terminate all Awards in exchange for a cash payment.
The Equity Incentive Plan may be amended from time to time or terminated in
its entirety by the Board of Directors; however, no amendment may be made
without stockholder approval if such approval is necessary to comply with any
applicable tax or regulatory requirement.
In connection with the Offering, the Company will grant Messrs. Verrochi,
Zenger, Puopolo, Bhatt and Gardner options to purchase 43,298, 100,000, 43,298,
50,000 and 10,000 shares of Common Stock, respectively, each of which will have
a per share exercise price equal to the initial offering price of $13.00. The
options granted to Messrs. Zenger, Bhatt and Gardner will become exercisable
with respect to one-third of the underlying shares of Common Stock on each of
the first three anniversaries of the date of grant, and the options granted to
Messrs. Verrochi and Puopolo will become exercisable with respect to all of the
underlying shares of Common Stock upon the closing of the Offering. Mr. Davies
also will be granted an option to
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<PAGE> 54
purchase 50,000 shares of Common Stock, the terms of which are described in
"Certain Transactions." All of these options will expire seven years from the
date of grant.
In addition to the options to be granted to Messrs. Verrochi, Zenger,
Puopolo, Bhatt, Gardner and Davies, the Company will award to employees and
consultants of the Founding Companies and PROVANT options under the Equity
Incentive Plan to purchase an aggregate of 572,387 shares of Common Stock. Each
such option will have a per share exercise price equal to the initial public
offering price of $13.00, will expire seven years from the date of grant and
generally will become exercisable with respect to one-third of the shares of
Common Stock issuable thereunder on each of the first three anniversaries of the
date of grant (except for options to purchase 30,000 shares of Common Stock
which will become exercisable with respect to all of the underlying Common Stock
upon the closing of the Offering).
STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
The Company's Board of Directors has adopted the Stock Plan for
Non-Employee Directors (the "Directors' Plan"). Subject to adjustment for stock
splits and similar events, a total of 100,000 shares of Common Stock have been
reserved for issuance under the Directors' Plan. Pursuant to the Directors'
Plan, in connection with the Offering, each director and director nominee who is
not an employee of or consultant to the Company or one of its subsidiaries (a
"non-employee director") and is not a stockholder of the Company prior to the
Offering will receive an option to purchase 7,500 shares of Common Stock with a
per share exercise price equal to the initial public offering price of $13.00.
Each non-employee director initially elected following the Offering will be
granted upon such election an option to purchase 7,500 shares of Common Stock.
The per share exercise price of options granted following the Offering will be
the fair market value of the Common Stock on the date of grant. Each option will
be non-transferable except upon death (unless otherwise approved by the Board),
will expire 10 years after the date of grant and will become exercisable with
respect to all of the shares of Common Stock issuable thereunder on the date
that is six months following the date of grant if the individual is a director
at such time. If the director dies or otherwise ceases to be a director prior to
the expiration of an option, the option (if exercisable) will remain exercisable
for a period of one year (following death) or three months (following other
termination of the individual's status as a director), but in no event beyond
the tenth anniversary of the date of grant. The Board of Directors may at any
time or times amend the Directors' Plan for any purpose that at the time may be
permitted by law.
As of the date of the closing of the Offering, options to purchase 15,000
shares of Common Stock will have been granted under the Directors' Plan.
STOCK PURCHASE PLAN
The 1998 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan")
has been approved by the Board of Directors and stockholders of the Company. The
Employee Stock Purchase Plan is designed to enable eligible employees to
purchase shares of Common Stock at a discount on a periodic basis. All employees
working more than 20 hours per week, other than employees owning 5% or more of
the combined voting power of all classes of stock of the Company, will be
eligible to participate. Purchases will occur at the end of option periods, each
of six months' duration. The first such option period will begin on June 1,
1998. The purchase price of Common Stock under the Employee Stock Purchase Plan
will be 85% of the lesser of the last sale price of the Common Stock on the day
prior to the beginning of an option period and the last sale price of the Common
Stock on the day prior to the end of the option period. Participants may elect
under the Employee Stock Purchase Plan to have from 2% to 10% of their pay
applied to the purchase of shares at the end of the option period.
Subject to adjustment for stock splits and similar events, a total of
500,000 shares of Common Stock has been reserved for issuance under the Employee
Stock Purchase Plan. None of these shares has been issued to date.
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<PAGE> 55
LIMITATION OF CERTAIN LIABILITY OF OFFICERS AND DIRECTORS
As permitted by the DGCL, the Company's Certificate of Incorporation
provides for the elimination, subject to certain conditions, of the personal
liability of directors of the Company for monetary damages for breach of their
fiduciary duties. The directors, however, remain subject to equitable remedies
and to liability for breach of their duty of loyalty to the Company or its
stockholders. The Company's Certificate of Incorporation and By-laws also
provide that the Company will indemnify its directors and officers. In addition,
the Company maintains an indemnification insurance policy covering all directors
and officers of the Company. In general, the Company's Certificate of
Incorporation, By-laws and the indemnification insurance policy attempt to
provide the maximum protection permitted by Delaware law with respect to
indemnification and exculpation of directors and officers.
Under the indemnification provisions of the Company's Certificate of
Incorporation and By-laws and the indemnification insurance policy, the Company
will repay certain expenses incurred by a director or officer in connection with
any civil or criminal action or proceeding, specifically including actions by or
in the name of the Company (derivative suits), where the individual's
involvement is by reason of the fact that he or she is or was a director or
officer of the Company. Such indemnifiable expenses include, to the maximum
extent permitted by law, attorney's fees, judgments, civil or criminal fines,
settlement amounts, and other expenses customarily incurred in connection with
legal proceedings. A director or officer will not receive indemnification if he
or she is found not to have acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
Company.
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<PAGE> 56
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, after giving effect to the Combination,
by (i) each director and director nominee of the Company, (ii) certain executive
officers of the Company, (iii) all directors, director nominees and executive
officers as a group, and (iv) each person or entity known to the Company to own
beneficially more than 5% of the outstanding Common Stock. The persons named in
this table have an address c/o the Company's principal executive offices, and,
except as indicated in the footnotes below, have sole investment and voting
power with respect to the shares beneficially owned by them.
<TABLE>
<CAPTION>
PERCENTAGE OWNED (1)
----------------------
BEFORE AFTER
NAME OF BENEFICIAL OWNER SHARES OFFERING OFFERING
- ------------------------ --------- -------- --------
<S> <C> <C> <C>
Paul M. Verrochi (2)(3).................................... 1,193,953 17.0% 12.4%
John H. Zenger (4)......................................... 196,197 2.9 2.1
Dominic J. Puopolo (2)(5).................................. 1,118,274 15.9 11.6
Rajiv Bhatt................................................ 99,567 1.5 1.1
Philip Gardner............................................. 339,821 5.0 3.6
Herbert A. Cohen (6)....................................... 112,488 1.7 1.2
Bert Decker................................................ 205,226 3.0 2.2
Paul C. Green.............................................. 392,633 5.8 4.2
Joe Hanson................................................. 68,362 1.0 *
John F. King (7)........................................... 292,271 4.3 3.1
A. Carl von Sternberg (8).................................. 496,693 7.3 5.3
Marc S. Wallace............................................ 97,664 1.4 1.0
Michael J. Davies (9)...................................... 370,632 5.4 3.9
David B. Hammond (10)...................................... 44,643 * *
John R. Murphy............................................. -- -- --
Esther T. Smith............................................ -- -- --
All directors, director nominees and executive officers as
a group (16 persons) (11)................................ 5,028,424 69.0 50.9
</TABLE>
- ---------------
* Less than 1%.
(1) Percentages in the table are based upon 6,805,558 and 9,405,558 shares of
Common Stock assumed to be outstanding as of the closing of the Combination
and the Offering, respectively.
(2) Includes 173,194 shares (assuming that the individual does not exercise
such warrant prior to the closing of the Offering) issuable pursuant to a
warrant that currently is exercisable, and 43,298 shares issuable upon the
exercise of an option that will become exercisable in full upon the closing
of the Offering. Excludes 216,492 shares issuable upon the exercise of the
Contingent Warrant described in "Certain Transactions."
(3) Includes 60,699 shares held by Mr. Verrochi's wife, and 140,980 shares held
by a trust of which Mr. Verrochi is trustee and as to which Mr. Verrochi
disclaims beneficial ownership.
(4) Shares held jointly with Mr. Zenger's wife. Excludes 98,881 shares held by
a trust for the benefit of Mr. Zenger's grandchildren, as to which Mr.
Zenger disclaims beneficial ownership.
(5) Includes 60,699 shares held by Mr. Puopolo's wife, and 140,980 shares held
by a trust of which Mr. Puopolo is trustee and as to which Mr. Puopolo
disclaims beneficial ownership.
(6) Includes 56,244 shares held by Mr. Cohen's wife.
(7) Shares are held jointly with Mr. King's wife.
(8) Includes 30,848 shares held by Mr. von Sternberg's wife.
(9) Includes 50,000 shares issuable upon the exercise of an option that will
become exercisable in full upon the closing of the Offering.
(10) Shares are held by a corporation of which the sole stockholders are Mr.
Hammond and his wife.
(11) See notes 2 through 10 above.
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<PAGE> 57
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
The Combination will be accomplished through separate mergers of each
Founding Company with a separate, newly formed subsidiary of the Company. As a
result, after the closing of the Combination and the Offering (the "Closing"),
all of the assets, liabilities and business operations formerly held by each
Founding Company will exist in a separate subsidiary of the Company.
Each of the merger agreements provides for the Company to pay the
stockholders of the Founding Company, except as discussed below, (i) a fixed
amount of cash at the Closing (subject to certain adjustments as discussed
below), (ii) shares of Common Stock at the Closing having a fixed dollar value,
with the final number of shares being determined by the Offering price, and
(iii) with respect to six of the Founding Companies, shares of Common Stock
deliverable after the Closing having a value up to a fixed dollar amount. The
Additional Consideration and J. Howard Contingent Consideration will be paid in
shares of Common Stock, with the number of those shares determined by a formula
based on the relationship of the EBIT of that Founding Company (including its
successor following the Closing) for the fiscal year ending June 30, 1998 (June
30, 1999 in the case of J. Howard) to a specified EBIT target. In particular,
each merger agreement with a Founding Company (other than Star Mountain)
contains a targeted pro forma EBIT amount in excess of a baseline figure which,
if achieved by the Founding Company, will result in the payment by the Company
to the former stockholders of the Founding Company of the maximum Additional
Consideration or J. Howard Contingent Consideration (consisting of a multiple of
the excess EBIT amount). To the extent the Founding Company does not achieve the
targeted amount, its former stockholders will receive a lesser amount of
Additional Consideration or J. Howard Contingent Consideration proportionately
related to the excess above the baseline figure. Shares of Common Stock issued
as Additional Consideration will be valued at the initial public offering price,
and shares issued as J. Howard Contingent Consideration will be valued based on
the average of the last sale prices of the Common Stock on Nasdaq during the 20
business days immediately following PROVANT's first public announcement of its
financial results for fiscal 1999.
For the seventh Founding Company, Star Mountain, the stockholders will be
entitled to receive additional shares of Common Stock or cash in accordance with
a formula based on the amount by which the EBIT of Star Mountain following the
Closing for the fiscal year ending June 30, 1999 exceeds a specified EBIT target
(the "Star Mountain Contingent Consideration"). In particular, if Star
Mountain's EBIT for fiscal 1999 exceeds the specified target, then (i) Star
Mountain's former non-voting stockholders will receive cash equal to a multiple
of the excess EBIT and (ii) Star Mountain's former voting stockholders will
receive, at their election, either cash equal to a multiple of the excess EBIT
or a number of shares of Common Stock equal to a multiple of the excess EBIT
divided by 80% of the average of the last sale prices of the Common Stock on
Nasdaq during the month of July 1999.
Holders of options to purchase shares of Star Mountain's non-voting stock
will receive cash in the Combination pursuant to that company's merger
agreement, and holders of options to purchase shares of Star Mountain's voting
stock will receive a combination of cash and Common Stock. All such options will
be treated as if they had been exercised in full (including all unvested
portions) as of the Closing. Holders of Star Mountain's non-voting stock will
receive only cash in connection with the Combination
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<PAGE> 58
The aggregate consideration to be paid by the Company in the Combination to
the stockholders and option holders of the Founding Companies is shown below and
consists of approximately $22.4 million in cash (prior to any adjustments
discussed in the following paragraph) and 3,459,341 shares of Common Stock at
the Closing, and up to a maximum of 969,218 shares of Common Stock as Additional
Consideration (assuming the achievement of certain EBIT targets) following the
end of fiscal 1998.
<TABLE>
<CAPTION>
AT CLOSING
----------------------------------------
SHARES ADDITIONAL CONSIDERATION
-------------------------- --------------------------
FOUNDING COMPANY CASH (1) DOLLAR VALUE NUMBER DOLLAR VALUE NUMBER
- ---------------- ---------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
BTI.......................... $5,000,000 $5,848,644 449,896 $2,000,000 153,846
Decker....................... 1,550,000 4,533,240 348,712 3,000,000 230,764
J. Howard.................... 1,700,000 3,071,988 236,308 4,300,000 *
LSS.......................... 2,625,000 7,677,396 590,568 1,000,000 76,922
MOHR......................... 1,200,000 2,709,648 208,435 2,000,000 153,845
Novations.................... 4,987,500 8,887,080 683,619 4,600,000 353,841
Star Mountain................ 5,353,000 12,243,516 941,803 * *
</TABLE>
- ---------------
* Excludes the Star Mountain Contingent Consideration and the number of shares
issuable as J. Howard Contingent Consideration.
(1) Prior to the adjustments discussed below.
Each of the mergers in the Combination is conditioned upon the applicable
Founding Company meeting certain specified financial standards (which vary among
the Founding Companies) as of the Closing, including a specified minimum net
worth. If a Founding Company's net worth as of the Closing is higher than the
specified minimum, the cash portion of the purchase price set forth above will
be increased by a dollar amount equal to the excess. If a Founding Company's net
worth as of the Closing is lower than the specified minimum, then all or a
portion of the shortfall will be repaid to the Company by certain stockholders
of such Founding Company through an indemnification payment based upon their
percentage of stock ownership in the Founding Company. Each Founding Company may
make a cash dividend to its stockholders prior to the Closing so long as doing
so will not prevent such Founding Company from satisfying the financial
standards specified in its merger agreement.
The consideration to be paid for the Founding Companies was determined
through arm's length negotiations between PROVANT and representatives of each
Founding Company. The factors considered by the parties in determining the
consideration to be paid included, among others, the pro forma adjusted EBIT,
net worth and future prospects of the Founding Companies.
In connection with the Combination, the following principals of the
Founding Companies who will become directors of the Company immediately
following the Closing will receive the following amounts, which are reflected in
the table above: Mr. Cohen, $500,020 and 112,488 shares of Common Stock
(including cash and shares issued to his wife); Mr. Decker, $759,623 and 205,226
shares of Common Stock; Dr. Green, $4,495,418 and 392,633 shares of Common
Stock; Mr. Hanson, $498,753 and 68,362 shares of Common Stock; Mr. King,
$968,109 and 292,271 shares of Common Stock; Mr. von Sternberg, $2,538,558 and
496,693 shares of Common Stock (including cash and shares issued to his wife);
and Mr. Wallace, $702,597 and 97,664 shares of Common Stock.
The consummation of the Combination is subject to completion of the
Offering and customary conditions including, among others, the continuing
accuracy at the Closing of the representations and warranties made by the
Founding Companies and the Company in the merger agreements, receipt of all
necessary consents and approvals, delivery of opinions of counsel, the
performance of covenants included in the agreements relating to the Combination,
and the nonexistence of a material adverse change in the business, results of
operations or financial condition of each Founding Company. The merger
agreements provide that certain stockholders of the Founding Companies will
indemnify PROVANT against certain liabilities, including breaches of such
Founding Company's representations and warranties thereunder.
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<PAGE> 59
Pursuant to the agreements entered into in connection with the Combination,
the principal stockholders of the Founding Companies have agreed not to compete
with the Company for five years, commencing as of the Closing. In addition, the
principal stockholders and certain other employees of each of the Founding
Companies will enter into three-year employment agreements with the Company.
Each such agreement with a Founding Company's director nominee (i.e., Messrs.
Cohen, Decker, Green, Hanson, King, von Sternberg and Wallace) will provide for
an initial base salary of $175,000 (except for Mr. Decker's agreement which will
provide for a base salary of $125,000), subject to upward adjustment in the sole
discretion of the Company, and in most cases participation in the Company's
bonus and benefit plans. Each agreement may be terminated prior to the
expiration of the three-year term either in the event of disability or for cause
(as defined). If the individual does not continue to be employed by the Company
upon the expiration of the agreement, the individual shall be entitled to
receive six months' severance at his base salary as in effect at the time of
expiration.
Certain of the indebtedness of the Founding Companies currently is
personally guaranteed by their respective stockholders. The Company will repay
such indebtedness at the Closing (from the net proceeds of the Offering and from
borrowings under its proposed credit facility), and the guarantees will be
released. In particular, the Company will repay amounts owed by Novations (which
totalled approximately $1.3 million as of December 31, 1997) and Star Mountain
(which totalled approximately $3.3 million as of December 31, 1997) which are
personally guaranteed by Messrs. Hanson and von Sternberg, respectively. In
addition, the Company will assume in the Combination other indebtedness of the
Founding Companies that had an aggregate outstanding balance of $1.8 million as
of December 31, 1997.
The former stockholders of the Founding Companies will agree that, for a
period of two years following the Closing, they will not sell any shares of
Common Stock received by them in connection with the Combination other than
pursuant to an effective registration statement under the Securities Act. The
Company has no obligation to provide such a registration statement but, in the
event the Company decides to register any shares received by any stockholder in
the Combination, or any shares of Common Stock issued or issuable pursuant to
options and warrants granted by PROVANT prior to the Closing, it must give each
of the Company's stockholders (giving effect to the Combination but not the
Offering) the opportunity to register a pro rata amount thereunder. In addition,
between the second and third anniversary of the Closing, these stockholders may
only sell such shares through a broker or brokers designated by the Company.
OTHER TRANSACTIONS
Organization of PROVANT
In connection with the founding and organization of PROVANT, Messrs.
Verrochi, Zenger, Puopolo, Gardner, Davies and Donald W. Glazer purchased the
following shares of Common Stock for an aggregate purchase price of
approximately $3,250: Mr. Verrochi, 977,461 shares; Mr. Zenger, 295,078 shares;
Mr. Puopolo, 901,782 shares; Mr. Gardner, 339,821 shares; Mr. Davies, 320,632
shares; and Mr. Glazer, 385,150 shares. Mr. Glazer will enter into a consulting
agreement with the Company having a term of two years from the Closing and
providing for an annual consulting fee of $125,000.
A consultant to the Company was granted an option in September 1997 to
purchase 10,000 shares of Common Stock at a per share exercise price of $5.00.
The option becomes exercisable with respect to all of the underlying shares of
Common Stock upon the Closing, and expires three years following the Closing.
American Business Partners LLC
During 1997, members of the management team and certain consultants were
assembled by American Business Partners LLC ("ABP") to pursue the consolidation
of companies in the training and development industry. Mr. Verrochi, Chairman of
the Board and Chief Executive Officer of the Company, and Mr. Puopolo, Executive
Vice President and Chief Financial Officer of the Company, are members of ABP.
ABP provided the Company with expertise regarding the consolidation process.
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<PAGE> 60
Expenses paid by the Company prior to the Closing in connection with the
Combination and the Offering have been financed with funds advanced to the
Company by Messrs. Verrochi and Puopolo. Outstanding advanced amounts bear
interest at an annual rate equal to the prime rate of interest as from time to
time published in The Wall Street Journal. The Company will repay certain of the
advanced amounts plus interest to Messrs. Verrochi and Puopolo at the Closing
out of the proceeds of the Offering, and the Company intends to pay the
remaining advanced amounts by borrowings under its proposed credit facility. See
"Use of Proceeds." As of December 31, 1997, Messrs. Verrochi and Puopolo had
advanced approximately $971,000 to the Company for such expenses.
As partial consideration for their commitment to extend the financing
described above, Messrs. Verrochi and Puopolo each received two warrants. The
first warrant entitles the holder to purchase 173,194 shares of Common Stock at
a per share exercise price equal to the initial public offering price of $13.00.
The second warrant entitles the holder to purchase 216,492 shares of Common
Stock which will become exercisable only if the market price of the Common Stock
increases to certain threshold levels (except as otherwise described below) (the
"Contingent Warrant"). Specifically, 20% of the total number of shares issuable
under the Contingent Warrant will become exercisable on each of the three
occasions that the market price of the Common Stock increases by 100%, 200%,
300%, respectively, from the initial public offering price, and the remaining
40% of the total number of shares issuable under the Contingent Warrant will
become exercisable if the market price of the Common Stock increases by 400%.
However, under certain circumstances involving the merger or sale of the
Company, the Contingent Warrant will become exercisable to purchase all of the
warrant shares. The exercise price of the Contingent Warrant increases on each
anniversary of the closing of the Offering. Specifically, the exercise price is
equal to the initial public offering price for the first 12 months following the
closing of the Offering and, for each 12 month period thereafter, is equal to
the initial public offering price plus 10% of the initial public offering price
multiplied by the number of full 12 month periods elapsed since the closing of
the Offering. However, once a portion of the Contingent Warrant becomes
exercisable, that portion's exercise price is fixed as of that date. All four
warrants expire on the seventh anniversary of the closing of the Offering. The
holders of the warrants have the right to require the Company to register the
resale of the shares that may be acquired upon exercise of the warrants under
the Securities Act.
In June 1997, Messrs. Verrochi and Puopolo sold to the Company furniture
and equipment for its corporate executive offices for an aggregate purchase
price of $150,000. The Company believes that the purchase price approximated the
fair market value of the furniture and equipment.
OTHER TRANSACTIONS INVOLVING OFFICERS AND DIRECTORS
Prior to the Offering, PROVANT had outstanding 3,346,217 shares of Common
Stock. All of such shares currently are beneficially owned by the proposed
management and directors of and consultants to PROVANT or members of their
families. The holders of all such shares have agreed with the Company that, for
a period of two years following the Closing, they will not sell any shares of
Common Stock held by them as of the Closing (or that may be purchased by them
under options and warrants outstanding as of the Closing) other than pursuant to
an effective registration statement under the Securities Act.
Michael J. Davies, who will become a director of the Company upon the
consummation of the Offering, also will become a full-time consultant to the
Company. For the performance of his consulting duties, Mr. Davies will be paid
an annual fee of $125,000. In addition, in consideration for his agreement to
become a consultant, Mr. Davies will receive, prior to the Closing, an option to
purchase 50,000 shares of Common Stock, which will become exercisable upon the
Closing for all of the shares issuable thereunder at a per share exercise price
equal to the initial public offering price of $13.00. Mr. Davies currently is a
consultant to PROVANT. For information regarding option grants to individuals
who will become executive officers of the Company upon the Closing, see
"Management -- Equity Incentive Plan."
The Company intends to use $750,000 of the net proceeds of the Offering to
pay a fee due upon the Closing to Legg Mason Wood Walker, Incorporated for
information relating to the training and development industry developed by Mr.
Davies while he served as Managing Director at that company. See "Use of
Proceeds."
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As a result of the Combination, the Company will become a party to a
six-year lease of administrative offices, effective January 1, 1996, from Paul
C. Green, Ph.D., who will become a director of the Company immediately after the
Closing. For the years ended June 30, 1995, 1996 and 1997, rent expense paid to
Dr. Green pursuant to the lease was approximately $90,000, $76,000 and $85,000,
respectively. The Company believes that the terms of the lease are no less
favorable to the Company than could be obtained by the Company from
non-affiliated third parties.
As a result of the Combination, the Company will become a party to a
five-year lease of office facilities renewable for an additional five years,
effective March 1997, from Novations Partners, L.L.C., a Utah limited liability
company (the "LLC") which is controlled by the stockholders of Novations. Joe
Hanson, one of the members of the LLC, will become a director of the Company
immediately after the Closing. The annual rent expense to be paid to the LLC is
$300,000 for the first year of the lease and increases 3% per year thereafter.
Following the Combination, the Company will pay the LLC approximately $75,000
per year through April 1, 2001 for the sublease of certain equipment. The
Company believes that the terms of the lease and sublease are no less favorable
to the Company than could be obtained from non-affiliated third parties. In
addition, Novations has the right to receive amounts loaned by Novations to the
LLC. The balance due totalled approximately $192,000 as of December 31, 1997.
All outstanding amounts owed to Novations pursuant to these arrangements will be
paid by the LLC at or before the Closing.
A. Carl von Sternberg was indebted to Star Mountain during 1997 under a
promissory note. Mr. von Sternberg will become a director of the Company
immediately after the Closing. Borrowings by Mr. von Sternberg under the note
totalled approximately $349,000 as of December 31, 1997. Outstanding principal
amounts owed under the note accrue interest from time to time at the prime rate
of interest as reported in The Wall Street Journal. All principal amounts owed
under the note, together with accrued interest, will be repaid by Mr. von
Sternberg on or before the consummation of the Combination.
In December 1997, Marc S. Wallace, who will become a director of the
Company immediately after the Closing, incurred indebtedness to J. Howard
pursuant to two promissory notes in the aggregate principal amount of $75,000.
Outstanding principal amounts owed under the notes accrue interest from time to
time at an annual rate of 7.0%. The notes mature on May 31, 1998.
COMPANY POLICY
The Company's policy is that any future transactions with directors,
officers, employees or affiliates of the Company be approved in advance by a
majority of the Company's Board of Directors, including a majority of the
disinterested members of the Board, and be on terms no less favorable to the
Company than the Company could obtain from non-affiliated parties.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 45,000,000 shares of
capital stock, par value $.01 per share, consisting of 40,000,000 shares of
Common Stock and 5,000,000 shares of preferred stock (the "Preferred Stock").
Without giving effect to the issuance of shares in the Offering (but giving
effect to the Combination), the Company has outstanding 6,805,558 shares of
Common Stock held by 78 stockholders, and no shares of Preferred Stock.
COMMON STOCK
Immediately following the Combination and the Offering, the Company will
have outstanding 9,405,558 shares of Common Stock and options and warrants to
purchase an aggregate of 1,673,355 shares of Common Stock. A total of 1,100,000
shares of Common Stock are reserved for issuance under the Equity Incentive
Plan, 100,000 shares of Common Stock under the Directors' Plan and 500,000
shares of Common Stock under the Employee Stock Purchase Plan. Holders of Common
Stock are entitled to one vote for each share held of
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record on all matters submitted to a vote of the stockholders, and do not have
cumulative voting rights. Subject to preferences that may be applicable to any
outstanding shares of Preferred Stock, holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Board of Directors of the Company out of funds legally available therefor.
See "Dividend Policy." All outstanding shares of Common Stock are, and the
shares to be issued in the Combination and sold in the Offering when issued and
paid for will be, fully paid and nonassessable, and the holders thereof will
have no preferences or rights of conversion, exchange or pre-emption. In the
event of any liquidation, dissolution or winding-up of the affairs of the
Company, holders of Common Stock will be entitled to share ratably in the assets
of the Company remaining after payment or provision for payment of all of the
Company's debts and obligations and after liquidation payments to holders of
outstanding shares of Preferred Stock, if any.
PREFERRED STOCK
The Preferred Stock, if issued, would have priority over the Common Stock
with respect to dividends and other distributions, including the distribution of
assets upon liquidation. The Board of Directors has the authority, without
further stockholder authorization, to issue from time to time shares of
Preferred Stock in one or more series and to fix the terms, limitations,
relative rights and preferences and variations of each series. Although the
Company has no present plans to issue any shares of Preferred Stock following
the closing of the Offering, the issuance of shares of Preferred Stock, or the
issuance of rights to purchase such shares, could decrease the amount of
earnings and assets available for distribution to the holders of Common Stock,
could adversely affect the rights and powers, including voting rights, of the
Common Stock, and could have the effect of delaying, deterring or preventing a
change in control of the Company or an unsolicited acquisition proposal.
WARRANTS TO PURCHASE COMMON STOCK
The Company has issued warrants to Messrs. Verrochi and Puopolo, the terms
of which are more fully described in "Certain Transactions."
CERTAIN PROVISIONS
Special Meetings of the Stockholders of the Company. The Company's By-laws
provide that a special meeting of the stockholders of the Company only may be
called by the President, the Chairman of the Board or by order of the Board of
Directors. The By-laws do not authorize the stockholders to call a special
meeting of stockholders, potentially limiting the stockholders' ability to offer
proposals between annual meetings if no special meetings are otherwise called by
the President, Chairman or the Board.
No Action by Written Consent. The Company's Certificate of Incorporation
does not permit the Company's stockholders to act by written consent. As a
result, any action to be taken by the Company's stockholders must be taken at a
duly called meeting of the stockholders.
STATUTORY BUSINESS COMBINATIONS PROVISION
The Company is subject to the provisions of Section 203 of the DGCL
("Section 203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person, or an affiliate or associate of such a person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the Board of Directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes such person an interested stockholder (excluding shares owned by persons
who are both officers and directors of the corporation, and shares held by
certain employee stock ownership plans); or (iii) on or after the date the
person becomes an interested stockholder, the business combination is approved
by the corporation's board of directors and by the holders of at least 66 2/3%
of the corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the
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disinterested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is (i) the owner of 15% or more of the outstanding
voting stock of the corporation or (ii) an affiliate or associate of the
corporation and who was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company is BankBoston, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Combination and the Offering, the Company will
have 9,405,558 shares of Common Stock issued and outstanding, and 1,673,355
shares of Common Stock issuable upon the exercise of outstanding options and
warrants. Of these shares, 2,600,000 shares sold pursuant to the Offering (or
2,990,000 shares, if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable without restriction under the Securities Act,
except any shares purchased by an "affiliate" (as that term is defined under the
rules and regulations of the Securities Act) of the Company, which shares will
be subject to the resale limitations of Rule 144 of the Securities Act. The
remaining shares outstanding upon completion of the Offering may be resold
publicly only upon registration under the Securities Act or in compliance with
an exemption from the registration requirements of the Securities Act, including
the exemption provided by Rule 144.
In general, under Rule 144, if a period of at least one year has elapsed
between the later of the date on which restricted securities were acquired from
the Company and the date on which they were acquired from an affiliate, then the
holder of such restricted securities (including an affiliate) is entitled to
sell that number of shares within any three-month period that does not exceed
the greater of (i) one percent of the then outstanding shares of Common Stock or
(ii) the average weekly reported volume of trading of Common Stock during the
four calendar weeks preceding such sale. Any shares of Common Stock issued as
Additional Consideration, J. Howard Contingent Consideration and Star Mountain
Contingent Consideration will be deemed to have been acquired at the Closing for
purposes of Rule 144. Sales under Rule 144 also are subject to certain
requirements pertaining to the manner of sales, notices of sales and the
availability of current public information concerning the Company. Any shares
not constituting restricted securities sold by affiliates must be sold in
accordance with the foregoing volume limitations and other requirements but
without regard to the one year holding period. Under Rule 144(k), if a period of
at least two years has elapsed from the later of the date on which restricted
securities were acquired from the Company and the date on which they were
acquired from the affiliate, a holder of such restricted securities who is not
an affiliate at the time of the sale and has not been an affiliate for at least
three months prior to the sale would be entitled to sell the shares immediately
without regard to the volume limitations and other conditions described above.
The Company and the holders of substantially all shares outstanding prior
to the Offering (including the holders of shares issued in connection with the
Combination) have agreed with the Representatives of the Underwriters not to
offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock, or any securities convertible into or exercisable or exchangeable for
shares of Common Stock, for a period of 180 days after the date of this
Prospectus (the "Lock-up Period") without the prior written consent of the
Representatives, except for: (i) in the case of the Company, Common Stock issued
pursuant to the Company's Equity Incentive Plan, Directors' Plan and Employee
Stock Purchase Plan or in connection with acquisitions; and (ii) in the case of
all such holders, the exercise of stock options pursuant to the benefit plans
described herein and shares of Common Stock disposed of as bona fide gifts,
subject, in each case, to any remaining portion of the Lock-up Period applying
to any shares so issued or transferred. In evaluating any request for a waiver
of the Lock-up Period, NationsBanc Montgomery Securities LLC will consider, in
accordance with its customary practice, all relevant facts and circumstances at
the time of the request, including, without limitation, the recent trading
market for the Common Stock, the size of the request and, with respect to a
request by the Company to issue additional equity securities, the purpose of
such an issuance.
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See "Underwriting." In addition, the stockholders of the Founding Companies and
all stockholders of the Company prior to the Offering have agreed to certain
transfer restrictions for a two-year period on all shares of Common Stock held
or to be held by them. See "Certain Transactions -- Organization of the Company"
and "-- Other Transactions Involving Officers and Directors."
In the aggregate, 100,000 shares of Common Stock are reserved for issuance
under the Directors' Plan, 1,100,000 shares are reserved for issuance under the
Equity Incentive Plan and 500,000 shares are reserved for issuance under the
Employee Stock Purchase Plan. The Company presently intends to file a
registration statement under the Securities Act to register Common Stock to be
issued pursuant to the exercise of options or stock granted or to be granted
under the Directors' Plan, Equity Incentive Plan and Employee Stock Purchase
Plan. Common Stock issued after the effective date of such registration
statement upon the exercise of such options (or the purchase of Common Stock
under the Employee Stock Purchase Plan) would be available for immediate resale
in the open market, subject to compliance with Rule 144 in the case of
affiliates.
Prior to the Offering, there has been no public market for the Common Stock
of the Company, and no predictions can be made of the effect, if any, that the
availability of shares for sale or the actual sale of shares will have on market
prices prevailing from time to time. Sales or the availability for sale of
substantial amounts of Common Stock in the public market could adversely affect
prevailing market prices and the ability of the Company to raise equity capital
in the future.
After the Closing, the Company plans to register an additional 3,000,000
shares of Common Stock under the Securities Act for use as consideration for
future acquisitions. Any such shares issued by the Company to affiliates of
companies acquired by the Company will be subject for one year after the
acquisition to the limitations and restrictions on resale imposed by Rule 145
under the Securities Act.
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UNDERWRITING
The underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities LLC, Salomon Smith Barney and Piper Jaffray
Inc. (the "Representatives"), have severally agreed, subject to the terms and
conditions in the underwriting agreement (the "Underwriting Agreement") by and
among the Company and the Underwriters, to purchase from the Company the number
of shares of Common Stock indicated below opposite their respective names, at
the initial public offering price less the underwriting discount set forth on
the cover page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent and
that the Underwriters are committed to purchase all of the shares of Common
Stock, if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
<S> <C>
NationsBanc Montgomery Securities LLC....................... 843,125
Smith Barney Inc............................................ 532,500
Piper Jaffray Inc........................................... 399,375
BancAmerica Robertson Stephens.............................. 110,000
Bear, Stearns & Co. Inc..................................... 110,000
BT Alex. Brown Incorporated................................. 110,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 110,000
PaineWebber Incorporated.................................... 110,000
Cruttenden Roth Incorporated................................ 55,000
EVEREN Securities, Inc...................................... 55,000
John G. Kinnard & Company, Incorporated..................... 55,000
C.E. UNTERBERG, TOWBIN...................................... 55,000
H.C. Wainwright & Co., Inc.................................. 55,000
---------
Total............................................. 2,600,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow selected dealers a
concession of not more than $0.50 per share; and the Underwriters may allow, and
such dealers may reallow, a concession of not more than $0.10 per share to
certain other dealers. After the initial public offering, the public offering
price and other selling terms may be changed by the Representatives. The Common
Stock is offered subject to receipt and acceptance by the Underwriters, and to
certain other conditions, including the right to reject orders in whole or in
part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 390,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise such over-allotment
option, the Underwriters will be committed, subject to certain conditions, to
purchase such additional shares in approximately the same proportion as set
forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with the Offering.
The Underwriting Agreement provides that the Company, its subsidiaries and
certain stockholders of the Founding Companies will indemnify the Underwriters
against certain liabilities, including civil liabilities under the Securities
Act, or will contribute to payments the Underwriters may be required to make in
respect thereof.
The Company's officers and directors and substantially all of the
stockholders of the Company prior to the Offering (including the holders of
shares issued in connection with the Combination) have agreed that during the
Lock-up Period they will not, without the prior written consent of NationsBanc
Montgomery Securities LLC, directly or indirectly sell, offer, contract or grant
any option to sell, pledge, transfer, establish an open put equivalent position
or otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable or exercisable for or
convertible into shares of
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Common Stock. The Company also has agreed not to issue, offer, sell, grant
options to purchase or otherwise dispose of any of the Company's equity
securities during the Lock-up Period without the prior written consent of
NationsBanc Montgomery Securities LLC, except for securities issued by the
Company in connection with acquisitions and for grants and exercises of stock
options, subject in each case to any remaining portion of the Lock-up Period
applying to shares issued or transferred. In evaluating any request for a waiver
of the Lock-up Period, NationsBanc Montgomery Securities LLC will consider, in
accordance with its customary practice, all relevant facts and circumstances at
the time of the request, including, without limitation, the recent trading
market for the Common Stock, the size of the request, and, with respect to a
request by the Company to issue additional equity securities, the purpose of
such an issuance. See "Shares Eligible for Future Sale."
In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M under the Securities Exchange Act of 1934 (the
"Exchange Act"), pursuant to which such persons may bid for or purchase Common
Stock for the purpose of stabilizing its market price. The Underwriters also may
create a short position for the account of the Underwriters by selling more
Common Stock in connection with the Offering than they are committed to purchase
from the Company and, in such case, may purchase Common Stock in the open market
following completion of the Offering to cover all or a portion of such short
position. The Underwriters may also cover all or a portion of such short
position, up to 390,000 shares of Common Stock, by exercising the Underwriters'
over-allotment option referred to above. In addition, NationsBanc Montgomery
Securities LLC, on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or dealer participating in the Offering), for the account of the
other Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
The Representatives have informed the Company that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts over
which they exercise discretionary authority in excess of 5% of the number of
shares of Common Stock offered hereby.
Prior to the Offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock has been determined by negotiations between the Company and the
Representatives. Among the factors considered in such negotiations were the
results of operations of the Founding Companies in recent periods, the prospects
for the Company and the industry in which the Company competes, an assessment of
the Company's management, its financial condition, the prospects for future
earnings of the Company, the present state of the Company's development, the
general condition of the economy and the securities markets at the time of the
Offering and the market prices of and demand for publicly traded common stock of
comparable companies in recent periods.
LEGAL MATTERS
The validity of the shares of Common Stock offered by this Prospectus will
be passed upon for the Company by Nutter, McClennen & Fish, LLP, Boston,
Massachusetts. Certain legal matters related to the Offering will be passed upon
for the Underwriters by Ropes & Gray, Boston, Massachusetts.
EXPERTS
The financial statements of PROVANT, Inc. as of June 30, 1997 and for the
period from November 16, 1996 (date of inception) to June 30, 1997, and the
financial statements of Behavioral Technology, Inc., Decker Communications,
Inc., J. Howard & Associates, Inc., Robert Steinmetz, Ph.D., and Associates,
Inc. d/b/a Learning Systems Sciences, MOHR Retail Learning Systems, Inc.,
Novations Group, Inc. and Star
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Mountain, Inc. and subsidiaries (as of and for the years ended December 31, 1996
and 1997), have been included herein and in the Registration Statement in
reliance on the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, upon the authority of said firm as
experts in giving said reports.
The financial statements of Star Mountain, Inc. for the year ended December
31, 1995 included in this Prospectus have been audited by Friedman & Fuller,
P.C., independent public accountants, as indicated in its report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (including any and all
amendments thereto, the "Registration Statement") under the Securities Act and
the rules and regulations promulgated thereunder, with respect to the Common
Stock offered hereby. This Prospectus omits certain information contained in the
Registration Statement, and reference is made to the Registration Statement and
the exhibits and schedules thereto for further information with respect to the
Company and the Common Stock offered hereby. Statements contained in this
Prospectus concerning the provisions or contents of any contract, agreement or
any other document referred to herein are not necessarily complete with respect
to each such contract, agreement or document filed as an exhibit to the
Registration Statement, and reference is made to such exhibit for a more
complete description of the matters involved, and each such statement shall be
deemed qualified by such reference. Upon completion of the Offering, the Company
will be subject to the information requirements of the Exchange Act, and in
accordance therewith will file reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information, as
well as the Registration Statement, including the exhibits and schedules
thereto, may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may be obtained from such offices, upon payment of the fees prescribed
by the Commission. The Commission maintains a Web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that submit electronic filings to the Commission.
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by an independent public accounting firm, and with quarterly reports
for the first three quarters of each fiscal year containing unaudited interim
consolidated financial information.
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<PAGE> 69
INDEX TO FINANCIAL STATEMENTS
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROVANT, INC. PRO FORMA:
Basis of Presentation..................................... F-3
Unaudited Pro Forma Combined Balance Sheet................ F-4
Unaudited Pro Forma Combined Statements of Operations..... F-5
Notes to Unaudited Pro Forma Combined Financial
Statements............................................. F-7
PROVANT, INC.:
Independent Auditors' Report.............................. F-13
Balance Sheets............................................ F-14
Statements of Operations.................................. F-15
Statements of Stockholders' Equity........................ F-16
Statements of Cash Flows.................................. F-17
Notes to Financial Statements............................. F-18
BEHAVIORAL TECHNOLOGY, INC.:
Independent Auditors' Report.............................. F-23
Balance Sheets............................................ F-24
Statements of Operations.................................. F-25
Statements of Stockholders' Equity........................ F-26
Statements of Cash Flows.................................. F-27
Notes to Financial Statements............................. F-28
DECKER COMMUNICATIONS, INC.:
Independent Auditors' Report.............................. F-31
Balance Sheets............................................ F-32
Statements of Operations.................................. F-33
Statements of Stockholders' Equity........................ F-34
Statements of Cash Flows.................................. F-35
Notes to Financial Statements............................. F-36
J. HOWARD & ASSOCIATES, INC.:
Independent Auditors' Report.............................. F-40
Balance Sheets............................................ F-41
Statements of Operations.................................. F-42
Statements of Stockholders' Equity........................ F-43
Statements of Cash Flows.................................. F-44
Notes to Financial Statements............................. F-45
LEARNING SYSTEMS SCIENCES (ROBERT STEINMETZ, PH.D., AND
ASSOCIATES, INC. ):
Independent Auditors' Report.............................. F-48
Balance Sheets............................................ F-49
Statements of Operations.................................. F-50
Statements of Stockholders' Equity........................ F-51
Statements of Cash Flows.................................. F-52
Notes to Financial Statements............................. F-53
</TABLE>
F-1
<PAGE> 70
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MOHR RETAIL LEARNING SYSTEMS, INC.:
Independent Auditors' Report.............................. F-56
Balance Sheets............................................ F-57
Statements of Operations.................................. F-58
Statements of Stockholders' Equity........................ F-59
Statements of Cash Flows.................................. F-60
Notes to Financial Statements............................. F-61
NOVATIONS GROUP, INC.:
Independent Auditors' Report.............................. F-64
Balance Sheets............................................ F-65
Statements of Operations.................................. F-66
Statements of Stockholders' Equity........................ F-67
Statements of Cash Flows.................................. F-68
Notes to Financial Statements............................. F-69
STAR MOUNTAIN, INC.:
Independent Auditors' Reports............................. F-73
Consolidated Balance Sheets............................... F-75
Consolidated Statements of Operations..................... F-76
Consolidated Statements of Stockholders' Equity........... F-77
Consolidated Statements of Cash Flows..................... F-78
Notes to Consolidated Financial Statements................ F-80
</TABLE>
F-2
<PAGE> 71
PROVANT, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to (i) the Combination of PROVANT and the Founding Companies, (ii) the
consummation of the Offering and the application of the net proceeds therefrom
and (iii) certain other adjustments described below and in the notes to the
unaudited pro forma combined financial statements. See "Combination" and "Use of
Proceeds" included elsewhere herein. In the Combination, subsidiaries of PROVANT
are merging with the following Founding Companies: Behavioral Technology, Inc.,
Decker Communications, Inc., J. Howard & Associates, Inc., MOHR Retail Learning
Systems, Inc., Novations Group, Inc., Robert Steinmetz, Ph.D., and Associates,
Inc., d/b/a Learning Systems Sciences and Star Mountain, Inc. The Combination
will occur simultaneously with the closing of the Offering and will be accounted
for using the purchase method of accounting. PROVANT has been identified as the
accounting acquiror in accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 97. These pro forma statements are based on the
historical financial statements of the Founding Companies included elsewhere in
this Prospectus and the estimates and assumptions set forth below and in the
notes to the unaudited pro forma combined financial statements.
The unaudited pro forma combined balance sheet gives effect to the
Combination and the Offering as if they had occurred on December 31, 1997. The
unaudited pro forma combined statements of operations give effect to these
transactions as if they had occurred on July 1, 1996.
PROVANT has preliminarily analyzed the benefits that it expects to realize
from reductions in salaries and certain benefits to the owners of the Founding
Companies. To the extent these owners have agreed prospectively to reductions in
salary, bonuses and benefits, these reductions have been reflected in the pro
forma combined statements of operations. With respect to other potential
benefits, PROVANT cannot quantify these benefits until completion of the
Combination. It is anticipated that these benefits will be offset by costs
related to the Company's new corporate management and by the costs associated
with being a public company. However, because these costs cannot be accurately
quantified at this time, they have not been included in the pro forma financial
information of PROVANT.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The unaudited pro forma combined financial data presented herein does
not purport to represent what the Company's financial position or results of
operations actually would have been had such events occurred at the beginning of
the periods presented, as assumed, or to project the Company's financial
position or results of operations for any future period or the future results of
the Founding Companies. The unaudited pro forma combined financial statements
should be read in conjunction with the historical financial statements of
PROVANT and the Founding Companies and the related notes thereto included
elsewhere in this Prospectus. Also see "Risk Factors" included elsewhere herein.
F-3
<PAGE> 72
PROVANT, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
STAR
BTI DECKER J. HOWARD LSS MOHR NOVATIONS MOUNTAIN PROVANT TOTAL
------ ------ --------- ------ ------ --------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......... $ -- $ 650 $ 208 $ 174 $ -- $ 23 $ 358 $ 3 $ 1,416
Investments........................ -- 738 -- -- -- -- -- -- 738
Accounts receivable, net........... 1,210 1,255 1,166 984 878 3,211 6,091 -- 14,795
Inventory.......................... -- -- -- -- 137 -- 129 -- 266
Due from related parties........... -- 202 214 -- -- 279 666 -- 1,361
Costs in excess of billings........ -- -- -- 561 -- -- -- -- 561
Prepaid expenses and other current
assets........................... 123 183 42 43 56 80 217 -- 744
------ ------ ------ ------ ------ ------ ------- ------- -------
Total current assets......... 1,333 3,028 1,630 1,762 1,071 3,593 7,461 3 19,881
Property and equipment, net.......... 120 353 301 153 46 437 946 148 2,504
Other assets......................... 8 105 138 104 -- -- 2,270 800 3,425
Goodwill............................. -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------- ------- -------
Total assets................. $1,461 $3,486 $2,069 $2,019 $1,117 $4,030 $10,677 $ 951 $25,810
====== ====== ====== ====== ====== ====== ======= ======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................... $ 422 $ 194 $ 59 $ 185 $ 230 $ 118 $ 1,685 $ 770 $ 3,663
Accrued expenses................... 148 199 105 40 309 160 1,152 -- 2,113
Accrued compensation............... 251 533 139 161 27 1,105 -- -- 2,216
Payable to stockholder/affiliate... -- -- -- -- -- -- -- 768 768
Billings in excess of costs........ -- -- -- 414 -- -- 1,247 -- 1,661
Deferred revenue................... 56 122 88 -- 85 -- -- -- 351
State income taxes................. -- 77 41 -- -- -- -- -- 118
Deferred tax liability............. -- -- -- -- -- 535 -- -- 535
Distributions payable.............. -- -- 103 -- -- -- -- -- 103
Current portion of long-term
debt............................. -- 405 -- -- -- 1,378 3,313 -- 5,096
------ ------ ------ ------ ------ ------ ------- ------- -------
Total current liabilities.... 877 1,530 535 800 651 3,296 7,397 1,538 16,624
Long-term debt, net of current
portion............................ -- 607 -- -- -- 365 304 -- 1,276
Deferred tax liability............... -- -- -- -- -- -- 198 -- 198
------ ------ ------ ------ ------ ------ ------- ------- -------
Total liabilities............ 877 2,137 535 800 651 3,661 7,899 1,538 18,098
Redeemable common stock.............. -- 300 -- -- -- -- -- -- 300
Stockholders' equity:
Common stock....................... 1 313 272 3 4 1 2,147 -- 2,741
Additional paid-in capital......... 182 -- -- -- -- -- -- 709 891
Translation adjustments............ (3) -- -- -- -- -- -- -- (3)
Unrealized gain on short-term
investments...................... -- 9 -- -- -- -- -- -- 9
Note receivable from stock sales... -- (171) -- -- -- -- -- -- (171)
Retained earnings (deficit)........ 404 898 1,262 1,216 462 368 1,257 (1,296) 4,571
Treasury stock..................... -- -- -- -- -- -- (626) -- (626)
------ ------ ------ ------ ------ ------ ------- ------- -------
Total stockholders' equity
(deficit).................. 584 1,049 1,534 1,219 466 369 2,778 (587) 7,412
------ ------ ------ ------ ------ ------ ------- ------- -------
Total liabilities and
stockholders' equity
(deficit).................. $1,461 $3,486 $2,069 $2,019 $1,117 $4,030 $10,677 $ 951 $25,810
====== ====== ====== ====== ====== ====== ======= ======= =======
<CAPTION>
COMBINATION PRO FORMA OFFERING
ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
----------- --------- ----------- -----------
(NOTE 3) (NOTE 3)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......... $ (61) $ 1,355 $ 2,447 $ 3,802
Investments........................ -- 738 -- 738
Accounts receivable, net........... -- 14,795 -- 14,795
Inventory.......................... -- 266 -- 266
Due from related parties........... (344) 1,017 -- 1,017
Costs in excess of billings........ -- 561 -- 561
Prepaid expenses and other current
assets........................... -- 744 -- 744
------- ------- -------- -------
Total current assets......... (405) 19,476 2,447 21,923
Property and equipment, net.......... -- 2,504 -- 2,504
Other assets......................... (37) 3,388 (800) 2,588
Goodwill............................. 51,286 51,286 -- 51,286
------- ------- -------- -------
Total assets................. $50,844 $76,654 $ 1,647 $78,301
======= ======= ======== =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................... $ -- $ 3,663 $ -- $ 3,663
Accrued expenses................... -- 2,113 -- 2,113
Accrued compensation............... -- 2,216 -- 2,216
Payable to stockholder/affiliate... 22,416 23,184 (23,184) --
Billings in excess of costs........ -- 1,661 -- 1,661
Deferred revenue................... -- 351 -- 351
State income taxes................. -- 118 -- 118
Deferred tax liability............. -- 535 -- 535
Distributions payable.............. -- 103 -- 103
Current portion of long-term
debt............................. -- 5,096 (2,900) 2,196
------- ------- -------- -------
Total current liabilities.... 22,416 39,040 (26,084) 12,956
Long-term debt, net of current
portion............................ -- 1,276 -- 1,276
Deferred tax liability............... 750 948 -- 948
------- ------- -------- -------
Total liabilities............ 23,166 41,264 (26,084) 15,180
Redeemable common stock.............. (300) -- -- --
Stockholders' equity:
Common stock....................... (2,673) 68 26 94
Additional paid-in capital......... 35,727 36,618 28,658 65,276
Translation adjustments............ 3 -- -- --
Unrealized gain on short-term
investments...................... (9) -- -- --
Note receivable from stock sales... 171 -- -- --
Retained earnings (deficit)........ (5,867) (1,296) (953) (2,249)
Treasury stock..................... 626 -- -- --
------- ------- -------- -------
Total stockholders' equity
(deficit).................. 27,978 35,390 27,731 63,121
------- ------- -------- -------
Total liabilities and
stockholders' equity
(deficit).................. $50,844 $76,654 $ 1,647 $78,301
======= ======= ======== =======
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-4
<PAGE> 73
PROVANT, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
STAR
BTI DECKER J. HOWARD LSS MOHR NOVATIONS MOUNTAIN PROVANT TOTAL
------ ------ --------- ------ --------- ---------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue...................... $7,096 $8,410 $7,317 $5,599 $3,015 $9,018 $20,790 $ -- $61,245
Cost of revenue.................... 1,488 2,275 2,160 1,928 825 4,839 12,602 -- 26,117
------ ------ -------- ------ -------- -------- ------- ------- -------
Gross profit............. 5,608 6,135 5,157 3,671 2,190 4,179 8,188 -- 35,128
Selling, general and
administrative expenses.......... 5,111 6,446 4,555 3,061 1,745 3,315 7,061 149 31,443
Goodwill amortization.............. -- -- -- -- -- -- -- -- --
------ ------ -------- ------ -------- -------- ------- ------- -------
Income (loss) from
operations............. 497 (311) 602 610 445 864 1,127 (149) 3,685
Other income, net.................. 40 -- 4 -- -- -- -- -- 44
Interest income (expense).......... 31 (9) 26 14 3 (137) (53) -- (125)
------ ------ -------- ------ -------- -------- ------- ------- -------
Income (loss) before
income taxes........... 568 (320) 632 624 448 727 1,074 (149) 3,604
Provision for income taxes......... -- 33 8 9 7 435 429 -- 921
------ ------ -------- ------ -------- -------- ------- ------- -------
Net income (loss)........ $ 568 $ (353) $ 624 $ 615 $ 441 $ 292 $ 645 $(149) $ 2,683
====== ====== ======== ====== ======== ======== ======= ======= =======
Net income per share...............
Shares used in computing net income
per share (Note 6)...............
<CAPTION>
COMBINATION PRO FORMA
ADJUSTMENTS COMBINED
----------- ----------
(NOTE 4)
<S> <C> <C>
Total revenue...................... $ 7,601 $68,846
Cost of revenue.................... 4,850 30,967
------- ---------
Gross profit............. 2,751 37,879
Selling, general and
administrative expenses.......... (2,780) 28,663
Goodwill amortization.............. 1,282 1,282
------- ---------
Income (loss) from
operations............. 4,249 7,934
Other income, net.................. -- 44
Interest income (expense).......... 8 (117)
------- ---------
Income (loss) before
income taxes........... 4,257 7,861
Provision for income taxes......... 2,842 3,763
------- ---------
Net income (loss)........ $ 1,415 $ 4,098
======= =========
Net income per share............... $ 0.51
=========
Shares used in computing net income
per share (Note 6)............... 8,009,861
=========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-5
<PAGE> 74
PROVANT, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
STAR
BTI DECKER J. HOWARD LSS MOHR NOVATIONS MOUNTAIN PROVANT
------- ------ --------- ------ ---- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue...................... $ 3,850 $5,160 $3,524 $2,771 $1,534 $5,256 $12,444 $ --
Cost of revenue.................... 775 1,340 1,156 1,121 523 2,677 7,300 --
------- -------- -------- ------ -------- -------- ------- -------
Gross profit............. 3,075 3,820 2,368 1,650 1,011 2,579 5,144 --
Selling, general and
administrative expenses.......... 4,406 3,414 2,777 1,118 1,050 2,062 4,149 1,099
Goodwill amortization.............. -- -- -- -- -- -- -- --
------- -------- -------- ------ -------- -------- ------- -------
Income (loss) from
operations............. (1,331) 406 (409) 532 (39) 517 995 (1,099)
Other income (expense), net........ 2 -- (3) -- -- -- -- --
Interest income (expense).......... 26 23 11 8 4 (133) (57) (48)
------- -------- -------- ------ -------- -------- ------- -------
Income (loss) before
income taxes........... (1,303) 429 (401) 540 (35) 384 938 (1,147)
Provision for income taxes......... -- 10 1 15 2 154 421 --
------- -------- -------- ------ -------- -------- ------- -------
Net income (loss)........ $(1,303) $ 419 $ (402) $ 525 $ (37) $ 230 $ 517 $(1,147)
======= ======== ======== ====== ======== ======== ======= =======
Net income per share...............
Shares used in computing net income
per share (Note 6)...............
<CAPTION>
COMBINATION PRO FORMA
TOTAL ADJUSTMENTS COMBINED
------- ----------- ---------
(NOTE 4)
<S> <C> <C> <C>
Total revenue...................... $34,539 $1,419 $35,958
Cost of revenue.................... 14,892 1,056 15,948
------- -------- ---------
Gross profit............. 19,647 363 20,010
Selling, general and
administrative expenses.......... 20,075 (3,748) 16,327
Goodwill amortization.............. -- 641 641
------- -------- ---------
Income (loss) from
operations............. (428) 3,470 3,042
Other income (expense), net........ (1) -- (1)
Interest income (expense).......... (166) 117 (49)
------- -------- ---------
Income (loss) before
income taxes........... (595) 3,587 2,992
Provision for income taxes......... 603 1,388 1,991
------- -------- ---------
Net income (loss)........ $(1,198) $2,199 $ 1,001
======= ======== =========
Net income per share............... $ 0.11
=========
Shares used in computing net income
per share (Note 6)............... 9,040,779
=========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-6
<PAGE> 75
PROVANT, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) GENERAL
Concurrently with and as a condition to the closing of the Offering,
PROVANT will acquire the seven Founding Companies in the Combination. The
acquisitions will be accounted for using the purchase method of accounting with
PROVANT being treated as the accounting acquiror.
The historical financial statements reflect the financial position and
results of operations of the Founding Companies and were derived from the
respective Founding Companies' financial statements where indicated. The periods
included in these financial statements for the individual Founding Companies are
as of and for the six months ended December 31, 1997 and for the year ended June
30, 1997.
(2) ACQUISITION OF FOUNDING COMPANIES
The following table sets forth the consideration to be paid (i) in cash and
(ii) in shares of Common Stock to the stockholders of each of the Founding
Companies. For purposes of computing the estimated purchase price for accounting
purposes, the value of the shares is determined using an estimated fair value of
$10.40 per share, which represents a discount of 20% from the initial public
offering price of $13.00 due to restrictions on the sale and transferability of
the shares issued. The total estimated value of the consideration of $58.4
million for the acquisitions is based upon preliminary estimates and is subject
to certain purchase price adjustments at the closing.
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------
CASH SHARES VALUE OF SHARES
------- --------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BTI............................................. $ 5,000 449,896 $ 4,679
Decker.......................................... 1,550 348,712 3,626
J. Howard....................................... 1,700 236,308 2,457
LSS............................................. 2,625 590,568 6,142
MOHR............................................ 1,200 208,435 2,168
Novations....................................... 4,988 683,619 7,110
Star Mountain................................... 5,353 941,803 9,795
------- --------- -------
Total................................. $22,416 3,459,341 $35,977
======= ========= =======
</TABLE>
(3) UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Records the stock split of 979.0292-for-1 in the form of a stock
dividend that will result in a total amount of outstanding shares of
Common Stock prior to the Offering (but giving effect to the
Combination) of 6,805,558.
(b) Records the distributions estimated at $560,000 which are expected to
be paid from cash on hand by certain Founding Companies prior to the
Closing of the Combination.
(c) Records the receipt of cash from certain stockholders in satisfaction
of certain receivables and transfer of certain assets.
(d) Records the deferred income taxes attributable to the temporary
differences between the financial reporting and tax basis of assets and
liabilities held in S corporations.
(e) Reflects the creation of approximately $51.3 million of goodwill from
the payment of the Common Stock and cash consideration for the Founding
Companies totaling approximately $58.4 million (see note 2) less net
assets of the Founding Companies of approximately $7.1 million, and
records the
F-7
<PAGE> 76
PROVANT, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
liability for the cash portion of the consideration to be paid to the
stockholders of the Founding Companies in connection with the
Combination.
(f) Records the cash proceeds of $28.7 million from the issuance of shares
of Common Stock, net of the underwriting discount and estimated
offering costs of $2.8 million. Offering costs primarily consist of
accounting fees, legal fees and printing expenses. Of the $2.8 million
of offering costs, approximately $800,000 has been recorded as deferred
offering costs paid with funds advanced by two of the Company's
executive officers.
(g) Records the cash portion of the consideration to be paid to
stockholders of the Founding Companies in connection with the
Combination, the repayment of funds advanced to PROVANT by two of its
executive officers of which $800,000 is considered paid as offering
costs, and the repayment of long-term debt of the Founding Companies.
The following table summarizes the adjustments to the unaudited pro forma
combined balance sheet adjustments (in thousands):
<TABLE>
<CAPTION>
Combination Adjustments Total
---------------------------------------- Combination
(a) (b) (c) (d) (e) Adjustments
----- ----- ----- ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents................... $ -- $(560) $ 499 $ -- $ -- $ (61)
Due from related parties.................... -- -- (344) -- -- (344)
----- ----- ----- ------ ------- -------
Total current assets...................... -- (560) 155 -- -- (405)
Goodwill, net............................... -- -- -- -- 51,286 51,286
Other assets................................ -- -- (110) 73 -- (37)
----- ----- ----- ------ ------- -------
Total assets...................... $ -- $(560) $ 45 $ 73 $51,286 $50,844
===== ===== ===== ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to stockholder/affiliate............ $ -- $ -- $ -- $ -- $22,416 $22,416
Deferred tax liability...................... -- -- -- 750 -- 750
----- ----- ----- ------ ------- -------
Total liabilities................. -- -- -- 750 22,416 23,166
Redeemable common stock..................... -- -- -- -- (300) (300)
Stockholders' equity:.......................
Common stock.............................. 33 -- -- -- (2,706) (2,673)
Additional paid-in capital................ (33) (560) -- (677) 36,997 35,727
Translation adjustments..................... -- -- -- -- 3 3
Unrealized gain on short-term investments... -- -- -- -- (9) (9)
Note receivable from stock sales............ -- -- 45 -- 126 171
Retained earnings (deficit)............... -- -- -- -- (5,867) (5,867)
Treasury stock............................ -- -- -- -- 626 626
----- ----- ----- ------ ------- -------
Total stockholders' equity
(deficit)....................... -- (560) 45 (677) 29,170 27,978
----- ----- ----- ------ ------- -------
Total liabilities and
stockholders' equity
(deficit)....................... $ -- $(560) $ 45 $ 73 $51,286 $50,844
===== ===== ===== ====== ======= =======
</TABLE>
F-8
<PAGE> 77
PROVANT, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
Offering
Adjustments Total
------------------- Offering
(f) (g) Adjustments
------- -------- -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.................................. $28,684 $(26,237) $ 2,447
------- -------- --------
Total current assets..................................... 28,684 (26,237) 2,447
Other assets............................................... -- (800) (800)
------- -------- --------
Total assets............................................... $28,684 $(27,037) $ 1,647
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt.......................... $ -- $ (2,900) $ (2,900)
Payable to stockholders/affiliate.......................... (23,184) (23,184)
------- -------- --------
Total current liabilities........................ -- (26,084) (26,084)
------- -------- --------
Total liabilities................................ -- (26,084) (26,084)
------- -------- --------
Stockholders' equity:
Common stock............................................. 26 -- 26
Additional paid-in capital............................... 28,658 -- 28,658
Retained earnings (deficit).............................. -- (953) (953)
------- -------- --------
Total stockholders' equity (deficit)............. 28,684 (953) 27,731
------- -------- --------
Total liabilities and stockholders' equity
(deficit)...................................... $28,684 $(27,037) $ 1,647
======= ======== ========
</TABLE>
(4) UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
YEAR ENDED JUNE 30, 1997
(a) Reflects the reduction in salaries, bonuses and benefits of $5.6 million to
certain of the owners of the Founding Companies to which they have agreed
prospectively. These reductions in salaries, bonuses and benefits are in
accordance with the terms of the owners' employment agreements with the
Company entered into in connection with the Combination. Such employment
agreements are primarily for three years, contain restrictions related to
competition and provide severance under certain circumstances.
(b) Reflects the amortization of goodwill to be recorded as a result of the
Combination over a 40-year estimated life.
(c) Reflects a pro forma provision for income taxes adjusted to reflect the
Company's estimated consolidated effective tax rate subsequent to the
Combination, after considering nondeductible goodwill amortization.
(d) Reflects the historical results of operations of companies acquired by Star
Mountain in February 1997 and October 1997.
(e) Reflects the reduction in interest expense net of income tax benefit,
related to the current portion of bank debt and notes payable to
stockholders that will be repaid with the proceeds of the Offering.
F-9
<PAGE> 78
PROVANT, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the adjustments to the unaudited pro forma
combined statements of operations (in thousands):
<TABLE>
<CAPTION>
Adjustments
----------------------------------------------- Total
(a) (b) (c) (d) (e) Adjustments
------- ------- ------- ------ ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Total revenue................... $ -- $ -- $ -- $7,601 $ -- $ 7,601
Cost of revenue................. -- -- -- 4,850 -- 4,850
Selling, general and
administrative expenses....... (5,607) -- -- 2,827 -- (2,780)
Goodwill amortization........... -- 1,282 -- -- -- 1,282
------- ------- ------- ------ ---- -------
Income (loss) from
operations.......... 5,607 (1,282) -- (76) -- 4,249
Interest expense................ -- -- -- (250) 258 8
------- ------- ------- ------ ---- -------
Income (loss) before
income taxes........ 5,607 (1,282) -- (326) 258 4,257
Provision (benefit) for income
taxes......................... -- -- 2,869 (130) 103 2,842
------- ------- ------- ------ ---- -------
Net (loss) income..... $ 5,607 $(1,282) $(2,869) $ (196) $155 $ 1,415
======= ======= ======= ====== ==== =======
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1997
(a) Reflects the reduction in salaries, bonuses and benefits of $4.1 million to
certain of the owners of the Founding Companies to which they have agreed
prospectively. These reductions in salaries, bonuses and benefits are in
accordance with the terms of the owners' employment agreements with the
Company entered into in connection with the Combination. Such employment
agreements are primarily for three years, contain restrictions related to
competition and provide severance under certain circumstances.
(b) Reflects the amortization of goodwill to be recorded as a result of the
Combination over a 40-year estimated life.
(c) Reflects a pro forma provision for income taxes adjusted to reflect the
Company's estimated effective tax rate subsequent to the combination after
considering nondeductible goodwill amortization.
(d) Reflects the historical results of operations of a company acquired by Star
Mountain in October 1997.
(e) Reflects the reduction in interest expense, net of income taxes, related to
the current portion of bank debt and notes payable to stockholders that will
be repaid with the proceeds of the Offering and records the additional
expense related to the unamortized debt discount on debt payable upon
closing of the Offering.
(f) Reflects the reduction in expense recorded related to the unamortized debt
discount on debt payable upon closing of the Offering.
F-10
<PAGE> 79
PROVANT, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the adjustments to the unaudited pro forma
combined statements of operations (in thousands):
<TABLE>
<CAPTION>
Adjustments
-------------------------------------------------- Total
(a) (b) (c) (d) (e) (f) Adjustments
------- ----- ------- ------ ----- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue................ $ -- $ -- $ -- $1,419 $ -- $ -- $ 1,419
Cost of revenue.............. -- -- -- 1,056 -- -- 1,056
Selling, general and
administrative expenses.... (4,100) -- -- 352 -- -- (3,748)
Goodwill amortization........ -- 641 -- -- -- -- 641
------- ----- ------- ------ ----- ----- -------
Income (loss) from
operations....... 4,100 (641) -- 11 -- -- 3,470
Other income (expense):
Interest (expense)
income.................. -- -- -- (29) (75) 221 117
------- ----- ------- ------ ----- ----- -------
Income (loss)
before income
taxes............ 4,100 (641) -- (18) (75) 221 3,587
Provision (benefit) for
income taxes............... -- -- 1,337 (7) 58 -- 1,388
------- ----- ------- ------ ----- ----- -------
Net income
(loss)........... $ 4,100 $(641) $(1,337) $ (11) $(133) $ 221 $ 2,199
======= ===== ======= ====== ===== ===== =======
</TABLE>
(5) EXPENSES
The pro forma adjustments to the statements of operations do not include
the payment of $750,000 in fees payable for information provided to the Company
relating to the training and development industry. Such payment will be charged
to expense in the period including the consummation of the Offering. The pro
forma adjustments also do not include approximately $485,000 of non-cash
compensation expense related to the issuance of Common Stock to officers of and
consultants to the Company during the six months ended December 31, 1997.
(6) NET INCOME PER SHARE
The shares used in computing pro forma net income per share consist of (i)
the weighted average shares outstanding, after giving effect to the stock split
described in Note 3 above, of 1,950,520 shares during the period ended June 30,
1997 and 2,981,438 shares during the period ended December 31, 1997 (ii)
3,459,341 shares issued to owners of the Founding Companies (excluding shares
issuable as Additional Consideration and J. Howard Contingent Consideration and
pursuant to the Star Mountain Contingent Consideration) and (iii) 2,600,000
shares of Common Stock sold in the Offering.
(7) STOCK-BASED COMPENSATION
At the consummation of the Offering, PROVANT will have three stock-based
compensation plans. The Company will have granted stock options under the Equity
Incentive Plan and the Stock Plan for Non-Employee Directors to purchase an
aggregate of 883,983 shares of Common Stock having a per-share exercise price
equal to the initial offering price of $13.00. No awards will have been made
under the Stock Purchase Plan.
The Company will apply Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation expense will be recognized for its fixed stock option plans and its
stock purchase plan. If compensation cost for the Company's stock-based
compensation plans were based on the fair value at the grant date for the awards
under the plans consistent with the method of Statement of Financial Accounting
Standards No. 123, the Company's pro forma net income and income per
F-11
<PAGE> 80
PROVANT, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
share for each period presented assuming such options were granted at the
beginning of the periods presented and that the compensation element of options
with immediate vesting was recognized during the year ended June 30, 1997 would
have been reduced to the amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1997 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
Net income -- pro forma..................................... $4,098 $1,001
====== ======
Pro forma as adjusted....................... $3,080 $ 701
====== ======
Basic income per share
Pro forma................................... $ 0.51 $ 0.11
====== ======
Pro forma as adjusted....................... $ 0.38 $ 0.08
====== ======
</TABLE>
The fair value of the stock options used to calculate the pro forma as
adjusted amounts was determined using the Minimum Value Method with an expected
option life of 4 years and a risk free interest rate of 5.5%.
F-12
<PAGE> 81
INDEPENDENT AUDITORS' REPORT
The Board of Directors,
PROVANT, Inc.:
We have audited the accompanying balance sheet of PROVANT, Inc., as of June
30, 1997 and the related statements of operations, stockholders' equity and cash
flows for the period from November 16, 1996 (date of inception) to June 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PROVANT, Inc. as of June 30,
1997 and the results of its operations and its cash flows for the period from
November 16, 1996 (date of inception) to June 30, 1997, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
January 9, 1998
F-13
<PAGE> 82
PROVANT, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1997
-------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 1 $ 3
------ ------
Total current assets.............................. 1 3
Property and equipment...................................... 150 148
Deferred offering costs..................................... -- 800
------ ------
Total assets...................................... $ 151 $ 951
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Notes payable to stockholders............................... $ 298 $ 768
Accounts payable............................................ -- 770
------ ------
Total current liabilities......................... 298 1,538
Stockholders' equity (deficit):
Common stock, $.01 per value; 10,000 shares authorized;
1,992.3 and 3,417.9 shares issued and outstanding at
June 30, 1997 and December 31, 1997, respectively...... -- --
Paid-in capital........................................... 2 709
Accumulated deficit....................................... (149) (1,296)
------ ------
Total stockholders' equity (deficit).............. (147) (587)
------ ------
Total liabilities and stockholders' equity........ $ 151 $ 951
====== ======
</TABLE>
See accompanying notes to financial statements.
F-14
<PAGE> 83
PROVANT, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 16, 1996
(DATE OF
INCEPTION) TO SIX MONTHS ENDED
JUNE 30, 1997 DECEMBER 31, 1997
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
Revenue.................................................... $ -- $ --
General and administrative expenses........................ 149 1,099
Interest expense........................................... -- 48
Loss before income taxes................................... (149) (1,147)
Income tax benefit......................................... -- --
-------- --------
Net loss................................................... $ (149) $ (1,147)
======== ========
Net loss per share-basic and diluted....................... $ (74.79) $(376.65)
Weighted average shares outstanding........................ 1,992.3 3,045.3
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE> 84
PROVANT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
----------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------ -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Initial capitalization.................. 1,992.3 $-- $ 2 $ -- $ 2
Net (loss).................... -- -- (149) (149)
------- -- ---- ------- -------
Balance at June 30, 1997................ 1,992.3 -- 2 (149) (147)
Issuance of management shares, July
1997.................................. 692.5 -- 1 -- 1
Issuance of warrants.................... -- -- 221 -- 221
Issuance of management shares, September
1997.................................. 704.8 -- 466 -- 466
Issuance of management shares, November
1997.................................. 28.3 -- 19 -- 19
Net (loss).................... -- -- -- (1,147) (1,147)
------- -- ---- ------- -------
Balance, December 31, 1997
(Unaudited)........................... 3,417.9 $-- $709 $(1,296) $ (587)
======= == ==== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE> 85
PROVANT, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 16, 1996
(DATE OF SIX MONTHS
INCEPTION) TO ENDED
JUNE 30, 1997 DECEMBER 31, 1997
---------------------- ------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net (loss)........................................... $ (89) $(1,147)
Depreciation......................................... -- 9
Non-cash interest.................................... -- 18
Non-cash compensation................................ -- 485
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Changes in assets and liabilities:
Deferred offering costs......................... -- (800)
Accounts payable................................ -- 770
----- -------
Net cash used in operating activities........ (149) (665)
----- -------
Cash flows from investing activities:
Acquisition of property and equipment................ (150) (7)
----- -------
Net cash used in investing activities........ (150) (7)
----- -------
Cash flows from financing activities...................
Issuance of stock.................................... 2 2
Increase in notes payable to stockholders............ 298 672
----- -------
Net cash provided by financing activities.... 300 674
----- -------
Net increase in cash and cash equivalents.............. 1 2
Cash and cash equivalents, beginning of period......... -- 1
----- -------
Cash and cash equivalents, end of period............... $ 1 $ 3
===== =======
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE> 86
PROVANT, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
(1) BUSINESS AND ORGANIZATION
PROVANT, Inc. (the "Company"), a Delaware corporation, was incorporated on
November 16, 1996. The Company intends to acquire seven providers of training
and development services and products in separate merger transactions (the
"Combination") simultaneously with its initial public offering (the "Offering")
of its Common Stock. The consummation of the Combination is conditioned upon the
closing of the Offering.
The Company has not conducted any operations, and all activities to date
have related to the Offering and the Combination. The Company's cash balances
were generated from the initial capitalization of the Company (see Note 3). All
other expenditures to date have been funded by loans from two of the Company's
principal stockholders.
The stockholders have committed to loan the Company the expenses and costs
of the Offering and the Combination. Loans by the stockholders in connection
with the Offering and the Combination amounted to $298 at June 30, 1997 and
$971, before debt discount of $203 at December 31, 1997. Certain costs have been
accounted for as deferred offering costs. There is no assurance that the pending
Combination discussed below will be completed or that the Company will be able
to generate future operating revenues.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim financial statements as of December 31, 1997 and for the six
months then ended are unaudited, and certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments
necessary to present fairly the financial position, results of operations and
cash flows with respect to the interim financial statements, have been included.
The results of operations for the interim periods are not necessarily indicative
of the results for the entire fiscal year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (FAS 128) Earnings per Share, which changed the
method of computing and presenting income per share. Basic income per share has
been computed using the weighted average number of outstanding common shares. In
computing diluted income per share, the exercise of options and warrants is not
assumed if the result would be antidilutive.
(3) STOCKHOLDERS' EQUITY
In connection with its organization and initial capitalization, the Company
sold 1,992.3 shares of its common stock, $.01 par value per share (the "Common
Stock"), at $1.00 per share. During the six months ended December 31, 1997, the
Company sold 1,425.6 additional shares for $1.00 per share. Holders of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the stockholders, and do not have cumulative voting
rights.
F-18
<PAGE> 87
PROVANT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," allows entities to choose between a fair value based
method of accounting for employee stock options or similar equity instruments
and the current intrinsic, value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25 (APB No. 25). Entities electing to
remain with the accounting in APB Opinion No. 25 must make pro forma disclosures
of net income and earnings per share as if the fair value method of accounting
had been applied. The Company will provide pro forma disclosure of net income
and earnings per share, as applicable, in the notes to future consolidated
financial statements.
(4) PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
The following unaudited, pro forma share and per share data is based on the
Company's intentions with respect to the Offering.
In connection with the Offering, the Company will increase the authorized
shares of stock to 45 million, consisting of 40 million shares of Common Stock
and 5 million shares of Preferred Stock, and will declare a stock split of
979.0292-for-1 in the form of a stock dividend that will result in a total
amount of outstanding shares of Common Stock prior to the Offering (but giving
effect to the Combination) of 6,805,558.
The following presents stockholders' equity on an actual and pro forma
basis (to give effect to the increase in the Company's authorized shares of
Common Stock, the authorization of a class of preferred stock and the stock
split) as of December 31, 1997 (in thousands).
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
------- ---------
<S> <C> <C>
Preferred Stock
None authorized (5 million shares authorized, none
issued and outstanding pro forma)................ $ -- $ --
Common Stock
10,000 shares authorized (40 million shares
authorized pro forma); 3,417.9 shares issued and
outstanding, (3,346,217 shares issued and
outstanding, pro forma).......................... -- 33
Paid-in capital....................................... 709 676
Accumulated deficit................................... (1,296) (1,296)
------- -------
Total....................................... $ (587) $ (587)
======= =======
</TABLE>
The following presents net loss per share data on a pro forma basis giving
effect to the stock split.
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
INCEPTION TO ENDED
JUNE 30, 1997 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
Net loss per share -- basic and diluted..... $ (0.08) $ (0.38)
---------- ----------
Weighted average shares outstanding......... 1,950,520 2,981,438
========== ==========
</TABLE>
Preferred Stock
The Preferred Stock, if issued, would have priority over the Common Stock
with respect to dividends and other distributions, including the distribution of
assets upon liquidation. The Board of Directors has the authority, without
further stockholder authorization, to issued from time to time shares of
Preferred Stock in one or more series and to fix the terms, limitations,
relative rights and preferences and variations of each series.
Equity Incentive Plan
The Company will adopt the 1998 Equity Incentive Plan (the "Equity
Incentive Plan"), which provides for the award of up to 1.1 million shares of
Common Stock in the form of incentive stock options ("ISOs"), non-qualified
stock options, stock appreciation rights, performance shares, restricted stock,
or stock units
F-19
<PAGE> 88
PROVANT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(each, an "Award"). All directors and employees of, and all consultants and
advisors to, the Company (including its subsidiaries) are eligible to
participate in the Equity Incentive Plan.
The Equity Incentive Plan will be administered by the Compensation
Committee (the "Committee"), which determines who shall receive Awards from
those individuals eligible to participate in the Equity Incentive Plan, the type
of Award to be made, the number of shares of Common Stock that may be acquired
pursuant to the Award and the specific terms and conditions of each Award,
including the purchase price, term, vesting schedule, restrictions on transfer
and any other conditions and limitations applicable to the Awards or their
exercise. Options that are ISOs may be exercisable for not more than 10 years
after the date the option is awarded. The Committee may at any time accelerate
the exercisability of all or any portion of an option.
Stock Options
On or prior to the date of the final Prospectus used in connection with the
Offering, the Company has agreed to grant options under the Equity Incentive
Plan to purchase an aggregate of 868,983 shares of Common Stock having a
per-share exercise price equal to the initial offering price. Of this amount,
options to purchase 702,387 shares will become exercisable with respect to
one-third of the underlying shares of Common Stock on each of the first three
anniversaries of the date of grant. The remaining options to purchase 166,596
shares will become exercisable with respect to all of the underlying shares of
Common Stock upon the closing of the Offering. The Company issued an option to
purchase 10,000 shares of Common Stock (on an after-split basis) at a purchase
price of $5 per share, exercisable immediately upon the closing of the Offering.
Stock Warrants
As partial consideration for the extension to the Company of the financing
described in Note 5 below, two of the Company's executive officers each received
two warrants. The first warrant is exercisable for 173,194 shares of Common
Stock at a per share exercise price equal to the initial public offering price
of $13.00. The second warrant is a warrant to purchase 216,492 shares of Common
Stock which will become exercisable only if the market price of the Common Stock
increases to certain threshold levels except as described below (the "Contingent
Warrant"). Specifically, 20% of the total number of shares issuable under the
Contingent Warrants will become exercisable on each of the three occasions that
the market price of the Common Stock increases by 100%, 200%, 300%,
respectively, from the initial public offering price, and the remaining 40% of
the total number of shares issuable under the Contingent Warrant will become
exercisable if the market price of the Common Stock increases by 400%. However,
under certain circumstances involving the merger or sale of the Company, the
Contingent Warrant will become exercisable to purchase all of the warrant
shares. The exercise price of the Contingent Warrant increases on each
anniversary of the closing of the Offering. Specifically, the exercise price is
equal to the initial public offering price for the first 12 months following the
closing of the Offering and, for each 12-month period thereafter, is equal to
the initial public offering price plus 10% of the initial public offering price
multiplied by the number of full 12 month periods elapsed since the closing of
the Offering. However, once a portion of the Contingent Warrant becomes
exercisable, that portion's exercise price is fixed as of that date. All four
warrants expire on the seventh anniversary of the closing of the Offering.
The four warrants have been accounted for in accordance with Opinion No. 14
of the Accounting Principles Board. Accordingly, the fair value allocated to the
warrants has been accounted for as discount on the related debt.
The holders of the warrants have the right to require the Company to
register the resale of the shares that may be acquired upon exercise of the
warrants under the Securities Act of 1933, as amended.
F-20
<PAGE> 89
PROVANT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Stock Purchase Plan
The Company will adopt the 1998 Employee Stock Purchase Plan (the "Plan").
The Plan provides for the sale of shares of Common Stock to employees at a
purchase price that is 85% of the lesser of the value of the Common Stock at the
beginning of a purchase period or at the end of a purchase period. The Company
has reserved 500,000 shares of Common Stock for issuance under the Plan.
Non-Employee Directors' Stock Plan
The Company's Board of Directors has adopted the Stock Plan for
Non-Employee Directors (the "Directors' Plan"). A total of 100,000 shares of
Common Stock are reserved for issuance under the Directors' Plan. Pursuant to
the Directors' Plan, on the date of the final Prospectus used in connection with
the Offering, each director and director nominee, if any, who is neither an
employee of the Company or one of its subsidiaries (a "non-employee director")
and is not a stockholder of the Company prior to the Offering will receive an
option to purchase 7,500 shares of Common Stock with a per-share exercise price
equal to the initial public offering price. Each non-employee director initially
elected following the Offering will be granted upon such election an option to
purchase 7,500 shares of Common Stock. Following his or her initial election,
each non-employee director will be granted, immediately following each annual
meeting of stockholders at which he or she is re-elected (and provided he or she
is still is a non-employee director at such time), an option to acquire an
additional 2,500 shares of Common Stock. The per share exercise price of options
granted following the Offering will be the fair market value of the Common Stock
on the date of grant. Each option will be non-transferable except upon death
(unless otherwise approved by the Board), will expire 10 years after the date of
grant will become exercisable with respect to all of the shares of Common Stock
issuable thereunder on the date that is six months following the date of grant
if the individual is a director at such time. If the director dies or otherwise
ceases to be a director prior to the expiration of an option, the option (if
exercisable) will remain exercisable for a period of one year following death or
three months following other termination of the individual's status as a
director, but in no event beyond the tenth anniversary of the date of grant. The
Board of Directors may at any time or times amend the Directors' Plan for any
purpose that at the time may be permitted by law.
(5) RELATED PARTY TRANSACTION
Expenses paid by the Company prior to the closing of the Offering have been
advanced under a $3 million line of credit issued on October 6, 1997 by two of
the Company's stockholders.
Amounts payable to stockholders under the line of credit, stated net of
debt discount, are due on the earlier of October 6, 2000 or the successful
completion of the Offering and bear interest at the prime rate as from time to
time published in the Wall Street Journal (8.5% at June 30, 1997).
The acquisition of the Company's property and equipment at June 30, 1997,
obtained from stockholders of the Company, was financed under the line of
credit.
(6) SUPPLEMENTAL CASH FLOW INFORMATION (UNAUDITED)
The Company recorded the following non-cash transactions during the six
months ended December 31, 1997:
<TABLE>
<S> <C>
Discount on indebtedness associated with issuance of stock
warrants.................................................. $221
====
Compensation expense in connection with sales of Company
stock at below fair market value.......................... $485
====
</TABLE>
F-21
<PAGE> 90
PROVANT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) SUBSEQUENT EVENT (UNAUDITED)
The Company and wholly-owned subsidiaries of the Company have signed
definitive agreements to acquire by merger seven companies ("the Founding
Companies") to be effective contemporaneously with the Offering. The companies
to be acquired are Behavioral Technology, Inc., Decker Communications, Inc., J.
Howard and Associates, Inc., Robert Steinmetz, Ph.D., and Associates, Inc.,
d/b/a Learning Systems Sciences, MOHR Retail Learning Systems, Inc., Novations
Group, Inc. and Star Mountain, Inc. The aggregate consideration that will be
paid by PROVANT, Inc. to acquire the Founding Companies is approximately $58.4
million, consisting of $22.4 million in cash and 3,459,341 shares of Common
Stock.
F-22
<PAGE> 91
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Behavioral Technology, Inc.:
We have audited the accompanying balance sheets of Behavioral Technology,
Inc., as of June 30, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended June 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Behavioral Technology, Inc.
as of June 30, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended June 30, 1997, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
January 9, 1998
F-23
<PAGE> 92
BEHAVIORAL TECHNOLOGY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
---------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 652 $1,254 $ --
Accounts receivable, net of allowance for doubtful
accounts of $89 at June 30, 1996 and 1997 and December
31, 1997............................................... 940 1,055 1,210
Prepaid expenses.......................................... 67 143 123
------ ------ ------
Total current assets.............................. 1,659 2,452 1,333
------ ------ ------
Property and equipment, net................................. 194 135 120
Other assets................................................ 8 7 8
------ ------ ------
Total assets...................................... $1,861 $2,594 $1,461
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 270 $ 268 $ 422
Accrued expenses.......................................... 123 148 148
Accrued compensation...................................... 316 433 251
Deferred revenue.......................................... 12 43 56
------ ------ ------
Total current liabilities......................... 721 892 877
------ ------ ------
Commitments and contingencies
Stockholders' equity:
Common stock, $10 par value; 1,000 shares authorized; 100,
99 and 104 shares issued and outstanding at June 30,
1996, June 30, 1997 and December 31, 1997,
respectively........................................... 1 1 1
Additional paid-in capital................................ -- -- 182
Translation adjustment.................................... -- (6) (3)
Retained earnings......................................... 1,139 1,707 404
------ ------ ------
Total stockholders' equity........................ 1,140 1,702 584
------ ------ ------
Total liabilities and stockholders' equity........ $1,861 $2,594 $1,461
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE> 93
BEHAVIORAL TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
-------------------------- -------------------
1995 1996 1997 1996 1997
------ ------ ------ ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue.................................... $3,803 $5,685 $7,096 $ 3,439 $ 3,850
Cost of revenue............................ 1,049 1,495 1,488 879 775
------ ------ ------ ------- --------
Gross profit..................... 2,754 4,190 5,608 2,560 3,075
Selling, general and administrative
expenses................................. 2,315 4,048 5,111 3,216 4,406
------ ------ ------ ------- --------
Income (loss) from operations.... 439 142 497 (656) (1,331)
------ ------ ------ ------- --------
Other income:
Royalties................................ 83 82 30 30 --
Interest................................. 13 27 31 16 26
Other income, net........................ 43 -- 10 12 2
------ ------ ------ ------- --------
Total other income............... 139 109 71 58 28
------ ------ ------ ------- --------
Net income (loss)................ $ 578 $ 251 $ 568 $ (598) $ (1,303)
====== ====== ====== ======= ========
Basic income (loss) per share.............. $5,780 $2,510 $5,680 $(5,980) $(12,650)
====== ====== ====== ======= ========
Weighted average shares outstanding........ 100 100 100 100 103
====== ====== ====== ======= ========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE> 94
BEHAVIORAL TECHNOLOGY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN TRANSLATION RETAINED
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS TOTAL
------ ------ ---------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994.......... 100 $1 $ -- $-- $ 310 $ 311
Net income.................... -- -- -- -- 578 578
--- -- ---- --- ------- -------
Balance, June 30, 1995.......... 100 1 -- -- 888 889
Net income.................... -- -- -- -- 251 251
--- -- ---- --- ------- -------
Balance, June 30, 1996.......... 100 1 -- -- 1,139 1,140
Net income.................... -- -- -- -- 568 568
Translation adjustment........ -- -- -- (6) -- (6)
Stock surrender............... (1) -- -- -- -- --
--- -- ---- --- ------- -------
Balance, June 30, 1997.......... 99 1 -- (6) 1,707 1,702
Net loss...................... -- -- -- -- (1,303) (1,303)
Translation adjustment........ -- -- -- 3 -- 3
Stock grant................... 5 -- 182 -- -- 182
--- -- ---- --- ------- -------
Balance, December 31, 1997
(Unaudited)................... 104 $1 $182 $(3) $ 404 $ 584
=== == ==== === ======= =======
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE> 95
BEHAVIORAL TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------- -----------------
1995 1996 1997 1996 1997
----- ----- ------ ------ --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 578 $ 251 $ 568 $(598) $(1,303)
----- ----- ------ ----- -------
Adjustments to reconcile net income (loss) to net
cash
provided by (used in) operating activities:
Depreciation and amortization............... 57 46 92 66 76
Non-cash compensation....................... -- -- -- -- 182
Changes in operating assets and liabilities:
Increase in accounts receivable.......... (176) (195) (115) (229) (155)
Increase in prepaid expenses............. -- (67) (76) (73) 20
Decrease in other assets................. -- -- 1 1 (1)
Increase (decrease) in accounts
payable................................ 90 47 (2) 422 154
Increase (decrease) in accrued
expenses............................... 19 172 142 209 (182)
Increase (decrease) in deferred
revenue................................ 22 (48) 31 (12) 13
----- ----- ------ ----- -------
Total adjustments...................... 12 (45) 73 384 107
----- ----- ------ ----- -------
Net cash provided by (used in)
operating activities................ 590 206 641 (214) (1,196)
----- ----- ------ ----- -------
Cash flows from investing activities:
Purchases of property and equipment.............. (157) (122) (42) (47) (61)
Proceeds from sale of property and equipment..... -- 5 9 -- --
Purchase of trademark............................ -- (7) -- -- --
----- ----- ------ ----- -------
Net cash used in investing
activities.......................... (157) (124) (33) (47) (61)
----- ----- ------ ----- -------
Cash flows from financing activities:
Proceeds received on line of credit.............. -- -- 200 -- --
Principal payments on line of credit............. -- -- (200) -- --
----- ----- ------ ----- -------
Net cash used in financing
activities.......................... -- -- -- -- --
----- ----- ------ ----- -------
Net increase (decrease) in cash and cash
equivalents...................................... 433 82 608 (261) (1,257)
Effect of exchange rate changes on cash............ -- -- (6) -- 3
Cash and cash equivalents, beginning of period..... 137 570 652 652 1,254
----- ----- ------ ----- -------
Cash and cash equivalents, end of period........... $ 570 $ 652 $1,254 $ 391 $ --
===== ===== ====== ===== =======
Supplemental disclosure:
Cash paid for interest........................... $ -- $ -- $ 2 $ -- $ --
===== ===== ====== ===== =======
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE> 96
BEHAVIORAL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
(1) NATURE OF OPERATIONS
Behavioral Technology, Inc. (the "Company") was founded in 1978. The
Company primarily provides train-the-trainer programs designed to help its
clients improve employee selection and to provide managers with a methodology
for assessing strengths and weaknesses of current employees. BTI's revenue is
derived primarily from the licensing to clients of the right to use its training
materials.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recognized as services are performed. The Company also licenses
to its clients the use of the Company's behavioral interviewing techniques. The
entire sale price is recognized when the noncancellable contract is signed and
the right to use the intellectual property is transferred. Deferred revenue is
recognized for payments received prior to services being performed.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Financial Information
The interim financial statements as of December 31, 1997 and for the six
months ended December 31, 1996 and 1997, are unaudited, and certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial position, results of
operations and cash flows with respect to the interim financial statements have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Prepaid Expenses
Prepaid expenses consist of costs incurred in developing videos and
publishing books. The costs of the videos are being amortized over five years
and the costs of the books are expensed as books are sold.
Property and Equipment
Property and equipment are stated at cost and depreciated using an
accelerated method over periods ranging from five to seven years. Leasehold
improvements are amortized over the term of the lease.
F-28
<PAGE> 97
BEHAVIORAL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
Financial instruments of the Company consist primarily of cash and cash
equivalents, short-term certificates of deposit, accounts receivable, accounts
payable and accrued expenses. The carrying value of these financial instruments
approximates their fair value due to the short maturity of these instruments.
Foreign Currency Translation
The Company operates a branch in Canada. Assets and liabilities for the
branch are translated into U.S. Dollars at the end of the year using year-end
exchange rates. Income and expenses are translated using the average exchange
rates for the year. Translation gains and losses are reported as a separate
component of stockholders' equity.
Income Taxes
The Company has elected to be treated as an S corporation. Therefore, the
net income of the Company is reported by the stockholders. Accordingly, no
provision for federal income taxes has been included in the financial
statements. Only certain state taxes are paid by the Company. The Company will
terminate its S corporation status concurrently with the combination described
in note 8.
Income per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (FAS 128), Earnings per Share, which changed the
method of computing and presenting income per share. Basic income per share has
been computed using the weighted average number of outstanding common shares.
The Company has a simple capital structure with no potentially dilutive shares.
Accordingly, only basic income per share has been presented. All periods
presented have been restated in accordance with FAS 128.
(3) RELATED PARTY TRANSACTIONS
The Company conducts its administrative operations in a facility leased
from the principal stockholder of the Company. Lease expense for the years ended
June 30, 1995, 1996 and 1997 was $90, $76 and $85, respectively.
Future minimum lease payments under all noncancelable operating leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1998.................................................. $ 83
1999.................................................. 86
2000.................................................. 89
2001.................................................. 89
2002.................................................. 45
----
$392
====
</TABLE>
F-29
<PAGE> 98
BEHAVIORAL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
JUNE 30,
------------
1996 1997
---- ----
<S> <C> <C>
Machinery and equipment..................................... $272 $307
Furniture and fixtures...................................... 97 95
Leasehold improvements...................................... 18 18
---- ----
387 420
Accumulated depreciation and amortization................... 193 285
---- ----
Property and equipment, net....................... $194 $135
==== ====
</TABLE>
Depreciation and amortization expense related to property and equipment for
the years ended June 30, 1995, 1996 and 1997 was $57, $46 and $92, respectively.
(5) LINE OF CREDIT
The Company entered into a line of credit agreement on October 15, 1996 for
borrowings up to $500. The line bears interest at prime plus 1%, is secured by
the accounts receivable of the Company, and is personally guaranteed by the
principal stockholder. The line of credit had a maturity date of October 15,
1997 and was renewed until October 15, 1998. There were no amounts outstanding
under this agreement at June 30, 1997.
(6) EMPLOYEE BENEFITS
The Company adopted a 401(k) profit sharing plan on January 1, 1996 that
covers all employees above the age of twenty-one who have completed one year of
service. Company contributions are made each year at the discretion of the Board
of Directors. The Company contributed $66 and $101 to the plan for the years
ended June 30, 1996 and 1997, respectively.
(7) CONCENTRATION OF CREDIT RISK
The Company's credit risks primarily relate to cash and cash equivalents
and accounts receivable. Cash and cash equivalents are primarily held in bank
accounts. Cash deposits in excess of FDIC insurance limits approximated $1,040
at June 30, 1997. The Company has not incurred losses related to these balances
to date.
(8) SUBSEQUENT EVENT (UNAUDITED)
In February 1998, the Company entered into a definitive merger agreement
with PROVANT, Inc. ("PROVANT") and one of its subsidiaries, whereby PROVANT will
acquire the Company upon completion of the proposed initial public offering.
F-30
<PAGE> 99
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Decker Communications, Inc.:
We have audited the accompanying balance sheets of Decker Communications,
Inc., as of June 30, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Decker Communications, Inc.,
as of June 30, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended June 30, 1997 in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
January 9, 1998
F-31
<PAGE> 100
DECKER COMMUNICATIONS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
---------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 314 $ 508 $ 650
Investments............................................... 565 533 738
Accounts receivable, net of allowance for doubtful
accounts of $23 at June 30, 1996 and $31 at June 30,
1997 and December 31, 1997............................. 1,242 1,608 1,255
Receivables from related parties.......................... -- -- 202
Prepaid expenses and other current assets................. 170 140 183
------ ------ ------
Total current assets.............................. 2,291 2,789 3,028
------ ------ ------
Property and equipment, net................................. 497 338 353
Other assets................................................ 47 59 105
------ ------ ------
Total assets...................................... $2,835 $3,186 $3,486
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 251 $ 111 $ 194
Accrued expenses.......................................... 283 378 199
Accrued compensation...................................... 469 639 533
Taxes payable............................................. 6 -- 77
Current portion of note payable........................... -- 416 405
Deferred revenue.......................................... 92 89 122
------ ------ ------
Total current liabilities......................... 1,101 1,633 1,530
------ ------ ------
Note payable, net of current portion........................ -- 623 607
Redeemable common stock..................................... -- 300 300
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; 750,000 shares authorized;
176,972, 138,027 and 143,417 shares issued and
outstanding at June 30, 1996, June 30, 1997 and
December 31, 1997, respectively........................ 397 269 313
Unrealized gain on investments............................ 5 9 9
Note receivable from stock sales.......................... (92) (127) (171)
Retained earnings......................................... 1,424 479 898
------ ------ ------
Total stockholders' equity........................ 1,734 630 1,049
------ ------ ------
Total liabilities and stockholders' equity........ $2,835 $3,186 $3,486
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE> 101
DECKER COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
-------------------------- ----------------
1995 1996 1997 1996 1997
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue....................................... $8,550 $8,620 $8,410 $4,047 $5,160
Cost of revenue............................... 2,419 2,655 2,275 1,166 1,340
------ ------ ------ ------ ------
Gross profit................................ 6,131 5,965 6,135 2,881 3,820
Selling, general and administrative
expenses.................................... 5,670 5,716 6,446 3,406 3,414
------ ------ ------ ------ ------
Income (loss) from operations............... 461 249 (311) (525) 406
Other (income) expense........................ (54) (74) 9 (13) (23)
------ ------ ------ ------ ------
Income (loss) before income taxes........... 515 323 (320) (512) 429
State income taxes............................ 67 30 33 -- 10
------ ------ ------ ------ ------
Net income (loss)........................... $ 448 $ 293 $ (353) $ (512) $ 419
====== ====== ====== ====== ======
Basic income (loss) per share................. $ 2.53 $ 1.63 $(2.55) $(3.55) $ 2.96
====== ====== ====== ====== ======
Weighted average shares outstanding........... 176,750 180,150 138,352 144,064 141,620
====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE> 102
DECKER COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTE
COMMON STOCK UNREALIZED RECEIVABLE
---------------- GAIN ON FROM STOCK RETAINED
SHARES AMOUNT INVESTMENTS SALES EARNINGS TOTAL
------- ------ ----------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994.................. 174,000 $ 314 $-- $ -- $1,257 $1,571
Sale of stock......................... 5,500 49 -- (50) -- (1)
Net income............................ -- -- -- -- 448 448
Dividends............................. -- -- -- -- (300) (300)
------- ----- -- ----- ------ ------
Balance, June 30, 1995.................. 179,500 363 -- (50) 1,405 1,718
Sale of stock......................... 4,000 42 -- (42) -- --
Repurchase of stock................... (6,528) (8) -- -- (59) (67)
Unrealized gain on investments........ -- -- 5 -- -- 5
Net income............................ -- -- -- -- 293 293
Dividends............................. -- -- -- -- (215) (215)
------- ----- -- ----- ------ ------
Balance, June 30, 1996.................. 176,972 397 5 (92) 1,424 1,734
Sale of stock......................... 8,080 35 -- (35) -- --
Repurchase of stock................... (37,850) (163) -- -- (138) (301)
Unrealized gain on investments........ -- -- 4 -- -- 4
Redeemable common stock............... (9,175) -- -- -- (300) (300)
Net loss.............................. -- -- -- -- (353) (353)
Dividends............................. -- -- -- -- (154) (154)
------- ----- -- ----- ------ ------
Balance, June 30, 1997.................. 138,027 269 9 (127) 479 630
Sale of stock......................... 5,390 44 -- (44) -- --
Net income............................ -- -- -- -- 419 419
------- ----- -- ----- ------ ------
Balance, December 31, 1997
(Unaudited)........................... 143,417 $ 313 $9 $(171) $ 898 $1,049
======= ===== == ===== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE> 103
DECKER COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED DECEMBER 31,
----------------------- -------------------
1995 1996 1997 1996 1997
----- ----- ----- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 448 $ 293 $(353) $(512) $ 419
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............. 127 223 194 118 78
Non-cash compensation..................... -- -- 825 825 --
(Gain) loss on disposal of property and
equipment.............................. -- (3) 12 20 --
Changes in operating assets and
liabilities:...........................
(Increase) decrease in accounts
receivable, trade.................... (210) 62 (366) 219 353
(Increase) decrease in prepaid expenses
and other current assets............. 12 20 30 (152) (245)
(Increase) decrease in other assets.... (18) 6 (12) (11) (46)
Increase (decrease) in accounts payable
and accrued expenses................. 247 (30) 119 (211) (125)
Increase (decrease) in deferred
revenue.............................. (40) (61) (3) (22) 33
----- ----- ----- ----- -----
Total adjustments.................... 118 217 799 786 48
----- ----- ----- ----- -----
Net cash provided by operating
activities........................ 566 510 446 274 467
----- ----- ----- ----- -----
Cash flows from investing activities:
Net change in investments...................... (344) 131 36 84 (205)
Purchases of property and equipment............ (136) (443) (56) (26) (96)
Proceeds from sale of property and equipment... -- 9 9 -- 3
----- ----- ----- ----- -----
Net cash (used in) provided by
investing activities.............. (480) (303) (11) 58 (298)
----- ----- ----- ----- -----
Cash flows from financing activities:
Dividends...................................... (300) (215) (154) -- --
Repurchase of stock............................ -- (67) (35) -- --
Payments of notes payable...................... (6) -- (52) (27) (27)
----- ----- ----- ----- -----
Net cash used in financing
activities........................ (306) (282) (241) (27) (27)
----- ----- ----- ----- -----
Net (decrease) increase in cash and cash
equivalents.................................... (220) (75) 194 305 142
Cash and cash equivalents, beginning of period... 609 389 314 314 508
----- ----- ----- ----- -----
Cash and cash equivalents, end of period......... $ 389 $ 314 $ 508 $ 619 $ 650
===== ===== ===== ===== =====
Supplemental disclosure:
Cash paid for interest......................... $ -- $ -- $ 80 $ 20 $ 38
===== ===== ===== ===== =====
Supplemental disclosure of non-cash item:
Increase (decrease) in market value of
investments................................. $ 19 $ (11) $ 4 $ -- $ --
===== ===== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE> 104
DECKER COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(1) NATURE OF OPERATIONS
Decker Communications, Inc. (the "Company") was founded in 1979. The
Company provides instructor-led training to businesses to improve employees'
business communication skills and communication between management and
employees. Revenue is derived primarily from fees charged to participants in its
instructor-led training programs.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenues are recognized as products and services are provided.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Financial Information
The interim financial statements as of December 31, 1997 and for the six
months ended December 31, 1996 and 1997 are unaudited, and certain information
and footnote disclosures normally included in the financial statements prepared
in accordance with generally accepted accounting principles have been omitted.
In the opinion of management, all adjustments consisting only of normal
recurring adjustments necessary to present fairly the financial position,
results of operations and cash flows with respect to the interim financial
statements have been included. The results of operations for the interim periods
are not necessarily indicative of the results for the entire fiscal year.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Investments
Marketable investment securities consist of U.S. treasury bills and equity
securities in various mutual funds. The investments are stated at fair market
value and are accounted for as available for sale securities under the
provisions of Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities. Unrealized gains are
included as a separate component of stockholders' equity.
Property and Equipment
Property and equipment are stated at cost and depreciated using an
accelerated method over periods ranging from five to seven years. Leasehold
improvements are amortized over the lease term.
Fair Value of Financial instruments
Financial instruments of the Company consist of cash and cash equivalents,
investments, accounts and notes receivable, accounts payable and accrued
liabilities. The carrying value of these financial instruments
F-36
<PAGE> 105
DECKER COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
approximates their fair value because of the short maturity of these
instruments. Based upon borrowing rates currently available to the Company for
issuance of similar debt with similar terms and remaining maturities, the
estimated fair value of the long-term debt approximates its carrying amount.
Income Taxes
The Company has elected to be treated as an S corporation. Therefore, the
net income of the Company is reported by the stockholders. Accordingly, no
provision for federal income taxes has been included in the financial
statements. Only certain state taxes are paid by the Company. The Company will
terminate its S corporation status concurrently with the combination described
in note 11.
Library of Copyrighted Materials
The Company derives a substantial portion of its revenue from training
programs which are based on its library of copyrighted materials and other
materials developed within the Company. Costs associated with the development of
these materials have been expensed as incurred.
Income per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (FAS 128), Earnings per Share, which changed the
method of computing and presenting income per share. Basic income per share has
been computed using the weighted average number of outstanding common shares.
The Company has a simple capital structure with no potentially dilutive shares.
Accordingly, only basic income per share has been presented. All periods
presented have been restated in accordance with FAS 128.
(3) RELATED PARTY TRANSACTIONS
The Company has a note receivable from a stockholder and officer of the
Company for the purchase of stock. The balance of this note was $92 and $127 at
June 30, 1996 and 1997, respectively. The note bears interest at the prevailing
rate and is secured by shares of Company stock and may be repaid by cash or
redemption of the stock to the Company. The note is reflected as a reduction of
stockholders' equity in the accompanying balance sheets.
(4) INVESTMENTS
Investments consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------
1996 1997
---- ----
<S> <C> <C>
U.S. Treasury Bills......................................... $433 $381
Mutual Funds................................................ 127 143
---- ----
Total cost........................................ $560 $524
Unrealized gain............................................. 5 9
---- ----
Total fair value.................................. $565 $533
==== ====
</TABLE>
F-37
<PAGE> 106
DECKER COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
JUNE 30,
----------------
1996 1997
------ ------
<S> <C> <C>
Equipment.................................................. $ 665 591
Furniture and fixtures..................................... 336 334
Software................................................... 129 143
Leasehold improvements..................................... 17 19
------ ------
1,147 1,087
Accumulated depreciation and amortization.................. 650 749
------ ------
Property and equipment, net...................... $ 497 338
====== ======
</TABLE>
Depreciation and amortization expense related to property and equipment for
the years ended June 30, 1995, 1996 and 1997 was $127, $223 and $194,
respectively.
(6) NOTE PAYABLE
In July 1996, the Company entered into a stock repurchase agreement with a
stockholder of the Company to repurchase 33,350 shares of common stock. In
connection with the agreement, the Company issued a secured promissory note to
the stockholder in the amount of $1,091. Of the total purchase price, $825 has
been attributed to compensation expense. The balance has been treated as a
repurchase of common stock. The note bears interest at 7.5%, with principal and
interest due monthly through June 30, 2009. The note is secured by all tangible
and intangible assets of the Company.
In connection with the stock repurchase agreement, the stockholder has the
option to accelerate the payment of a portion of the outstanding balance upon
the occurrence of certain events. One such event has occurred, as discussed in
note 11 (unaudited), giving the stockholder the right to accelerate
approximately $416 of the principal balance. This amount has been classified as
current in the accompanying balance sheet at June 30, 1997. The stockholder has
not yet chosen to accelerate the note.
Also in connection with the stock repurchase agreement, the Company issued
a put option to the stockholder which gave him the right, upon occurrence of a
triggering event, to sell his remaining 9,175 shares of common stock to the
Company at an arbitrated value per share. Payment pursuant to this put option
would be made by amending the principal balance of the note payable by the
amount of the purchase price, effective July 1, 1999. The stockholder has not
yet chosen to exercise the put option. Common shares held under this option have
been reflected as redeemable common stock in the June 30, 1997 balance sheet.
Principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1998.......................................... $ 410
1999.......................................... 60
2000.......................................... 64
2001.......................................... 69
2002.......................................... 75
Thereafter.................................... 347
------
Total..................................... $1,025
======
</TABLE>
F-38
<PAGE> 107
DECKER COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) LINE OF CREDIT
The Company has a $250 line of credit agreement with a bank, with interest
payable at prime plus 1.5%. The line of credit is secured by substantially all
of the Company's assets and is guaranteed by the principal stockholder of the
Company. At June 30, 1996 and 1997, there were no amounts outstanding under the
agreement.
(8) OPERATING LEASES
The Company leases all of its facilities under cancelable and noncancelable
operating leases that expire on various dates through fiscal 2002. Most of these
leases generally provide for rent escalation based upon changes in real estate
taxes and operating expenses.
Future minimum lease payments under all noncancelable operating leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1998.......................................... $ 494
1999.......................................... 502
2000.......................................... 382
2001.......................................... 374
2002.......................................... 108
------
Total $1,860
======
</TABLE>
Rent expense for the years ended June 30, 1995, 1996 and 1997 was $505,
$561 and $510, respectively.
(9) EMPLOYEE BENEFITS
The Company has a 401(k) plan in which it matches 50% of employee annual
contributions up to $1 per employee. The Company contributed $29, $20 and $28 to
the plan for the years ended June 30, 1995, 1996 and 1997, respectively.
(10) CONCENTRATION OF CREDIT RISK
The Company's three largest customers accounted for approximately 16%, 30%,
and 16% of total revenues for the years ended June 30, 1995, 1996 and 1997,
respectively. Accounts receivable from these customers represented approximately
13% and 16% of the total accounts receivable balance at June 30, 1996 and 1997,
respectively.
(11) SUBSEQUENT EVENT (UNAUDITED)
In February 1998, the Company entered into a definitive merger agreement
with PROVANT, Inc. ("PROVANT") and one of its subsidiaries, whereby PROVANT will
acquire the Company upon completion of the proposed initial public offering.
F-39
<PAGE> 108
INDEPENDENT AUDITORS' REPORT
The Board of Directors
J. Howard & Associates, Inc.:
We have audited the accompanying balance sheets of J. Howard & Associates,
Inc., as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of J. Howard & Associates,
Inc., as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
1997 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
April 3, 1998
F-40
<PAGE> 109
J. HOWARD & ASSOCIATES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 201 $ 208
Accounts receivable, net of allowance for doubtful
accounts of $84 at December 31, 1996 and $74 at
December 31, 1997...................................... 724 1,166
Due from employees and related parties.................... 17 214
Prepaid expenses.......................................... 14 42
------ ------
Total current assets.............................. 956 1,630
------ ------
Property and equipment, net................................. 365 301
Other assets................................................ 44 138
------ ------
Total assets...................................... $1,365 $2,069
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 12 $ 59
Accrued expenses.......................................... 106 105
Accrued compensation...................................... 32 139
Deferred revenue.......................................... 135 88
Accrued state income taxes................................ 38 41
Distributions payable..................................... -- 103
------ ------
Total current liabilities......................... 323 535
------ ------
Commitments and contingencies
Stockholders' equity:
Class A voting common stock, no par value; authorized
100,000 shares; issued and outstanding 72,533 shares at
December 31, 1996 and 1997............................. 175 175
Class B non-voting common stock, no par value; authorized
25,000 shares; issued and outstanding 16,267 shares at
December 31, 1996 and 1997............................. 97 97
Retained earnings......................................... 770 1,262
------ ------
Total stockholders' equity........................ 1,042 1,534
------ ------
Total liabilities and stockholders' equity........ $1,365 $2,069
====== ======
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE> 110
J. HOWARD & ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Revenue..................................................... $6,251 $7,110 $7,684
Cost of revenue............................................. 1,964 2,166 2,346
------ ------ ------
Gross profit.............................................. 4,287 4,944 5,338
Selling, general, and administrative expenses............... 4,158 4,559 4,748
------ ------ ------
Income from operations.................................... 129 385 590
------ ------ ------
Other income (expense):
Interest and dividend income.............................. 6 31 15
Interest expense.......................................... (9) -- --
Other income.............................................. -- 3 --
------ ------ ------
Total other income (expense)...................... (3) 34 15
------ ------ ------
Income before income taxes........................ 126 419 605
State income taxes.......................................... 10 8 5
------ ------ ------
Net income........................................ $ 116 $ 411 $ 600
====== ====== ======
Basic income per share...................................... $ 1.45 $ 4.81 $ 6.76
====== ====== ======
Weighted average shares outstanding......................... 80,000 85,500 88,800
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE> 111
J. HOWARD & ASSOCIATES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CLASS A VOTING CLASS B NON-VOTING
COMMON STOCK COMMON STOCK
---------------- ------------------ RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
------ ------ ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.......... 66,667 $ 64 13,333 $ 42 $1,059 $1,165
Net income........................ -- -- -- -- 116 116
Distributions to stockholders..... -- -- -- -- (473) (473)
------ ---- ------ ---- ------ ------
Balance, December 31, 1995.......... 66,667 64 13,333 42 702 808
Net income........................ -- -- -- -- 411 411
Distributions to stockholders..... -- -- -- -- (343) (343)
Stock grant....................... 5,866 111 2,934 55 -- 166
------ ---- ------ ---- ------ ------
Balance, December 31, 1996.......... 72,533 175 16,267 97 770 1,042
Net income........................ -- -- -- -- 600 600
Distributions to stockholders..... -- -- -- -- (108) (108)
------ ---- ------ ---- ------ ------
Balance, December 31, 1997.......... 72,533 $175 16,267 $ 97 $1,262 $1,534
====== ==== ====== ==== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE> 112
J. HOWARD & ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 116 $ 411 $ 600
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 95 104 139
Non-cash compensation................................ -- 166 --
Loss on sale of property and equipment............... -- -- 15
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable........ (116) 37 (442)
(Increase) decrease in prepaid expenses........... 10 (10) (28)
(Increase) decrease in other assets............... 12 9 (94)
Increase (decrease) in accounts payable and
accrued expenses................................ 153 (282) 256
Increase (decrease) in state income taxes......... 8 11 3
Increase (decrease) in deferred revenue........... 91 18 (47)
----- ----- -----
Total adjustments............................... 253 53 (198)
----- ----- -----
Net cash provided by operating activities....... 369 464 402
----- ----- -----
Cash flows from investing activities:
Purchases of property and equipment....................... (50) (299) (101)
Proceeds from sale of property and equipment.............. -- -- 11
Net (increase) decrease in amounts due from employees and
related parties........................................ (8) 51 (197)
----- ----- -----
Net cash used in investing activities........... (58) (248) (287)
----- ----- -----
Cash flows from financing activities:
Payments on long-term debt................................ (42) -- --
Distributions to stockholders............................. (335) (481) (108)
----- ----- -----
Net cash used in financing activities........... (377) (481) (108)
----- ----- -----
Net increase (decrease) in cash and cash equivalents........ (66) (265) 7
Cash and cash equivalents, beginning of year................ 532 466 201
----- ----- -----
Cash and cash equivalents, end of year...................... $ 466 $ 201 208
===== ===== =====
Supplemental disclosure:
Cash paid for interest.................................... $ 9 $ -- $ --
===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE> 113
J. HOWARD & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
(1) NATURE OF OPERATIONS
J. Howard & Associates, Inc. (the "Company") was founded in 1977. The
Company provides instructor-led training to individual managers and client
companies to identify and address potential obstacles to improving workplace
productivity, including race and gender issues, sexual harassment and failure of
employees to take measured risks. Revenue is derived primarily from
instructor-led seminars and, to a lesser extent, from rendering consulting
services.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recognized as products and services are provided.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost and depreciated using accelerated
and straight-line methods over periods ranging from three to seven years.
Leasehold improvements are amortized over the term of the lease.
Fair Value of Financial Instruments
Financial instruments of the Company consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses. The
carrying value of these financial instruments approximates their fair value
because of the short maturity of these instruments.
Income Taxes
The Company has elected to be treated as an S corporation. Therefore, the
net income of the Company is reported by the stockholders. Accordingly, no
provision for federal income taxes has been included in the financial
statements. Only certain state taxes are paid by the Company. The Company will
terminate its S corporation status concurrently with the combination described
in note 11.
Income per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (FAS 128), Earnings per Share, which changed the
method of computing and presenting income per share. Basic income per share has
been computed using the weighted average number of outstanding common shares.
The Company has a simple capital structure with no potentially dilutive shares.
Accordingly, only basic income per share has been presented. All periods
presented have been restated in accordance with FAS 128.
F-45
<PAGE> 114
J. HOWARD & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) RELATED PARTY TRANSACTIONS
Due from employees and related parties consists of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Due from The Efficacy Institute, Inc........................ $14 $ 39
Due from (to) stockholders.................................. (9) 173
Due from employees.......................................... 12 2
--- ----
$17 $214
=== ====
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Equipment.................................................. $ 677 $ 631
Furniture and fixtures..................................... 255 270
Leasehold improvements..................................... 49 49
Investment art............................................. 21 21
Computer software.......................................... 113 207
Vehicles................................................... 38 38
------ ------
1,153 1,216
Accumulated depreciation and amortization.................. 788 915
------ ------
Property and equipment, net...................... $ 365 $ 301
====== ======
</TABLE>
Depreciation and amortization expense related to property and equipment for
the years ended December 31, 1995, 1996 and 1997 was $95, $104 and $139,
respectively.
(5) LINE OF CREDIT
The Company has a secured revolving line of credit agreement which permits
borrowings of up to $500 at the bank's base rate plus one percent. No amounts
were outstanding under this agreement at December 31, 1995, 1996 and 1997.
Substantially all assets of the Company are pledged as collateral under this
agreement.
(6) DISTRIBUTIONS TO STOCKHOLDERS
As discussed in note 2, the stockholders are taxed on their proportionate
share of the Company's taxable income. It has been the Company's policy to make
distributions to the stockholders for the purpose of funding these income tax
obligations.
(7) LEASE COMMITMENTS
The Company is committed under various noncancelable operating leases for
office space and equipment through June 2005. Lease expense charged to
operations was $256 in 1995, $247 in 1996 and $149 in 1997.
F-46
<PAGE> 115
J. HOWARD & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under all noncancelable operating leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998................................................ $ 344
1999................................................ 616
2000................................................ 617
2001................................................ 577
2002................................................ 554
------
Thereafter.......................................... $1,372
======
$4,080
</TABLE>
(8) STOCKHOLDERS' EQUITY
During the year ended December 31, 1996, 5,866 shares of Class A common
stock (voting) no par value and 2,934 shares of Class B common stock
(non-voting) no par value were issued 50% each to two new shareholders in
recognition of compensation expense of $111 and $55, respectively.
On June 30, 1995, the Company approved an increase in the authorized common
stock Class A (voting) from 12,500 shares to 100,000 shares and common stock
Class B (non-voting) from 1,000 shares to 25,000 shares. Additionally, the
Company approved an exchange of 40 shares of the newly authorized shares for
each share of the previously authorized shares (or a 40 for 1 stock split). All
share data has been retroactively adjusted to reflect the stock split.
(9) EMPLOYEE BENEFITS
The Company maintains a defined contribution retirement plan for all
eligible employees. Company contributions are at the discretion of the Board of
Directors, but cannot exceed the maximum amount deductible under applicable
provisions of the Internal Revenue Code.
Contributions to the plan amounted to $34 for each of the years ended
December 31, 1995, 1996 and 1997.
(10) CONCENTRATION OF CREDIT RISK
The Company's three largest customers accounted for approximately 30%, 63%
and 34% of net program revenues for the years ended December 31, 1995, 1996 and
1997, respectively. Accounts receivable from these customers approximated $514
and $280 at December 31, 1996 and 1997, respectively.
The Company maintains cash deposits in two banks located in eastern
Massachusetts and in a money market mutual fund account sponsored by a
registered broker-dealer. Cash deposits in excess of FDIC insurance limits
approximated $140 and $46 at December 31, 1996 and 1997, respectively.
(11) SUBSEQUENT EVENTS
In February 1998, the Company entered into a definitive merger agreement
with PROVANT, Inc. ("PROVANT") and one of its subsidiaries, whereby PROVANT will
acquire the Company upon completion of the proposed initial public offering.
F-47
<PAGE> 116
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Robert Steinmetz, Ph.D., and Associates, Inc.
d/b/a Learning Systems Sciences:
We have audited the accompanying balance sheets of Robert Steinmetz, Ph.D.,
and Associates, Inc., d/b/a Learning Systems Sciences as of December 31, 1997
and 1996 and the related statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Robert Steinmetz, Ph.D., and
Associates, Inc., d/b/a Learning Systems Sciences as of December 31, 1997 and
1996 and the results of its operations and its cash flows for each of the years
in the three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
April 3, 1998
F-48
<PAGE> 117
ROBERT STEINMETZ, PH.D., AND ASSOCIATES, INC.
D/B/A LEARNING SYSTEMS SCIENCES
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------ ------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 274 $ 174
Accounts receivable, net of allowance for doubtful
accounts of $88........................................ 703 984
Costs in excess of billings............................... 267 561
Prepaid expenses and other current assets................. 53 43
------ ------
Total current assets.............................. 1,297 1,762
------ ------
Property and equipment, net................................. 129 153
Other assets................................................ 103 104
------ ------
Total assets...................................... $1,529 $2,019
====== ======
Current liabilities:
Accounts payable.......................................... $ 64 $ 185
Accrued expenses.......................................... 166 40
Accrued compensation...................................... 124 161
Billings in excess of costs............................... 710 414
------ ------
Total current liabilities......................... 1,064 800
------ ------
Commitments and contingencies
Stockholders' equity:
Common stock, $3 par value; 1,000 shares authorized,
issued and outstanding................................. 3 3
Retained earnings......................................... 462 1,216
------ ------
Total stockholders' equity........................ 465 1,219
------ ------
Total liabilities and stockholders' equity........ $1,529 $2,019
====== ======
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE> 118
ROBERT STEINMETZ, PH.D., AND ASSOCIATES, INC.
D/B/A LEARNING SYSTEMS SCIENCES
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Revenue..................................................... $3,332 $5,123 $5,681
Cost of revenue............................................. 1,390 1,696 2,202
------ ------ ------
Gross profit.............................................. 1,942 3,427 3,479
Selling, general and administrative expenses................ 1,767 3,079 2,226
------ ------ ------
Income from operations............................ 175 348 1,253
------ ------ ------
Other income (expense):
Other..................................................... (49) -- --
Interest income, net...................................... 2 9 15
------ ------ ------
Total other income (expense)...................... (47) 9 15
------ ------ ------
Income before income taxes........................ 128 357 1,268
Income taxes................................................ 86 7 18
------ ------ ------
Net income........................................ $ 42 $ 350 $1,250
====== ====== ======
Basic income per share...................................... $ 42 $ 350 $1,250
====== ====== ======
Weighted average shares outstanding......................... 1,000 1,000 1,000
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE> 119
ROBERT STEINMETZ, PH.D., AND ASSOCIATES, INC.
D/B/A LEARNING SYSTEMS SCIENCES
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ -------- ------
<S> <C> <C> <C> <C>
Balance, December 31, 1994.............................. 1,000 $3 $ 70 $ 73
Net income............................................ -- -- 42 42
----- -- ------ ------
Balance, December 31, 1995.............................. 1,000 3 112 115
Net income............................................ -- -- 350 350
----- -- ------ ------
Balance, December 31, 1996.............................. 1,000 3 462 465
Dividend -- -- (496) (496)
Net income............................................ -- -- 1,250 1,250
----- -- ------ ------
Balance, December 31, 1997.............................. 1,000 $3 $1,216 $1,219
===== == ====== ======
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE> 120
ROBERT STEINMETZ, PH.D., AND ASSOCIATES, INC.
D/B/A LEARNING SYSTEMS SCIENCES
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
----- ----- ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 42 $ 350 $1,250
----- ----- ------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 48 43 62
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable........ (467) (195) (281)
(Increase) decrease in prepaid expenses and other
current assets.................................. 12 (30) 10
(Increase) decrease in costs in excess of
billings........................................ (184) 14 (294)
(Increase) decrease in other assets............... (17) (19) (1)
Increase (decrease) in accounts payable and
accrued expenses................................ 50 115 32
Increase (decrease) in billings in excess of
costs........................................... 560 37 (296)
----- ----- ------
Total adjustments............................... 2 (35) (768)
----- ----- ------
Net cash provided by operating activities....... 44 315 482
----- ----- ------
Cash flows from investing activity:
Purchases of property and equipment....................... (84) (85) (86)
----- ----- ------
Cash flows from financing activity:
Dividend.................................................. -- -- (496)
Net (decrease) increase in cash and cash
equivalents.................................. (40) 230 (100)
Cash and cash equivalents, beginning of year................ 84 44 274
----- ----- ------
Cash and cash equivalents, end of year...................... $ 44 $ 274 $ 174
===== ===== ======
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE> 121
ROBERT STEINMETZ, PH.D., AND ASSOCIATES, INC.
D/B/A LEARNING SYSTEMS SCIENCES
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
(1) NATURE OF OPERATIONS
Robert Steinmetz, Ph.D., and Associates, Inc., d/b/a Learning Systems
Sciences, was founded in 1979. The Company creates customized training products
that generally are designed to facilitate faster learning of customer interface
devices and higher productivity of retail associates. Revenue is derived
primarily from the design, development and delivery of its products.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company follows the percentage-of-completion method of accounting for
contracts. Accordingly, income is recognized in the ratio that costs incurred
bear to estimated total costs. Adjustments to cost estimates are made
periodically, and losses expected to be incurred on contracts in progress are
charged to operations in the period such losses are determined. The aggregate of
costs incurred and income recognized on uncompleted contracts in excess of
related billings is shown as a current asset, and the aggregate of billings on
uncompleted contracts in excess of related costs incurred and income recognized
is shown as a current liability.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost and depreciated using an
accelerated method over periods ranging from five to seven years. Leasehold
improvements are amortized over the term of the lease.
Fair Value of Financial Instruments
Financial instruments of the Company consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities. The
carrying value of these financial instruments approximates their fair value
because of the short maturity of these instruments.
Income Taxes
Effective August 31, 1995, the Company elected to be treated as an S
corporation. Therefore, the net income of the Company is reported by the
stockholders. Accordingly, no provision for federal income taxes has been
included in the financial statements for the periods subsequent to that date.
Only certain state income taxes are paid by the Company. The Company will
terminate its S corporation status concurrently with the combination described
in note 7.
F-53
<PAGE> 122
ROBERT STEINMETZ, PH.D., AND ASSOCIATES, INC.
D/B/A LEARNING SYSTEMS SCIENCES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
Income per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (FAS 128), Earnings per Share, which changed the
method of computing and presenting income per share. Basic income per share has
been computed using the weighted average number of outstanding common shares.
The Company has a simple capital structure with no potentially dilutive shares.
Accordingly, only basic income per share has been presented. All periods
presented have been restated in accordance with FAS 128.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Machinery and equipment..................................... $248 $328
Furniture and fixtures...................................... 48 54
Automobiles................................................. 10 10
Leasehold improvements...................................... 12 12
---- ----
318 404
Less accumulated depreciation and amortization.............. 189 251
---- ----
Property and equipment, net....................... $129 $153
==== ====
</TABLE>
Depreciation and amortization expense related to property and equipment for
the years ended December 31, 1995, 1996 and 1997 was $48, $43 and $62,
respectively.
(4) OPERATING LEASES
Operating lease commitments consist of facility and automobile rentals.
Future minimum lease payments under all noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1998................................................ $135
1999................................................ 39
----
$174
====
</TABLE>
Lease expense for the years ended December 31, 1995, 1996 and 1997 totaled
$93, $112 and $136, respectively.
(5) EMPLOYEE BENEFITS
The Company has established a profit sharing plan for the benefit of its
employees. Company contributions are made at the discretion of the Board of
Directors. The Company contributed $83 to the plan in 1995. No contribution was
made for the years ended December 31, 1996 or 1997.
(6) CONCENTRATION OF CREDIT RISK
The Company had three customers that accounted for 41% of total revenue and
two customers that accounted for 27% of total revenue for the years ended
December 31, 1996 and 1997, respectively. Accounts receivable from these
customers represented approximately 50% and 28% of the total accounts receivable
balance at December 31, 1996 and 1997, respectively.
F-54
<PAGE> 123
ROBERT STEINMETZ, PH.D., AND ASSOCIATES, INC.
D/B/A LEARNING SYSTEMS SCIENCES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(7) SUBSEQUENT EVENT
In February 1998, the Company entered into a definitive merger agreement
with PROVANT, Inc. ("PROVANT") and one of its subsidiaries, whereby PROVANT will
acquire the Company upon completion of the proposed initial public offering.
F-55
<PAGE> 124
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MOHR Retail Learning Systems, Inc.:
We have audited the accompanying balance sheets of MOHR Retail Learning
Systems, Inc., as of June 30, 1997 and 1996, and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
two-year period ended June 30, 1997. These financial statements are the
responsibility of MOHR Retail Learning Systems, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of MOHR Retail Learning
Systems, Inc. as of June 30, 1997 and 1996, and the results of its operations
and its cash flows for each of the years in the two-year period ended June 30,
1997, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
January 9, 1998
F-56
<PAGE> 125
MOHR RETAIL LEARNING SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
------------ DECEMBER 31,
1996 1997 1997
---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $221 $260 $ --
Accounts receivable, net of allowance for doubtful
accounts of $46 at June 30, 1996 and 1997 and December
31, 1997............................................... 211 548 878
Inventory................................................. 99 133 137
Prepaid expenses.......................................... 11 14 56
---- ---- ------
Total current assets.............................. 542 955 1,071
Property and equipment, net................................. 18 44 46
---- ---- ------
Total assets...................................... $560 $999 $1,117
==== ==== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $118 $ 74 $ 230
Accrued expenses.......................................... 320 295 309
Accrued compensation...................................... 12 54 27
Deferred revenue.......................................... 48 73 85
---- ---- ------
Total current liabilities......................... 498 496 651
---- ---- ------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; 2,500 shares authorized; 100
shares issued and outstanding.......................... 4 4 4
Retained earnings......................................... 58 499 462
---- ---- ------
Total stockholders' equity........................ 62 503 466
---- ---- ------
Total liabilities and stockholders' equity........ $560 $999 $1,117
==== ==== ======
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE> 126
MOHR RETAIL LEARNING SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
---------------- ------------------
1996 1997 1996 1997
------ ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue............................................... $2,171 $3,015 $ 1,114 $ 1,534
Cost of revenue....................................... 677 825 352 523
------ ------ ------- -------
Gross profit........................................ 1,494 2,190 762 1,011
Selling, general and administrative expenses.......... 1,151 1,745 743 1,050
------ ------ ------- -------
Income (loss) from operations....................... 343 445 19 (39)
Interest income (expense)............................. (3) 3 2 4
------ ------ ------- -------
Income (loss) before income taxes................... 340 448 21 (35)
State income taxes.................................... 1 7 -- 2
------ ------ ------- -------
Net income (loss)........................... $ 339 $ 441 $ 21 $ (37)
====== ====== ======= =======
Basic income (loss) per share......................... $3,390 $4,410 $ 210 $ (370)
====== ====== ======= =======
Weighted average shares outstanding................... 100 100 100 100
====== ====== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-58
<PAGE> 127
MOHR RETAIL LEARNING SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------- RETAINED EARNINGS
SHARES AMOUNT (ACCUMULATED DEFICIT) TOTAL
------ ------ --------------------- -----
<S> <C> <C> <C> <C>
Balance, June 30, 1995......................... 100 $ 4 $(281) $(277)
Net income................................... -- -- 339 339
--- --- ----- -----
Balance, June 30, 1996......................... 100 4 58 62
Net income................................... -- -- 441 441
--- --- ----- -----
Balance, June 30, 1997......................... 100 4 499 503
Net loss..................................... -- -- (37) (37)
--- --- ----- -----
Balance, December 31, 1997 (Unaudited)......... 100 $ 4 $ 462 $ 466
=== === ===== =====
</TABLE>
See accompanying notes to financial statements.
F-59
<PAGE> 128
MOHR RETAIL LEARNING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
-------------- ----------------
1996 1997 1996 1997
----- ----- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ 339 $ 441 $ 21 $ (37)
----- ----- ----- -----
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 10 15 4 11
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable...... (99) (337) (213) (330)
(Increase) decrease in inventory................ 4 (34) (23) (4)
(Increase) decrease in prepaid expenses......... 3 (3) (24) (42)
Increase (decrease) in accounts payable......... (1) (44) 4 156
Increase (decrease) in accrued expenses......... (15) 17 (8) (13)
Increase (decrease) in deferred revenue......... (29) 25 37 12
----- ----- ----- -----
Total adjustments............................. (127) (361) (223) (210)
----- ----- ----- -----
Net cash provided by (used in) operating
activities................................. 212 80 (202) (247)
----- ----- ----- -----
Cash flows from investing activities:
Purchases of property and equipment..................... (8) (41) (19) (13)
----- ----- ----- -----
Net cash used in investing activities......... (8) (41) (19) (13)
----- ----- ----- -----
Net increase (decrease) in cash and cash equivalents...... 204 39 (221) (260)
Cash and cash equivalents, beginning of period............ 17 221 221 260
----- ----- ----- -----
Cash and cash equivalents, end of period.................. $ 221 $ 260 $ -- $ --
===== ===== ===== =====
Supplemental disclosure:
Cash paid for interest.................................. $ -- $ 3 $ -- $ --
===== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-60
<PAGE> 129
MOHR RETAIL LEARNING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
(1) NATURE OF OPERATIONS
MOHR Retail Learning Systems, Inc. (the "Company") was founded in 1991. The
Company offers train-the-trainer seminars to help clients in the retail industry
to improve productivity by fostering a customer oriented focus at the sales
management and associate levels. In some of its programs, the Company trains
employees directly through instructor-led seminars. Revenue is derived primarily
from the licensing to clients of the right to use the Company's training
programs. Revenue is received on a participant or site basis.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recognized as services are performed. The Company contracts with
customers to provide materials and training seminars. Deferred revenue is
recognized for payments received prior to services being performed.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Financial Information
The interim financial statements as of December 31, 1997 and for the six
months ended December 31, 1996 and 1997, are unaudited, and certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial position, results of
operations and cash flows with respect to the interim financial statements have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Inventory
The Company owns training supplies and manuals which are accounted for
using the lower of cost first-in, first-out (FIFO) or market basis of
accounting.
Property and Equipment
Property and equipment are stated at cost and depreciated using an
accelerated method over five years. Leasehold improvements are amortized over
the term of the lease.
F-61
<PAGE> 130
MOHR RETAIL LEARNING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses. The
carrying amount of these financial instruments approximates fair value because
of the short maturity of those instruments.
Income Taxes
The Company has elected to be treated as an S corporation. Therefore, the
net income of the Company is reported by the stockholders. Accordingly, no
provision for federal income taxes has been included in the financial
statements. Only certain state taxes are paid by the Company. The Company will
terminate its S corporation status concurrently with the combination discussed
in note 7.
Income per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (FAS 128), Earnings per Share, which changed the
method of computing and presenting income per share. Basic income per share has
been computed using the weighted average number of outstanding common shares.
The Company has a simple capital structure with no potentially dilutive shares.
Accordingly, only basic income per share has been presented. All periods
presented have been restated in accordance with FAS 128.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
JUNE 30,
------------
1996 1997
---- ----
<S> <C> <C>
Equipment................................................... $34 61
Furniture................................................... 9 19
Leasehold improvements...................................... -- 4
--- --
43 84
Accumulated depreciation and amortization................... 25 40
--- --
Property and equipment, net....................... $18 44
=== ==
</TABLE>
Depreciation and amortization expense related to property and equipment was
$10 and $15 in the years ended June 30, 1996 and 1997, respectively.
(4) LEASE COMMITMENTS
The Company is committed under various noncancelable operating leases for
office space and equipment through February 2000. Lease expense for the years
ended June 30, 1996 and 1997 was $18 and $34, respectively. Future minimum lease
payments under all noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
<S> <C>
1998............................................. $41
1999............................................. 40
2000............................................. 1
---
Total....................................... $82
===
</TABLE>
F-62
<PAGE> 131
MOHR RETAIL LEARNING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) EMPLOYEE BENEFITS
Eligible employees of the Company participate in a profit sharing plan
sponsored by the Company. The Plan provides that the Company make discretionary
contributions to the Plan. The Company made contributions of $145 and $104 for
the years ended June 30, 1996 and 1997, respectively.
(6) CONCENTRATION OF CREDIT RISK
The Company's credit risks primarily relate to cash and cash equivalents
and accounts receivable. Cash and cash equivalents are primarily held in bank
accounts. Cash deposits in excess of FDIC insurance limits approximated $108 at
June 30, 1997. The Company has not incurred losses related to these balances to
date.
For the year ended June 30, 1996, the Company had one customer that
accounted for 11 percent of total revenue. For the year ended June 30, 1997, no
customer represented greater than 10 percent of total revenue.
(7) SUBSEQUENT EVENT (UNAUDITED)
In February 1998, the Company entered into a definitive merger agreement
with PROVANT, Inc. ("PROVANT") and one of its subsidiaries, whereby PROVANT will
acquire the Company upon completion of the proposed initial public offering.
F-63
<PAGE> 132
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Novations Group, Inc.:
We have audited the accompanying balance sheets of Novations Group, Inc.,
as of June 30, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Novations Group, Inc., as of
June 30, 1997 and 1996, and the results of its operations and its cash flows for
each of the years in the three-year period ended June 30, 1997 in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
January 9, 1998
F-64
<PAGE> 133
NOVATIONS GROUP, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
---------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 17 $ 88 $ 23
Accounts receivable, net of allowance for doubtful
accounts of $158....................................... 1,976 2,202 3,211
Receivable from related parties........................... 179 414 279
Prepaid expenses.......................................... 63 115 80
------ ------ ------
Total current assets.............................. 2,235 2,819 3,593
Property and equipment, net................................. 552 492 437
------ ------ ------
Total assets...................................... $2,787 $3,311 $4,030
====== ====== ======
Current liabilities:
Current portion of notes payable.......................... 1,079 1,298 1,378
Accounts payable.......................................... 225 118 118
Accrued compensation...................................... 836 803 1,105
Accrued expenses.......................................... 275 177 160
Deferred income taxes..................................... -- 415 535
------ ------ ------
Total current liabilities......................... 2,415 2,811 3,296
------ ------ ------
Notes payable............................................... 459 361 365
Commitments and contingencies
Stockholders' equity:
Common stock, $1.00 par value; 1,000,000 shares
authorized; 1,000 shares issued and outstanding at June
30, 1996, 1997 and December 31, 1997, respectively..... 1 1 1
Retained earnings......................................... (88) 138 368
------ ------ ------
Total stockholders' equity........................ (87) 139 369
------ ------ ------
Total liabilities and stockholders' equity........ $2,787 $3,311 $4,030
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-65
<PAGE> 134
NOVATIONS GROUP, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
-------------------------- ----------------
1995 1996 1997 1996 1997
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue....................................... $7,175 $9,039 $9,018 $4,658 $5,256
Cost of revenue............................... 3,885 4,733 4,839 2,503 2,677
------ ------ ------ ------ ------
Gross profit........................ 3,290 4,306 4,179 2,155 2,579
Selling, general, and administrative
expenses.................................... 3,167 4,094 3,315 1,668 2,062
------ ------ ------ ------ ------
Income from operations.............. 123 212 864 487 517
Interest expense, net......................... 98 98 137 89 133
------ ------ ------ ------ ------
Income before income taxes.......... 25 114 727 398 384
Income taxes.................................. 22 40 435 2 154
------ ------ ------ ------ ------
Net income.......................... $ 3 $ 74 $ 292 $ 396 $ 230
====== ====== ====== ====== ======
Basic income per share........................ $ 3 $ 74 $ 292 $ 396 $ 230
====== ====== ====== ====== ======
Weighted average shares outstanding........... 1,000 1,000 1,000 1,000 1,000
====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-66
<PAGE> 135
NOVATIONS GROUP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS
---------------- (ACCUMULATED
SHARES AMOUNT DEFICIT) TOTAL
------ ------ ------------ -----
<S> <C> <C> <C> <C>
Balance, June 30, 1994............................... 1,000 $ 1 $ (45) $ (44)
Net income......................................... -- -- 3 3
Distributions to stockholders...................... -- -- (79) (79)
------ --- ----- -----
Balance, June 1995................................... 1,000 1 (121) (120)
Net income......................................... -- -- 74 74
Distributions to stockholders...................... -- -- (41) (41)
------ --- ----- -----
Balance, June 30, 1996............................... 1,000 1 (88) (87)
Net income......................................... -- -- 292 292
Distributions to stockholders...................... -- -- (66) (66)
------ --- ----- -----
Balance, June 30, 1997............................... 1,000 1 138 139
Net income......................................... -- -- 230 230
------ --- ----- -----
Balance, December 31, 1997 (Unaudited)............... 1,000 $ 1 $ 368 $ 369
====== === ===== =====
</TABLE>
See accompanying notes to financial statements.
F-67
<PAGE> 136
NOVATIONS GROUP, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
--------------------- -----------------
1995 1996 1997 1996 1997
----- ----- ----- ------ --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 3 $ 74 $ 292 $ 396 $ 230
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 203 167 197 111 90
Deferred income taxes............................. -- -- 415 -- 120
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable...... (670) (357) (226) 101 (1,009)
(Increase) decrease in prepaid expenses and
other current assets......................... (250) 86 (287) 3 170
Increase (decrease) in accounts payable and
accrued expenses............................. 358 (88) (238) (318) 285
----- ----- ----- ----- -------
Total adjustments............................ (359) (192) (554) (103) (464)
----- ----- ----- ----- -------
Net cash (used by) provided by operating
activities................................. (356) (118) 153 293 (114)
----- ----- ----- ----- -------
Cash flows from investing activities:
Purchases of property and equipment.................. (217) (427) (137) (143) (35)
----- ----- ----- ----- -------
Cash flows from financing activities:
Net repayments/proceeds from long-term debt.......... 340 117 121 (111) 84
Capital distribution................................. (40) (41) (66) -- --
----- ----- ----- ----- -------
Net cash provided by financing activities.... 300 76 55 (111) 84
----- ----- ----- ----- -------
Net (decrease) increase in cash and cash equivalents... (273) (469) 71 39 (65)
Cash and cash equivalents, beginning of period......... 759 486 17 17 88
----- ----- ----- ----- -------
Cash and cash equivalents, end of period............... $ 486 $ 17 $ 88 $ 56 $ 23
===== ===== ===== ===== =======
Supplemental disclosure:
Cash paid for interest............................... $ 120 $ 120 $ 151 $ 89 $ 139
===== ===== ===== ===== =======
</TABLE>
See accompanying notes to financial statements.
F-68
<PAGE> 137
NOVATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) NATURE OF OPERATIONS
Novations Group, Inc. (the "Company") was founded in 1986. The Company
assists clients in, among other things, clarifying and communicating their
business strategies and re-designing their organizations and work systems.
Revenue is derived primarily from fees for professional services and, to a
lesser extent, from the sale of services and products to support human resources
management.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recognized as services are performed and products are provided.
Use of Estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Financial Information
The interim financial statements as of December 31, 1997 and for the six
months ended December 31, 1996 and 1997, are unaudited, and certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial position, results of
operations and cash flows with respect to the interim financial statements have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over periods ranging from five to seven years. Leasehold
improvements are amortized over the term of the lease.
Fair Value of Financial Instruments
Financial instruments of the Company consist of cash, marketable
securities, accounts receivable, accounts payable and accrued liabilities and
debt. The carrying value of these financial instruments approximates their fair
value due to the short maturity of these instruments. The carrying value of debt
approximates fair value because the interest rates on the debt approximate the
rates currently available to the Company.
F-69
<PAGE> 138
NOVATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
For periods prior to January 1, 1997, the Company elected to be treated as
an S corporation. Therefore, in such periods the net income of the Company was
reported by the stockholders, and no provision for federal income taxes was
included in the financial statements for such periods, and only certain state
taxes were paid by the Company. The Company terminated its S corporation status
effective January 1, 1997. Accordingly, for periods subsequent to January 1,
1997, the Company accounted for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. 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.
Income per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (FAS 128), Earnings per Share which changed the
method of computing and presenting income per share. Basic income per share has
been computed using the weighted average number of outstanding common shares.
The Company has a simple capital structure with no potentially dilutive shares.
Accordingly, only basic income per share has been presented. All periods
presented have been restated in accordance with FAS 128.
(3) RELATED PARTY TRANSACTIONS
The Company advanced cash to an entity controlled by the stockholders of
the Company. The balance due to the Company as of June 30, 1996, 1997 and
September 30, 1997 was $140, $332 and $192, respectively. Also included in
receivables from related parties are employee advances of $39, $82 and 149 at
June 30, 1996, 1997 and September 30, 1997, respectively.
The Company leases certain office facilities from a partnership controlled
by the Company's stockholders.
The terms of the lease require annual payments of $300,000, increasing by
3% per year, through March 2002. The Company has an option to renew the lease
for an additional five-year term. The Company has guaranteed a $1.2 million note
payable to a financial institution by the partnership.
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
JUNE 30,
----------------
1996 1997
------ ------
<S> <C> <C>
Computer equipment and software............................ $ 922 945
Leasehold improvements..................................... 167 198
Office equipment........................................... 108 170
Furniture and fixtures..................................... 94 115
------ ------
1,291 1,428
Accumulated depreciation and amortization.................. 739 936
------ ------
Property and equipment, net........................... $ 552 492
====== ======
</TABLE>
Depreciation and amortization expense related to property and equipment for
the years ended June 1995, 1996 and 1997, was $203, $167 and $197, respectively.
F-70
<PAGE> 139
NOVATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) NOTES PAYABLE
Notes payable consist of notes to former stockholders, with interest
imputed at 8.75%. Payments are due monthly or annually through March 2002.
Aggregate maturities required on these notes at June 30, are as follows:
<TABLE>
<S> <C>
1998.................................................. $ 59
1999.................................................. 97
2000.................................................. 98
2001.................................................. 98
2002.................................................. 68
----
Total............................................ $420
====
</TABLE>
(6) OPERATING LEASES
The Company leases all of its facilities and certain office equipment under
cancelable and noncancelable operating leases that expire on various dates
through 2003.
Future minimum lease payments under all noncancelable operating leases,
including leases to related parties, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30:
--------------------
<S> <C>
1998.................................................. $ 585
1999.................................................. 654
2000.................................................. 632
2001.................................................. 534
2002.................................................. 334
Thereafter............................................ 48
------
Total............................................ $2,787
======
</TABLE>
Lease expense for the years ended June 30, 1995, 1996 and 1997 was $71,
$211 and $385, respectively.
(7) LINE OF CREDIT
The Company has a $1,500 line of credit agreement with a bank, with
interest payable at the bank's prime rate. The interest rate at June 30, 1996
and 1997 was 10 percent. The line of credit is secured by substantially all of
the Company's assets and is guaranteed by the principal stockholders of the
Company.
The Company had $1,000 and $1,239 at June 30, 1996 and 1997, respectively,
outstanding under the agreement.
(8) INCOME TAXES
As discussed in note 2, the Company terminated its S corporation election
effective January 1, 1997. The effect of the termination is to reduce net income
and income per share by $415 and $415, respectively, for the year ended June 30,
1997.
F-71
<PAGE> 140
NOVATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense for the year ended June 30, 1997 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Federal................................... $-- $380 $380
State..................................... 20 35 55
--- ---- ----
$20 $415 $435
=== ==== ====
</TABLE>
Income tax expense for the year ended June 30, 1997 differs from the amount
computed by applying the U.S. federal tax rate of 34% to pretax income as a
result of the following:
<TABLE>
<S> <C>
Computed "expected" tax expense............................. $ 247
Income (reduction) in income taxes resulting from:
Change from S corporation status.......................... 310
Income earned during S corporation period................. (135)
State taxes net of federal benefit........................ 36
Other..................................................... (23)
-----
$ 435
=====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at June 30, 1997
are presented below.
<TABLE>
<S> <C>
Deferred tax assets:
Accounts payable and accrued expenses..................... $ 450
Net operating loss carryforward........................... 93
-----
Total gross deferred tax assets................... 543
Deferred tax liability:
Accounts receivable and prepaid expenses.................. (958)
-----
Net deferred tax liability.................................. $(415)
=====
</TABLE>
The net operating loss carryforward is subject to limitation in the event
of a greater than 50% change in ownership.
(9) EMPLOYEE BENEFITS
The Company has a 401(k) plan in which it matches 50% of employee
contributions up to a maximum of 4%. The Company contributed $44, $60 and $75 to
the plan for the years ended June 30, 1995, 1996 and 1997, respectively.
(10) CONCENTRATION OF CREDIT RISK
For the year ended June 30, 1995, the Company had two customers that each
accounted for greater than 10 percent of revenue. For each of the years ended
June 30, 1996 and 1997, the Company had one customer that accounted for greater
than 10 percent of revenue.
(11) SUBSEQUENT EVENT (UNAUDITED)
In February 1998, the Company entered into a definitive merger agreement
with PROVANT, Inc. ("PROVANT") and one of its subsidiaries, whereby PROVANT will
acquire the Company upon completion of the proposed initial public offering.
F-72
<PAGE> 141
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Star Mountain, Inc.:
We have audited the accompanying statements of operations, stockholders'
equity, and cash flows of Star Mountain, Inc. for the year ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Star
Mountain, Inc. for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
Friedman & Fuller, P.C.
Rockville, Maryland
February 16, 1996
F-73
<PAGE> 142
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Star Mountain, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Star
Mountain, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the two-year period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Star Mountain, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
April 3, 1998
F-74
<PAGE> 143
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------ -------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 39 $ 358
Accounts receivable....................................... 4,395 6,091
Current portion of notes receivable, related parties...... 181 666
Inventory................................................. 100 129
Other current assets...................................... 71 100
Deferred income taxes..................................... 29 117
------ -------
Total current assets.............................. 4,815 7,461
------ -------
Property and equipment:
Furniture and fixtures.................................... 65 531
Office equipment.......................................... 746 1,444
Computer software......................................... 69 114
Leasehold improvements.................................... 16 87
Automobiles............................................... 31 73
------ -------
927 2,249
Less accumulated depreciation and amortization............ 423 1,303
------ -------
504 946
------ -------
Other assets:
Notes receivable, related parties, net of current
portion................................................ 267 --
Other assets.............................................. 140 459
Land held for investment.................................. 110 110
Goodwill, net of accumulated amortization of $23 and
$88.................................................... 147 1,701
------ -------
664 2,270
------ -------
$5,983 $10,677
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable, bank........................................ $ 905 $ 2,858
Current portion of notes payable.......................... 95 455
Accounts payable.......................................... 1,295 1,685
Accrued expenses.......................................... 573 1,152
Billings in excess of costs and earnings.................. 1,076 1,247
------ -------
Total current liabilities......................... 3,944 7,397
------ -------
Long-term liabilities:
Notes payable, net of current portion..................... -- 304
Deferred income taxes..................................... 29 198
------ -------
Total long-term liabilities....................... 29 502
------ -------
Total liabilities................................. 3,973 7,899
------ -------
Commitments and contingencies
Stockholders' equity:
Common stock.............................................. 8 2,147
Additional paid-in capital................................ 2,058 --
Retained earnings......................................... 529 1,257
------ -------
2,595 3,404
Less common stock held in treasury at cost................ (585) (626)
------ -------
2,010 2,778
------ -------
$5,983 $10,677
====== =======
</TABLE>
See accompanying notes to consolidated financial statements
F-75
<PAGE> 144
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenue..................................................... $14,306 $16,313 $23,775
Direct costs................................................ 8,668 9,457 14,504
------- ------- -------
Gross profit.............................................. 5,638 6,856 9,271
Operating expenses.......................................... 4,411 5,476 7,591
------- ------- -------
Income from operations...................................... 1,227 1,380 1,680
------- ------- -------
Other income (expense):
Interest income........................................... 19 25 44
Interest expense.......................................... (54) (65) (144)
Other, net................................................ (200) (339) (306)
------- ------- -------
(235) (379) (406)
------- ------- -------
Income before income taxes.................................. 992 1,001 1,274
Income taxes................................................ -- 397 546
------- ------- -------
Net income.................................................. $ 992 $ 604 $ 728
======= ======= =======
Basic income per share...................................... $ 0.11 $ 0.07 $ 0.09
======= ======= =======
Diluted income per share.................................... $ 0.11 $ 0.07 $ 0.08
======= ======= =======
Weighted average shares outstanding......................... 8,825 8,422 8,078
======= ======= =======
Weighted average shares and potentially dilutive shares
outstanding............................................... 8,963 8,565 8,823
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-76
<PAGE> 145
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TREASURY STOCK
------------------ PAID-IN EARNINGS -------------------
SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT TOTAL
--------- ------ ---------- --------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994..... 740,852 $ 8 $ 1,955 $ (688) -- $ -- $1,275
Issuance of common stock upon
exercise of options.......... 11,827 -- 36 -- -- -- 36
Distributions to
shareholders................. -- -- -- (379) -- -- (379)
Purchase of treasury stock..... -- -- -- -- 22,700 (65) (65)
Net income..................... -- -- -- 992 -- -- 992
--------- ------ ------- ------ ---------- ----- ------
Balance, December 31, 1995..... 752,679 8 1,991 (75) 22,700 (65) 1,859
Issuance of common stock upon
exercise of options.......... 9,414 -- 67 -- -- -- 67
Purchase of treasury stock..... -- -- -- -- 65,671 (520) (520)
Net income..................... -- -- -- 604 -- -- 604
--------- ------ ------- ------ ---------- ----- ------
Balance, December 31, 1996..... 762,093 8 2,058 529 88,371 (585) 2,010
Issuance of common stock upon
exercise of options.......... 87,621 32 -- -- -- -- 32
Purchase of treasury stock..... -- -- -- -- 12,584 (41) (41)
Stock split, conversion to no
par stock.................... 8,383,023 2,058 (2,058) -- 1,110,505 -- --
Issuance of common stock....... 50,735 49 -- -- -- -- 49
Net income..................... -- -- -- 728 -- -- 728
--------- ------ ------- ------ ---------- ----- ------
Balance, December 31, 1997..... 9,283,472 $2,147 $ -- $1,257 1,211,460 $(626) $2,778
========= ====== ======= ====== ========== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements
F-77
<PAGE> 146
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers.............................. $ 13,419 $ 16,428 $ 23,529
Cash paid to suppliers and employees...................... (12,620) (14,890) (22,083)
Interest received......................................... 19 25 44
Interest paid............................................. (54) (65) (144)
Income taxes paid......................................... -- (420) (482)
-------- -------- --------
Net cash provided by operating activities......... 764 1,078 864
-------- -------- --------
Cash flows from investing activities:
Issuance of notes receivable.............................. (64) (96) (218)
Acquisition of property and equipment..................... (159) (61) (358)
Business acquisitions..................................... (100) (300) (1,752)
Purchase of land held for investment...................... -- (110) --
Other..................................................... (8) 2 --
-------- -------- --------
Net cash used in investing activities............. (331) (565) (2,328)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (payments) on line-of-credit............... (15) (86) 1,953
Principal payments on long-term debt...................... -- -- (210)
Proceeds from other notes payable......................... 25 95 --
Payments on other notes payable........................... (34) (35) --
Proceeds from issuance of common stock.................... 36 68 81
Purchase of treasury stock................................ (65) (520) (41)
Distributions to shareholders............................. (379) -- --
-------- -------- --------
Net cash provided by (used in) financing
activities....................................... (432) (478) 1,783
-------- -------- --------
Net increase in cash........................................ 1 35 319
Cash, beginning of year..................................... 3 4 39
-------- -------- --------
Cash, end of year........................................... $ 4 $ 39 $ 358
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-78
<PAGE> 147
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
Reconciliation of net income to net cash provided by
operating activities:
Net income................................................ $ 992 $ 604 $ 728
------- ------ ------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 96 139 314
Loss on sale of assets.................................... -- 4 11
Deferred income taxes..................................... -- -- (9)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable.................................... (1,053) (637) (417)
Inventory.............................................. -- 18 (29)
Other current assets................................... 47 (34) 24
Other assets........................................... (25) (69) (237)
Increase (decrease) in:
Accounts payable....................................... 425 168 90
Accrued expenses....................................... 116 133 218
Billings in excess of costs and anticipated profits.... 166 752 171
------- ------ ------
Total adjustments......................................... (228) 474 136
------- ------ ------
Net cash provided by operating activities................. $ 764 $1,078 $ 864
======= ====== ======
</TABLE>
Non-cash investing and financing activities: In February 1997, the Company
issued a note payable of $506,000 for a portion of the purchase price of ORA. In
October 1997, the Company issued a note payable of $325,000 for a portion of the
purchase price of SED.
See accompanying notes to consolidated financial statements
F-79
<PAGE> 148
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(1) NATURE OF OPERATIONS
Star Mountain, Inc. (the "Company") was founded in 1987. The Company is
primarily engaged in contracting with the U.S. Government to provide technical
and professional services in the form of computer-based training, software
development and computer applications support. In August 1996, the Company
formed a wholly-owned subsidiary, Star Digital, Inc. to acquire the assets of
Computer Visions, Inc. Star Digital, Inc. is primarily a value added distributor
of computer equipment. In February 1997, the Company acquired the stock of
Odyssey Research Associates, Inc. ("ORA"). ORA is primarily engaged in
contracting with the U.S. Government to perform research relating to computer
access and security. ORA includes the accounts of 168004 Canada, Inc. ("ORA
Canada"), a wholly-owned subsidiary, which had performed similar contracts for
the Canadian Government, but currently had minimal activity. Effective October
1, 1997, the Company acquired the net assets of the SED Division of Essex
Corporation, which now operates as a division of the Company. This division
provides weapons handling training for the U.S. Department of Defense.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
A major portion of the Company's revenue results from services performed
under U.S. government contracts, either directly or through subcontracts. The
majority of the Company's contracts are fixed-price contracts. Revenue on fixed
price contracts is recognized using the percentage of completion method based on
costs incurred in relation to total estimated costs. Revenue on
time-and-materials contracts is recognized to the extent of fixed billable rates
for hours delivered plus reimbursable costs. Revenue on cost-plus-fee contracts
is recognized based on reimbursable costs incurred plus estimated fees earned
thereon. At the time it is recognized that it is probable that a contract will
result in a loss and the loss can be reasonably estimated, the entire estimated
loss is included in the determination of net income. In accordance with industry
practice, amounts relating to long-term contracts are classified as current
assets although an indeterminable portion of these amounts is not expected to be
realized within one year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Credit Risk
The Company's accounts receivable consist principally of unsecured amounts
due from the U.S. Government.
Cash Equivalents
Cash equivalents are defined as highly liquid short-term investments whose
maturity dates do not extend past three months from the original date of
purchase. The Company has held no such instruments.
Property and Equipment
Property and equipment are stated at cost and include additions and major
replacements or betterments. Depreciation and amortization are provided for in
amounts which amortize the cost of properties utilizing the straight-line method
over estimated useful lives of three to seven years. Maintenance, repairs and
minor renewals are expensed as incurred. Any gain or loss on disposition is
included in the determination of net income.
F-80
<PAGE> 149
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill
Goodwill represents the excess of the cost of business acquisitions,
accounted for by the purchase method, over the fair value of the net assets
thereof. Goodwill is being amortized on a straight-line basis principally over
14 years.
Fair Value of Financial Instruments
Financial instruments of the Company consist primarily of cash, accounts
receivable, note payable, bank, accounts payable and accrued expenses. The
carrying value of these financial instrument approximates their fair value
because of the short maturity of these instruments.
Income Taxes
Through December 31, 1995, the Company had elected to be taxed as an S
Corporation and, accordingly, the financial statements for 1995 do not reflect
any provision for income taxes since elements of income and deduction passed
through directly to the shareholders. Effective January 1, 1996, the Company
terminated its election to be taxed as an S Corporation.
Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial reporting and
tax bases of assets and liabilities. 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 settled. Future
tax benefits recognized as deferred tax assets must be reduced by a valuation
allowance where it is more likely than not that the benefits may not be
realized.
(3) ACQUISITIONS
On June 19, 1995, the Company acquired all of the assets of BZ Academy,
Inc. (BZ). The acquisition has been accounted for as a purchase and has operated
as the AIT division of the Company. Tangible assets were recorded at their book
value at the date of purchase, which approximated their fair value. The
difference between the purchase price and the assets' book value was recorded as
goodwill.
On August 1, 1996, the Company formed a new corporation, Star Digital,
Inc., to acquire the assets of Computer Visions, Inc. The acquisition has been
accounted for as a purchase. Computer Visions' tangible assets were recorded at
their fair value, which approximated the purchase price. No goodwill was
recorded.
On February 21, 1997, the Company acquired the outstanding stock of ORA.
The acquisition has been accounted for as a purchase. The excess of the purchase
price over the book value of the net assets of ORA at the purchase date has been
recorded as goodwill.
On September 30, 1997, the Company acquired certain assets of Simms
Industries. The acquisition has been accounted for as a purchase. The assets
acquired consisted primarily of accounts receivable and fixed assets.
On October 1, 1997, the Company acquired the net assets of the Systems
Effectiveness Division (SED) of Essex Corporation for a total price of $1,475.
The net assets represent substantially all of the operating assets of the
division. The excess of the purchase price over the book value of the tangible
assets acquired of approximately $930 has been recorded as goodwill.
The following table sets forth the pro forma information assuming that all
acquisitions had occurred on January 1, 1995 (the earliest date information is
available). The pro forma information takes into account amortization of
goodwill and additional interest costs, net of tax benefits.
F-81
<PAGE> 150
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Gross revenue......................................... $22,668 $24,818 $28,383
Operating income...................................... 1,081 1,524 1,298
Net income............................................ 723 529 627
Earnings per share.................................... $ 0.08 $ 0.06 $ 0.08
</TABLE>
(4) ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Government contracts:
Billed.................................................... $3,333 $4,828
Unbilled.................................................. 698 926
Other....................................................... 364 337
------ ------
$4,395 $6,091
====== ======
</TABLE>
(5) NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Due from majority shareholder, unsecured, interest at
prime..................................................... $ 131 $ 349
Due from former employee, secured, interest at 10 percent... 317 317
------ ------
448 666
Less current portion........................................ 181 666
------ ------
$ 267 $ --
====== ======
</TABLE>
(6) NOTE PAYABLE, BANK
The Company maintains a bank line of credit arrangement that provides for
borrowings of 90% of billed accounts receivable less than 90 days old, not to
exceed $3,500 in total. Advances bear interest at LIBOR plus 250 basis points.
The line is collateralized by substantially all of the Company's assets. The
agreement requires the Company to meet certain covenants including limitations
on dividends, and maintenance of adjusted tangible net worth, as defined. The
Company has been in compliance with the lender's covenants during each of the
periods presented. At December 31, 1996 and 1997, overdrafts in the payroll and
operating bank accounts amounting to $236 and $259, respectively, have been
included in the outstanding balance on the line since such overdrafts are
automatically covered by the bank as checks are presented for payment.
F-82
<PAGE> 151
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
---- ----
<S> <C> <C>
Note payable, shareholder, representing temporary advances
of working capital, interest at LIBOR plus 250 basis
points, due on demand. Unsecured.......................... $95 $ --
Note payable, purchase of subsidiary, ORA, interest at 9%,
payable in four annual installments of $127 beginning
February 1998. ........................................... 406
--- ----
Note payable, purchase of net assets of SED, interest at 9%,
payable in monthly installments of $23 through December
1998...................................................... -- 284
Note payable, purchase of net assets of SIMMS Industries.... -- 24
Capital leases, payable in monthly installments of $2
including interest at 9% to 17.5% due July 2000........... -- 45
--- ----
Total....................................................... 95 759
Less current portion........................................ 95 455
--- ----
Long-term portion........................................... $-- $304
=== ====
</TABLE>
(8) EMPLOYEE BENEFITS
The Company has a 401(k) plan in which it matches 50% of employee
contributions, up to a maximum of 3% of each employee's gross annual
compensation. In addition, the Company may contribute a discretionary amount
annually. Total expense under the plan for the years ended December 31, 1995,
1996 and 1997, was $121, $123 and $153, respectively.
(9) COMMITMENTS AND CONTINGENCIES
Substantially all of the Company's revenue and costs for all periods since
December 31, 1996, are subject to audit by agencies of the U.S. Government.
Management does not expect the results of these audits to have a material impact
on the financial position or future results of operations of the Company.
The Company leases equipment and office space under various noncancellable
operating leases. The office leases provide for future rental increases based on
the Company's pro-rata share of increases in building operating expenses and
real estate taxes, and for inflation adjustments based on increases in the
Consumer Price Index. Rent expense, including month-to-month leases, for the
years ended December 31, 1995, 1996 and 1997, totalled $557, $595 and $868,
respectively. Future minimum lease commitments under non-cancellable operating
leases for years ending December 31, are as follows:
<TABLE>
<CAPTION>
OFFICE/
WAREHOUSE EQUIPMENT TOTAL
--------- --------- ------
<S> <C> <C> <C>
1998..................................................... $ 523 $236 $ 759
1999..................................................... 522 123 645
2000..................................................... 507 59 566
2001..................................................... 456 2 458
2002..................................................... 233 -- 233
2003..................................................... 76 -- 76
------ ---- ------
$2,317 $420 $2,737
====== ==== ======
</TABLE>
F-83
<PAGE> 152
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) COMMON STOCK
Common stock consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1995 1996 1997
---------- --------- ----------
<S> <C> <C> <C>
Par value....................................... $ .01 .01 N/A
Shares:
Authorized.................................... 1,000,000 1,000,000 15,000,000
Issued........................................ 752,679 762,093 9,283,472
</TABLE>
Effective February 14, 1997, the Company's voting common stock was
increased from 800,000 shares of $.01 par value to 12,000,000 shares of no par
value, and the non-voting stock was increased from 200,000 shares of $.01 par
value to 3,000,000 shares of no par value.
(11) STOCK OPTIONS
The Company offers key employees the opportunity to purchase stock through
the Star Mountain Key Person Stock Option Plan (the "Plan"). Under the Plan, the
Company issues options to eligible employees who must have one year of service
with the Company. The exercise price for the options is at or above the current
market price of the Company's shares, as determined by management. Management
has applied a consistent formula which includes gross revenue and net income in
determining the Company's share price. Options are exercisable upon issuance for
periods of 3 to 5 years from the date of the grant.
The activity in the Plan since 1995 is presented below. All options and
option prices have been restated to reflect the 12:1 stock split in February
1997.
<TABLE>
<CAPTION>
NUMBER OF OPTIONS WEIGHTED
OUTSTANDING AND AVERAGE
EXERCISABLE EXERCISE PRICE
----------------- --------------
<S> <C> <C>
Balance, December 31, 1994............................ 912,000 $0.31
Granted............................................. 384,000 0.47
Forfeited........................................... (360,000) 0.21
---------
Balance, December 31, 1995............................ 936,000 0.42
Granted............................................. 936,000 0.49
Forfeited........................................... (348,000) 0.46
---------
Balance, December 31, 1996............................ 1,524,000 0.45
Granted............................................. 331,000 1.00
Exercised........................................... (73,200) 0.24
Forfeited........................................... (120,000) 0.49
---------
Balance, December 31, 1997............................ 1,661,800 0.52
=========
</TABLE>
The weighted average price for options outstanding and exercisable at
December 31, 1997 was $.52. The weighted average remaining term of the
outstanding options is 3 years.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 defines a "fair value based method" of accounting
for an employee stock option. Under this method, compensation cost is measured
at the grant date based on the value of the award and is recognized over the
service period. The Company has historically accounted for employee stock
options under the "intrinsic value method" as defined by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Under the intrinsic value method,
F-84
<PAGE> 153
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation cost is the excess, if any, of the quoted market price of the stock
at grant date over the amount an employee must pay to acquire the stock. The
Company's Plan, accounted for under APB Opinion No. 25, does not result in any
compensation cost.
SFAS No. 123 allows an entity to continue to use the intrinsic value method
and management has elected to do so. However, entities electing to remain on the
intrinsic value method must make pro forma disclosures of net income, as if the
fair value based method of accounting had been applied. Because the method of
accounting in SFAS No. 123 has not been applied to options granted prior to
January 1, 1994, the resulting pro forma compensation costs may not be
representative of the cost to be expected in future years.
Under SFAS No. 123, net income would have been as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net income, as reported.................................... $ 992 $ 604 $ 728
Pro forma net income....................................... $ 984 $ 586 $ 675
Income per share, as reported.............................. $0.11 $0.07 $0.09
Pro forma income per share................................. $0.11 $0.06 $0.08
</TABLE>
The fair value of each option is estimated on the date of grant using the
following assumptions: no dividend yield, no volatility, risk-free interest
rates approximating 6% and expected lives of 3 to 5 years. The weighted average
grant date fair value of the options was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average fair value.................. $.11 $.13 $.16
</TABLE>
(12) EARNINGS PER SHARE:
Earnings per share is computed based on the weighted average number of
common shares outstanding in each period. The dilutive effect of outstanding
stock options is computed using the treasury stock method. Since there is no
public market for the Company's stock, current market price has been assumed to
be the exercise price of the latest stock options issued. Basic and diluted
earnings per share have been computed as follows:
<TABLE>
<CAPTION>
EFFECT OF DILUTIVE DILUTED BASIC DILUTED
NET INCOME BASIC SHARES STOCK OPTIONS SHARES EPS EPS
---------- ------------ ------------------ ------- ----- -------
(NUMERATOR) (DENOMINATOR) (DENOMINATOR)
<S> <C> <C> <C> <C> <C> <C>
Year ended:
December 31, 1995......... $992 8,824,986 138,404 8,963,390 $0.11 $0.11
December 31, 1996......... 604 8,422,206 143,176 8,565,382 0.07 0.07
December 31, 1997......... 728 8,078,338 744,751 8,823,089 0.09 0.08
</TABLE>
F-85
<PAGE> 154
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) INCOME TAXES
Income tax expense consists of the following amounts:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Current:
Federal.................................................. $313 $426
State.................................................... 84 123
Deferred:
Federal.................................................. -- (3)
---- ----
$397 $546
==== ====
</TABLE>
The differences between the effective income tax rate and the statutory
federal income tax rates are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
----- -----
<S> <C> <C>
Computed "expected" tax on income........................... 34.0% 34.0%
State taxes, net of federal benefit......................... 4.1 4.1
Other, net.................................................. 1.6 4.7
----- -----
Taxes on income............................................. 39.7% 42.8%
===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Deferred tax assets result from
accrued employee benefits,
principally vacation...................................... $ 29 $ 90
Accrued expenses.......................................... -- 27
---- ----
$ 29 $117
==== ====
Deferred tax liabilities result from:
Differences in depreciation methods....................... $ 29 $135
Change in accounting method from cash to accrual for
ORA.................................................... -- 63
---- ----
$ 29 $198
==== ====
</TABLE>
(14) SUBSEQUENT EVENT
In February 1998, the Company entered into a definitive merger agreement
with PROVANT, Inc. ("PROVANT") and one of its subsidiaries, whereby PROVANT will
acquire the Company upon completion of the proposed initial public offering.
F-86
<PAGE> 155
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No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with the
Offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of any offer to buy any securities
other than the shares of Common Stock to which it relates or an offer to, or a
solicitation of, any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company or that information
contained herein is correct as of any time subsequent to the date hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................... 3
Risk Factors............................. 9
Combination.............................. 15
Use of Proceeds.......................... 18
Dividend Policy.......................... 18
Capitalization........................... 19
Dilution................................. 20
Selected Financial Data.................. 21
Star Mountain Selected Financial Data.... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 24
Business................................. 40
Management............................... 49
Principal Stockholders................... 56
Certain Transactions..................... 57
Description of Capital Stock............. 61
Shares Eligible for Future Sale.......... 63
Underwriting............................. 65
Legal Matters............................ 66
Experts.................................. 66
Additional Information................... 67
Index to Financial Statements............ F-1
</TABLE>
Until May 23, 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities offered hereby, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
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2,600,000 SHARES
[PROVANT CORPORATE LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
NATIONSBANC MONTGOMERY
SECURITIES LLC
SALOMON SMITH BARNEY
PIPER JAFFRAY INC.
APRIL 28, 1998
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