<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PROVANT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 8742 04-3395167
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
67 BATTERYMARCH STREET, SUITE 600
BOSTON, MA 02110
(617) 261-1600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
PAUL M. VERROCHI
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PROVANT, INC.
67 BATTERYMARCH STREET, SUITE 600
BOSTON, MA 02110
(617) 261-1600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES OF COMMUNICATIONS TO:
CONSTANTINE ALEXANDER, ESQUIRE
JAMES E. DAWSON, ESQUIRE
NUTTER MCCLENNEN & FISH, LLP
ONE INTERNATIONAL PLACE
BOSTON, MA 02110
(617) 439-2000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=========================================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value.......... 3,000,000 shares $18.59 $55,770,000 $16,452.15
=========================================================================================================================
</TABLE>
(1) Determined pursuant to Rule 457(c) under the Securities Act of 1933, as
amended, based upon the average of the high and low prices per share of the
Common Stock as reported on the Nasdaq National Market on June 18, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 25, 1998
3,000,000 SHARES
[PROVANT LOGO]
COMMON STOCK
This Prospectus relates to 3,000,000 shares of Common Stock, $.01 par value
per share (the "Common Stock"), of PROVANT, Inc. ("PROVANT" or the "Company")
that may be offered and issued by the Company from time to time in connection
with acquisitions of other businesses or properties by the Company.
PROVANT intends to concentrate its acquisitions within the training and
development industry. If the opportunity arises, however, PROVANT may attempt to
make acquisitions that either are complementary to its present operations or
advantageous even though they may be dissimilar to its present activities. The
consideration for any such acquisition may consist of shares of Common Stock,
cash, notes or other evidences of debt, assumptions of liabilities or a
combination thereof, as determined from time to time by negotiations between
PROVANT and the owners or controlling persons of businesses or properties to be
acquired.
The shares covered by this Prospectus may be issued in exchange for shares
of capital stock, partnership interests or other assets representing an
interest, direct or indirect, in other companies or other entities, in exchange
for assets used in or related to the business of such companies or entities, or
otherwise pursuant to the agreements providing for such acquisitions. The terms
of such acquisitions and of the issuance of shares of Common Stock under
acquisition agreements generally will be determined by direct negotiations with
the owners or controlling persons of the businesses or properties to be acquired
or, in the case of entities that are more widely held, through exchange offers
to stockholders or documents soliciting the approval of statutory mergers,
consolidations or sales of assets. It is anticipated that the shares of Common
Stock issued in any such acquisition will be valued at a price reasonably
related to the market value of the Common Stock either at the time of agreement
on the terms of an acquisition or at or about the time of delivery of the
shares.
It is not expected that underwriting discounts or commissions will be paid
by the Company in connection with issuances of shares of Common Stock under this
Prospectus. However, finders' fees or brokers' commissions may be paid from time
to time in connection with specific acquisitions, and such fees may be paid
through the issuance of shares of Common Stock covered by this Prospectus. Any
person receiving such a fee may be deemed to be an underwriter within the
meaning of the Securities Act of 1933, as amended (the "Securities Act").
The Company's Common Stock is listed on The Nasdaq National Market
("Nasdaq") under the symbol "POVT." The closing market price of the Common Stock
on Nasdaq on June 24, 1998 was $18.625.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
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.
, 1998
<PAGE> 3
PROSPECTUS SUMMARY
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. In May 1998, PROVANT, Inc.
acquired 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, (i) all share, per share and
financial information in this Prospectus give effect to the Combination
(excluding the issuance of 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) and a stock split of 979.0292-for-1 on all shares of Common Stock
outstanding as of April 28, 1998, 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).
Investors should carefully consider the information set forth under the heading
"Risk Factors."
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 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
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<PAGE> 4
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, 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 600, 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
<PAGE> 5
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 in May 1998 of the initial public
offering of the Company's Common Stock (including the exercise of the
underwriters' over-allotment option in connection therewith)(the "IPO") 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>
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1997 MARCH 31, 1998
------------- ------------------
<S> <C> <C>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA(1):
Revenue................................................... $68,846 $55,903
Cost of revenue........................................... 30,967 24,423
---------- -------------
Gross profit.............................................. 37,879 31,480
Selling, general and administrative expenses (2).......... 28,663 24,443
Goodwill amortization (3)................................. 1,282 962
---------- -------------
Income from operations.................................... 7,934 6,075
Interest and other income (expense), net.................. (73) 2
---------- -------------
Income before income taxes................................ 7,861 6,077
Provision for income taxes (4)............................ 3,763 2,815
---------- -------------
Net income................................................ $ 4,098 $ 3,262
========== =============
Net income per share...................................... $ 0.42 $ 0.33
========== =============
Shares used in computing net income per share (5)......... 9,795,558 9,795,558
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA(6):
Working capital........................................... $14,423
Total assets.............................................. 81,654
Long-term debt, net of current maturities................. 1,056
Stockholders' equity...................................... 67,276
</TABLE>
- ---------------
(1) The pro forma combined statement of operations data assumes that the
Combination and the IPO 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 (i) salary, bonuses and benefits paid to
certain of the owners of the Founding Companies to which they agreed
prospectively, and (ii) non-cash compensation expense totalling
approximately $485,000 during the nine months ended March 31, 1998 related
to the issuance of Common Stock to officers of and consultants to the
Company (collectively, the "Compensation Differential"). For the year ended
June 30, 1997 and the nine months ended March 31, 1998, the Compensation
Differential was approximately $5.6 million and $5.4 million, respectively.
(3) Reflects amortization of the goodwill being 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
<PAGE> 6
(5) Consists of: (i) 3,459,341 shares issued to the stockholders of the Founding
Companies in the Combination (without giving effect to the issuance of
Additional Consideration, the J. Howard Contingent Consideration or the Star
Mountain Contingent Consideration); (ii) 3,346,217 shares outstanding prior
to the Combination and the IPO; and (iii) 2,990,000 shares sold in the IPO.
(6) The pro forma combined balance sheet data assumes that the Combination and
the IPO were consummated on March 31, 1998. 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.
6
<PAGE> 7
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>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BTI:
Revenue....................................... $ 3,803 $ 5,685 $ 7,096 $ 5,210 $ 5,956
Gross profit.................................. 2,754 4,190 5,608 4,098 4,783
Income (loss) from operations................. 439 142 497 88 (790)
Pro forma income from operations (1).......... 350 705 1,439 1,004 1,672
Basic net income (loss) per share............. 5,780 2,510 5,680 1,480 (7,388)
DECKER:
Revenue....................................... $ 8,550 $ 8,620 $ 8,410 $ 5,698 $ 7,784
Gross profit.................................. 6,131 5,965 6,135 4,069 5,729
Income (loss) from operations (2)............. 461 249 (311) (852) 592
Pro forma income from operations (1).......... 653 441 854 203 930
Basic net income (loss) per share............. 2.53 1.63 (2.55) (6.14) 4.18
J. HOWARD:
Revenue....................................... $ 5,444 $ 7,388 $ 7,317 $ 5,162 $ 5,006
Gross profit.................................. 3,646 5,084 5,157 3,623 3,391
Income (loss) from operations................. 519 720 602 106 (557)
Pro forma income from operations (1).......... 701 1,265 1,548 992 48
Basic net income (loss) per share............. 6.45 8.96 7.12 1.41 (6.14)
LSS (3):
Revenue....................................... $ 2,983 $ 4,233 $ 5,599 $ 4,113 $ 4,237
Gross profit.................................. 1,903 2,549 3,671 2,816 2,304
Income from operations........................ 209 381 610 359 712
Pro forma income from operations (1).......... 573 940 1,928 1,514 711
Basic net income per share.................... .01 .02 .04 .03 .05
MOHR:
Revenue....................................... $ 1,459 $ 2,171 $ 3,015 $ 1,993 $ 2,883
Gross profit.................................. 1,288 1,494 2,190 1,441 1,987
Income (loss) from operations................. (26) 343 445 209 590
Pro forma income from operations (1).......... 47 487 779 418 801
Basic net income (loss) per share............. (280) 3,390 4,410 2,110 5,930
NOVATIONS:
Revenue....................................... $ 7,175 $ 9,039 $ 9,018 $ 6,716 $ 8,248
Gross profit.................................. 3,290 4,306 4,179 3,020 4,357
Income from operations........................ 123 212 864 622 876
Pro forma income from operations (1).......... 1,331 1,683 1,525 1,099 2,089
Basic net income per share.................... 3 74 292 190 401
STAR MOUNTAIN:
Revenue....................................... $11,875 $14,361 $20,790 $14,309 $20,370
Gross profit.................................. 4,507 5,704 8,188 5,974 8,566
Income from operations........................ 1,286 292 1,127 822 1,568
Pro forma income from operations (1).......... 1,116 696 1,368 1,018 1,684
Basic and diluted net income per share........ 0.14 0.02 0.08 0.04 0.08
</TABLE>
- ---------
(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 and the nine months ended
March 31, 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.
7
<PAGE> 8
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
Until the IPO, the Founding Companies operated independently of one
another. Currently, the Company has no centralized financial reporting system
and initially is relying on the existing reporting systems of the Founding
Companies. The Company's senior management group was 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 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
8
<PAGE> 9
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 depend on the continuing efforts of its executive
officers and the senior management of the Founding Companies. In particular, the
Company depends 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 has
entered 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 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.
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
9
<PAGE> 10
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 27% of the Company's pro forma revenue in the nine months
ended March 31, 1998 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 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."
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
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<PAGE> 11
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 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."
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND PROMOTERS
The Company's directors, executive officers and promoters currently
beneficially own approximately 50.0% of the Company's outstanding shares of
Common Stock, and will beneficially own additional shares if some or all of the
Additional Consideration, J. Howard Contingent Consideration and/or Star
Mountain Contingent Consideration is paid. As a result, these stockholders, if
they were to act together, have the ability
11
<PAGE> 12
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 under
Rule 144 under 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
IPO and the shares issued in the Combination are "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 IPO agreed
with the Company to certain transfer restrictions for a two-year period
following the IPO on the Common Stock held by them as of the closing of the IPO
(and, for substantially all such stockholders, from time to time thereafter) and
(for certain stockholders) on the Common Stock that may be purchased by them
under options and warrants outstanding as of the closing of the IPO. 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 IPO and
substantially all of the stockholders of the Founding Companies have agreed 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 until
October 26, 1998 without the written consent of NationsBanc Montgomery
Securities LLC, 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."
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 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."
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<PAGE> 13
POSSIBLE VOLATILITY OF STOCK PRICE AND LIMITATIONS ON RESALE
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
may adversely affect the prevailing market price of the Common Stock.
Affiliates of companies acquired by PROVANT who receive Common Stock under
this Prospectus are subject for one year to the restrictions of Rule 145 under
the Securities Act, including the volume of sale limitations and manner of sale
requirements thereof. The requirements of Rule 145 may limit the ability of such
affiliates of resell Common Stock they receive under this Prospectus.
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's credit
arrangements currently prohibit dividend payments. See "Dividend Policy."
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<PAGE> 14
COMBINATION
PROVANT's objective is to become a leading provider of training and
development services and products. PROVANT acquired the Founding Companies in
merger transactions simultaneously with the consummation of the IPO. For a
description of the transactions pursuant to which the Founding Companies were
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 prior to the Combination, 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 prior to the Combination, 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: Learning Systems Sciences, Inc. ("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
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<PAGE> 15
of retail associates. LSS's training products are delivered 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 prior to the Combination, 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 prior to the Combination,
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 paid by PROVANT at the closing of the
Combination was $67.4 million, consisting of $22.4 million in cash and 3,459,341
shares of Common Stock. In addition, in connection with the Combination, PROVANT
assumed indebtedness of the Founding Companies aggregating approximately $7.0
million as of March 31, 1998.
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<PAGE> 16
The former stockholders of five of the Founding Companies are 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 IPO 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.
For a more detailed description of the transactions comprising the
Combination, see "Certain Transactions -- Organization of the Company."
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<PAGE> 17
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on Nasdaq under the symbol "POVT." From April
29, 1998 (the first day of trading on Nasdaq) through June 24, 1998, the high
and low sale prices for the Common Stock as reported by Nasdaq were $22.50 and
$16.00, respectively. On June 24, 1998, the last reported sale price of the
Common Stock was $18.625. As of such date, there were 109 holders of record of
Common Stock.
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, 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 credit facility currently restricts the Company's
ability to pay dividends without the consent of the lender.
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<PAGE> 18
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PROVANT acquired the Founding Companies simultaneously with the
consummation of the IPO. For financial reporting purposes, PROVANT has been
designated as the accounting acquiror. The following data presents selected
historical financial data for PROVANT (without giving effect to the Combination
or the IPO) 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 IPO and the application of
the net proceeds. See PROVANT's historical financial statements and 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 NINE MONTHS
NOVEMBER 16, 1996 NINE MONTHS ENDED
(DATE OF INCEPTION) ENDED YEAR ENDED MARCH 31,
TO JUNE 30, 1997 MARCH 31, 1998 JUNE 30, 1997 1998
------------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................. $ -- $ -- $ 68,846 $ 55,903
Cost of revenue..................... -- -- 30,967 24,423
---------- ---------- ---------- ----------
Gross profit........................ -- -- 37,879 31,480
Selling, general and administrative
expenses (2)..................... 149 1,394 28,663 24,443
Goodwill amortization (3)........... -- -- 1,282 962
---------- ---------- ---------- ----------
Income (loss) from operations....... (149) (1,394) 7,934 6,075
Interest and other income (expense),
net.............................. -- (95) (73) 2
---------- ---------- ---------- ----------
Income (loss) before provision for
income taxes..................... (149) (1,489) 7,861 6,077
Provision for income taxes (4)...... -- -- 3,763 2,815
---------- ---------- ---------- ----------
Net income (loss)................... $ (149) $ (1,489) $ 4,098 $ 3,262
========== ========== ========== ==========
Net income (loss) per share......... $ (.08) $ (.49) $ 0.42 $ 0.33
========== ========== ========== ==========
Shares used in computing net income
per share (5).................... 1,950,520 3,025,592 9,795,558 9,795,558
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
PRO FORMA
HISTORICAL COMBINED (6)
---------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $(2,093) $ 14,423
Total assets.............................................. 1,196 81,654
Long-term debt, net of current maturities................. -- 1,056
Stockholders' equity (deficit)............................ (929) 67,276
</TABLE>
- ---------------
(1) The pro forma combined statement of operations data assumes that the
Combination and the IPO 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 (i) salary, bonuses and
benefits paid to certain of the owners of the Founding Companies to which
they agreed prospectively, and (ii) non-cash compensation expense totalling
approximately $485,000 during the nine months ended March 31, 1998 related
to the issuance of Common Stock to officers of and consultants to the
Company (collectively, the "Compensation Differential"). For the year ended
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<PAGE> 19
June 30, 1997 and the nine months ended March 31, 1998, the Compensation
Differential was approximately $5.6 million and $5.4 million, respectively.
(3) Reflects in the pro forma data amortization of the goodwill being 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 issued to the
stockholders of the Founding Companies in the Combination (without giving
effect to the issuance of Additional Consideration, the J. Howard Contingent
Consideration or the Star Mountain Contingent Consideration); (ii) 3,346,217
shares outstanding prior to the Combination and the IPO; and (iii) 2,990,000
shares sold in the IPO.
(6) The pro forma combined balance sheet data assumes that the Combination and
the IPO were consummated on March 31, 1998. 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.
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<PAGE> 20
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 selected data for the three months
ended March 31, 1997 and 1998 are derived from Star Mountain's unaudited
financial statements which, in the opinion of management, contain all
adjustments, consisting only of normal recurring adjustments, required to
present fairly the company's financial position and results of operations for
those periods. The data presented below is neither comparable to nor indicative
of the Company's post-Combination financial position or results of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................. $8,293 $9,731 $14,306 $16,313 $23,775 $4,850 $ 7,926
Cost of revenue.......................... 5,418 6,350 8,668 9,457 14,504 2,937 4,504
------ ------ ------- ------- ------- ------ -------
Gross profit............................. 2,875 3,381 5,638 6,856 9,271 1,913 3,422
Selling, general and administrative
expenses............................... 2,619 2,973 4,411 5,476 7,591 1,839 2,849
------ ------ ------- ------- ------- ------ -------
Income from operations................... 256 408 1,227 1,380 1,680 74 573
Interest and other income (expense), net (150) (194) (235) (379) (406) (25) (99)
------ ------ ------- ------- ------- ------ -------
Income before provision for income
taxes.................................. 106 214 992 1,001 1,274 49 474
Provision for income taxes(1)............ -- -- -- 397 546 169 334
------ ------ ------- ------- ------- ------ -------
Net income............................... $ 106 $ 214 $ 992 $ 604 $ 728 $ (120) $ 140
====== ====== ======= ======= ======= ====== =======
Weighted average shares outstanding...... 8,443 8,821 8,825 8,422 8,078 8,336 8,073
Weighted average shares and potentially
dilutive shares outstanding............ 9,271 9,058 8,963 8,565 8,823 8,336 7,328
Basic income per share................... $ 0.01 $ 0.02 $ 0.11 $ 0.07 $ 0.09 $ (.01) $ .02
====== ====== ======= ======= ======= ====== =======
Diluted income per share................. $ 0.01 $ 0.02 $ 0.11 $ 0.07 $ 0.08 $ (.01) $ .02
====== ====== ======= ======= ======= ====== =======
BALANCE SHEET DATA:
Working capital.......................... $ 583 $ 847 $ 942 $ 871 $ 64 $ 188 $ 251
Total assets............................. 3,231 3,507 4,775 5,983 10,677 7,035 12,299
Long term debt, net of current
maturities............................. -- -- -- -- 304 411 464
Stockholders' equity..................... 1,021 1,274 1,859 2,010 2,778 2,066 2,930
</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.
20
<PAGE> 21
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 agreed in the Combination to certain adjustments in their
annual historical salaries, bonuses and benefits. 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, together with non-cash compensation
expense relating to the issuance of Common Stock by the Company to certain
officers and consultants during the nine months ended March 31, 1998, is
referred to herein as the "Compensation Differential." The aggregate
Compensation Differentials for 1995, 1996 and 1997 and for the nine months ended
March 31, 1997 and 1998 were $1.8
21
<PAGE> 22
million, $3.9 million, $5.6 million, $4.9 million and $5.4 million,
respectively, and have been reflected as a pro forma adjustment in the Unaudited
Pro Forma Combined 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.
As a result of the Combination, the Company expects to realize certain
savings from: (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. At this time, the Company
cannot quantify these savings, and 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. 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 $49.8 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, was recorded as goodwill on the
Company's balance sheet in the Combination. Goodwill is being 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 $1.2 million per
year. The amount amortized, however, will not be deductible for tax purposes.
See "Certain Transactions -- Organization of the Company."
RESULTS OF OPERATIONS -- PRO FORMA COMBINED
The following table sets forth certain selected pro forma combined
financial data for the Company on a historical basis and as a percentage of
revenue for the periods indicated. For information regarding the pro forma
adjustments made to the combined data, see notes 1-3 to the Company's results
from operations data contained in "Selected Financial Data."
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------------- ----------------------------------
1997 1998 1997 1998
--------------- --------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.................... $16,527 100.0% $19,945 100.0% $49,471 100.0% $55,903 100.0%
Cost of revenue............ 7,104 43.0 8,475 42.5 22,132 44.7 24,423 43.7
------- ----- ------- ----- ------- ----- ------- -----
Gross profit............... 9,423 57.0 11,470 57.5 27,339 55.3 31,480 56.3
Selling, general and
administrative
expenses................. 7,262 44.0 8,601 43.1 21,162 42.9 24,443 43.7
Goodwill amortization...... 320 1.9 320 1.6 962 1.9 962 1.7
------- ----- ------- ----- ------- ----- ------- -----
Income from operations..... $ 1,841 11.1% $ 2,549 12.8% $ 5,215 10.5% $ 6,075 10.9%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
PRO FORMA COMBINED RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 (THE "1997
QUARTER") COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1998 (THE "1998 QUARTER")
Revenue. Revenue increased $3.4 million, or 20.7%, from $16.5 million in
the 1997 Quarter to $19.9 million in the 1998 Quarter. The increase was
primarily due to increased demand for the Company's train-the-trainer seminars
and consulting services.
Cost of Revenue. Cost of revenue as a percentage of revenue decreased
slightly from 43.0% in the 1997 Quarter to 42.5% in the 1998 Quarter primarily
due to better utilization of certain fixed overhead costs.
Gross Profit. Gross profit increased $2.0 million, or 21.7%, from $9.4
million in the 1997 Quarter to $11.4 million in the 1998 Quarter primarily due
to the increase in revenue. As a percentage of revenue, gross profit increased
slightly from 57.0% in the 1997 Quarter to 57.5% in the 1998 Quarter.
22
<PAGE> 23
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.3 million, or 18.4%, from $7.3 million in
the 1997 Quarter to $8.6 million in the 1998 Quarter primarily due to the costs
of establishing the corporate office and higher selling expenses associated with
increased revenue. As a percentage of revenue, selling, general and
administrative expenses decreased from 44.0% in the 1997 Quarter to 43.1% in the
1998 Quarter primarily due to the fixed nature of a portion of the Company's
selling, general and administrative expenses.
PRO FORMA COMBINED RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 1997 (THE "1997
PERIOD") COMPARED TO THE NINE MONTHS ENDED MARCH 31, 1998 (THE "1998 PERIOD")
Revenue. Revenue increased $6.4 million, or 13.0%, from $49.5 million in
the 1997 Period to $55.9 million in the 1998 Period. The increase was primarily
due to increased demand for the Company's train-the-trainer seminars and
consulting services.
Cost of Revenue. Cost of revenue as a percentage of revenue decreased from
44.7% in the 1997 Period to 43.7% in the 1998 Period primarily due to better
utilization of certain fixed overhead costs.
Gross Profit. Gross profit increased $4.1 million, or 15.1%, from $27.3 in
the 1997 Period to $31.4 million in the 1998 Period primarily due to the
increase in revenue. As a percentage of revenue, gross profit increased from
55.3% in the 1997 Period to 56.3% in the 1998 Period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.2 million, or 15.5%, from $21.2 million in
the 1997 Period to $24.4 million in the 1998 Period primarily due to the costs
of establishing the corporate office and higher selling expenses associated with
increased revenue. As a percentage of revenue, selling, general and
administrative expenses increased from 42.9% in the 1997 Period to 43.7% in the
1998 Period primarily due to the costs of establishing the corporate office.
RESULTS OF OPERATIONS -- COMBINED
The summary combined statement of operations data for 1995, 1996 and 1997
and the nine months ended March 31, 1997 and 1998 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 as a combined entity.
23
<PAGE> 24
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, NINE MONTHS ENDED MARCH 31,
----------------------------------------------------- ----------------------------------
1995 (1) 1996 1997 1997 1998
--------------- --------------- --------------- --------------- ---------------
(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% $43,201 100.0% $54,484 100.0%
Cost of revenue...... 17,770 43.0 22,205 43.1 26,117 42.6 18,160 42.0 23,367 42.9
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross profit......... 23,519 57.0 29,292 56.9 35,128 57.4 25,011 58.0 31,117 57.1
Selling, general and
administrative
expenses........... 20,508 49.7 26,953 52.3 31,443 51.4 23,687 54.9 29,520 54.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income (loss) from
operations......... $ 3,011 7.3% $ 2,339 4.6% $ 3,685 6.0% $ 1,354 3.1% $ 1,597 2.9%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Compensation
differential....... $ 1,760 4.3% $ 3,878 7.5% $ 5,607 9.2% $ 4,894 11.3% $ 5,429 10.0%
</TABLE>
- ---------------
(1) Includes 1995 data for LSS for the 12 months ended August 31, 1995.
COMBINED RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 1998 (THE "1998 PERIOD")
COMPARED TO THE NINE MONTHS ENDED MARCH 31, 1997 (THE "1997 PERIOD")
Revenue. Revenue increased $11.3 million, or 26.1%, from $43.2 million in
the 1997 Period to $54.5 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 $5.2 million, or 28.7%, from
$18.2 million in the 1997 Period to $23.4 million in the 1998 Period. As a
percentage of revenue, cost of revenue increased from 42.0% in the 1997 Period
to 42.9% 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 $6.1 million, or 24.3%, from $25.0
million in the 1997 Period to $31.1 million in the 1998 Period. As a percentage
of revenue, gross profit decreased from 58.0% in the 1997 Period to 57.1% in the
1998 Period, primarily due to the increased costs described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $5.8 million, or 24.6%, from $23.7 million in
the 1997 Period to $29.5 million in the 1998 Period. Excluding the Compensation
Differential of $4.9 million and $5.4 million in the 1997 Period and the 1998
Period, respectively, selling, general and administrative expenses would have
increased $5.3 million, or 28.2%, from $18.8 million in the 1997 Period to $24.1
million in the 1998 Period. As a percentage of revenue, selling, general and
administrative expenses would have increased on an adjusted basis from 43.5% in
the 1997 Period to 44.2% in the 1998 Period. The increase as a percentage of
revenue on an adjusted basis was primarily due to an increase in adjusted
operating expenses associated with PROVANT of approximately $900,000.
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
24
<PAGE> 25
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
As of March 31, 1998, the Company had, on a combined pro forma basis, after
giving effect to the Combination and the IPO (including the application of the
net proceeds therefrom), cash of $6.0 million and outstanding indebtedness of
$1.2 million. On April 8, 1998, the Company entered into a revolving credit
facility with Fleet National Bank, the material terms of which are summarized as
follows. The facility provides 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, acquisitions and working capital.
Loans made under the credit facility 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 from the Company's
initial borrowing under the facility (which borrowing had yet to occur as of
June 25, 1998), and all amounts outstanding thereunder (if any) will be due at
such time. The credit facility (i) prohibits the payment of dividends and other
distributions by the Company,
25
<PAGE> 26
(ii) generally does not permit the Company to incur or assume other
indebtedness, and (iii) requires the Company to comply with certain financial
covenants. As of June 25, 1998, there were no amounts outstanding under the
credit facility.
The Company anticipates that its cash flow from operations, the net
proceeds from the IPO and borrowings under the 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 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 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 through the
issuance of shares of Common Stock, borrowings, including use of amounts
available under its credit facility, and cash flow from operations. To the
extent the Company funds a significant portion of the consideration for future
acquisitions with cash, it may have to increase the amount of the credit
facility or obtain other sources of financing.
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, NINE MONTHS ENDED MARCH 31,
-------------------------------------------------- --------------------------------
1995 1996 1997 1997 1998
-------------- -------------- -------------- -------------- --------------
(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% $5,210 100.0% $5,956 100.0%
Cost of revenue......... 1,049 27.6 1,495 26.3 1,488 21.0 1,112 21.3 1,173 19.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit............ 2,754 72.4 4,190 73.7 5,608 79.0 4,098 78.7 4,783 80.3
Selling, general and
administrative
expenses.............. 2,315 60.9 4,048 71.2 5,111 72.0 4,010 77.0 5,573 93.6
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from
operations............ $ 439 11.5% $ 142 2.5% $ 497 7.0% $ 88 1.7% $ (790) (13.3)%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Compensation
differential.......... $ (89) (2.3)% $ 563 9.9% $ 942 13.3% $ 916 17.6% $2,462 41.3%
</TABLE>
RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 1998 (THE "1998 PERIOD") COMPARED TO
THE NINE MONTHS ENDED MARCH 31, 1997 (THE "1997 PERIOD") -- BTI
Revenue. Revenue increased approximately $746,000, or 14.3%, from $5.2
million in the 1997 Period to $6.0 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 increased approximately $61,000, or 5.5%,
from approximately $1.1 million in the 1997 Period to approximately $1.2 million
in the 1998 Period. As a percentage of revenue, cost of revenue decreased from
21.3% in the 1997 Period to 19.7% in the 1998 Period, primarily due to a
decrease in the average unit cost of participant materials.
Gross Profit. Gross profit increased approximately $685,000, or 16.7%,
from $4.1 million in the 1997 Period to $4.8 million in the 1998 Period. As a
percentage of revenue, gross profit increased from 78.7% in the 1997 Period to
80.3% in the 1998 Period, primarily due to the cost savings described above.
26
<PAGE> 27
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.6 million, or 39.0%, from $4.0 million in
the 1997 Period to $5.6 million in the 1998 Period. Excluding the Compensation
Differential attributable to BTI of approximately $916,000 and $2.5 million in
the 1997 Period and 1998 Period, respectively, selling, general and
administrative expenses would have remained relatively constant at $3.1 million
in both periods. As a percentage of revenue, selling, general and administrative
expenses would have decreased on an adjusted basis from 59.4% in the 1997 Period
to 52.2% 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.
LIQUIDITY AND CAPITAL RESOURCES -- BTI
BTI generated net cash from operating activities of approximately $641,000
in 1997. In the 1998 Period, BTI used approximately $780,000 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
27
<PAGE> 28
$65,000 in the 1998 Period for purchases of property and equipment. At March 31,
1998, BTI had working capital of $1.0 million.
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, NINE MONTHS ENDED MARCH 31,
-------------------------------------------------- --------------------------------
1995 1996 1997 1997 1998
-------------- -------------- -------------- -------------- --------------
(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% $5,698 100.0% $7,784 100.0%
Cost of revenue......... 2,419 28.3 2,655 30.8 2,275 27.1 1,629 28.6 2,055 26.4
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit............ 6,131 71.7 5,965 69.2 6,135 72.9 4,069 71.4 5,729 73.6
Selling, general and
administrative
expenses.............. 5,670 66.3 5,716 66.3 6,446 76.6 4,921 86.4 5,137 66.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from
operations............ $ 461 5.4% $ 249 2.9% $ (311) (3.7)% $ (852) (15.0)% $ 592 7.6%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Compensation
differential.......... $ 192 2.2% $ 192 2.2% $1,165 13.9% $1,055 18.5% $ 338 4.3%
</TABLE>
RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 1998 (THE "1998 PERIOD") COMPARED TO
THE NINE MONTHS ENDED MARCH 31, 1997 (THE "1997 PERIOD") -- DECKER
Revenue. Revenue increased $2.1 million, or 36.6%, from $5.7 million in
the 1997 Period to $7.8 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 $426,000, or
26.2%, from $1.6 million in the 1997 Period to $2.1 million in the 1998 Period.
As a percentage of revenue, cost of revenue decreased from 28.6% in the 1997
Period to 26.4% in the 1998 Period, primarily due to increased utilization of
trainers.
Gross Profit. Gross profit increased approximately $1.7 million, or 40.8%,
from $4.1 million in the 1997 Period to $5.7 million in the 1998 Period. As a
percentage of revenue, gross profit increased from 71.4% in the 1997 Period to
73.6% in the 1998 Period, primarily due to the reasons described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $216,000, or 4.4%, from $4.9 million in the
1997 Period to $5.1 million in the 1998 Period. Excluding the Compensation
Differential of $1.1 million and approximately $338,000 attributable to Decker
in the 1997 Period and 1998 Period, respectively, selling, general and
administrative expenses would have increased approximately $933,000, or 24.1%,
from $3.9 million in the 1997 Period to $4.8 million in the 1998 Period. As a
percentage of revenue, selling, general and administrative expenses would have
decreased on an adjusted basis from 67.8% in the 1997 Period to 61.7% in the
1998 Period, primarily due to the company's larger revenue base.
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 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
28
<PAGE> 29
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 $558,000 in the 1998 Period. Net cash used in
investing activities was approximately $11,000 in 1997 and approximately $50,000
in the 1998 Period, primarily for purchases of property and equipment. Net cash
used in financing activities was approximately $241,000 in 1997 and
approximately $391,000 in the 1998 Period, primarily for the payment of
dividends. At March 31, 1998, Decker had working capital of $1.2 million and
approximately $593,000 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 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.
29
<PAGE> 30
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, THREE MONTHS ENDED MARCH 31,
-------------------------------------------------- --------------------------------
1995 1996 1997 1997 1998
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue....................... $6,251 100.0% $7,110 100.0% $7,684 100.0% $2,005 100.0% $1,482 100.0%
Cost of revenue............... 1,964 31.4 2,166 30.5 2,346 30.5 569 28.4 459 31.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit.................. 4,287 68.6 4,944 69.5 5,338 69.5 1,436 71.6 1,023 69.0
Selling, general and
administrative expenses..... 4,158 66.5 4,559 64.1 4,748 61.8 933 46.5 1,171 79.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from
operations.................. $ 129 2.1% $ 385 5.4% $ 590 7.7% $ 503 25.1% $ (148) (10.0)%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Compensation differential..... $ 522 8.4% $ 944 13.3% $ 603 7.8% $ 60 3.0% $ 122 8.2%
</TABLE>
RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (THE "1998 PERIOD") COMPARED
TO THE THREE MONTHS ENDED MARCH 31, 1997 (THE "1997 PERIOD") -- J. HOWARD
Revenue. Revenue decreased approximately $523,000, or 26.1%, from $2.0
million in the 1997 Period to $1.5 million in the 1998 Period, primarily due to
lower license revenue.
Cost of Revenue. Cost of revenue decreased approximately $110,000, or
19.3%, from approximately $569,000 in the 1997 Period to approximately $459,000
in the 1998 Period. As a percentage of revenue, cost of revenue increased from
28.4% in the 1997 Period to 31.0% in the 1998 Period due to the fixed nature of
a portion of the company's costs.
Gross Profit. Gross profit decreased approximately $413,000, or 28.8%,
from $1.4 million in the 1997 Period to $1.0 million in the 1998 Period. As a
percentage of revenue, gross profit decreased from 71.6% in the 1997 Period to
69.0% in the 1998 Period, due to the reasons described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $238,000, or 25.5%, from
approximately $933,000 in the 1997 Period to $1.2 million in the 1998 Period.
Excluding the Compensation Differential of approximately $60,000 and
approximately $122,000 attributable to J. Howard in the 1997 Period and the 1998
Period, respectively, selling, general and administrative expenses would have
increased approximately $176,000, or 20.2%, from approximately $873,000 in the
1997 Period to $1.0 million in the 1998 Period. As a percentage of revenue,
selling, general and administrative expenses would have increased on an adjusted
basis from 43.5% in the 1997 Period to 70.8% in the 1998 Period, primarily due
to compensation paid to additional salespeople who did not generate material
revenue during the 1998 Period and the decrease in revenue.
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
30
<PAGE> 31
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.
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
$402,000 in the year ended December 31, 1997 and used approximately $270,000 in
operating activities in the 1998 Period. Net cash used in investing activities
was approximately $287,000 in the year ended December 31, 1997, primarily for
advances made to related parties, and approximately $58,000 in the 1998 Period,
primarily for purchases of property and equipment. Net cash used in financing
activities was approximately $108,000 in the year ended December 31, 1997 for
distributions to stockholders. Net cash provided by financing activities was
approximately $120,000 for the 1998 Period, from borrowings to fund operating
activities. At March 31, 1998, J. Howard had working capital of $1.0 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.
31
<PAGE> 32
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, THREE MONTHS ENDED MARCH 31,
-------------------------------------------------- --------------------------------
1995 1996 1997 1997 1998
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............................. $3,332 100.0% $5,123 100.0% $5,681 100.0% $1,424 100.0% $1,466 100.0%
Cost of revenue..................... 1,390 41.7 1,696 33.1 2,202 38.8 450 31.6 812 55.4
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit........................ 1,942 58.3 3,427 66.9 3,479 61.2 974 68.4 654 44.6
Selling, general and administrative
expenses.......................... 1,767 53.0 3,079 60.1 2,226 39.2 504 35.4 474 32.3
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from operations.............. $ 175 5.3% $ 348 6.8% $1,253 22.0% $ 470 33.0% $ 180 12.3%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Compensation differential........... $ 415 12.5% $1,379 26.9% $ 300 5.3% $ 47 3.3% $ (91) (6.2)%
</TABLE>
RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (THE "1998 PERIOD") COMPARED
TO THE THREE MONTHS ENDED MARCH 31, 1997 (THE "1997 PERIOD") -- LSS
Revenue. Revenue increased approximately $42,000, or 2.9%, from $1.4
million in the 1997 Period to $1.5 million in the 1998 Period.
Cost of Revenue. Cost of revenue increased approximately $362,000, or
80.4%, from approximately $450,000 in the 1997 Period to approximately $812,000
in the 1998 Period. As a percentage of revenue, cost of revenue increased from
31.6% in the 1997 Period to 55.4% in the 1998 Period, primarily due to increased
video production costs associated with certain of the Company's products during
the period.
Gross Profit. Gross profit decreased approximately $320,000, or 32.9%,
from approximately $974,000 in the 1997 Period to approximately $654,000 in the
1998 Period. As a percentage of revenue, gross profit decreased from 68.4% in
the 1997 Period to 44.6% in the 1998 Period, primarily due to the increased
video production costs described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased approximately $30,000, or 6.0%, from
approximately $504,000 in the 1997 Period to approximately $474,000 in the 1998
Period. Excluding the Compensation Differential of approximately $47,000 and
approximately $(91,000) attributable to LSS in the 1997 Period and the 1998
Period, respectively, selling, general and administrative expenses would have
increased approximately $108,000, or 23.6%, from approximately $457,000 in the
1997 Period to approximately $565,000 in the 1998 Period. As a percentage of
revenue, selling, general and administrative expenses would have increased on an
adjusted basis from 32.1% in the 1997 Period to 38.5% in the 1998 Period,
primarily due to increased new product development costs.
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.
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.
32
<PAGE> 33
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 $482,000
in the year ended December 31, 1997 and approximately $410,000 in the 1998
Period. Net cash used in investing activities was approximately $86,000 in the
year ended December 31, 1997 and approximately $13,000 in the 1998 Period, for
purchases of property and equipment. Cash used in financing activities was
approximately $496,000 and approximately $279,000 during the year ended December
31, 1997 and the 1998 Period, respectively, for dividends paid to stockholders.
At March 31, 1998, LSS had working capital of approximately $879,000.
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 derived primarily from the licensing to clients of the right to use
its training programs on a participant or site basis.
33
<PAGE> 34
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, NINE MONTHS ENDED MARCH 31,
-------------------------------- --------------------------------
1996 1997 1997 1998
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue....................... $2,171 100.0% $3,015 100.0% $1,993 100.0% $2,883 100.0%
Cost of revenue............... 677 31.2 825 27.4 552... 27.7 896 31.1
------ ----- ------ ----- ------ ----- ------ -----
Gross profit.................. 1,494 68.8 2,190 72.6 1,441 72.3 1,987 68.9
Selling, general and
administrative expenses..... 1,151 53.0 1,745 57.9 1,232 61.8 1,397 48.4
------ ----- ------ ----- ------ ----- ------ -----
Income from operations........ $ 343 15.8% $ 445 14.7% $ 209 10.5% $ 590 20.5%
====== ===== ====== ===== ====== ===== ====== =====
Compensation differential..... $ 144 6.6% $ 334 11.1% $ 209 10.5% $ 211 7.3%
</TABLE>
RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 1998 (THE "1998 PERIOD") COMPARED TO
THE NINE MONTHS ENDED MARCH 31, 1997 (THE "1997 PERIOD") -- MOHR
Revenue. Revenue increased approximately $890,000, or 44.7%, from $2.0
million in the 1997 Period to $2.9 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 $344,000, or
62.3%, from approximately $552,000 in the 1997 Period to approximately $896,000
in the 1998 Period. As a percentage of revenue, cost of revenue increased from
27.7% in the 1997 Period to 31.1% in the 1998 Period, primarily due to increased
new product development costs.
Gross Profit. Gross profit increased approximately $546,000, or 37.9%,
from $1.4 million in the 1997 Period to $2.0 million in the 1998 Period. As a
percentage of revenue, gross profit decreased from 72.3% in the 1997 Period to
68.9% 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 $165,000, or 13.4%, from $1.2
million in the 1997 Period to $1.4 million in the 1998 Period. Excluding the
Compensation Differential of approximately $209,000 and approximately $211,000
attributable to MOHR in the 1997 Period and 1998 Period, respectively, selling,
general and administrative expenses would have increased approximately $163,000,
or 15.9%, from $1.0 million in the 1997 Period to $1.2 million in the 1998
Period. As a percentage of revenue, selling, general and administrative expenses
would have decreased on an adjusted basis from 51.3% in the 1997 Period to 41.1%
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.
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
34
<PAGE> 35
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 and approximately $164,000 in the 1998 Period. Net cash used in
investing activities was approximately $41,000 in 1997 and approximately $18,000
in the 1998 Period, for purchases of property and equipment. At March 31, 1998,
MOHR had working capital of $1.1 million.
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>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------------------------ -------------------------------
1995 1996 1997 1997 1998
-------------- -------------- -------------- -------------- --------------
(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% $6,716 100.0% $8,248 100.0%
Cost of revenue.................. 3,885 54.1 4,733 52.4 4,839 53.7 3,696 55.0 3,891 47.2
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit..................... 3,290 45.9 4,306 47.6 4,179 46.3 3,020 45.0 4,357 52.8
Selling, general and
administrative expenses........ 3,167 44.2 4,094 45.3 3,315 36.7 2,398 35.7 3,481 42.2
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from operations........... $ 123 1.7% $ 212 2.3% $ 864 9.6% $ 622 9.3% $ 876 10.6%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Compensation differential........ $1,208 16.8% $1,471 16.3% $ 661 7.3% $ 477 7.1% $1,213 14.7%
</TABLE>
RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 1998 (THE "1998 PERIOD") COMPARED TO
THE NINE MONTHS ENDED MARCH 31, 1997 (THE "1997 PERIOD") -- NOVATIONS
Revenue. Revenue increased $1.5 million, or 22.8%, from $6.7 million in
the 1997 Period to $8.2 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 $195,000, or 5.3%
from $3.7 million in the 1997 Period to $3.9 million in the 1998 Period. As a
percentage of revenue, cost of revenue decreased from 55.0% in the 1997 Period
to 47.2% in the 1998 Period, primarily due to the increased utilization of the
company's consultants.
Gross Profit. Gross profit increased $1.3 million, or 44.3%, from $3.0
million in the 1997 Period to $4.3 million in the 1998 Period. As a percentage
of revenue, gross profit increased from 45.0% in the 1997 Period to 52.8% in the
1998 Period, primarily due to the increased utilization rate described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.1 million, or 45.2%, from $2.4 million in
the 1997 Period to $3.5 million in the 1998 Period. Excluding the Compensation
Differential attributable to Novations of approximately $477,000 and $1.2
million in the 1997 Period and 1998 Period, respectively, selling, general and
administrative expenses would have increased approximately $347,000, or 18.1%,
from $1.9 million in the 1997 Period to $2.3 million in the 1998 Period. As a
percentage of revenue, selling, general and administrative expenses would have
decreased on an adjusted
35
<PAGE> 36
basis from 28.6% in the 1997 Period to 27.5% 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
$81,000 in the 1998 Period due to an increase in accounts receivable. Net cash
used in investing activities was approximately $137,000 in 1997, primarily for
purchases of property and equipment. Net cash provided by investing activities
was approximately $73,000 in the 1998 Period, primarily due to a decrease in
related party receivables. Net cash provided by financing activities was
approximately $55,000 in 1997 from net proceeds of long-term debt. Net cash used
in financing activities was approximately $73,000 in the 1998 Period, for the
repayment of long-term debt and distributions to stockholders. At March 31,
1998, Novations had working capital of approximately $426,000 and approximately
$299,000 of long term debt.
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
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<PAGE> 37
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, THREE MONTHS ENDED MARCH 31,
-------------------------------------------------- --------------------------------
1995 1996 1997 1997 1998
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............................. $14,306 100.0% $16,313 100.0% $23,775 100.0% $4,850 100.0% $7,926 100.0%
Cost of revenue..................... 8,668 60.6 9,457 58.0 14,504 61.0 2.937 60.6 4,504 56.8
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit........................ 5,638 39.4 6,856 42.0 9,271 39.0 1,913 39.4 3,422 43.2
Selling, general and administrative
expenses.......................... 4,611 32.2 5,815 35.6 7,897 33.2 1,839 37.9 2,849 36.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from operations.............. $1,027 7.2% $1,041 6.4% $1,374 5.8% $ 74 1.5% $ 573 7.2%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Compensation differential........... $ 64 0.4% $ 304 1.9% $ 180 0.8% $ 45 0.9% $ 26 0.3%
</TABLE>
RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (THE "1998 PERIOD") COMPARED
TO THE THREE MONTHS ENDED MARCH 31, 1997 (THE "1997 PERIOD) -- STAR MOUNTAIN
Revenue. Revenue increased $3.1 million, or 63.4%, from $4.8 million in
the 1997 Period to $7.9 million in the 1998 Period primarily due to an increase
in the number of federal government contracts undertaken, as well as revenue
contributed by businesses acquired during the first and fourth quarters of the
year ended December 31, 1997.
Cost of Revenue. Cost of revenue increased $1.6 million, or 53.4%, from
$2.9 million in the 1997 Period to $4.5 million in the 1998 Period. As a
percentage of revenue, cost of revenue decreased from 60.6% in the 1997 Period
to 56.8% in the 1998 Period, primarily due to better utilization of the
Company's fixed costs.
Gross Profit. Gross profit increased $1.5 million, or 78.9%, from $1.9
million in the 1997 Period to $3.4 million in the 1998 Period. As a percentage
of revenue, gross profit increased from 39.4% in the 1997 Period to 43.2% in the
1998 Period, primarily due to the utilization improvements described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.0 million, or 54.9%, from $1.8 million in
the 1997 Period to $2.8 in the 1998 Period. Excluding the Compensation
Differential of approximately $45,000 and approximately $26,000 attributable to
Star Mountain in the 1997 Period and the 1998 Period, respectively, selling,
general and administrative expenses would have remained at $1.8 million in the
1997 Period and $2.8 million in the 1998 Period. As a percentage of revenue,
selling, general and administrative expenses would have decreased on an adjusted
basis from 37.0% in the 1997 Period to 35.6% in the 1998 Period, primarily due
to the larger revenue base.
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.
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<PAGE> 38
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.
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 approximately
$864,000 in the year ended December 31, 1997, and used approximately $301,000 in
operating activities in the 1998 Period. Net cash used in investing activities
was $2.3 million and approximately $223,000 in the year ended December 31, 1997
and the 1998 Period, respectively, primarily in connection with acquisitions.
Net cash provided by financing activities was $1.8 million and approximately
$166,000 in the year ended December 31, 1997 and the 1998 Period, respectively,
primarily from borrowings on the company's line of credit. At March 31, 1998,
Star Mountain had working capital of approximately $251,000, and long-term debt
of approximately $464,000.
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<PAGE> 39
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
39
<PAGE> 40
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 is
pursuing 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
40
<PAGE> 41
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 currently operates with a
decentralized management structure under which management at each of the
Founding Companies makes most of the day-to-day operating decisions and has
primary responsibility for the profitability and growth of its business. The
Company utilizes 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
is evaluating 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 established strong relationships with its clients but could
offer 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 is pursuing
an aggressive sales and marketing strategy designed to establish new client
relationships and expand existing relationships. Specifically, the Company is:
(i) hiring additional salespeople to supplement the existing sales efforts of
the Founding Companies; (ii) establishing a nationwide telemarketing program
focusing primarily on medium-sized corporations; and (iii) participating 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.
41
<PAGE> 42
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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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 its training and development services and products, the
Company 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 nine months ended March 31, 1998. 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 nine months ended March 31,
1998, Star Mountain's training and development work for federal government
clients generated approximately 27% 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 targets its prospects
primarily through direct sales, public seminars, client referrals and a variety
of media,
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<PAGE> 46
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.
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.
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
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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 734 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 120 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 as of June 25, 1998 concerning
the Company's directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- --------------------------------------------------------
<S> <C> <C>
Paul M. Verrochi..................... 49 Chairman and Chief Executive Officer
John H. Zenger....................... 66 President and Director
Dominic J. Puopolo................... 55 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.................... 54 Director
David B. Hammond..................... 53 Director
John R. Murphy....................... 64 Director
Esther T. Smith...................... 59 Director
</TABLE>
Paul M. Verrochi has been Chairman of the Board and Chief Executive Officer
of the Company since May 1998. Prior to the IPO, Mr. Verrochi was President and
a director of the Company. 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 has been President and a director of the Company since May
1998. Prior to the IPO, from May 1997 until May 1998, Mr. Zenger was a
consultant to the Company. 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 has been Executive Vice President and Chief Financial
Officer of the Company since May 1998. Mr. Puopolo also has served as a director
of the Company since November 1996. Prior to the IPO, Mr. Puopolo also was
Treasurer of the Company. 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 Trustees of Emerson College of Communications and is Chairman of its
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<PAGE> 49
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 has been Senior Vice President, Treasurer and Chief Accounting
Officer of the Company since May 1998. Prior to the IPO, from August 1997 until
May 1998, Mr. Bhatt was a consultant to the Company. 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 has been Vice President of the Company since May 1998. Prior
to the IPO, from February 1997 until May 1998, Mr. Gardner was a consultant to
the Company. 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 has been a director of the Company, and Chairman of MOHR,
since May 1998. Previously, from February 1991 until May 1998, Mr. Cohen was
Chief Executive Officer of MOHR. 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 has been a director of the Company since May 1998. Mr. Decker
also serves as Chairman of Decker, a position he has held since October 1979.
From October 1979 until May 1998, Mr. Decker also was Chief Executive Officer of
Decker. 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. has been a director of the Company, and Chairman of
BTI, since May 1998. Dr. Green also serves as Chief Executive Officer of BTI, a
position he has held 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 has been a director of the Company since May 1998, and has
served as 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, 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
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Brigham Young University and his Bachelor of Science degree in Accounting from
Brigham Young University.
John F. King has been a director of the Company, and Chairman of LSS, since
May 1998. Previously, from December 1990 until May 1998, Mr. King was Chief
Executive Officer of LSS. 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 has been a director of the Company, and Chairman of
Star Mountain, since May 1998. Mr. von Sternberg also serves as President of
Star Mountain, a position he has held 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 has been a director of the Company since May 1998, and has
been President of J. Howard since January 1991. Previously, from April 1983
until May 1998, Mr. Wallace also was Treasurer of J. Howard. 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 has been a director of the Company since May 1998. Mr.
Davies also has served as a consultant to the Company since February 1997. 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 has been a director of the Company since May 1998. 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 has been a director of the Company since May 1998. 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 has been a director of the Company since May 1998. Since
October 1996, Ms. Smith has been a management consultant in corporate
positioning and internet enterprise development. From October 1996 to December
1997, she was Editor-at-Large of TechNews Inc. ("TechNews"). Previously, from
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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.
BOARD OF DIRECTORS
The Board of Directors currently consists 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.
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee, consisting of Messrs. Hammond and Murphy and Ms.
Smith, makes recommendations concerning the engagement of independent public
accountants, reviews with the independent public accountants the plans for and
results of the Company's annual audit, approves professional services provided
by and the independence of the independent public accountants, considers the
range of audit and non-audit fees, and reviews the adequacy of the Company's
internal accounting controls. The Compensation Committee, consisting of Messrs.
Hammond and Murphy and Ms. Smith, establishes the general compensation policy
for the Company, approves increases in directors' fees and salaries paid to
officers and senior employees of the Company, administers the Company's 1998
Equity Incentive Plan and Stock Plan for Non-Employee Directors, and determines,
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.
The Board of Directors also has established an Acquisition Committee
(consisting of Messrs. Puopolo, Verrochi, von Sternberg, Green and Hammond), a
Strategic Planning Committee (consisting of Messrs. Zenger, Decker and Green),
and a Technology Development Committee (consisting of Ms. Smith and Messrs. Mr.
King and von Sternberg).
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 receives 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 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 option grants as described in "-- Stock Plan for Non-Employee
Directors."
EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS
The Company was incorporated in 1996 and conducted no operations and paid
no compensation to its officers in fiscal 1997. The Company has entered into
employment agreements with each of its executive officers, the material terms of
which are summarized below.
The Company's employment agreement with each of Messrs. Verrochi, Zenger,
Puopolo, Bhatt and Gardner has a term expiring on May 4, 2001, 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 current base salaries for Messrs. Verrochi, Zenger, Puopolo,
Bhatt and Gardner under their agreements 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 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
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<PAGE> 52
Messrs. Verrochi, Zenger, Puopolo, Bhatt and Gardner has agreed not to compete
with the Company for a period that expires on May 4, 2003. Pursuant their
employment agreements, upon the closing of the IPO, Messrs. Verrochi and Puopolo
received options to purchase 43,298 shares of Common Stock each. See "-- Equity
Incentive Plan."
The principals of the Founding Companies who became directors of the
Company immediately following the closing of the Combination entered into
three-year employment agreements with subsidiaries 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 is 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 IPO, the Company granted to 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 has a per
share exercise price equal to the IPO 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 April 28, 1999,
2000 and 2001, and the options granted to Messrs. Verrochi and Puopolo became
exercisable with respect to all of the underlying shares of Common Stock as of
the closing of the IPO. Mr. Davies also was granted an option to purchase 50,000
shares of Common Stock, the terms of which are described in "Certain
Transactions." All of these options expire seven years from the date of grant.
In addition to the options granted to Messrs. Verrochi, Zenger, Puopolo,
Bhatt, Gardner and Davies, the Company awarded to employees of and consultants
to the Company options under the Equity Incentive Plan in connection with the
IPO to purchase an aggregate of 572,387 shares of Common Stock. Each such option
has a per share exercise price equal to the IPO price of $13.00, expires seven
years from the date of grant and generally becomes 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 became exercisable with respect to all of the
underlying Common Stock upon the closing of the IPO).
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<PAGE> 53
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 IPO, 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
IPO received 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 IPO 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 IPO will be the fair market
value of the Common Stock on the date of grant. Each option granted under the
Directors' Plan 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 this Prospectus, options to purchase 15,000 shares of
Common Stock 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 began 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 business day
immediately preceding the beginning of an option period and the last sale price
of the Common Stock on the business day immediately preceding 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 have been reserved for issuance under the
Employee Stock Purchase Plan. None of these shares has been issued to date.
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
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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> 55
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of June 25, 1998
regarding the beneficial ownership of the Company's Common Stock by (i) each
director of the Company, (ii) certain executive officers of the Company, (iii)
all directors 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>
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE OWNED (1)
------------------------ --------- --------------------
<S> <C> <C>
Paul M. Verrochi (2)(3)................................. 1,193,953 11.9%
John H. Zenger (4)...................................... 196,197 2.0
Dominic J. Puopolo (2)(5)............................... 1,118,274 11.2
Rajiv Bhatt............................................. 99,567 1.0
Philip Gardner.......................................... 339,821 3.5
Herbert A. Cohen (6).................................... 113,488 1.2
Bert Decker............................................. 205,326 2.1
Paul C. Green (7)....................................... 393,733 4.0
Joe Hanson.............................................. 68,362 *
John F. King (8)........................................ 292,271 3.0
A. Carl von Sternberg (9)............................... 497,925 5.1
Marc S. Wallace......................................... 97,477 *
Michael J. Davies (10).................................. 371,632 3.8
David B. Hammond (11)................................... 44,643 *
John R. Murphy.......................................... 2,000 *
Esther T. Smith......................................... 1,000 *
All directors and executive officers as a group (16
persons) (12)......................................... 5,035,669 49.0
</TABLE>
- ---------------
* Less than 1%.
(1) Percentages in the table are based upon 9,795,558 shares of Common Stock
outstanding as of June 25, 1998.
(2) Includes 173,194 shares issuable pursuant to a warrant that currently is
exercisable, and 43,298 shares issuable upon the exercise of an option that
is exercisable. 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.
(4) Shares are 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.
(6) Includes 56,244 shares held by Mr. Cohen's wife.
(7) Includes 900 shares held by members of Dr. Green's family.
(8) Shares are held jointly with Mr. King's wife.
(9) Includes 30,848 shares held by Mr. von Sternberg's wife and 1,232 shares
held by two trusts of which Mr. von Sternberg is trustee.
(10) Includes 50,000 shares issuable upon the exercise of an option that
currently is exercisable in full.
(11) Shares are held by a corporation of which the sole stockholders are Mr.
Hammond and his wife.
(12) See notes 2 through 11 above.
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CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
The Combination was accomplished through separate mergers of each Founding
Company with a subsidiary of the Company. As a result, all of the assets,
liabilities and business operations formerly held by each Founding Company
currently exist in a separate subsidiary of the Company.
With respect to six of the Founding Companies, each of the merger
agreements provides that the Company will pay, as additional purchase price,
shares of Common Stock deliverable after the Closing having a value up to a
fixed dollar amount. The number of shares issuable as Additional Consideration
and J. Howard Contingent Consideration will be determined by a formula based on
the relationship of the EBIT of that Founding Company (including its successor
Company subsidiary) 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 of
$13.00, 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 former 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
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.
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<PAGE> 57
The aggregate consideration paid by the Company in the Combination to the
stockholders and option holders of the Founding Companies is shown below,
consisting of approximately $22.4 million in cash and 3,459,341 shares of Common
Stock. Also shown below is the allocation among the five Founding Companies of
the maximum of 969,218 shares of Common Stock issuable as Additional
Consideration (assuming the achievement of certain EBIT targets) following the
end of fiscal 1998.
<TABLE>
<CAPTION>
AT COMBINATION CLOSING
----------------------------------------
SHARES ADDITIONAL CONSIDERATION
-------------------------- --------------------------
FOUNDING COMPANY CASH 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.
The consideration 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 director designees of the Founding
Companies received 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,
$701,265 and 97,477 shares of Common Stock.
Pursuant to the agreements entered into in connection with the Combination,
the principal stockholders of the Founding Companies agreed not to compete with
the Company for a period that expires on May 4, 2003. In addition, upon the
closing of the Combination, the principal stockholders and certain other
employees of each of the Founding Companies entered into three-year employment
agreements with the Company. Each such agreement with a Founding Company's
director designee (i.e., Messrs. Cohen, Decker, Green, Hanson, King, von
Sternberg and Wallace) provides for an initial base salary of $175,000 (except
for Mr. Decker's agreement which provides 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 was personally
guaranteed by their respective stockholders. The Company repaid such
indebtedness from the net proceeds of the IPO and the guarantees were released.
In particular, the Company repaid amounts owed by Novations (which totalled
approximately $1.7 million) and Star Mountain (which totalled approximately $3.5
million) which were personally guaranteed by Messrs. Hanson and von Sternberg,
respectively. In addition, the Company assumed in the Combination other
indebtedness of the Founding Companies that had an aggregate outstanding balance
of $2.5 million as of March 31, 1998.
The former stockholders of the Founding Companies have agreed 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
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<PAGE> 58
Combination (and, for certain stockholders, from time to time thereafter or upon
the exercise of options held by them) 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 IPO closing (other than options granted pursuant
to the Equity Incentive Plan or Directors' Plan), it must give each of the
Company's stockholders (without giving effect to the IPO) 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 has a consulting agreement
with the Company having a term expiring on May 4, 2000 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 became exercisable with respect to all of the underlying shares of
Common Stock upon the closing of the IPO, and expires on May 4, 2001.
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.
Expenses paid by the Company prior to the closing of and in connection with
the Combination and the IPO were financed with funds advanced to the Company by
Messrs. Verrochi and Puopolo. Outstanding advanced amounts accrued 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 repaid the advanced amounts
plus interest (which totalled $1.8 million) to Messrs. Verrochi and Puopolo out
of the proceeds of the IPO.
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 IPO price of $13.00. The second warrant,
entitling the holder to purchase 216,492 shares of Common Stock, 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 IPO 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 IPO. Specifically, the exercise price is equal to the IPO price
for the first 12 months following the closing of the IPO and, for each 12 month
period thereafter, is equal to the IPO price plus 10% of the IPO price
multiplied by the number of full 12 month periods elapsed since the closing of
the IPO. 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 May 4, 2005. The holders of the warrants have the right
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<PAGE> 59
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 IPO, PROVANT had outstanding 3,346,217 shares of Common Stock.
All of such shares currently are beneficially owned by 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, until May 4, 2000, they will not
sell any shares of Common Stock held by them from time to time (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 relating to an underwritten public offering.
Michael J. Davies, who became a director of the Company upon the
consummation of the IPO, also became a full-time consultant to the Company. For
the performance of his consulting duties, Mr. Davies is paid an annual fee of
$125,000. In addition, in consideration for his agreement to become a
consultant, Mr. Davies received an option to purchase 50,000 shares of Common
Stock, which currently is exercisable for all of the shares issuable thereunder
at a per share exercise price equal to the initial public offering price of
$13.00.
The Company used $750,000 of the net proceeds of the IPO to pay a fee due
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.
As a result of the Combination, the Company became a party to a six-year
lease of administrative offices, effective January 1, 1996, from Paul C. Green,
Ph.D., who is a director of the Company. 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 also became 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, is a director of the Company. The annual
rent expense to be paid to the LLC was $300,000 for the first year of the lease,
and the lease provides for a 3% annual increase thereafter. The Company also
assumed in the Combination the obligation to 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 loaned the LLC funds during 1997, the balance of which
totalled approximately $192,000 as of March 31, 1998. All outstanding amounts
owed to Novations pursuant to these arrangements were paid by the LLC at or
before the closing of the Combination.
A. Carl von Sternberg, a director of the Company, was indebted to Star
Mountain during 1997 under a promissory note. Borrowings by Mr. von Sternberg
under the note totalled approximately $406,000 as of March 31, 1998. Outstanding
principal amounts owed under the note accrued interest from time to time at the
prime rate of interest as reported in The Wall Street Journal, and all principal
amounts owed under the note, together with accrued interest, were repaid by Mr.
von Sternberg prior to May 31, 1998.
In December 1997, Marc S. Wallace, a director of the Company, 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
accrued interest from time to time at an annual rate of 7.0%, and all principal
amounts owed under the notes, together with accrued interest, were repaid by Mr.
Wallace prior to May 31, 1998.
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<PAGE> 60
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").
The Company currently has outstanding 9,795,558 shares of Common Stock held by
109 stockholders, and no shares of Preferred Stock.
COMMON STOCK
The Company has outstanding 9,795,558 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 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 fully paid and
nonassessable, and the holders thereof 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, 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
60
<PAGE> 61
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 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
The Company currently has 9,795,558 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 outstanding shares, 2,990,000 shares
sold pursuant to the IPO are 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 outstanding shares 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 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 has filed 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. As a result, Common
Stock issued upon the exercise of substantially all of such options (or the
purchase of Common Stock under the Employee Stock Purchase Plan) will be
available for immediate resale in the open market, subject to compliance with
Rule 144 in the case of affiliates.
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
61
<PAGE> 62
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 of the Combination 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 date on
which restricted securities were acquired from the Company or an 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 IPO (including the holders of shares issued in connection with the
Combination) have agreed 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 expiring on
October 26, 1998 (the "Lock-up Period") without the prior written consent of
NationsBanc Montgomery Securities LLC, 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 in certain circumstances 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. In
addition, the stockholders of the Founding Companies and all stockholders of the
Company prior to the IPO 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."
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.
PLAN OF DISTRIBUTION
This Prospectus relates to 3,000,000 shares of Common Stock that may be
offered and issued by the Company from time to time in connection with
acquisitions of other businesses or other properties by the Company.
PROVANT intends to concentrate its acquisitions within the training and
development industry. If the opportunity arises, however, PROVANT may attempt to
make acquisitions that are either complementary to its present operations or
advantageous even though they may be dissimilar to its present activities. The
consideration for any such acquisition may consist of shares of Common Stock,
cash, notes or other evidences of debt, assumptions of liabilities or a
combination thereof, as determined from time to time by negotiations between
PROVANT and the owners or controlling persons of businesses or properties to be
acquired.
The shares covered by this Prospectus may be issued in exchange for shares
of capital stock, partnership interests or other assets representing an
interest, direct or indirect, in other companies or other entities, in exchange
for assets used in or related to the business of such companies or entities, or
otherwise pursuant to the agreements providing for such acquisitions. The terms
of such acquisitions and of the issuance of shares of Common Stock under
acquisition agreements will generally be determined by direct negotiations with
the owners or controlling persons of the businesses or properties to be acquired
or, in the case of entities that are more widely held, through exchange offers
to stockholders or documents soliciting the approval of statutory mergers,
consolidations or sales of assets. It is anticipated that the shares of Common
Stock issued in any such acquisition will be valued at a price reasonably
related to the market value of the Common Stock either at the time of agreement
on the terms of an acquisition or at or about the time of delivery of the
shares.
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<PAGE> 63
It is not expected that underwriting discounts or commissions will be paid
by the Company in connection with issuances of shares of Common Stock under this
Prospectus. However, finders' fees or brokers' commissions may be paid from time
to time in connection with specific acquisitions, and such fees may be paid
through the issuance of shares of Common Stock covered by this Prospectus. Any
person receiving such a fee may be deemed to be an underwriter within the
meaning of the Securities Act.
Affiliates of companies acquired by PROVANT who receive Common Stock under
this Prospectus are subject for one year to the restrictions of Rule 145 under
the Securities Act, including the volume of sale limitations and manner of sale
requirements thereof. The requirements of Rule 145 may limit the ability of such
affiliates to resell Common Stock they may receive under this Prospectus.
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.
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 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.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (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 furnishes its stockholders with annual reports containing
audited consolidated financial statements and an opinion thereon expressed by an
independent public accounting firm.
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<PAGE> 65
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-22
Balance Sheets............................................ F-23
Statements of Operations.................................. F-24
Statements of Stockholders' Equity........................ F-25
Statements of Cash Flows.................................. F-26
Notes to Financial Statements............................. F-27
DECKER COMMUNICATIONS, INC.:
Independent Auditors' Report.............................. F-30
Balance Sheets............................................ F-31
Statements of Operations.................................. F-32
Statements of Stockholders' Equity........................ F-33
Statements of Cash Flows.................................. F-34
Notes to Financial Statements............................. F-35
J. HOWARD & ASSOCIATES, INC.:
Independent Auditors' Report.............................. F-39
Balance Sheets............................................ F-40
Statements of Operations.................................. F-41
Statements of Stockholders' Equity........................ F-42
Statements of Cash Flows.................................. F-43
Notes to Financial Statements............................. F-44
LEARNING SYSTEMS SCIENCES (ROBERT STEINMETZ, PH.D., AND
ASSOCIATES, INC. ):
Independent Auditors' Report.............................. F-47
Balance Sheets............................................ F-48
Statements of Operations.................................. F-49
Statements of Stockholders' Equity........................ F-50
Statements of Cash Flows.................................. F-51
Notes to Financial Statements............................. F-52
</TABLE>
F-1
<PAGE> 66
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MOHR RETAIL LEARNING SYSTEMS, INC.:
Independent Auditors' Report.............................. F-55
Balance Sheets............................................ F-56
Statements of Operations.................................. F-57
Statements of Stockholders' Equity........................ F-58
Statements of Cash Flows.................................. F-59
Notes to Financial Statements............................. F-60
NOVATIONS GROUP, INC.:
Independent Auditors' Report.............................. F-63
Balance Sheets............................................ F-64
Statements of Operations.................................. F-65
Statements of Stockholders' Equity........................ F-66
Statements of Cash Flows.................................. F-67
Notes to Financial Statements............................. F-68
STAR MOUNTAIN, INC.:
Independent Auditors' Reports............................. F-72
Consolidated Balance Sheets............................... F-74
Consolidated Statements of Operations..................... F-75
Consolidated Statements of Stockholders' Equity........... F-76
Consolidated Statements of Cash Flows..................... F-77
Notes to Consolidated Financial Statements................ F-79
</TABLE>
F-2
<PAGE> 67
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 IPO 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" included
elsewhere herein. In the Combination, subsidiaries of PROVANT merged 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
occurred simultaneously with the closing of the IPO and was 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 IPO as if they had occurred on March 31, 1998. 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 at this time quantify these benefits, and moreover, 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. Neither the anticipated benefits nor the anticipated costs have
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> 68
PROVANT, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1998
(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.......... $ 409 $ 625 $ -- $ 292 $ 406 $ 7 $ -- $ 32 $ 1,771
Investments........................ -- 391 10 -- -- -- -- -- 401
Accounts receivable, net........... 1,470 1,652 1,448 1,048 773 3,756 8,321 -- 18,468
Inventory.......................... -- -- -- -- 128 110 102 -- 340
Due from related parties........... -- 2 191 6 -- 293 406 -- 898
Costs in excess of billings........ -- -- -- 188 -- -- -- -- 188
Prepaid expenses and other current
assets........................... 135 185 41 23 30 3 135 -- 552
------ ------ ------ ------ ------ ------ ------- ------- -------
Total current assets......... 2,014 2,855 1,690 1,557 1,337 4,169 8,964 32 22,618
Property and equipment, net.......... 111 406 349 151 45 402 856 147 2,467
Other assets......................... 8 108 82 90 -- -- 2,479 1,017 3,784
Goodwill............................. -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------- ------- -------
Total assets................. $2,133 $3,369 $2,121 $1,798 $1,382 $4,571 $12,299 $1,196 $28,869
====== ====== ====== ====== ====== ====== ======= ======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................... $ 406 $ 333 $ 66 $ 63 $ 147 $ 255 $ 1,773 $ 825 $ 3,868
Accrued expenses................... 108 199 160 172 84 196 422 -- 1,341
Accrued compensation............... 432 506 134 68 -- 994 861 -- 2,995
Due to stockholder................. -- -- -- -- -- -- -- 1,300 1,300
Billings in excess of costs........ -- -- -- 364 -- -- 2,186 -- 2,186
Deferred revenue................... 24 143 106 -- 55 -- -- -- 328
State income taxes................. 40 20 41 11 -- -- 320 -- 432
Distributions payable.............. -- -- 103 -- -- -- -- -- 103
Deferred tax liability............. -- -- -- -- -- 675 -- -- 675
Current portion of long-term
debt............................. -- 405 120 -- -- 1,623 3,515 -- 5,663
------ ------ ------ ------ ------ ------ ------- ------- -------
Total current liabilities.... 1,010 1,606 730 678 286 3,743 8,713 2,125 18,891
Long-term debt, net of current
portion............................ -- 593 -- -- -- 299 464 -- 1,356
Deferred taxes....................... -- -- -- -- -- -- 192 -- 192
------ ------ ------ ------ ------ ------ ------- ------- -------
Total liabilities............ 1,010 2,199 730 678 286 4,042 9,369 2,125 20,439
Redeemable common stock.............. -- 300 -- -- -- -- -- -- 300
Stockholders' equity:
Common stock....................... 1 313 272 3 4 1 2,159 33 2,786
Additional paid-in capital......... 182 -- -- -- -- -- -- 699 881
Translation adjustment............. (6) -- -- -- -- -- -- -- (6)
Note receivable from stock sales... -- (171) -- -- -- -- -- -- (171)
Retained earnings (deficit)........ 946 728 1,119 1,117 1,092 528 1,397 (1,661) 5,266
Treasury stock..................... -- -- -- -- -- -- (626) -- (626)
------ ------ ------ ------ ------ ------ ------- ------- -------
Total stockholders' equity
(deficit).................. 1,123 870 1,391 1,120 1,096 529 2,930 (929) 8,130
------ ------ ------ ------ ------ ------ ------- ------- -------
Total liabilities and
stockholders' equity....... $2,133 $3,369 $2,121 $1,798 $1,382 $4,571 $12,299 $1,196 $28,869
====== ====== ====== ====== ====== ====== ======= ======= =======
<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.......... $ (93) $ 1,678 $ 4,333 $ 6,011
Investments........................ -- 401 -- 401
Accounts receivable, net........... -- 18,468 -- 18,468
Inventory.......................... -- 340 -- 340
Due from related parties........... (344) 554 -- 554
Costs in excess of billings........ -- 188 -- 188
Prepaid expenses and other current
assets........................... -- 552 -- 552
------- ------- -------- -------
Total current assets......... (437) 22,181 4,333 26,514
Property and equipment, net.......... -- 2,467 -- 2,467
Other assets......................... 167 3,951 (1,091) 2,860
Goodwill............................. 49,813 49,813 -- 49,813
------- ------- -------- -------
Total assets................. $49,543 $78,412 $ 3,242 $81,654
======= ======= ======== =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................... -- $ 3,868 -- $ 3,868
Accrued expenses................... -- 1,341 -- 1,341
Accrued compensation............... -- 2,995 -- 2,995
Due to stockholder................. 22,416 23,716 (23,716) --
Billings in excess of costs........ -- 2,186 -- 2,186
Deferred revenue................... -- 328 -- 328
State income taxes................. -- 432 -- 432
Distributions payable.............. -- 103 -- 103
Deferred tax liability............. -- 675 -- 675
Current portion of long-term
debt............................. -- 5,663 (5,500) 163
------- ------- -------- -------
Total current liabilities.... 22,416 41,307 (29,216) 12,091
Long-term debt, net of current
portion............................ -- 1,356 (300) 1,056
Deferred taxes....................... 1,039 1,231 -- 1,231
------- ------- -------- -------
Total liabilities............ 23,455 43,894 (29,516) 14,378
Redeemable common stock.............. (300) -- -- --
Stockholders' equity:
Common stock....................... (2,718) 68 30 98
Additional paid-in capital......... 35,230 36,111 33,662 69,773
Translation adjustment............. 6 -- -- --
Note receivable from stock sales... 171 -- -- --
Retained earnings (deficit)........ (6,927) (1,661) (934) (2,595)
Treasury stock..................... 626 -- -- --
------- ------- -------- -------
Total stockholders' equity
(deficit).................. 26,388 34,518 32,758 67,276
------- ------- -------- -------
Total liabilities and
stockholders' equity....... $49,543 $78,412 $ 3,242 $81,654
======= ======= ======== =======
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-4
<PAGE> 69
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........ $ 0.42
=======
Shares used in computing net
income per share (Note
6)........................ 9,795,558
=========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-5
<PAGE> 70
PROVANT, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
(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...................... $ 5,956 $7,784 $5,006 $4,237 $2,883 $8,248 $20,370 $ --
Cost of revenue.................... 1,173 2,055 1,615 1,933 896 3,891 11,804 --
------- ------ ------ ------ ------ ------ ------- -------
Gross profit.................. 4,783 5,729 3,391 2,304 1,987 4,357 8,566 --
Selling, general, and
administrative expenses.......... 5,573 5,137 3,948 1,592 1,397 3,481 6,998 1,394
Goodwill amortization.............. -- -- -- -- -- -- -- --
------- ------ ------ ------ ------ ------ ------- -------
Income (loss) from
operations.................. (790) 592 (557) 712 590 876 1,568 (1,394)
Other income (expense), net........ 2 3 (3) -- -- -- -- --
Interest income (expense).......... 27 12 16 12 5 (181) (156) (95)
------- ------ ------ ------ ------ ------ ------- -------
Income (loss) before income
taxes....................... (761) 607 (544) 724 595 695 1,412 (1,489)
Provision for income taxes......... -- 8 1 19 2 294 755 --
------- ------ ------ ------ ------ ------ ------- -------
Net income (loss)............. $ (761) $ 599 $ (545) $ 705 $ 593 $ 401 $ 657 $(1,489)
======= ====== ====== ====== ====== ====== ======= =======
Net income per share...............
Shares used in computing net income
per share (Note 6)...............
<CAPTION>
COMBINATION PRO FORMA
TOTAL ADJUSTMENTS COMBINED
------- ----------- ---------
<S> <C> <C> <C>
Total revenue...................... $54,484 $1,419 $ 55,903
Cost of revenue.................... 23,367 1,056 24,423
------- ------ ----------
Gross profit.................. 31,117 363 31,480
Selling, general, and
administrative expenses.......... 29,520 (5,077) 24,443
Goodwill amortization.............. -- 962 962
------- ------ ----------
Income (loss) from
operations.................. 1,597 4,478 6,075
Other income (expense), net........ 2 -- 2
Interest income (expense).......... (360) 360 --
------- ------ ----------
Income (loss) before income
taxes....................... 1,239 4,838 6,077
Provision for income taxes......... 1,079 1,736 2,815
------- ------ ----------
Net income (loss)............. $ 160 $3,102 $ 3,262
======= ====== ==========
Net income per share............... $ 0.33
==========
Shares used in computing net income
per share (Note 6)............... 9,795,558
==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-6
<PAGE> 71
PROVANT, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) GENERAL
Concurrently with the IPO, PROVANT acquired the seven Founding Companies in
the Combination. The acquisitions have been 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 pro forma financial statements for the individual Founding
Companies are as of March 31, 1998 and for the year ended June 30, 1997 and the
nine months ended March 31, 1998.
(2) ACQUISITION OF FOUNDING COMPANIES
The following table sets forth the consideration 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 was determined using an estimated fair value of $10.40
per share, representing 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.
<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 distributions estimated at $592,000 which were paid from
cash on hand by certain Founding Companies prior to the Closing of the
Combination.
(b) Records the receipt of cash from certain stockholders in satisfaction
of certain receivables and transfer of certain assets.
(c) 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.
(d) Reflects the creation of approximately $49.8 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 $8.6 million, and
records the liability for the cash portion of the consideration to be
paid to the stockholders of the Founding Companies in connection with
the Combination.
F-7
<PAGE> 72
PROVANT, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(e) Records the cash proceeds of $33.4 million from the issuance of shares
of Common Stock, net of the underwriting discount and offering costs of
$2.8 million. Offering costs primarily consisted of accounting fees,
legal fees and printing expenses. Of the $2.8 million of offering
costs, approximately $800,000 was recorded as deferred offering costs
paid with funds advanced by two of the Company's executive officers.
(f) Records the cash portion of the consideration 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 $1.1 million 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 (in thousands):
<TABLE>
<CAPTION>
Combination Adjustments Total
-------------------------------- Combination
(a) (b) (c) (d) Adjustments
----- ----- ------ ------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.......................... $(592) $ 499 $ -- $ -- $ (93)
Due from related parties........................... -- (344) -- -- (344)
----- ----- ------ ------- -------
Total current assets............................. (592) 155 -- -- (437)
Goodwill, net...................................... -- -- -- 49,813 49,813
Other assets....................................... -- (110) 277 -- 167
----- ----- ------ ------- -------
Total assets............................. $(592) $ 45 $ 277 $49,813 $49,543
===== ===== ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to stockholder................................. $ -- $ -- $ -- $22,416 $22,416
Deferred tax liability............................. -- -- 1,039 -- 1,039
----- ----- ------ ------- -------
Total liabilities........................ -- -- 1,039 22,416 23,455
Redeemable common stock............................ -- -- -- (300) (300)
Stockholders' equity:..............................
Common stock..................................... -- -- -- (2,718) (2,718)
Additional paid-in capital....................... (592) -- (762) 36,584 35,230
Translation adjustments.......................... -- -- -- 6 6
Note receivable from stock sales................. -- 45 -- 126 171
Retained earnings (deficit)...................... -- -- -- (6,927) (6,927)
Treasury stock................................... -- -- -- 626 626
----- ----- ------ ------- -------
Total stockholders' equity (deficit)..... (592) 45 (762) 27,697 26,388
----- ----- ------ ------- -------
Total liabilities and stockholders'
equity (deficit)....................... $(592) $ 45 $ 277 $49,813 $49,543
===== ===== ====== ======= =======
</TABLE>
F-8
<PAGE> 73
PROVANT, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
Offering
Adjustments Total
------------------- Offering
(e) (f) Adjustments
------- -------- -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.................................. $33,399 $(29,066) $ 4,333
------- -------- --------
Total current assets..................................... 33,399 (29,066) 4,333
Other assets............................................... -- (1,091) (1,091)
------- -------- --------
Total assets............................................... $33,399 $(30,157) $ 3,242
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt.......................... $ -- $ (5,500) $ (5,500)
Due to stockholder......................................... (23,716) (23,716)
------- -------- --------
Total current liabilities........................ -- (29,216) (29,216)
------- -------- --------
Long-term debt, net of current portion..................... -- (300) (300)
Total liabilities................................ -- (29,516) (29,516)
------- -------- --------
Stockholders' equity:
Common stock............................................. 30 -- 30
Additional paid-in capital............................... 33,369 293 33,662
Retained earnings (deficit).............................. -- (934) (934)
------- -------- --------
Total stockholders' equity (deficit)............. 33,399 (641) 32,758
------- -------- --------
Total liabilities and stockholders' equity
(deficit)...................................... $33,399 $(30,157) $ 3,242
======= ======== ========
</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 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 being 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 were repaid with the proceeds of the IPO.
F-9
<PAGE> 74
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>
NINE MONTHS ENDED MARCH 31, 1998
(a) Reflects the reduction in salaries, bonuses and benefits of $4.9 million to
certain of the owners of the Founding Companies to which they have agreed
prospectively, and 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 nine months ended March 31, 1998. 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 tax benefit,
related to the current portion of bank debt and notes payable to
stockholders that were repaid with the proceeds of the IPO.
F-10
<PAGE> 75
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......................... $ -- $ -- $ -- $1,419 $ -- $ 1,419
Cost of revenue....................... -- -- -- 1,056 -- 1,056
Selling, general and administrative
expenses............................ (5,429) -- -- 352 -- (5,077)
Goodwill amortization................. -- 962 -- -- -- 962
------- ----- ------- ------ ---- -------
Income (loss) from
operations................ 5,429 (962) -- 11 -- 4,478
Other income (expense):
Interest (expense) income........... -- -- -- (29) 389 360
------- ----- ------- ------ ---- -------
Income (loss) before income
taxes..................... 5,429 (962) -- (18) 389 4,838
Provision (benefit) for income
taxes............................... -- -- 1,587 (7) 156 1,736
------- ----- ------- ------ ---- -------
Net income (loss)........... $ 5,429 $(962) $(1,587) $ (11) $233 $ 3,102
======= ===== ======= ====== ==== =======
</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 IPO.
(6) NET INCOME PER SHARE
The shares used in computing pro forma net income per share consist of (i)
3,346,217 shares outstanding prior to the Combination and the IPO, (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) 2,990,000
shares of Common Stock sold in the IPO.
(7) STOCK-BASED COMPENSATION
PROVANT has three stock-based compensation plans. The Company has 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 have been made to date 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 share for
each period presented assuming such options were granted at the beginning of the
periods presented
F-11
<PAGE> 76
PROVANT, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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>
NINE MONTHS
YEAR ENDED ENDED
JUNE 30, 1997 MARCH 31, 1998
------------- -----------------
<S> <C> <C>
Net income -- pro forma..................................... $4,098 $3,262
====== ======
Pro forma as adjusted....................... $3,080 $2,812
====== ======
Basic income per share
Pro forma................................... $ .42 $ .33
====== ======
Pro forma as adjusted....................... $ .31 $ .29
====== ======
</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> 77
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, except as to note 3
which is as of April 28, 1998
F-13
<PAGE> 78
PROVANT, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1998
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 1 $ 32
------ ------
Total current assets.............................. 1 32
Property and equipment...................................... 150 147
Deferred offering costs..................................... -- 1,017
------ ------
Total assets...................................... $ 151 $1,196
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Notes payable to stockholders............................... $ 298 $1,300
Accounts payable............................................ -- 825
------ ------
Total current liabilities......................... 298 2,125
Stockholders' equity (deficit):
Preferred stock, none issued.............................. -- --
Common stock, $.01 par value; 1,950,520 and 3,346,224
shares issued and outstanding at June 30, 1997 and
March 31, 1998, respectively........................... 20 33
Paid-in capital........................................... -- 699
Accumulated deficit....................................... (167) (1,661)
------ ------
Total stockholders' equity (deficit).............. (147) (929)
------ ------
Total liabilities and stockholders' equity........ $ 151 $1,196
====== ======
</TABLE>
See accompanying notes to financial statements.
F-14
<PAGE> 79
PROVANT, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 16, 1996
(DATE OF NINE MONTHS
INCEPTION) TO ENDED
JUNE 30, 1997 MARCH 31, 1998
----------------- ----------------
(UNAUDITED)
<S> <C> <C>
Revenue.................................................... $ -- $ --
General and administrative expenses........................ 149 1,394
Interest expense........................................... -- 95
---------- ----------
Loss before income taxes................................... (149) (1,489)
Income tax benefit......................................... -- --
---------- ----------
Net loss................................................... $ (149) $ (1,489)
========== ==========
Net loss per share-basic and diluted....................... $ (0.08) $ (0.49)
========== ==========
Weighted average shares outstanding........................ 1,950,520 3,025,592
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE> 80
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................. 1,950,520 $20 $ -- $ (18) $ 2
Net (loss)................... -- -- (149) (149)
--------- -- ---- ------- -------
Balance at June 30, 1997............... 1,950,520 20 -- (167) (147)
Issuance of management shares, July
1997................................. 677,978 6 -- (5) 1
Issuance of warrants................... -- -- 221 -- 221
Issuance of management shares,
September 1997....................... 690,020 7 459 -- 466
Issuance of management shares, November
1997................................. 27,706 -- 19 -- 19
Net (loss)............................. -- -- -- (1,489) (1,489)
--------- -- ---- ------- -------
Balance, March 31, 1998 (Unaudited).... 3,346,224 $33 $699 $(1,661) $ (929)
========= == ==== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE> 81
PROVANT, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 16, 1996
(DATE OF NINE MONTHS
INCEPTION) TO ENDED
JUNE 30, 1997 MARCH 31, 1998
---------------------- --------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net (loss)................................................ $(149) $(1,489)
----- -------
Depreciation.............................................. -- 18
Non-cash interest......................................... -- 36
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.............................. -- (1,017)
Accounts payable..................................... -- 825
----- -------
Total adjustments.................................... 0 347
----- -------
Net cash used in operating activities............. (149) (1,142)
----- -------
Cash flows from investing activities:
Acquisition of property and equipment..................... (150) (15)
----- -------
Net cash used in investing activities............. (150) (15)
----- -------
Cash flows from financing activities........................
Issuance of stock......................................... 2 2
Increase in notes payable to stockholders................. 298 1,186
----- -------
Net cash provided by financing activities......... 300 1,188
----- -------
Net increase in cash and cash equivalents................... 1 31
Cash and cash equivalents, beginning of period.............. -- 1
----- -------
Cash and cash equivalents, end of period.................... $ 1 $ 32
===== =======
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE> 82
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
$1,485, before debt discount of $185 at March 31, 1998 (unaudited). 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 March 31, 1998 and for the nine
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 1,950,520 shares of its common stock, $.01 par value per share (the "Common
Stock"), at $1.00 per share. During the nine months ended March 31, 1998, the
Company sold 1,395,704 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> 83
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.
In connection with the Offering, the Company increased the authorized
shares of stock to 45 million, consisting of 40 million shares of Common Stock
and 5 million shares of Preferred Stock, and declared a stock split of
979.0292-for-1 in the form of a stock dividend that resulted in a total amount
of outstanding shares of Common Stock prior to the Offering (but giving effect
to the Combination) of 6,805,558. All share and per share data have been
restated to reflect the split.
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.
Equity Incentive Plan
The Company adopted 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
(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
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 $13.00 per share. 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 4 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
F-19
<PAGE> 84
PROVANT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
Stock Purchase Plan
The Company has adopted 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. 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.
F-20
<PAGE> 85
PROVANT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) 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.
(5) SUPPLEMENTAL CASH FLOW INFORMATION (UNAUDITED)
The Company recorded the following non-cash transactions during the nine
months ended March 31, 1998:
<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>
(6) 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-21
<PAGE> 86
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-22
<PAGE> 87
BEHAVIORAL TECHNOLOGY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
---------------- MARCH 31,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 652 $1,254 $ 409
Accounts receivable, net of allowance for doubtful
accounts of $89 at June 30, 1996 and 1997 and March 31,
1998................................................... 940 1,055 1,470
Prepaid expenses.......................................... 67 143 135
------ ------ ------
Total current assets.............................. 1,659 2,452 2,014
------ ------ ------
Property and equipment, net................................. 194 135 111
Other assets................................................ 8 7 8
------ ------ ------
Total assets...................................... $1,861 $2,594 $2,133
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 270 $ 268 $ 406
Accrued expenses.......................................... 123 148 108
Accrued compensation...................................... 316 433 432
Deferred revenue.......................................... 12 43 24
Income taxes payable...................................... -- -- 40
------ ------ ------
Total current liabilities......................... 721 892 1,010
------ ------ ------
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 March 31, 1998, respectively... 1 1 1
Additional paid-in capital................................ -- -- 182
Translation adjustment.................................... -- (6) (6)
Retained earnings......................................... 1,139 1,707 946
------ ------ ------
Total stockholders' equity........................ 1,140 1,702 1,123
------ ------ ------
Total liabilities and stockholders' equity........ $1,861 $2,594 $2,133
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE> 88
BEHAVIORAL TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
-------------------------- -----------------
1995 1996 1997 1997 1998
------ ------ ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue...................................... $3,803 $5,685 $7,096 $5,210 $ 5,956
Cost of revenue.............................. 1,049 1,495 1,488 1,112 1,173
------ ------ ------ ------ -------
Gross profit....................... 2,754 4,190 5,608 4,098 4,783
Selling, general and administrative
expenses................................... 2,315 4,048 5,111 4,010 5,573
------ ------ ------ ------ -------
Income (loss) from operations...... 439 142 497 88 (790)
------ ------ ------ ------ -------
Other income:
Royalties.................................. 83 82 30 -- --
Interest................................... 13 27 31 21 27
Other income, net.......................... 43 -- 10 39 2
------ ------ ------ ------ -------
Total other income................. 139 109 71 60 29
------ ------ ------ ------ -------
Net income (loss).................. $ 578 $ 251 $ 568 $ 148 $ (761)
====== ====== ====== ====== =======
Basic income (loss) per share................ $5,780 $2,510 $5,680 $1,480 $(7,388)
====== ====== ====== ====== =======
Weighted average shares outstanding.......... 100 100 100 100 103
====== ====== ====== ====== =======
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE> 89
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...................... -- -- -- -- (761) (761)
Translation adjustment........ -- -- -- -- -- --
Stock grant................... 5 -- 182 -- -- 182
--- -- ---- --- ------- -------
Balance, March 31, 1998
(Unaudited)................... 104 $1 $182 $(6) $ 946 $ 1,123
=== == ==== === ======= =======
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE> 90
BEHAVIORAL TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED JUNE 30, MARCH 31,
---------------------- ---------------
1995 1996 1997 1997 1998
----- ----- ------ ----- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 578 $ 251 $ 568 $ 148 $ (761)
----- ----- ------ ----- -------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 57 46 92 88 89
Non-cash compensation................................. -- -- -- -- 182
Changes in operating assets and liabilities:
(Increase) in accounts receivable................... (176) (195) (115) (409) (415)
(Increase) decrease in prepaid expenses............. -- (67) (76) (60) 8
(Increase) decrease in other assets................. -- -- 1 1 (1)
Increase (decrease) in accounts payable............. 90 47 (2) 184 138
Increase (decrease) in accrued expenses............. 19 172 142 270 (1)
Increase (decrease) in deferred revenue............. 22 (48) 31 (201) (19)
----- ----- ------ ----- -------
Total adjustments................................. 12 (45) 73 (127) (19)
----- ----- ------ ----- -------
Net cash provided by (used in) operating
activities...................................... 590 206 641 21 (780)
----- ----- ------ ----- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (157) (122) (42) (47) (65)
Proceeds from sale of property and equipment.............. -- 5 9 -- --
Purchase of trademark..................................... -- (7) -- -- --
----- ----- ------ ----- -------
Net cash used in investing activities............. (157) (124) (33) (47) (65)
----- ----- ------ ----- -------
Cash flows from financing activities:
Proceeds received on line of credit....................... -- -- 200 -- --
Principal payments on line of credit...................... -- -- (200) (200) --
----- ----- ------ ----- -------
Net cash used in financing activities............. -- -- -- (200) --
----- ----- ------ ----- -------
Net increase (decrease) in cash and cash equivalents........ 433 82 608 (226) (845)
Effect of exchange rate changes on cash..................... -- -- (6) 2 --
Cash and cash equivalents, beginning of period.............. 137 570 652 652 1,254
----- ----- ------ ----- -------
Cash and cash equivalents, end of period.................... $ 570 $ 652 $1,254 $ 428 $ 409
===== ===== ====== ===== =======
Supplemental disclosure:
Cash paid for interest.................................... $ -- $ -- $ 2 $ 2 $ --
===== ===== ====== ===== =======
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE> 91
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 March 31, 1998 and for the nine
months ended March 31, 1997 and 1998, 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-27
<PAGE> 92
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-28
<PAGE> 93
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-29
<PAGE> 94
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-30
<PAGE> 95
DECKER COMMUNICATIONS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
---------------- -----------
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 314 $ 508 $ 625
Investments............................................... 565 533 391
Accounts receivable, net of allowance for doubtful
accounts of $23 at June 30, 1996 and $31 at June 30,
1997 and March 31, 1998................................ 1,242 1,608 1,652
Receivables from related parties.......................... -- -- 2
Prepaid expenses and other current assets................. 170 140 185
------ ------ ------
Total current assets.............................. 2,291 2,789 2,855
------ ------ ------
Property and equipment, net................................. 497 338 406
Other assets................................................ 47 59 108
------ ------ ------
Total assets...................................... $2,835 $3,186 $3,369
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 251 $ 111 $ 333
Accrued expenses.......................................... 283 378 199
Accrued compensation...................................... 469 639 506
Taxes payable............................................. 6 -- 20
Current portion of note payable........................... -- 416 405
Deferred revenue.......................................... 92 89 143
------ ------ ------
Total current liabilities......................... 1,101 1,633 1,606
------ ------ ------
Note payable, net of current portion........................ -- 623 593
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 March
31, 1998, respectively................................. 397 269 313
Unrealized gain on investments............................ 5 9 --
Note receivable from stock sales.......................... (92) (127) (171)
Retained earnings......................................... 1,424 479 728
------ ------ ------
Total stockholders' equity........................ 1,734 630 870
------ ------ ------
Total liabilities and stockholders' equity........ $2,835 $3,186 $3,369
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE> 96
DECKER COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
-------------------------- ------------------
1995 1996 1997 1997 1998
------ ------ ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue....................................... $8,550 $8,620 $8,410 $5,698 $7,784
Cost of revenue............................... 2,419 2,655 2,275 1,629 2,055
------ ------ ------ ------ ------
Gross profit................................ 6,131 5,965 6,135 4,069 5,729
Selling, general and administrative
expenses.................................... 5,670 5,716 6,446 4,921 5,137
------ ------ ------ ------ ------
Income (loss) from operations............... 461 249 (311) (852) 592
Other (income) expense........................ (54) (74) 9 (1) 15
------ ------ ------ ------ ------
Income (loss) before income taxes........... 515 323 (320) (853) 607
State income taxes............................ 67 30 33 2 8
------ ------ ------ ------ ------
Net income (loss)........................... $ 448 $ 293 $ (353) $ (855) $ 599
====== ====== ====== ====== ======
Basic income (loss) per share................. $ 2.53 $ 1.63 $(2.55) $(6.14) $ 4.18
====== ====== ====== ====== ======
Weighted average shares outstanding........... 176,750 180,150 138,352 139,358 143,417
====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE> 97
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) -- --
Unrealized gain on investments........ -- -- (9) -- -- (9)
Dividends............................. -- -- -- -- (350) (350)
Net income............................ -- -- -- -- 599 599
------- ----- -- ----- ------ ------
Balance, March 31, 1998 (Unaudited)..... 143,417 $ 313 $-- $(171) $ 728 $ 870
======= ===== == ===== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE> 98
DECKER COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
----------------------- ---------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 448 $ 293 $(353) $(855) $ 599
----- ----- ----- ----- -----
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............. 127 223 194 156 115
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) 491 (44)
(Increase) decrease in related party
receivable........................... -- -- -- 79 (2)
(Increase) decrease in prepaid expenses
and other current assets............. 12 20 30 (162) (45)
(Increase) decrease in other assets.... (18) 6 (12) (34) (49)
Increase (decrease) in accounts payable
and accrued expenses................. 247 (30) 119 (162) (70)
Increase (decrease) in deferred
revenue.............................. (40) (61) (3) 17 54
----- ----- ----- ----- -----
Total adjustments.................... 118 217 799 1,230 (41)
----- ----- ----- ----- -----
Net cash provided by operating
activities........................ 566 510 446 375 558
----- ----- ----- ----- -----
Cash flows from investing activities:
Net change in investments...................... (344) 131 36 422 133
Purchases of property and equipment............ (136) (443) (56) (41) (186)
Proceeds from sale of property and equipment... -- 9 9 -- 3
----- ----- ----- ----- -----
Net cash (used in) provided by
investing activities.............. (480) (303) (11) 381 (50)
----- ----- ----- ----- -----
Cash flows from financing activities:
Dividends...................................... (300) (215) (154) (155) (350)
Repurchase of stock............................ -- (67) (35) -- --
Payments of notes payable...................... (6) -- (52) (13) (11)
Repayments of long-term debt................... -- -- -- (27) (30)
----- ----- ----- ----- -----
Net cash used in financing
activities........................ (306) (282) (241) (195) (391)
----- ----- ----- ----- -----
Net (decrease) increase in cash and cash
equivalents.................................... (220) (75) 194 561 117
Cash and cash equivalents, beginning of period... 609 389 314 314 508
----- ----- ----- ----- -----
Cash and cash equivalents, end of period......... $ 389 $ 314 $ 508 $ 875 $ 625
===== ===== ===== ===== =====
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 $ -- $ (9)
===== ===== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE> 99
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 March 31, 1998 and for the nine
months ended March 31, 1997 and 1998 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-35
<PAGE> 100
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-36
<PAGE> 101
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-37
<PAGE> 102
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-38
<PAGE> 103
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-39
<PAGE> 104
J. HOWARD & ASSOCIATES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 201 $ 208 $ --
Investments............................................... -- -- 10
Accounts receivable, net of allowance for doubtful
accounts of $84 at December 31, 1996 and $74 at
December 31, 1997 and March 31, 1998................... 724 1,166 1,448
Due from employees and related parties.................... 17 214 191
Prepaid expenses.......................................... 14 42 41
------ ------ ------
Total current assets.............................. 956 1,630 1,690
------ ------ ------
Property and equipment, net................................. 365 301 349
Other assets................................................ 44 138 82
------ ------ ------
Total assets...................................... $1,365 $2,069 $2,121
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 12 $ 59 $ 66
Accrued expenses.......................................... 106 105 160
Accrued compensation...................................... 32 139 134
Deferred revenue.......................................... 135 88 106
Accrued state income taxes................................ 38 41 41
Distributions payable..................................... -- 103 103
Current portion of long-term debt......................... -- -- 120
------ ------ ------
Total current liabilities......................... 323 535 730
------ ------ ------
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, December 31, 1997 and March 31,
1998................................................... 175 175 175
Class B non-voting common stock, no par value; authorized
25,000 shares; issued and outstanding 16,267 shares at
December 31, 1996, December 31, 1997 and March 31,
1998................................................... 97 97 97
Retained earnings......................................... 770 1,262 1,119
------ ------ ------
Total stockholders' equity........................ 1,042 1,534 1,391
------ ------ ------
Total liabilities and stockholders' equity........ $1,365 $2,069 $2,121
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE> 105
J. HOWARD & ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- ------------------
1995 1996 1997 1997 1998
------ ------ ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue..................................... $6,251 $7,110 $7,684 $2,005 $1,482
Cost of revenue............................. 1,964 2,166 2,346 569 459
------ ------ ------ ------ ------
Gross profit.............................. 4,287 4,944 5,338 1,436 1,023
Selling, general, and administrative
expenses.................................. 4,158 4,559 4,748 933 1,171
------ ------ ------ ------ ------
Income (loss) from operations............. 129 385 590 503 (148)
------ ------ ------ ------ ------
Other income (expense):
Interest and dividend income.............. 6 31 1 5
Interest expense.......................... (9) -- -- -- --
Other income (expense).................... -- 3 -- -- --
------ ------ ------ ------ ------
Total other income (expense)...... (3) 34 15 1 5
------ ------ ------ ------ ------
Income (loss) before income
taxes........................... 126 419 605 504 (143)
State income taxes.......................... 10 8 5 2 --
------ ------ ------ ------ ------
Net income (loss)................. $ 116 $ 411 $ 600 $ 502 $ (143)
====== ====== ====== ====== ======
Basic income (loss) per share............... $ 1.45 $ 4.81 $ 6.76 $ 5.65 $(1.61)
====== ====== ====== ====== ======
Weighted average shares outstanding......... 80,000 85,500 88,800 88,800 88,800
====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE> 106
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
Net loss.......................... -- -- -- -- (143) (143)
------ ---- ------ ---- ------ ------
Balance, March 31, 1998
(Unaudited)....................... 72,533 $175 16,267 $ 97 $1,119 $1,391
====== ==== ====== ==== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE> 107
J. HOWARD & ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 116 $ 411 $ 600 $ 502 $(143)
----- ----- ----- ----- -----
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............. 95 104 139 29 33
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) (752) (282)
(Increase) decrease in prepaid
expenses............................. 10 (10) (28) (8) 1
Increase in investments................ -- -- -- -- (10)
(Increase) decrease in other assets.... 12 9 (94) -- 56
Increase (decrease) in accounts payable
and accrued expenses................. 153 (282) 256 68 75
Increase in state income taxes......... 8 11 3 3 --
Increase (decrease) in deferred
revenue.............................. 91 18 (47) -- --
----- ----- ----- ----- -----
Total adjustments.................... 253 53 (198) (660) (127)
----- ----- ----- ----- -----
Net cash provided by (used in)
operating activities.............. 369 464 402 (158) (270)
----- ----- ----- ----- -----
Cash flows from investing activities:
Purchases of property and equipment............ (50) (299) (101) (8) (81)
Proceeds from sale of property and equipment... -- -- 11 -- --
Net (increase) decrease in amounts due from
employees and related parties............... (8) 51 (197) (17) 23
----- ----- ----- ----- -----
Net cash used in investing
activities........................ (58) (248) (287) (25) (58)
----- ----- ----- ----- -----
Cash flows from financing activities:
Proceeds (payments) on long-term debt.......... (42) -- -- -- 120
Distributions to stockholders.................. (335) (481) (108) (18) --
----- ----- ----- ----- -----
Net cash (used in) provided by
financing activities.............. (377) (481) (108) (18) 120
----- ----- ----- ----- -----
Net increase (decrease) in cash and cash
equivalents.................................... (66) (265) 7 (201) (208)
Cash and cash equivalents, beginning of period... 532 466 201 201 208
----- ----- ----- ----- -----
Cash and cash equivalents, end of period......... $ 466 $ 201 208 $ -- $ --
===== ===== ===== ===== =====
Supplemental disclosure:
Cash paid for interest......................... $ 9 $ -- $ -- $ -- $ --
===== ===== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE> 108
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.
Interim Financial Information
The interim financial statements as of March 31, 1998 and for the three
months ended March 31, 1997 and 1998, 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 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.
F-44
<PAGE> 109
J. HOWARD & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
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.
F-45
<PAGE> 110
J. HOWARD & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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.
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-46
<PAGE> 111
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-47
<PAGE> 112
ROBERT STEINMETZ, PH.D., AND ASSOCIATES, INC.
D/B/A LEARNING SYSTEMS SCIENCES
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 274 $ 174 $ 292
Accounts receivable, net of allowance for doubtful
accounts of $88 at December 31, 1996 and 1997 and $67
at March 31, 1998...................................... 703 984 1,048
Due from related parties.................................. -- -- 6
Costs in excess of billings............................... 267 561 188
Prepaid expenses and other current assets................. 53 43 23
------ ------ ------
Total current assets.............................. 1,297 1,762 1,557
------ ------ ------
Property and equipment, net................................. 129 153 151
Other assets................................................ 103 104 90
------ ------ ------
Total assets...................................... $1,529 $2,019 $1,798
====== ====== ======
Current liabilities:
Accounts payable.......................................... $ 64 $ 185 $ 63
Accrued expenses.......................................... 166 40 172
Accrued compensation...................................... 124 161 68
Billings in excess of costs............................... 710 414 364
Taxes payable............................................. -- -- 11
------ ------ ------
Total current liabilities......................... 1,064 800 678
------ ------ ------
Commitments and contingencies
Stockholders' equity:
Common stock, stated value; 14,000,000 shares authorized,
issued and outstanding................................. 3 3 3
Retained earnings......................................... 462 1,216 1,117
------ ------ ------
Total stockholders' equity........................ 465 1,219 1,120
------ ------ ------
Total liabilities and stockholders' equity........ $1,529 $2,019 $1,798
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE> 113
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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue...................... $ 3,332 $ 5,123 $ 5,681 $ 1,424 $ 1,466
Cost of revenue.............. 1,390 1,696 2,202 450 812
---------- ---------- ---------- ---------- ----------
Gross profit............... 1,942 3,427 3,479 974 654
Selling, general and
administrative expenses.... 1,767 3,079 2,226 504 474
---------- ---------- ---------- ---------- ----------
Income from
operations....... 175 348 1,253 470 180
---------- ---------- ---------- ---------- ----------
Other income (expense):
Other...................... (49) -- -- -- 4
Interest income, net....... 2 9 15 3 --
---------- ---------- ---------- ---------- ----------
Total other income
(expense)........ (47) 9 15 3 4
---------- ---------- ---------- ---------- ----------
Income before
income taxes..... 128 357 1,268 473 184
Income taxes................. 86 7 18 -- 4
---------- ---------- ---------- ---------- ----------
Net income......... $ 42 $ 350 $ 1,250 $ 473 $ 180
========== ========== ========== ========== ==========
Basic income per share....... $ -- $ .03 $ .09 $ .03 $ .01
========== ========== ========== ========== ==========
Weighted average shares
outstanding................ 14,000,000 14,000,000 14,000,000 14,000,000 14,000,000
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE> 114
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.......................... 14,000,000 $3 $ 70 $ 73
Net income........................................ -- -- 42 42
---------- -- ------ ------
Balance, December 31, 1995.......................... 14,000,000 3 112 115
Net income........................................ -- -- 350 350
---------- -- ------ ------
Balance, December 31, 1996.......................... 14,000,000 3 462 465
Dividend -- -- (496) (496)
Net income........................................ -- -- 1,250 1,250
---------- -- ------ ------
Balance, December 31, 1997.......................... 14,000,000 3 1,216 1,219
Dividend -- -- (279) (279)
Net income........................................ -- -- 180 180
---------- -- ------ ------
Balance, March 31, 1998 (Unaudited)................. 14,000,000 $3 $1,117 $1,120
========== == ====== ======
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE> 115
ROBERT STEINMETZ, PH.D., AND ASSOCIATES, INC.
D/B/A LEARNING SYSTEMS SCIENCES
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- -------------
1995 1996 1997 1997 1998
------ ------ ------- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 42 $ 350 $1,250 $ 473 $ 180
----- ----- ------ ----- -----
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 48 43 62 12 15
Changes in operating assets and liabilities:
Increase in accounts receivable........... (467) (195) (281) (186) (64)
(Increase) decrease in prepaid expenses
and other current assets................ 12 (30) 10 (15) 14
(Increase) decrease in costs in excess of
billings................................ (184) 14 (294) (78) 373
(Increase) decrease in other assets....... (17) (19) (1) (1) 14
Increase (decrease) in accounts payable
and accrued expenses.................... 50 115 32 (34) (72)
Increase (decrease) in billings in excess
of costs................................ 560 37 (296) (97) (50)
----- ----- ------ ----- -----
Total adjustments....................... 2 (35) (768) (399) 230
----- ----- ------ ----- -----
Net cash provided by operating
activities........................... 44 315 482 74 410
----- ----- ------ ----- -----
Cash flows from investing activity:
Purchases of property and equipment............... (84) (85) (86) (23) (13)
----- ----- ------ ----- -----
Cash flows from financing activity:
Dividend.......................................... -- -- (496) -- (279)
----- ----- ------ ----- -----
Net (decrease) increase in cash and cash
equivalents.......................... (40) 230 (100) 51 118
Cash and cash equivalents, beginning of period...... 84 44 274 274 174
----- ----- ------ ----- -----
Cash and cash equivalents, end of period............ $ 44 $ 274 $ 174 $ 325 $ 292
===== ===== ====== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE> 116
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.
Interim Financial Information
The interim financial statements as of March 31, 1998 and for the three
months ended March 31, 1997 and 1998 are unaudited, and certain information and
footnote disclosure 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 fair the financial position results of a
parities 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 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.
F-52
<PAGE> 117
ROBERT STEINMETZ, PH.D., AND ASSOCIATES, INC.
D/B/A LEARNING SYSTEMS SCIENCES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
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.
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>
F-53
<PAGE> 118
ROBERT STEINMETZ, PH.D., AND ASSOCIATES, INC.
D/B/A LEARNING SYSTEMS SCIENCES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
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.
(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.
Subsequent to December 31, 1997, the Company declared a stock split of
14,000-for-1 in the form of a stock dividend. All share and per share
information has been restated to reflect the split.
F-54
<PAGE> 119
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-55
<PAGE> 120
MOHR RETAIL LEARNING SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
------------ MARCH 31,
1996 1997 1998
---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $221 $260 $ 406
Accounts receivable, net of allowance for doubtful
accounts of $46 at June 30, 1996 and 1997 and March 31,
1998................................................... 211 548 773
Inventory................................................. 99 133 128
Prepaid expenses.......................................... 11 14 30
---- ---- ------
Total current assets.............................. 542 955 1,337
Property and equipment, net................................. 18 44 45
---- ---- ------
Total assets...................................... $560 $999 $1,382
==== ==== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $118 $ 74 $ 147
Accrued expenses.......................................... 320 295 84
Accrued compensation...................................... 12 54 --
Deferred revenue.......................................... 48 73 55
---- ---- ------
Total current liabilities......................... 498 496 286
---- ---- ------
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 1,092
---- ---- ------
Total stockholders' equity........................ 62 503 1,096
---- ---- ------
Total liabilities and stockholders' equity........ $560 $999 $1,382
==== ==== ======
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE> 121
MOHR RETAIL LEARNING SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JUNE 30, MARCH 31,
---------------- ------------------
1996 1997 1997 1998
------ ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue............................................... $2,171 $3,015 $ 1,993 $ 2,883
Cost of revenue....................................... 677 825 552 896
------ ------ ------- -------
Gross profit........................................ 1,494 2,190 1,441 1,987
Selling, general and administrative expenses.......... 1,151 1,745 1,232 1,397
------ ------ ------- -------
Income from operations.............................. 343 445 209 590
Interest income (expense)............................. (3) 3 2 5
------ ------ ------- -------
Income before income taxes.......................... 340 448 211 595
State income taxes.................................... 1 7 -- 2
------ ------ ------- -------
Net income.................................. $ 339 $ 441 $ 211 $ 593
====== ====== ======= =======
Basic income per share................................ $3,390 $4,410 $ 2,110 $ 5,930
====== ====== ======= =======
Weighted average shares outstanding................... 100 100 100 100
====== ====== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE> 122
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 income.................................. -- -- 593 593
--- --- ------- -------
Balance, March 31, 1998 (Unaudited)........... 100 $ 4 $ 1,092 $ 1,096
=== === ======= =======
</TABLE>
See accompanying notes to financial statements.
F-58
<PAGE> 123
MOHR RETAIL LEARNING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
JUNE 30, MARCH 31,
-------------- --------------
1996 1997 1997 1998
----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 339 $ 441 $ 211 $ 593
----- ----- ----- -----
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 10 15 7 17
Changes in operating assets and liabilities:
Increase in accounts receivable................. (99) (337) (219) (225)
(Increase) decrease in inventory................ 4 (34) (17) 5
(Increase) decrease in prepaid expenses......... 3 (3) (22) (16)
Increase (decrease) in accounts payable......... (1) (44) 12 73
Increase (decrease) in accrued expenses......... (15) 17 (16) (265)
Increase (decrease) in deferred revenue......... (29) 25 47 (18)
----- ----- ----- -----
Total adjustments............................. (127) (361) (208) (429)
----- ----- ----- -----
Net cash provided by operating activities..... 212 80 3 164
----- ----- ----- -----
Cash flows from investing activities:
Purchases of property and equipment..................... (8) (41) (27) (18)
----- ----- ----- -----
Net cash used in investing activities......... (8) (41) (27) (18)
----- ----- ----- -----
Net increase (decrease) in cash and cash equivalents...... 204 39 (24) 146
Cash and cash equivalents, beginning of period............ 17 221 221 260
----- ----- ----- -----
Cash and cash equivalents, end of period.................. $ 221 $ 260 $ 197 $ 406
===== ===== ===== =====
Supplemental disclosure:
Cash paid for interest.................................. $ -- $ 3 $ -- $ --
===== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-59
<PAGE> 124
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 March 31, 1998 and for the nine
months ended March 31, 1997 and 1998, 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-60
<PAGE> 125
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-61
<PAGE> 126
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-62
<PAGE> 127
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-63
<PAGE> 128
NOVATIONS GROUP, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
---------------- MARCH 31,
1996 1997 1998
------ ------ ---------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 17 $ 88 $ 7
Accounts receivable, net of allowance for doubtful
accounts of $158....................................... 1,976 2,202 3,756
Inventory................................................. -- -- 110
Receivable from related parties........................... 179 414 293
Prepaid expenses.......................................... 63 115 3
------ ------ ------
Total current assets.............................. 2,235 2,819 4,169
Property and equipment, net................................. 552 492 402
------ ------ ------
Total assets...................................... $2,787 $3,311 $4,571
====== ====== ======
Current liabilities:
Current portion of notes payable.......................... 1,079 1,298 1,623
Accounts payable.......................................... 225 118 255
Accrued compensation...................................... 836 803 994
Accrued expenses.......................................... 275 177 196
Deferred income taxes..................................... -- 415 675
------ ------ ------
Total current liabilities......................... 2,415 2,811 3,743
------ ------ ------
Notes payable............................................... 459 361 299
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 March 31, 1998, respectively........ 1 1 1
Retained earnings (deficit)............................... (88) 138 528
------ ------ ------
Total stockholders' equity (deficit).............. (87) 139 529
------ ------ ------
Total liabilities and stockholders' equity........ $2,787 $3,311 $4,571
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-64
<PAGE> 129
NOVATIONS GROUP, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
-------------------------- ------------------
1995 1996 1997 1997 1998
------ ------ ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue....................................... $7,175 $9,039 $9,018 $6,716 $8,248
Cost of revenue............................... 3,885 4,733 4,839 3,696 3,891
------ ------ ------ ------ ------
Gross profit........................ 3,290 4,306 4,179 3,020 4,357
Selling, general, and administrative
expenses.................................... 3,167 4,094 3,315 2,398 3,481
------ ------ ------ ------ ------
Income from operations.............. 123 212 864 622 876
Interest expense, net......................... 98 98 137 149 181
------ ------ ------ ------ ------
Income before income taxes.......... 25 114 727 473 695
Income taxes.................................. 22 40 435 283 294
------ ------ ------ ------ ------
Net income.......................... $ 3 $ 74 $ 292 $ 190 $ 401
====== ====== ====== ====== ======
Basic income per share........................ $ 3 $ 74 $ 292 $ 190 $ 401
====== ====== ====== ====== ======
Weighted average shares outstanding........... 1,000 1,000 1,000 1,000 1,000
</TABLE>
See accompanying notes to financial statements.
F-65
<PAGE> 130
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......................................... -- -- 401 401
Distributions to stockholders...................... -- -- (11) (11)
------ --- ----- -----
Balance, March 31, 1998 (Unaudited).................. 1,000 $ 1 $ 528 $ 529
====== === ===== =====
</TABLE>
See accompanying notes to financial statements.
F-66
<PAGE> 131
NOVATIONS GROUP, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED JUNE 30, MARCH 31,
--------------------- -----------------
1995 1996 1997 1997 1998
----- ----- ----- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 3 $ 74 $ 292 $ 190 $ 401
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 203 167 197 156 138
Deferred income taxes............................ -- -- 415 -- 260
Changes in operating assets and liabilities:
Increase (decrease) in current portion LT
debt........................................ -- -- -- 100 325
(Increase) decrease in accounts receivable..... (670) (357) (226) (86) (1,554)
Increase in inventory.......................... -- -- -- -- (110)
(Increase) decrease in prepaid expenses........ (250) 86 (287) 3 112
Increase (decrease) in income taxes payable.... -- -- -- 283 --
Increase (decrease) in accounts payable and
accrued expenses............................ 358 (88) (238) (275) 347
----- ----- ----- ------- -------
Total adjustments........................... (359) (192) (554) 181 (482)
----- ----- ----- ------- -------
Net cash (used by) provided by operating
activities................................ (356) (118) 153 371 (81)
----- ----- ----- ------- -------
Cash flows from investing activities:
(Increase) decrease related party receivable........ -- -- -- (104) 121
Purchases of property and equipment................. (217) (427) (137) (173) (48)
----- ----- ----- ------- -------
Cash used in investing activities................... (217) (427) (137) (277) 73
----- ----- ----- ------- -------
Cash flows from financing activities:
Net (repayments)/proceeds from long-term debt....... 340 117 121 (111) (62)
Distribution to stockholders........................ (40) (41) (66) -- (11)
----- ----- ----- ------- -------
Net cash provided by (used in) financing
activities................................ 300 76 55 (111) (73)
----- ----- ----- ------- -------
Net (decrease) increase in cash and cash
equivalents......................................... (273) (469) 71 (17) (81)
Cash and cash equivalents, beginning of period........ 759 486 17 17 88
----- ----- ----- ------- -------
Cash and cash equivalents, end of period.............. $ 486 $ 17 $ 88 $ 0 $ 7
===== ===== ===== ======= =======
Supplemental disclosure:
Cash paid for interest.............................. $ 120 $ 120 $ 151 $ 89 $ 139
===== ===== ===== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-67
<PAGE> 132
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 March 31, 1998 and for the nine
months ended March 31, 1997 and 1998, 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-68
<PAGE> 133
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-69
<PAGE> 134
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.
F-70
<PAGE> 135
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-71
<PAGE> 136
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-72
<PAGE> 137
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-73
<PAGE> 138
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1996 1997 1998
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 39 $ 358 $ --
Accounts receivable....................................... 4,395 6,091 8,321
Current portion of notes receivable, related parties...... 181 666 406
Inventory................................................. 100 129 102
Other current assets...................................... 71 100 135
Deferred income taxes..................................... 29 117 --
------ ------- -------
Total current assets.............................. 4,815 7,461 8,964
------ ------- -------
Property and equipment:
Furniture and fixtures.................................... 65 531 346
Office equipment.......................................... 746 1,444 1,281
Computer software......................................... 69 114 266
Leasehold improvements.................................... 16 87 89
Automobiles............................................... 31 73 77
------ ------- -------
927 2,249 2,059
Less accumulated depreciation and amortization............ 423 1,303 1,203
------ ------- -------
504 946 856
------ ------- -------
Other assets:
Notes receivable, related parties, net of current
portion................................................ 267 -- --
Other assets.............................................. 140 459 600
Land held for investment.................................. 110 110 110
Goodwill, net of accumulated amortization of $23 and
$88.................................................... 147 1,701 1,769
------ ------- -------
664 2,270 2,479
------ ------- -------
Total assets...................................... $5,983 $10,677 $12,299
====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable, bank........................................ $ 905 $ 2,858 $ 3,515
Current portion of notes payable.......................... 95 455 --
Accounts payable.......................................... 1,295 1,685 1,773
Accrued expenses.......................................... 573 1,152 422
Accrued compensation...................................... -- -- 861
Billings in excess of costs and earnings.................. 1,076 1,247 1,822
Income taxes payable...................................... -- -- 320
------ ------- -------
Total current liabilities......................... 3,944 7,397 8,713
------ ------- -------
Long-term liabilities:
Notes payable, net of current portion..................... -- 304 464
Deferred income taxes..................................... 29 198 192
------ ------- -------
Total long-term liabilities....................... 29 502 656
------ ------- -------
Total liabilities................................. 3,973 7,899 9,369
------ ------- -------
Commitments and contingencies
Stockholders' equity:
Common stock.............................................. 8 2,147 2,159
Additional paid-in capital................................ 2,058 -- --
Retained earnings......................................... 529 1,257 1,397
------ ------- -------
2,595 3,404 3,756
Less common stock held in treasury at cost................ (585) (626) (626)
------ ------- -------
Total stockholders' equity........................ 2,010 2,778 2,930
------ ------- -------
Total liabilities and stockholders' equity........ $5,983 $10,677 $12,299
====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-74
<PAGE> 139
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue.................................... $14,306 $16,313 $23,775 $4,850 $7,926
Direct costs............................... 8,668 9,457 14,504 2,937 4,504
------- ------- ------- ------ ------
Gross profit............................. 5,638 6,856 9,271 1,913 3,422
Operating expenses......................... 4,411 5,476 7,591 1,839 2,849
------- ------- ------- ------ ------
Income from operations..................... 1,227 1,380 1,680 74 573
------- ------- ------- ------ ------
Other income (expense):
Interest income.......................... 19 25 44 -- --
Interest expense......................... (54) (65) (144) (25) (99)
Other, net............................... (200) (339) (306) -- --
------- ------- ------- ------ ------
(235) (379) (406) (25) (99)
------- ------- ------- ------ ------
Income before income taxes................. 992 1,001 1,274 49 474
Income taxes............................... -- 397 546 169 334
------- ------- ------- ------ ------
Net income (loss).......................... $ 992 $ 604 $ 728 (120) 140
======= ======= ======= ====== ======
Basic income (loss) per share.............. $ 0.11 $ 0.07 $ 0.09 $(0.01) $ 0.02
======= ======= ======= ====== ======
Diluted income (loss) per share............ $ 0.11 $ 0.07 $ 0.08 $(0.01) $ 0.02
======= ======= ======= ====== ======
Weighted average shares outstanding........ 8,825 8,422 8,078 8,336 8,073
======= ======= ======= ====== ======
Weighted average shares and potentially
dilutive shares outstanding.............. 8,963 8,565 8,823 8,336 7,328
======= ======= ======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements
F-75
<PAGE> 140
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
Issuance of common stock........ 1,553 12 -- -- -- -- 12
Net income...................... -- -- -- 140 -- -- 140
--------- ------ ------- ------ --------- ----- ------
Balance, March 31, 1998
(Unaudited)................... 9,285,025 $2,159 -- $1,397 1,211,460 $(626) $2,930
========= ====== ======= ====== ========= ===== ======
</TABLE>
See accompanying notes to consolidated financial statements
F-76
<PAGE> 141
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -----------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers.......................... $ 13,419 $ 16,428 $ 23,529 $ 5,407 $ 6,682
Cash paid to suppliers and employees.................. (12,620) (14,890) (22,083) (5,132) (6,202)
Interest received..................................... 19 25 44 14 10
Interest paid......................................... (54) (65) (144) (14) (110)
Income taxes paid..................................... -- (420) (482) -- (81)
-------- -------- -------- ------- -------
Net cash (used) provided by operating
activities.................................. 764 1,078 864 275 (301)
-------- -------- -------- ------- -------
Cash flows from investing activities:
Issuance of notes receivable.......................... (64) (96) (218) (35) --
Acquisition of property and equipment................. (159) (61) (358) (26) (14)
Business acquisitions................................. (100) (300) (1,752) (1,168) (68)
Purchase of land held for investment.................. -- (110) -- -- --
Other................................................. (8) 2 -- -- (141)
-------- -------- -------- ------- -------
Net cash used in investing activities......... (331) (565) (2,328) (1,229) (223)
-------- -------- -------- ------- -------
Cash flows from financing activities:
Net borrowings (payments) on line-of-credit........... (15) (86) 1,953 -- --
Principal repayments on long-term debt................ -- -- (210) -- --
Proceeds from other notes payable..................... 25 95 -- 1,235 160
Payments on other notes payable....................... (34) (35) -- -- --
Proceeds from issuance of common stock................ 36 68 81 13 12
Purchase of treasury stock............................ (65) (520) (41) -- --
Distributions to shareholders......................... (379) -- -- -- --
Decrease in deferred income taxes..................... -- -- -- -- (6)
-------- -------- -------- ------- -------
Net cash provided by (used in) financing
activities.................................. (432) (478) 1,783 1,248 166
-------- -------- -------- ------- -------
Net (decrease) increase in cash......................... 1 35 319 294 (358)
Cash, and cash equivalents, beginning of period......... 3 4 39 39 358
-------- -------- -------- ------- -------
Cash, and cash equivalents, end of period............... $ 4 $ 39 $ 358 $ 333 $ --
======== ======== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-77
<PAGE> 142
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- ----------------
1995 1996 1997 1997 1998
------- ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Reconciliation of net income to net cash provided by
operating activities:
Net income (loss)................................... $ 992 $ 604 $ 728 $ (120) $ 140
------- ------ ------ ------ ------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 96 139 314 57 104
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) (603) (2,230)
Inventory........................................ -- 18 (29) (13) 27
Other current assets............................. 47 (34) 24 (208) 377
Other assets..................................... (25) (69) (237) (74) (35)
Increase (decrease) in:
Accounts payable................................. 425 168 90 -- 88
Accrued expenses................................. 116 133 218 1,298 653
Billings in excess of costs and anticipated
profits........................................ 166 752 171 (62) 575
------- ------ ------ ------ ------
Total adjustments................................... (228) 474 136 395 (441)
------- ------ ------ ------ ------
Net cash provided by (used in) operating
activities....................................... $ 764 $1,078 $ 864 $ 275 $ (301)
======= ====== ====== ====== ======
</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-78
<PAGE> 143
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.
Interim Financial Information
The interim financial statements as of March 31, 1998 and for the three
months ended March 31, 1997 and 1998 are unaudited, and certain information and
footnote disclosure 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 fair the financial position results of a
parities 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.
Credit Risk
The Company's accounts receivable consist principally of unsecured amounts
due from the U.S. Government.
F-79
<PAGE> 144
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-80
<PAGE> 145
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
<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
F-81
<PAGE> 146
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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-82
<PAGE> 147
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-83
<PAGE> 148
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-84
<PAGE> 149
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-85
<PAGE> 150
================================================================================
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............................. 8
Combination.............................. 14
Price Range of Common Stock.............. 17
Dividend Policy.......................... 17
Selected Financial Data.................. 18
Star Mountain Selected Financial Data.... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 21
Business................................. 39
Management............................... 48
Principal Stockholders................... 55
Certain Transactions..................... 56
Description of Capital Stock............. 60
Shares Eligible for Future Sale.......... 61
Plan of Distribution..................... 62
Legal Matters............................ 63
Experts.................................. 63
Available Information.................... 63
Index to Financial Statements............ F-1
</TABLE>
================================================================================
================================================================================
3,000,000 SHARES
[PROVANT LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
, 1998
================================================================================
<PAGE> 151
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Delaware corporation. Reference is made to Section 145 of
the DGCL, as amended, which provides that a corporation may indemnify any person
who was or is a party to or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he or she is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding if he or she 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
corporation and, with respect to any criminal action or proceedings, had no
reasonable cause to believe his or her conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he or she is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) actually and reasonably incurred by him or
her in connection with the defense or settlement of such action or suit if he or
she 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 corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite an adjudication of liability, but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper. The
Company's Certificate of Incorporation further provides that the Company shall
indemnify its directors and officers to the full extent permitted by the law of
the State of Delaware.
The Company's Certificate of Incorporation provides that the Company's
directors shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except to the extent that
exculpation from liability is not permitted under the DGCL as in effect at the
time such liability is determined.
The Certificate of Incorporation and By-laws also provide that each person
who was or is made a party to, or is involved in, any action, suit, proceeding
or claim by reason of the fact that he or she is or was a director or officer of
the Registrant (or is or was serving at the request of the Registrant as a
director or officer of any other enterprise including service with respect to
employee benefit plans) shall be indemnified and held harmless by the
Registrant, to the full extent permitted by Delaware law, as in effect from time
to time, against all expenses (including attorneys' fees and expenses),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with the investigation, preparation to defend or
defense of such action, suit, proceeding or claim. The Company's By-laws allow
for similar rights of indemnification to be afforded, in the Company's
discretion, to its employees and agents.
The rights to indemnification and the payment of expenses provided by the
Certificate of Incorporation and By-laws do not apply to any action, suit,
proceeding or claim initiated by or on behalf of a person otherwise entitled to
the benefit of such provisions. Any person seeking indemnification under the
By-laws shall be deemed to have met the standard of conduct required for such
indemnification unless the contrary shall be established. Any repeal or
modification of such indemnification provisions shall not adversely affect any
right or protection of a director or officer with respect to any conduct of such
director or officer occurring prior to such repeal or modification.
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<PAGE> 152
The Company maintains an indemnification insurance policy covering all
directors and officers of the Company and its subsidiaries.
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
- ------- ----------- ----------
<C> <S> <C>
**3.1 Certificate of Incorporation of the Company.................
**3.2 By-laws of the Company......................................
**4.1 Form of Specimen Stock Certificate..........................
+5 Opinion of Nutter, McClennen & Fish, LLP....................
**10.1 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., Behavioral Acquisition Corp., Paul M. Verrochi,
Dominic J. Puopolo, Behavioral Technology, Inc. and Paul C.
Green, Ph.D. ...............................................
**10.2 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., Decker Acquisition Corp., Paul M. Verrochi, Dominic J.
Puopolo, Decker Communications, Inc., Bert Decker and
Kenneth Taylor..............................................
**10.3 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., Howard Acquisition Corp., Paul M. Verrochi, Dominic J.
Puopolo, J. Howard & Associates, Inc., Jeffrey P. Howard and
Marc S. Wallace.............................................
**10.4 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., LSS Acquisition Corp., Paul M. Verrochi, Dominic J.
Puopolo, Robert Steinmetz, Ph.D., and Associates, Inc.,
Edwin Bauch as Trustee of the Steinmetz Children's Trust
u/d/t dated December 31, 1996, Edwin Bauch as Trustee of the
King Children's Trust u/d/t dated December 31, 1996, John F.
King and Robert A. Steinmetz, Ph.D. ........................
**10.5 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., MOHR Acquisition Corp., Paul M. Verrochi, Dominic J.
Puopolo, MOHR Retail Learning Systems, Inc., Herbert Cohen,
Judith Cohen and Michael Patrick............................
**10.6 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., Paul M. Verrochi, Dominic J. Puopolo, Star Mountain,
Inc., Star Acquisition Corp. and Carl von Sternberg.........
**10.7 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., Novations Acquisition Corp., Paul M. Verrochi, Dominic
J. Puopolo, Novations Group, Inc., Joseph Folkman, Joseph
Hanson, Kurt Sandholtz, Norman Smallwood, Randy Stott and
Jonathan Younger............................................
**10.8 Form of First Amendment to Agreement and Plan of Merger (J.
Howard).....................................................
**10.9 1998 Equity Incentive Plan..................................
**10.10 Stock Plan for Non-Employee Directors.......................
**10.11 Form of 1998 Employee Stock Purchase Plan...................
**10.12 Form of Warrants to Messrs. Verrochi and Puopolo............
**10.13 Form of Contingent Warrants to Messrs. Verrochi and
Puopolo.....................................................
**10.14 Form of Employment Agreement between Rajiv Bhatt and
PROVANT, Inc. ..............................................
**10.15 Form of Employment Agreement between MOHR Acquisition Corp.,
Herbert A. Cohen, and PROVANT, Inc. ........................
**10.16 Form of Employment Agreement between Decker Acquisition
Corp., Bert Decker, and PROVANT, Inc. ......................
**10.17 Form of Employment Agreement between Philip Gardner and
PROVANT, Inc. ..............................................
**10.18 Form of Employment Agreement between Behavioral Acquisition
Corp., Paul C. Green, and PROVANT, Inc. ....................
**10.19 Form of Employment Agreement between Novations Acquisition
Corp., Joe Hanson, and PROVANT, Inc. .......................
**10.20 Form of Employment Agreement between LSS Acquisition Corp.,
John F. King, and PROVANT, Inc. ............................
**10.21 Form of Employment Agreement between Dominic J. Puopolo and
PROVANT, Inc. ..............................................
</TABLE>
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<PAGE> 153
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
- ------- ----------- ----------
<C> <S> <C>
**10.22 Form of Employment Agreement between A. Carl von Sternberg,
Star Acquisition Corp. and PROVANT, Inc. ...................
**10.23 Form of Employment Agreement between Paul M. Verrochi and
PROVANT, Inc. ..............................................
**10.24 Form of Employment Agreement between Howard Acquisition
Corp., Marc S. Wallace, and PROVANT, Inc. ..................
**10.25 Form of Employment Agreement between John H. Zenger and
PROVANT, Inc. ..............................................
**10.26 Form of Consulting Agreement between Michael J. Davies and
PROVANT, Inc................................................
**10.27 Lease Agreement between Behavioral Technology, Inc. and Paul
C. Green, Ph.D..............................................
**10.28 Lease Agreement between Novations Group, Inc. and Novations
Partners, L.L.C. ...........................................
**10.29 Form of Consulting Agreement between Donald W. Glazer and
PROVANT, Inc................................................
*10.30 Revolving Credit Agreement dated April 8, 1998 between
PROVANT, Inc. and Fleet National Bank.......................
**21 Subsidiaries of the Registrant..............................
+23.1 Consent of KPMG Peat Marwick LLP............................
+23.2 Consent of Friedman & Fuller, P.C...........................
+23.3 Consent of Nutter, McClennen & Fish, LLP (contained in
Exhibit 5)..................................................
+24 Power of Attorney (contained in the signature page to this
Registration Statement).....................................
</TABLE>
- ---------------
* Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the three months ended March 31, 1998.
** Incorporated by reference to the Company's Registration Statement on Form S-1
(File No. 333-46157).
+ Filed herewith.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the DGCL and the Registrant's Certificate of
Incorporation and By-laws, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate
II-3
<PAGE> 154
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of Form
S-4, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(5) To supply by means of post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-4
<PAGE> 155
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Boston, the
Commonwealth of Massachusetts, on the 25th day of June 1998.
PROVANT, INC.
By: /s/ PAUL M. VERROCHI
------------------------------------
Paul M. Verrochi
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below on this Registration Statement
hereby constitutes and appoints Paul M. Verrochi, Rajiv Bhatt, Constantine
Alexander and James E. Dawson, and each of them, with full power to act without
the other, his or her true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities (until revoked in writing), to sign
any and all amendments (including post-effective amendments and amendments
thereto) to this Registration Statement on Form S-4 of the registrant, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary fully to all
intents and purposes as he or she might or could do in person, thereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ PAUL M. VERROCHI Chairman of the Board and Chief Executive June 25, 1998
- ------------------------------------------------ Officer
Paul M. Verrochi
/s/ DOMINIC J. PUOPOLO Executive Vice President, Chief Financial June 25, 1998
- ------------------------------------------------ Officer and Director
Dominic J. Puopolo
/s/ JOHN H. ZENGER President and Director June 25, 1998
- ------------------------------------------------
John H. Zenger
/s/ RAJIV BHATT Senior Vice President,Treasurer and Chief June 25, 1998
- ------------------------------------------------ Accounting Officer
Rajiv Bhatt
/s/ HERBERT A. COHEN Director June 25, 1998
- ------------------------------------------------
Herbert A. Cohen
/s/ BERT DECKER Director June 25, 1998
- ------------------------------------------------
Bert Decker
</TABLE>
II-5
<PAGE> 156
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ PAUL C. GREEN Director June 25, 1998
- ------------------------------------------------
Paul C. Green
/s/ JOE HANSON Director June 25, 1998
- ------------------------------------------------
Joe Hanson
/s/ JOHN F. KING Director June 25, 1998
- ------------------------------------------------
John F. King
/s/ A. CARL VON STERNBERG Director June 25, 1998
- ------------------------------------------------
A. Carl von Sternberg
/s/ MARC S. WALLACE Director June 25, 1998
- ------------------------------------------------
Marc S. Wallace
/s/ MICHAEL J. DAVIES Director June 25, 1998
- ------------------------------------------------
Michael J. Davies
Director
- ------------------------------------------------
David B. Hammond
/s/ JOHN R. MURPHY Director June 25, 1998
- ------------------------------------------------
John R. Murphy
/s/ ESTHER T. SMITH Director June 25, 1998
- ------------------------------------------------
Esther T. Smith
</TABLE>
II-6
<PAGE> 157
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
- ------- ----------- ----------
<C> <S> <C>
**3.1 Certificate of Incorporation of the Company.................
**3.2 By-laws of the Company......................................
**4.1 Form of Specimen Stock Certificate..........................
+5 Opinion of Nutter, McClennen & Fish, LLP....................
**10.1 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., Behavioral Acquisition Corp., Paul M. Verrochi,
Dominic J. Puopolo, Behavioral Technology, Inc. and Paul C.
Green, Ph.D. ...............................................
**10.2 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., Decker Acquisition Corp., Paul M. Verrochi, Dominic J.
Puopolo, Decker Communications, Inc., Bert Decker and
Kenneth Taylor..............................................
**10.3 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., Howard Acquisition Corp., Paul M. Verrochi, Dominic J.
Puopolo, J. Howard & Associates, Inc., Jeffrey P. Howard and
Marc S. Wallace.............................................
**10.4 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., LSS Acquisition Corp., Paul M. Verrochi, Dominic J.
Puopolo, Robert Steinmetz, Ph.D., and Associates, Inc.,
Edwin Bauch as Trustee of the Steinmetz Children's Trust
u/d/t dated December 31, 1996, Edwin Bauch as Trustee of the
King Children's Trust u/d/t dated December 31, 1996, John F.
King and Robert A. Steinmetz, Ph.D. ........................
**10.5 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., MOHR Acquisition Corp., Paul M. Verrochi, Dominic J.
Puopolo, MOHR Retail Learning Systems, Inc., Herbert Cohen,
Judith Cohen and Michael Patrick............................
**10.6 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., Paul M. Verrochi, Dominic J. Puopolo, Star Mountain,
Inc., Star Acquisitions Corp. and Carl von Sternberg........
**10.7 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., Novations Acquisition Corp., Paul M. Verrochi, Dominic
J. Puopolo, Novations Group, Inc., Joseph Folkman, Joseph
Hanson, Kurt Sandholtz, Norman Smallwood, Randy Stott and
Jonathan Younger............................................
**10.8 Form of First Amendment to Agreement and Plan of Merger (J.
Howard).....................................................
**10.9 1998 Equity Incentive Plan..................................
**10.10 Stock Plan for Non-Employee Directors.......................
**10.11 Form of 1998 Employee Stock Purchase Plan...................
**10.12 Form of Warrants to Messrs. Verrochi and Puopolo............
**10.13 Form of Contingent Warrants to Messrs. Verrochi and
Puopolo.....................................................
**10.14 Form of Employment Agreement between Rajiv Bhatt and
PROVANT, Inc. ..............................................
**10.15 Form of Employment Agreement between MOHR Acquisition Corp.,
Herbert A. Cohen, and PROVANT, Inc. ........................
**10.16 Form of Employment Agreement between Decker Acquisition
Corp., Bert Decker, and PROVANT, Inc. ......................
**10.17 Form of Employment Agreement between Philip Gardner and
PROVANT, Inc. ..............................................
**10.18 Form of Employment Agreement between Behavioral Acquisition
Corp., Paul C. Green, and PROVANT, Inc. ....................
**10.19 Form of Employment Agreement between Novations Acquisition
Corp., Joe Hanson, and PROVANT, Inc. .......................
**10.20 Form of Employment Agreement between LSS Acquisition Corp.,
John F. King, and PROVANT, Inc. ............................
**10.21 Form of Employment Agreement between Dominic J. Puopolo and
PROVANT, Inc. ..............................................
**10.22 Form of Employment Agreement between A. Carl von Sternberg,
Star Acquisition Corp. and PROVANT, Inc. ...................
**10.23 Form of Employment Agreement between Paul M. Verrochi and
PROVANT, Inc. ..............................................
</TABLE>
<PAGE> 158
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
- ------- ----------- ----------
<C> <S> <C>
**10.24 Form of Employment Agreement between Howard Acquisition
Corp., Marc S. Wallace, and PROVANT, Inc. ..................
**10.25 Form of Employment Agreement between John H. Zenger and
PROVANT, Inc. ..............................................
**10.26 Form of Consulting Agreement between Michael J. Davies and
PROVANT, Inc................................................
**10.27 Lease Agreement between Behavioral Technology, Inc. and Paul
C. Green, Ph.D..............................................
**10.28 Lease Agreement between Novations Group, Inc. and Novations
Partners, L.L.C. ...........................................
**10.29 Form of Consulting Agreement between Donald W. Glazer and
PROVANT, Inc................................................
*10.30 Revolving Credit Agreement dated April 8, 1998 between
PROVANT, Inc. and Fleet National Bank.......................
**21 Subsidiaries of the Registrant..............................
+23.1 Consent of KPMG Peat Marwick LLP............................
+23.2 Consent of Friedman & Fuller, P.C...........................
+23.3 Consent of Nutter, McClennen & Fish, LLP (contained in
Exhibit 5)..................................................
+24 Power of Attorney (contained in the signature page to this
Registration Statement).....................................
</TABLE>
- ---------------
* Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the three months ended March 31, 1998.
** Incorporated by reference to the Company's Registration Statement on Form S-1
(File No. 333-46157).
+ Filed herewith.
<PAGE> 1
EXHIBIT 5
---------
NUTTER, MCCLENNEN & FISH, LLP
ATTORNEYS AT LAW
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110-2699
TELEPHONE: 617-439-2000 FACSIMILE: 617-973-9748
CAPE COD OFFICE DIRECT DIAL NUMBER
HYANNIS, MASSACHUSETTS
June 25, 1998
100230-11
PROVANT, Inc.
67 Batterymarch Street, Suite 600
Boston, MA 02110
Gentlemen/Ladies:
Reference is made to that certain Registration Statement on Form S-4 (the
"Registration Statement") which PROVANT, Inc., a Delaware corporation (the
"Company"), has filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Securities Act"), relating to an
aggregate of 3,000,000 shares of common stock, $.01 par value, of the Company
(the "Shares"). We understand that the Shares may be offered and issued by the
Company from time to time in connection with acquisitions of other businesses or
properties by the Company.
We have acted as counsel for the Company in connection with the
Registration Statement. We have examined original or certified copies of the
Certificate of Incorporation of the Company, as amended to date, the Company's
By-laws, the corporate records of the Company to the date hereof, certificates
of public officials, and such other documents, records and materials as we have
deemed necessary in connection with this opinion letter. Based upon the
foregoing, and in reliance upon information from time to time furnished to us by
the Company's officers, directors and agents, we are of the opinion that the
Shares, or any portion thereof, when duly authorized, issued and delivered by
the Company in connection with each acquisition and in accordance with
applicable state law, will be validly issued, fully paid and non-assessable.
We understand that this opinion letter is to be used in connection with the
Registration Statement, as finally amended, and hereby consent to the filing of
this opinion letter with and as a part of the Registration Statement as so
amended, and to the reference to our firm in the Prospectus under the heading
"Legal Matters." It is understood that this opinion letter is to
<PAGE> 2
PROVANT, Inc.
June 25, 1998
Page 2
be used in connection with the offering and sale of the Shares only while the
Registration Statement, as amended from time to time, is effective under the
Securities Act.
Very truly yours,
/s/ Nutter, McClennen & Fish, LLP
Nutter, McClennen & Fish, LLP
JED/DSS
<PAGE> 1
EXHIBIT 23.1
Accountants' Consent
The Board of Directors
Provant, Inc.:
We consent to the use of our reports included herein and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
June 25, 1998
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Accountants
The Board of Directors
Star Mountain, Inc.:
We consent to the reference to our firm under the heading "Experts" and to the
use of our report, dated February 16, 1996, on the financial statements of Star
Mountain, Inc. for the year ended December 31, 1995, in the Registration
Statement on Form S-4 and the related Prospectus of Provant, Inc. for the
registration of its Common Stock.
Friedman & Fuller, P.C.
/s/ Friedman & Fuller, P.C.
Rockville, Maryland
June 25, 1998
