<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 7, 1999
REGISTRATION NO. 333-57733
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 2 TO
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:
JAMES E. DAWSON, ESQUIRE
CONSTANTINE ALEXANDER, 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(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value.......... 3,000,000 shares $18.59 $55,770,000 $16,452.15
- -------------------------------------------------------------------------------------------------------------------------
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</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.
(2) Previously paid.
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
Filed pursuant to Rule 424(b)(3)
File No. 333-57733
3,000,000 SHARES
[PROVANT LOGO]
Common Stock
This prospectus relates to 3 million shares of common stock that we may
offer and sell from time to time in connection with our acquisitions of other
businesses.
We think most of our acquisitions will be within the performance
improvement training industry. If the opportunity arises, however, we may make
complementary or advantageous acquisitions of companies in other lines of
business. We will pay for our acquisitions with shares of common stock, cash,
promissory notes, assumptions of liabilities or a combination, as determined by
negotiations between us and the owners or controlling persons of the companies
to be acquired. However, for acquisitions of companies whose ownership interests
are more widely held, we may make exchange offers to stockholders or solicit the
approval of statutory mergers, consolidations or sales of assets. The shares of
common stock issued in any acquisition typically will be valued at a price
related to the trading price of the common stock either at the time of agreement
on the terms of an acquisition or at or about the time we deliver the shares.
Our common stock is listed on The Nasdaq National Market under the symbol
"POVT." The closing price of the common stock on Nasdaq on January 11, 1999 was
$21.25.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN RISKS
THAT PROSPECTIVE INVESTORS SHOULD CONSIDER.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------------
January 12, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 6
Price Range of Common Stock................................. 9
Dividend Policy............................................. 9
Selected Financial Data..................................... 10
Star Mountain Selected Financial Data....................... 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Business.................................................... 28
Management.................................................. 36
Principal Stockholders...................................... 44
Certain Transactions........................................ 45
Description of Capital Stock................................ 48
Shares Eligible for Future Sale............................. 50
Plan of Distribution........................................ 50
Legal Matters............................................... 51
Experts..................................................... 51
Available Information....................................... 52
Index to Financial Statements............................... F-1
</TABLE>
------------------------
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions, including, among other things:
- Our limited combined operating history and risks related to integrating
our businesses;
- Risks related to our anticipated growth and acquisition strategies;
- Risks related to our ability to attract and retain key personnel;
- Uncertainty about anticipated trends in our business and the performance
improvement industry;
- Risks regarding technology; and
- Uncertainties regarding our ability to continue to control costs and
maintain quality.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties, and assumptions, the forward-looking
events discussed in this prospectus might not occur.
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
2
<PAGE> 4
PROSPECTUS SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL STATEMENTS
AND RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. THE TERMS "PROVANT,"
"WE" AND "OUR" AS USED IN THIS PROSPECTUS REFER TO "PROVANT, INC." AND ITS
SUBSIDIARIES AS A CONSOLIDATED ENTITY, EXCEPT WHERE IT IS MADE CLEAR THAT SUCH
TERM MEANS ONLY THE PARENT COMPANY. IN MAY 1998, WE COMMENCED OPERATIONS BY
ACQUIRING SEVEN COMPANIES PROVIDING PERFORMANCE IMPROVEMENT SERVICES AND
PRODUCTS IN A TRANSACTION KNOWN AS THE "COMBINATION." THESE SEVEN COMPANIES ARE
REFERRED TO AS THE "FOUNDING COMPANIES." SINCE MAY 1998, WE HAVE ACQUIRED FIVE
ADDITIONAL COMPANIES.
OUR COMPANY
We are a leading provider of performance improvement training services and
products. Our clients are Fortune 1000 companies, other large and medium-sized
corporations and government entities. We offer both customized and standardized
services and products that are designed to provide measurable improvement in
performance and productivity for both employees and organizations. We can
deliver these performance improvement solutions using various delivery methods
to suit our clients' needs, including traditional delivery methods (such as
instructor-led classroom training and train-the-trainer programs) and
technology-based delivery methods (such as CD-ROM, intranets and the Internet).
In addition, we offer management consulting and training management services.
Our goal is to become the leading single-source provider of high-quality
performance improvement services and products. For our fiscal year ended June
30, 1998, we had pro forma revenue of $115.3 million and pro forma income from
operations of $13.4 million.
OUR CLIENTS
The PROVANT companies are recognized leaders in their fields and have
developed well-established client bases. During fiscal 1998, we provided
performance improvement services and products to more than 1,400 companies and
135 government entities. Our clients include Bell Atlantic, Deloitte & Touche,
the Department of Energy, Ford, Hewlett-Packard, Intel, J.P. Morgan, Kellogg,
Marriott International and Mobil. During this period, we generated revenues of
more than $100,000 from approximately 145 different corporate clients and from
over 10 different federal government entities.
OUR INDUSTRY
The performance improvement market is large and growing. We believe that
companies increasingly view employee training as a competitive necessity rather
than an optional expense in a technology-driven, knowledge-based economy.
According to TRAINING magazine, domestic corporations with over 100 employees
budgeted approximately $60.7 billion on training in 1998, compared to
approximately $48.2 billion in 1993, representing a compound annual growth rate
of approximately 4.7%. Expenditures on external providers of performance
improvement services and products by domestic corporations with over 100
employees have increased from approximately $9.4 billion in 1993 to a budgeted
$14.3 billion in 1998, representing a compound annual growth rate of 8.8%. These
expenditures have increased as a percentage of the total training budgets of
such corporations from approximately 19.5% in 1993 to a budgeted 23.6% in 1998.
We believe that no company in the industry has more than a two percent share of
the external training market. An increasing number of organizations are using
external suppliers for their training requirements so that they can focus on
their core competencies, turn fixed training costs into variable costs, and
obtain comprehensive training content and delivery capabilities that may not be
available internally.
3
<PAGE> 5
OUR STRATEGY
We intend to capitalize on the growth in our industry and the trend toward
using external suppliers by pursuing a multi-faceted growth strategy. Key
components of our growth strategy include:
- using our existing client relationships to cross-sell our services and
products;
- continuing to develop industry-specific service and product offerings;
- leveraging investments in technology-based delivery methods;
- continuing to expand our sales and marketing activities;
- expanding our service and product offerings; and
- completing strategic acquisitions that will help us expand our service
and product offerings, distribution capabilities and client base.
OUR ADDRESS
Our principal executive offices are located at 67 Batterymarch Street,
Suite 600, Boston, Massachusetts 02110, and our telephone number at that
location is (617) 261-1600.
RECENT DEVELOPMENTS
Our preliminary selected unaudited consolidated financial results for the
three and six months ended December 31, 1998, compared to our pro forma combined
results for the same periods in 1997, are as follows (in thousands except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1998 1997 1998 1997
------- --------- ------- ---------
PRO FORMA PRO FORMA
ACTUAL COMBINED ACTUAL COMBINED
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Revenue....................................... $31,740 $18,220 $55,450 $35,958
Operating Income.............................. 3,667 1,755 6,256 3,546
Net Income.................................... 1,840 921 3,239 1,861
Diluted earnings per common share............. $ 0.15 $ 0.09 $ 0.28 $ 0.18
</TABLE>
The pro forma combined results for the three and six months ended December
31, 1997 include the results of PROVANT and the seven Founding Companies and
exclude $2.8 million and $4.1 million, respectively, of compensation expense (in
order to adjust salary, bonus and benefits paid to certain owners of the
Founding Companies to contractually agreed-upon levels), $148,000 and $156,000
of interest expense, respectively, and $485,000 of non-cash compensation expense
for both periods. The pro forma combined results reflect an adjustment for
goodwill amortization of $300,000 and $623,000, respectively, for the three and
six months ended December 31, 1997, and assume that all income is subject to an
effective corporate tax rate of 40%, adjusted for non-tax deductible goodwill.
The pro forma combined results also include the results of a company acquired by
one of the Founding Companies in October 1997 as if that company was acquired on
July 1, 1997.
4
<PAGE> 6
SUMMARY FINANCIAL DATA
The following table presents summary historical and pro forma financial
data on the bases described below and elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
------------- ----------------------------
PRO FORMA ACTUAL PRO FORMA
--------- ------ ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.................................... $ 115,327 $ 23,710 $ 31,404
Cost of revenue.................................. 48,827 10,148 13,175
---------- ---------- ----------
Gross profit..................................... 66,500 13,562 18,229
Selling, general and administrative expenses..... 50,709 10,593 14,074
Goodwill amortization............................ 2,348 380 591
---------- ---------- ----------
Income from operations........................... 13,443 2,589 3,564
Interest and other income (expense), net......... (1,736) (3) (422)
---------- ---------- ----------
Income before income taxes....................... 11,707 2,586 3,142
Provision for income taxes....................... 5,622 1,187 1,493
---------- ---------- ----------
Net income....................................... $ 6,085 $ 1,399 $ 1,649
========== ========== ==========
Earnings per common share:
Basic.......................................... $ 0.54 $ 0.14 $ 0.15
========== ========== ==========
Diluted........................................ $ 0.52 $ 0.13 $ 0.13
========== ========== ==========
Weighted average common shares outstanding:
Basic......................................... 11,311,801 10,070,808 11,311,801
Diluted........................................ 11,731,105 11,124,260 12,376,184
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------
ACTUAL PRO FORMA
--------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 11,916 $ 8,682
Total assets.............................................. 101,959 132,341
Long-term debt, net of current portion.................... 8,402 22,270
Stockholders' equity...................................... 72,953 84,798
</TABLE>
- ---------------
The pro forma consolidated statement of operations data assumes that our 12
acquisitions and initial public offering were completed on July 1, 1997. This
data is not necessarily indicative of the results we would have obtained if
these events had actually then occurred or of our future results. The pro forma
balance sheet data gives effect to the three acquisitions that we completed
after September 30, 1998 as if they had occurred on that date. The pro forma
data is based on estimates, available information and assumptions that
management deems appropriate.
The pro forma statement of operations data for the year ended June 30, 1998
reflects the elimination of non-recurring fees totalling approximately $1.3
million and non-cash compensation expense totalling $686,000. The pro forma
statement of operations data for both periods presented above reflects the
elimination of the compensation differential resulting from the pro forma
adjustments of salary, bonus and benefits paid to certain owners of the
businesses we acquired to contractually agreed-upon levels. For fiscal 1998 and
the three months ended September 30, 1998, the aggregate compensation
differential was approximately $6.7 million and $172,000, respectively. The pro
forma consolidated statement of operations data for both periods also reflects
amortization of the goodwill being recorded as a result of each of our 12
acquisitions over a 40-year period, and assumes that all income is subject to an
effective corporate income tax rate of 40%, adjusted for non-tax deductible
goodwill.
5
<PAGE> 7
RISK FACTORS
Investing in the common stock will provide you with an equity ownership
interest in PROVANT. As a PROVANT stockholder, you will be subject to risks
inherent in our business. The value of your investment may increase or decline
and could result in a loss. You should carefully consider the following factors
as well as other information contained in this prospectus before deciding to
invest in shares of the common stock.
LIMITED COMBINED OPERATING HISTORY
Our companies did not begin to operate on a combined basis until the
combination of the seven Founding Companies in May 1998. Since then, we have
added the operations of five acquired companies. We have a limited history of
managing the combined operations of our companies.
Our companies offer different services and products, use different
technologies, target different clients and have different corporate cultures.
These differences increase the risk that our efforts to integrate these
businesses may not succeed. We manage our companies and intend to manage
subsequently-acquired businesses on a decentralized basis. This operating
strategy could result in inconsistent operating and financial practices that
could adversely impact our profitability. If we fail to integrate successfully
the operations of our companies, our business could be adversely affected.
RISKS RELATED TO CROSS-SELLING
A key component of our internal growth strategy is to cross-sell our
services and products within our existing client base. We have limited
experience in cross-selling and cannot guarantee that significant cross-selling
will occur. Our failure to increase sales through cross-selling or otherwise
achieve internal growth could negatively affect the value of your investment.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
We plan to grow in part by acquiring additional performance improvement
businesses. We may have trouble integrating and managing acquired businesses
without incurring substantial costs, delays or other operational or financial
problems. We also could be adversely affected by difficulties associated with
combining diverse business systems and cultures, and failures to retain key
personnel. In addition, if increased competition for acquisition candidates
develops, it may be more difficult for us to acquire suitable companies on
favorable terms. Uncertainties regarding the size, timing and integration of
acquisitions may cause our operating results to be difficult to predict from
quarter to quarter.
We often finance acquisitions by issuing shares of common stock as part of
the purchase price. However, if the common stock does not maintain a sufficient
market value, or the principals of acquired companies otherwise refuse to accept
common stock as part of the purchase price, we might not be able to use common
stock in acquisitions and instead would be required to use more cash to maintain
our acquisition program. If in this scenario we do not have sufficient cash, we
will not be able to achieve expected growth without raising additional capital
through debt or equity financings. To the extent that we rely on debt
financings, if available, we may increase our borrowing costs and decrease our
profitability.
At September 30, 1998, on a pro forma basis, our total assets were
approximately $132.3 million, of which approximately $93.2 million, or 70%, was
goodwill from acquisitions. To date, we have assigned a 40-year amortization
period to the goodwill of each of our acquired businesses. If the anticipated
cash flow from an acquired business does not support the value of its remaining
goodwill, we would be required to reduce the goodwill value and record a charge
to our earnings. Our future earnings also could be reduced if there is any
change in the accounting standards for goodwill which has the effect of
shortening the permitted goodwill amortization period. Accounting standards
writing organizations are considering such changes.
DEPENDENCE ON KEY PERSONNEL
Our success depends on the efforts, abilities and leadership of the
following senior executives: Paul M. Verrochi, our Chairman and Chief Executive
Officer; John H. Zenger, our President; Dominic J. Puopolo, our
6
<PAGE> 8
Executive Vice President and Chief Financial Officer; and Rajiv Bhatt, our
Executive Vice President and Chief Operating Officer. While we have entered into
employment agreements with each of these executives, we cannot be assured of
retaining the services of any of them. If any of these four individuals were to
leave, our business could be adversely affected.
We also must continue to attract and retain instructors and consultants who
possess the skills and experience required by our clients. In addition, to
initiate, develop and maintain client relationships, we must retain our senior
managers and salespeople. If we fail to attract and retain senior managers,
qualified instructors, consultants and salespeople, our revenues and
profitability could be negatively affected.
CONVERSION TO TECHNOLOGY-BASED DELIVERY METHODS
Traditionally, many of our companies have used instructors, written
materials or video to deliver performance improvement services and products. We
plan to rely increasingly on technology-based delivery methods such as CD-ROM,
intranets, the Internet and other distance-based media, and to convert to these
formats certain services and products that previously have been delivered
through the more "traditional" formats. We may be unable to recoup the costs
associated with converting content to different formats or developing new
delivery formats for our services and products. We run the risk that certain
clients may resist the newer formats, especially if the newer formats do not
yield comparable performance improvement results. These formats also might be
rendered obsolete by new technologies. We cannot guarantee that we will be able
to keep up with the pace of technological change in our industry. Any of these
risks, if realized, could hurt our operating results.
FLUCTUATIONS IN OPERATING RESULTS
Our companies experience and expect to continue to experience fluctuations
in quarterly operating results. Because of this, you should not consider our
results for any quarter to be necessarily indicative of future results. Results
may vary as a result of, among other things, the overall level of performance
improvement services and products sold, the gain or loss of material client
relationships, the timing, structure and magnitude of acquisitions, or the
utilization rates of our salaried trainers and consultants. The timing or
completion of client engagements or custom services and products also could
result in fluctuations in our quarterly results of operations. To the extent
they are unexpected, downward fluctuations may result in a decline in the
trading price of our common stock.
Affiliates of companies we acquire who receive common stock under this
prospectus must comply for one year with the restrictions of Rule 145 under the
Securities Act of 1933, including restrictions limiting the number of shares
they may sell and the manner in which they can sell them.
RELATIONSHIP WITH FEDERAL GOVERNMENT ENTITIES
We derived approximately 19% of our pro forma revenue in the year ended
June 30, 1998 from services and products provided to numerous federal government
entities. Our operations could suffer due to a general reduction in federal
government spending for external training and development, a Congressional
budget impasse, or an inability to maintain our relationship with particular
federal government entities. In addition, the government typically shares
equally in the ownership of courseware and materials that we develop with
government funds, and may share this courseware or materials with other entities
including our competitors. Contracts with the federal government entail other
unique risks including potential government audits and retroactive downward
repricing of sales.
RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY
We use legal and contractual methods to protect proprietary information
contained in our performance improvement services and products. However, many of
our services and products do not include any mechanisms to prohibit or prevent
unauthorized use, and the means we do have for protecting our proprietary
information may not be sufficient to discourage unauthorized use.
7
<PAGE> 9
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers currently beneficially own
approximately 40% of our outstanding common stock. As a result, if these
stockholders were to act together, they could, as a practical matter, determine
the outcome of corporate actions requiring stockholder approval, including the
election of directors and the approval of significant corporate transactions,
such as a sale of PROVANT. This concentration of ownership may make it more
difficult for a third party to acquire control of us.
POSSIBLE FUTURE SALES OF SHARES
The holders of our common stock prior to the Combination and the former
stockholders of the Founding Companies, who together with their donees
collectively own approximately 7,706,673 shares of common stock, contractually
agreed not to sell these shares prior to May 4, 2000. We are waiving these
restrictions to the extent necessary to permit these individuals to sell 917,461
shares in a public offering that we expect will be completed in February 1999.
Sales of substantial amounts of the shares owned by these individuals subsequent
to the public offering, or even the perception that sales of that magnitude
could someday occur, may depress our stock price and could hurt our ability
either to raise money by selling stock or to use stock in acquisitions.
8
<PAGE> 10
PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the Nasdaq National Market under the symbol
"POVT." The following table sets forth the high and low sales prices for the
common stock from April 29, 1998 (the first day of trading on Nasdaq) through
January 11, 1999.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1998
Fourth Quarter (from April 29, 1998)....................... $22.50 $16.00
FISCAL 1999
First Quarter.............................................. 19.00 10.00
Second Quarter............................................. 24.25 9.50
Third Quarter (through January 11, 1999)................... 24.75 20.00
</TABLE>
On January 11, 1999, the last reported sale price of the common stock was
$21.25. As of such date, there were 163 holders of record of common stock.
DIVIDEND POLICY
We intend to retain all of our earnings, if any, to finance the expansion
of our business and for general corporate purposes, and do not anticipate paying
cash dividends on our 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,
our future earnings, if any, operating and financial condition, capital
requirements, general business conditions and any other factors the Board of
Directors may consider. In addition, our credit facility currently prohibits the
payment of dividends without the consent of the lenders.
9
<PAGE> 11
SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial
data for PROVANT (which includes the accounts of each acquired company from its
date of acquisition), which has been derived from our historical consolidated
financial statements included elsewhere in this prospectus. The following table
also presents selected consolidated financial data on a pro forma basis
reflecting adjustments described below and elsewhere in this prospectus. See our
historical consolidated financial statements and unaudited pro forma
consolidated financial statements, as well as the other financial statements and
notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 16, 1996
(DATE OF INCEPTION) YEAR ENDED THREE MONTHS ENDED
TO JUNE 30, 1997 JUNE 30, 1998 SEPTEMBER 30, 1998
------------------- ---------------------- -----------------------
PRO PRO
ACTUAL FORMA ACTUAL FORMA
--------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.............................. $ -- $ 14,189 $ 115,327 $ 23,710 $ 31,404
Cost of revenue............................ -- 6,374 48,827 10,148 13,175
--------- --------- ---------- ---------- ----------
Gross profit............................... -- 7,815 66,500 13,562 18,229
Selling, general and administrative
expenses................................. 149 10,447 50,709 10,593 14,074
Goodwill amortization...................... -- 245 2,348 380 591
--------- --------- ---------- ---------- ----------
Income (loss) from operations.............. (149) (2,877) 13,443 2,589 3,564
Interest and other income (expense), net... -- (220) (1,736) (3) (422)
--------- --------- ---------- ---------- ----------
Income (loss) before income taxes.......... (149) (3,097) 11,707 2,586 3,142
Provision (benefit) for income taxes....... -- (203) 5,622 1,187 1,493
--------- --------- ---------- ---------- ----------
Net income (loss).......................... $ (149) $ (2,894) $ 6,085 $ 1,399 $ 1,649
========= ========= ========== ========== ==========
Earnings (loss) per common share:
Basic.................................... $ (0.08) $ (0.67) $ 0.54 $ 0.14 $ 0.15
========= ========= ========== ========== ==========
Diluted.................................. $ (0.08) $ (0.67) $ 0.52 $ 0.13 $ 0.13
========= ========= ========== ========== ==========
Weighted average common shares outstanding:
Basic.................................... 1,950,520 4,350,169 11,311,801 10,070,808 11,311,801
Diluted.................................. 1,950,520 4,350,169 11,731,105 11,124,260 12,376,184
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------
JUNE 30, 1998 ACTUAL PRO FORMA
------------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 11,107 $ 11,916 $ 8,682
Total assets................................................ 86,358 101,959 132,341
Long-term debt, net of current portion...................... 874 8,402 22,270
Stockholders' equity........................................ 66,499 72,953 84,798
</TABLE>
- ---------------
The pro forma consolidated statement of operations data assumes that our 12
acquisitions and initial public offering were completed on July 1, 1997. This
data is not necessarily indicative of the results we would have obtained if
these events had actually then occurred or of our future results. The pro forma
balance sheet data gives effect to the three acquisitions that we completed
after September 30, 1998 as if they had occurred on that date. The pro forma
data is based on estimates, available information and assumptions that
management deems appropriate.
The pro forma statement of operations data for the year ended June 30, 1998
reflects the elimination of non-recurring fees totalling approximately $1.3
million and non-cash compensation expense totalling $686,000. The pro forma
statement of operations data for both periods presented above reflects the
elimination of the compensation differential resulting from the pro forma
adjustments of salary, bonus and benefits paid to
10
<PAGE> 12
certain owners of the businesses we acquired to contractually agreed-upon
levels. For fiscal 1998 and the three months ended September 30, 1998, the
aggregate compensation differential was approximately $6.7 million and $172,000,
respectively. The pro forma consolidated statement of operations data for both
periods also reflects amortization of the goodwill being recorded as a result of
each of our 12 acquisitions over a 40-year period, and assumes that all income
is subject to an effective corporate income tax rate of 40%, adjusted for
non-tax deductible goodwill.
STAR MOUNTAIN SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
We have reported in this prospectus PROVANT's operating results commencing
with our inception on November 16, 1996. For the purpose of providing five full
years of selected historical financial data, as required under the rules of the
SEC, we must also present the following historical selected financial data for
Star Mountain, a significant predecessor company. The selected data for the
years ended December 31, 1995, 1996 and 1997 and the period January 1, 1998 to
May 4, 1998 is derived from, and should be read in conjunction with, Star
Mountain's audited financial statements (and the notes thereto) appearing
elsewhere in this prospectus. The selected data for the years ended December 31,
1993 and 1994 are derived from Star Mountain's audited financial statements for
those years. The data presented below is neither comparable to nor indicative of
our post-Combination financial position or results of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
--------------------------------------------- JANUARY 1, 1998
1993 1994 1995 1996 1997 TO MAY 4, 1998
------ ------ ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................... $8,293 $9,731 $14,306 $16,313 $23,775 $ 11,052
Cost of revenue............................. 5,418 6,350 8,668 9,457 14,504 6,109
------ ------ ------- ------- ------- --------
Gross profit................................ 2,875 3,381 5,638 6,856 9,271 4,943
Selling, general and administrative
expenses.................................. 2,619 2,973 4,411 5,476 7,591 3,650
------ ------ ------- ------- ------- --------
Income from operations...................... 256 408 1,227 1,380 1,680 1,293
Interest and other income (expense), net.... (150) (194) (235) (379) (406) (137)
------ ------ ------- ------- ------- --------
Income before provision for income taxes.... 106 214 992 1,001 1,274 1,156
Provision for income taxes(1)............... -- -- -- 397 546 457
------ ------ ------- ------- ------- --------
Net income.................................. $ 106 $ 214 $ 992 $ 604 $ 728 $ 699
====== ====== ======= ======= ======= ========
Earnings per common share: basic............ $ 0.01 $ 0.02 $ 0.11 $ 0.07 $ 0.09 $ 0.09
====== ====== ======= ======= ======= ========
Earnings per common share: diluted.......... $ 0.01 $ 0.02 $ 0.11 $ 0.07 $ 0.08 $ 0.08
====== ====== ======= ======= ======= ========
Shares used in computing basic earnings per
common share.............................. 8,443 8,821 8,825 8,422 8,078 8,074
Shares used in computing diluted earnings
per common share.......................... 9,271 9,058 8,963 8,565 8,823 8,871
BALANCE SHEET DATA:
Working capital............................. $ 583 $ 847 $ 942 $ 871 $ 64
Total assets................................ 3,231 3,507 4,775 5,983 10,677
Long term debt, net of current portion...... -- -- -- -- 304
Stockholders' equity........................ 1,021 1,274 1,859 2,010 2,778
</TABLE>
- ---------------
(1) Through December 31, 1995, Star Mountain had elected to be treated as an S
corporation and, accordingly, there was no provision for income taxes for
periods ending on or prior to that date.
11
<PAGE> 13
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 our fiscal year 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 (for example, "1997" means the fiscal year
ended June 30, 1997). The following discussion should be read in conjunction
with our historical consolidated financial statements and the Founding
Companies' financial statements and the related notes thereto appearing
elsewhere in this prospectus.
FOUNDING COMPANIES
Our operations in the performance improvement industry began in May 1998
when we acquired the seven Founding Companies. The Founding Companies are:
Behavioral Technology, Inc. ("BTI"); Decker Communications, Inc. ("Decker"); J.
Howard & Associates, Inc. ("J. Howard"); Learning Systems Sciences ("LSS"); MOHR
Retail Learning Systems, Inc. ("MOHR"); Novations Group, Inc. ("Novations"); and
Star Mountain, Inc. (with its subsidiaries, "Star Mountain").
ACQUISITIONS SINCE THE IPO
Since the Combination, we have acquired the five businesses described in
the table below.
<TABLE>
<CAPTION>
COMPANY DATE ACQUIRED AREA OF EXPERTISE
- -------------------------------------- ------------------------------- -------------------------------
<S> <C> <C>
KC Resources Creative Solutions, Inc. July 20, 1998 Technology-based instructional
design
American Media Incorporated September 14, 1998 General business management
solutions
Strategic Interactive, Inc. October 26, 1998 Web-based training management
solutions
Gulliver Ritchie Associates, Inc. November 16, 1998 Technology-based training
solutions
Executive Perspectives, Inc. November 24, 1998 Custom training simulations
</TABLE>
Each acquisition was accounted for under the purchase method of accounting.
The aggregate purchase price of these acquisitions was $51.2 million, consisting
of $30.2 million in cash and 1,516,243 shares of common stock. In addition, the
former owners of these businesses are entitled to receive contingent
consideration based upon the future earnings before interest and taxes of these
businesses. For accounting purposes, any contingent consideration paid in these
acquisitions will be treated as additional purchase price.
We currently have letters of intent to acquire a technology-based
instructional design company and a custom simulations training company for an
aggregate base purchase price of approximately $11 million, plus contingent
consideration of up to $500,000.
REVENUES, COSTS AND EXPENSES
We receive revenue from five main sources: (i) instructor-led and
train-the-trainer programs; (ii) license fees; (iii) custom services and
products; (iv) consulting and training management services; and (v) standardized
products. We recognize revenue from instructor-led training and
train-the-trainer programs, usually on a participant basis, when the training is
delivered. From our train-the-trainer arrangements, we also recognize license
fees on a per-participant basis when a certified client trainer delivers our
courses and materials to other employees of the client. We recognize revenue
from a site license at the time the license is granted. We recognize maintenance
fees on our training management services as they are performed over the life of
the contract. We generally recognize revenue from our custom services and
products based on the percentage-of-completion method. We recognize revenue from
fees for our consulting services, for which we charge an hourly or per diem
rate, when the consulting is provided. We also recognize revenue for our
standardized products, such as books or videotapes, when the products are
shipped.
12
<PAGE> 14
Cost of revenue primarily consists of: (i) salaries and benefits for our
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, our gross margins
are affected by the number of instructors, consultants and course designers and
their utilization during any given period.
Selling, general and administrative expenses consist primarily of salaries,
benefits and bonuses for our corporate, sales, marketing and administrative
personnel, and marketing and advertising expenses for our services and products.
Selling, general and administrative expenses also include incentive and
discretionary bonuses paid to executives and other key employees. Other selling,
general and administrative expenses include non-reimbursable travel expenses,
rent, depreciation, telecommunication costs, postage and other operating costs.
Before we acquired them, each of the Founding Companies and the businesses
we acquired after the Combination operated as an independent entity, 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 and the
subsequently-acquired businesses agreed in connection with the acquisitions to
adjust their annual salaries, bonuses and benefits. The difference (positive or
negative) between the base salary of the owners and key employees of the
Founding Companies and the subsequently-acquired businesses immediately after
their dates of acquisition and their salaries, bonuses and benefits during any
comparable period is reflected in our unaudited pro forma consolidated
statements of operations as the "Compensation Differential." The aggregate
Compensation Differentials for 1998 and the three months ended September 30,
1998 were $6.7 million and $172,000, respectively. The unaudited pro forma
combined statements of operations include a provision for income tax as if we
were taxed as a C corporation during all periods presented.
UNAUDITED REVENUES AND GROSS PROFIT -- THREE MONTHS ENDED SEPTEMBER 30, 1997
(PRO FORMA) AND 1998 (HISTORICAL) -- PROVANT
The following selected unaudited historical and pro forma financial data
represents our revenues and gross profit on an absolute basis and as a
percentage of revenue for the periods indicated. The pro forma adjustments in
the table below, which give effect only to the Combination and the historical
revenues and gross profit of companies acquired by Star Mountain in February and
October 1997, should be distinguished from the more extensive pro forma
adjustments made to our historical consolidated financial statements that are
contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
1997 1998
------------------ ----------------
PRO FORMA COMBINED HISTORICAL
------------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total revenue........................................... $17,738 100.0% $23,710 100.0%
Cost of revenue......................................... 8,056 45.4 10,148 42.8
------- ----- ------- -----
Gross profit............................................ $ 9,682 54.6% $13,562 57.2%
======= ===== ======= =====
</TABLE>
PRO FORMA COMBINED RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 (THE
"1998 QUARTER") COMPARED TO THE HISTORICAL RESULTS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 (THE "1999 QUARTER")
Revenue. Revenue increased $6.0 million, or 33.7%, from $17.7 million in
the 1998 Quarter to $23.7 million in the 1999 Quarter. The increase was
primarily attributable to an increased number of government contracts,
train-the-trainer programs and contracts to develop interactive multimedia
programs, as well as revenues from businesses acquired during the 1999 Quarter.
Cost of Revenue. Cost of revenue as a percentage of revenue decreased from
45.4% in the 1998 Quarter to 42.8% in the 1999 Quarter primarily due to a
favorable revenue mix, which was composed of increased license fees and higher
sales of products through direct mail distribution.
13
<PAGE> 15
Gross Profit. Gross profit increased $3.9 million, or 40.1%, from $9.7
million in the 1998 Quarter to $13.6 million in the 1999 Quarter primarily due
to a favorable revenue mix, which was composed of increased license fees and
higher sales of products through direct mail distribution. As a percentage of
revenue, gross profit increased from 54.6% in the 1998 Quarter to 57.2% in the
1999 Quarter.
RESULTS OF OPERATIONS -- PROVANT HISTORICAL
The following consolidated financial information represents our operations
(including the operations of the Founding Companies from May 4, 1998, their date
of acquisition in the Combination) on a historical basis. The following
historical financial information for fiscal 1998 includes a non-recurring fee of
$750,000 for information related to the performance improvement industry,
non-cash compensation expense totaling $686,000 related to the issuance of
common stock and stock options to certain of our officers and consultants, and
non-recurring Combination-related costs of $588,000.
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 16, 1996
(DATE OF INCEPTION) YEAR ENDED
TO JUNE 30, 1997 JUNE 30, 1998
------------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total revenue............................................ $ -- $14,189 100.0%
Cost of revenue.......................................... -- 6,374 44.9
----- ------- -----
Gross profit............................................. -- 7,815 55.1
Selling, general and administrative expenses............. 149 10,447 73.7
Goodwill amortization.................................... -- 245 1.7
----- ------- -----
Income (loss) from operations............................ $(149) $(2,877) (20.3)%
===== ======= =====
</TABLE>
HISTORICAL RESULTS FOR THE PERIOD FROM NOVEMBER 16, 1996 (DATE OF INCEPTION) TO
JUNE 30, 1997 (THE "1997 PERIOD") COMPARED TO 1998
Revenue. Revenue increased from nil in the 1997 Period to $14.2 million in
1998 due to the acquisition of the Founding Companies on May 4, 1998 and the
inclusion of their operating results commencing on that date.
Cost of Revenue. Cost of revenue increased from nil in the 1997 Period to
$6.4 million in 1998 due to the acquisition of the Founding Companies on May 4,
1998 and the inclusion of their operating results commencing on that date.
Gross Profit. Gross profit increased from nil in the 1997 Period to $7.8
million in 1998 due to the acquisition of the Founding Companies on May 4, 1998
and the inclusion of their operating results commencing on that date.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $149,000 in the 1997 Period to $10.4
million in 1998 due to the acquisition of the Founding Companies on May 4, 1998
and the inclusion of their operating results commencing on that date. Prior to
the acquisition of the Founding Companies, selling, general and administrative
expenses included corporate expenses, consisting primarily of consulting fees
and travel expenses incurred to consummate the Combination and the IPO.
LIQUIDITY AND CAPITAL RESOURCES
We have a revolving line of credit of up to $60.0 million (increased from
$40.0 million as of December 31, 1998), guaranteed by all of our significant
wholly-owned subsidiaries and secured by a pledge of the capital stock of each
of our wholly-owned subsidiaries. We can use the credit facility to finance
acquisitions (including the refinancing of indebtedness of acquired companies),
working capital and general corporate purposes. Loans made under the credit
facility bear interest at a rate, at our option, based on either a Eurodollar
rate or the bank's prime rate. The credit facility will terminate on December
31, 2001, and all outstanding amounts will be due at such time. The credit
facility (i) generally prohibits us from paying dividends and other
distributions, (ii) generally does not permit us to incur or assume other
indebtedness, and
14
<PAGE> 16
(iii) requires us to comply with certain financial covenants. As of December 31,
1998, $20.9 million was outstanding under the credit facility, which had a
weighted average interest rate of 5.8%.
We anticipate that our cash flow from operations and borrowings under the
credit facility, as well as the net proceeds of offerings of our common stock,
will provide cash sufficient to satisfy our working capital needs, debt service
requirements and planned capital expenditures for the next 12 months.
THE YEAR 2000 ISSUE
We use information technology ("IT") systems in our internal operations,
including applications used in client order processing, inventory management,
financial business systems and various administrative functions which are
primarily "off-the-shelf" applications. Non-IT systems used in our internal
operations consist primarily of voice and data communications systems and
elevator and climate control systems. In addition, we deliver several of our
products on technology-based platforms, such as CD-ROM, intranets and the
Internet. Management has completed the assessment of our IT and non-IT systems
and products for all of our companies except for our two most recent
acquisitions, whose assessments will be completed by the end of January 1999.
Our completed assessment has indicated the need to replace some personal
computers and upgrade two phone switches. We estimate the cost of these
remediation efforts to be approximately $55,000. Management expects to complete
any necessary remediation, implementation and final testing of IT and non-IT
systems and products by March 31, 1999. To the extent the source code of IT and
non-IT internal systems and customer products may be deficient despite our
assessment with respect to "Year 2000" issues, our failure to make any required
modifications in order to make the systems and products "Year 2000" compliant
could have a material adverse effect on our business.
We derive a substantial amount of our revenues from services and products
delivered to entities affiliated with the federal government. During fiscal
1998, our work for federal government clients generated approximately 19% of our
pro forma consolidated revenue. Failure by these government entities to make
their respective computer software programs and operating systems "Year 2000"
compliant could have a material adverse effect on our business.
We have not yet completed the evaluation of our most reasonably likely
worst case "Year 2000" scenario, nor have we completed our contingency planning
with respect to the "Year 2000." We also have not yet completed our evaluation
of our vendors' contingency planning with respect to their potential "Year 2000"
deficiencies. We intend to complete both these evaluations and contingency
planning during fiscal 1999.
To date, we have incurred approximately $40,000 to remediate "Year 2000"
issues. Management currently believes that any future costs to remediate "Year
2000" issues will not be material to our financial position or results of
operations.
RESULTS OF OPERATIONS -- BTI
BTI primarily provides train-the-trainer programs designed to help its
clients improve employee recruitment, selection and retention. BTI's revenue is
derived primarily from the licensing to clients of the right to use its training
materials.
15
<PAGE> 17
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, FOR THE PERIOD
-------------------------------- -----------------------------------
JULY 1, 1997 TO MAY 5, 1998 TO
1996 1997 MAY 4, 1998 JUNE 30, 1998
-------------- -------------- ----------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............................ $5,685 100.0% $7,096 100.0% $ 6,567 100.0% $1,276 100.0%
Cost of revenue.................... 1,495 26.3 1,488 21.0 1,243 18.9 281 22.0
------ ----- ------ ----- ------- ------- ------ -----
Gross profit....................... 4,190 73.7 5,608 79.0 5,324 81.1 995 78.0
Selling, general and administrative
expenses......................... 4,048 71.2 5,111 72.0 6,648 101.2 841 65.9
------ ----- ------ ----- ------- ------- ------ -----
Income (loss) from operations...... $ 142 2.5% $ 497 7.0% $(1,324) (20.1)% $ 154 12.1%
====== ===== ====== ===== ======= ======= ====== =====
Compensation differential.......... $ 563 9.9% $ 942 13.3% $ 3,355 51.1% $ -- --%
</TABLE>
RESULTS FOR THE TWELVE MONTHS ENDED JUNE 30, 1998 (THE "1998 PERIOD") COMPARED
TO THE TWELVE MONTHS ENDED JUNE 30, 1997 (THE "1997 PERIOD") -- BTI
Revenue. Revenue increased approximately $747,000, or 10.5%, from $7.1
million in the 1997 Period to $7.8 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 $36,000, or 2.4%,
from approximately $1.4 million in the 1997 Period to approximately $1.5 million
in the 1998 Period. As a percentage of revenue, cost of revenue decreased from
21.0% in the 1997 Period to 19.4% in the 1998 Period, primarily due to a
decrease in the average unit cost of participant materials.
Gross Profit. Gross profit increased approximately $711,000, or 12.7%,
from $5.6 million in the 1997 Period to $6.3 million in the 1998 Period. As a
percentage of revenue, gross profit increased from 79.0% in the 1997 Period to
80.6% in the 1998 Period, primarily due to the cost savings described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.4 million, or 46.5%, from $5.1 million in
the 1997 Period to $7.5 million in the 1998 Period. Excluding the Compensation
Differential attributable to BTI of approximately $942,000 and $3.4 million in
the 1997 Period and 1998 Period, respectively, selling, general and
administrative expenses would have remained relatively constant at $4.2 million
and $4.1 million in the 1997 and 1998 Periods, respectively. As a percentage of
revenue, selling, general and administrative expenses would have decreased on an
adjusted basis from 58.8% in the 1997 Period to 52.7% 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
16
<PAGE> 18
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.
LIQUIDITY AND CAPITAL RESOURCES -- BTI
BTI generated net cash from operating activities of approximately $641,000
in 1997. For the period from July 1, 1997 to May 4, 1998, BTI used approximately
$465,000 in operating activities, primarily for the payment of bonuses to key
employees. Net cash used in investing activities was approximately $33,000 in
1997 for purchases of property and equipment, and approximately $294,000 in the
period from July 1, 1997 to May 4, 1998 due to an increase in amounts due to
related parties. At May 4, 1998, BTI had a working capital deficit of
approximately $73,000.
RESULTS OF OPERATIONS -- DECKER
Decker provides instructor-led training to improve employees' business
communication and presentation skills. 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, FOR THE PERIOD
-------------------------------- ----------------------------------
JULY 1, 1997 TO MAY 5, 1998 TO
1996 1997 MAY 4, 1998 JUNE 30, 1998
-------------- -------------- ---------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................................. $8,620 100.0% $8,410 100.0% $8,729 100.0% $2,016 100.0%
Cost of revenue......................... 2,655 30.8 2,275 27.1 2,275 26.1 494 24.5
------ ----- ------ ----- ------ ----- ------ -----
Gross profit............................ 5,965 69.2 6,135 72.9 6,454 73.9 1,522 75.5
Selling, general and administrative
expenses.............................. 5,716 66.3 6,446 76.6 5,696 65.2 1,255 62.3
------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from operations........... $ 249 2.9% $ (311) (3.7)% $ 758 8.7% $ 267 13.2%
====== ===== ====== ===== ====== ===== ====== =====
Compensation differential............... $ 192 2.2% $1,165 13.9% $ 372 4.3% $ -- --%
</TABLE>
RESULTS FOR THE TWELVE MONTHS ENDED JUNE 30, 1998 (THE "1998 PERIOD") COMPARED
TO THE TWELVE MONTHS ENDED JUNE 30, 1997 (THE "1997 PERIOD") -- DECKER
Revenue. Revenue increased $2.3 million, or 27.8%, from $8.4 million in
the 1997 Period to $10.7 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 $494,000, or
21.7%, from $2.3 million in the 1997 Period to $2.8 million in the 1998 Period.
As a percentage of revenue, cost of revenue decreased from 27.1% in the 1997
Period to 25.8% in the 1998 Period, primarily due to increased utilization of
trainers.
Gross Profit. Gross profit increased approximately $1.8 million, or 30.0%,
from $6.1 million in the 1997 Period to $8.0 million in the 1998 Period. As a
percentage of revenue, gross profit increased from 72.9% in the 1997 Period to
74.2% in the 1998 Period, primarily due to the reasons described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $505,000, or 7.8%, from $6.4
million in the 1997 Period to $7.0 million in the 1998 Period. Excluding the
Compensation Differential of $1.2 million and approximately $372,000
attributable to Decker in the 1997 Period and 1998 Period, respectively,
selling, general and administrative expenses would have increased approximately
$1.3 million, or 24.6%, from $5.3 million in the 1997 Period to $6.6 million in
the 1998 Period. As a percentage of revenue, selling, general and administrative
expenses would have decreased on
17
<PAGE> 19
an adjusted basis from 62.8% in the 1997 Period to 61.2% 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
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.
LIQUIDITY AND CAPITAL RESOURCES -- DECKER
Decker generated net cash from operating activities of approximately
$446,000 in 1997 and approximately $1.1 million in the period from July 1, 1997
to May 4, 1998. Net cash used in investing activities was approximately $11,000
in 1997 and approximately $31,000 in the period from July 1, 1997 to May 4,
1998, primarily for purchases of property and equipment. Net cash used in
financing activities was approximately $241,000 in 1997 and approximately
$590,000 in the period from July 1, 1997 to May 4, 1998, primarily for the
payment of dividends. At May 4, 1998, Decker had working capital of $1.3 million
and approximately $583,000 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 and sexual harassment.
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.
18
<PAGE> 20
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, FOR THE PERIOD
------------------------------------------------ FOR THE -----------------------------------
SIX MONTHS
ENDED JANUARY 1, 1998 MAY 5, 1998
1995 1996 1997 JUNE 30, 1997 TO MAY 4, 1998 TO JUNE 30, 1998
-------------- -------------- -------------- -------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $6,251 100.0% $7,110 100.0% $7,684 100.0% $4,160 100.0% $2,041 100.0% $1,248 100.0%
Cost of revenue......... 1,964 31.4 2,166 30.5 2,346 30.5 1,190 28.6 670 32.8 389 31.2
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit............ 4,287 68.6 4,944 69.5 5,338 69.5 2,970 71.4 1,371 67.2 859 68.8
Selling, general and
administrative
expenses.............. 4,158 66.5 4,559 64.1 4,748 61.8 1,971 47.4 1,476 72.3 721 57.8
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from
operations............ $ 129 2.1% $ 385 5.4% $ 590 7.7% $ 999 24.0% $ (105) (5.1)% $ 138 11.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Compensation
differential.......... $ 522 8.4% $ 944 13.3% $ 603 7.8% $ 120 2.9% $ 497 24.4% $ -- --%
</TABLE>
RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 (THE "1998 PERIOD") COMPARED TO
THE SIX MONTHS ENDED JUNE 30, 1997 (THE "1997 PERIOD") -- J. HOWARD
Revenue. Revenue decreased approximately $871,000, or 20.9%, from $4.2
million in the 1997 Period to $3.3 million in the 1998 Period, primarily due to
lower license revenue.
Cost of Revenue. Cost of revenue decreased approximately $131,000, or
11.0%, from approximately $1.2 million in the 1997 Period to approximately $1.1
million in the 1998 Period. As a percentage of revenue, cost of revenue
increased from 28.6% in the 1997 Period to 32.2% in the 1998 Period due to the
fixed nature of a portion of the company's costs.
Gross Profit. Gross profit decreased approximately $740,000, or 24.9%,
from $3.0 million in the 1997 Period to $2.2 million in the 1998 Period. As a
percentage of revenue, gross profit decreased from 71.4% in the 1997 Period to
67.8% in the 1998 Period, due to the reasons described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $226,000, or 11.5%, from $2.0
million in the 1997 Period to $2.2 million in the 1998 Period. Excluding the
Compensation Differential of approximately $120,000 and approximately $497,000
attributable to J. Howard in the 1997 Period and the 1998 Period, respectively,
selling, general and administrative expenses would have decreased approximately
$151,000, or 8.2%, from $1.9 million in the 1997 Period to $1.7 million in the
1998 Period. As a percentage of revenue, selling, general and administrative
expenses would have increased on an adjusted basis from 44.5% in the 1997 Period
to 51.7% 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.
19
<PAGE> 21
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $189,000, or 4.1%, from $4.6
million in the year ended December 31, 1996 to $4.7 million in the year ended
December 31, 1997. Excluding the Compensation Differential of approximately
$944,000 and approximately $603,000 attributable to J. Howard in the year ended
December 31, 1996 and the year ended December 31, 1997, respectively, selling,
general and administrative expenses would have increased approximately $530,000,
or 14.7%, from $3.6 million in the year ended December 31, 1996 to $4.1 million
in the year ended December 31, 1997. As a percentage of revenue, selling,
general and administrative expenses would have increased on an adjusted basis
from 50.8% in the year ended December 31, 1996 to 53.9% in the year ended
December 31, 1997, primarily due to compensation paid to additional salespeople
hired during the year ended December 31, 1997 who did not generate material
revenue during that year.
RESULTS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER
31, 1995 -- J. HOWARD
Revenue. Revenue increased approximately $859,000, or 13.7%, from $6.3
million in the year ended December 31, 1995 to $7.1 million in the year ended
December 31, 1996, primarily due to a general increase in the number of client
engagements.
Cost of Revenue. Cost of revenue increased approximately $202,000, or
10.3%, from $2.0 million in the year ended December 31, 1995 to $2.2 million in
the year ended December 31, 1996. As a percentage of revenue, cost of revenue
decreased slightly from 31.4% in the year ended December 31, 1995 to 30.5% in
the year ended December 31, 1996.
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 $272,000 in
operating activities in the period from January 1, 1998 to May 4, 1998. 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 $75,000 was generated in the period from January 1, 1998 to May 4,
1998, primarily from advances repaid by related parties. 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 $282,000 for the period from January 1, 1998 to May
4, 1998, from borrowings to fund operating activities. At May 4, 1998, J. Howard
had working capital of $1.2 million.
RESULTS OF OPERATIONS -- LSS
LSS creates customized technology-based training solutions that generally
are designed to facilitate faster learning of point-of-sale devices and higher
productivity of retail associates. LSS derives revenue from the design,
development and delivery of its products.
20
<PAGE> 22
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>
FOR THE PERIOD
--------------------------------
YEAR ENDED DECEMBER 31, FOR THE SIX MAY 5, 1998
------------------------------------------------ MONTHS ENDED JANUARY 1, 1998 TO JUNE 30,
1995 1996 1997 JUNE 30, 1997 TO MAY 4, 1998 1998
-------------- -------------- -------------- -------------- ---------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................... $3,332 100.0% $5,123 100.0% $5,681 100.0% $2,910 100.0% $2,861 100.0% $ 936 100.0%
Cost of revenue........... 1,390 41.7 1,696 33.1 2,202 38.8 1,081 37.1 909 31.8 446 47.7
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ----- -----
Gross profit.............. 1,942 58.3 3,427 66.9 3,479 61.2 1,829 62.9 1,952 68.2 490 52.4
Selling, general and
administrative
expenses................ 1,767 53.0 3,079 60.1 2,226 39.2 1,108 38.1 633 22.1 420 44.9
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ----- -----
Income from operations.... $ 175 5.3% $ 348 6.8% $1,253 22.0% $ 721 24.8% $1,319 46.1% $ 70 7.5%
====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ===== =====
Compensation
differential............ $ 415 12.5% $1,379 26.9% $ 300 5.3% $ 210 7.2% $ (121) (4.2)% $ -- --%
</TABLE>
RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 (THE "1998 PERIOD") COMPARED TO
THE SIX MONTHS ENDED JUNE 30, 1997 (THE "1997 PERIOD") -- LSS
Revenue. Revenue increased approximately $887,000, or 30.5%, from $2.9
million in the 1997 Period to $3.8 million in the 1998 Period, primarily due to
new client relationships.
Cost of Revenue. Cost of revenue increased approximately $274,000, or
25.3%, from $1.1 million in the 1997 Period to $1.4 million in the 1998 Period.
As a percentage of revenue, cost of revenue decreased from 37.1% in the 1997
Period to 35.7% in the 1998 Period, primarily due to reduced video production
costs associated with certain of the Company's products during the period.
Gross Profit. Gross profit increased approximately $613,000, or 33.5%,
from $1.8 million in the 1997 Period to $2.4 million in the 1998 Period. As a
percentage of revenue, gross profit decreased from 62.9% in the 1997 Period to
64.3% in the 1998 Period, primarily due to the reduced video production costs
described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased approximately $55,000, or 5.0%, from $1.1
million in the 1997 Period to $1.0 million in the 1998 Period. Excluding the
Compensation Differential of approximately $210,000 and approximately $(121,000)
attributable to LSS in the 1997 Period and the 1998 Period, respectively,
selling, general and administrative expenses would have increased approximately
$276,000, or 30.7%, from approximately $898,000 in the 1997 Period to $1.2
million in the 1998 Period. As a percentage of revenue, selling, general and
administrative expenses would have remained unchanged on an adjusted basis at
30.9% in both the 1997 Period and the 1998 Period.
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.
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
approxi-
21
<PAGE> 23
mately $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
million 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 $1.0 million in the period
from January 1, 1998 to May 4, 1998. Net cash used in investing activities was
approximately $86,000 in the year ended December 31, 1997 and approximately
$271,000 in the period from January 1, 1998 to May 4, 1998, for purchases of
property and equipment. Cash used in financing activities was approximately
$496,000 and approximately $629,000 during the year ended December 31, 1997 and
the period from January 1, 1998 to May 4, 1998, respectively, for dividends paid
to stockholders. At May 4, 1998, LSS had working capital of approximately $1.4
million.
RESULTS OF OPERATIONS -- MOHR
MOHR offers train-the-trainer and instructor-led 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.
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.
22
<PAGE> 24
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>
FOR THE PERIOD
YEAR ENDED JUNE 30, --------------------------------
-------------------------------- JULY 1, 1997 MAY 5, 1998 TO
1996 1997 TO MAY 4, 1998 JUNE 30, 1998
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue....................... $2,171 100.0% $3,015 100.0% $3,237 100.0% $1,045 100.0%
Cost of revenue............... 677 31.2 825 27.4 1,009.. 31.2 361 34.5
------ ----- ------ ----- ------ ----- ------ -----
Gross profit.................. 1,494 68.8 2,190 72.6 2,228 68.8 684 65.5
Selling, general and
administrative expenses..... 1,151 53.0 1,745 57.9 1,510 46.6 378 36.2
------ ----- ------ ----- ------ ----- ------ -----
Income from operations........ $ 343 15.8% $ 445 14.7% $ 718 22.2% $ 306 29.3%
====== ===== ====== ===== ====== ===== ====== =====
Compensation differential..... $ 144 6.6% $ 334 11.1% $ 205 6.3% $ -- --%
</TABLE>
RESULTS FOR THE TWELVE MONTHS ENDED JUNE 30, 1998 (THE "1998 PERIOD") COMPARED
TO THE TWELVE MONTHS ENDED JUNE 30, 1997 (THE "1997 PERIOD") -- MOHR
Revenue. Revenue increased $1.3 million, or 42.0%, from $3.0 million in
the 1997 Period to $4.3 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 $545,000, or
66.1%, from approximately $825,000 in the 1997 Period to $1.4 million in the
1998 Period. As a percentage of revenue, cost of revenue increased from 27.4% in
the 1997 Period to 32.0% in the 1998 Period, primarily due to increased new
product development costs.
Gross Profit. Gross profit increased approximately $722,000, or 33.0%,
from $2.2 million in the 1997 Period to $2.9 million in the 1998 Period. As a
percentage of revenue, gross profit decreased from 72.6% in the 1997 Period to
68.0% 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 $143,000, or 8.2%, from $1.7
million in the 1997 Period to $1.9 million in the 1998 Period. Excluding the
Compensation Differential of approximately $334,000 and approximately $205,000
attributable to MOHR in the 1997 Period and 1998 Period, respectively, selling,
general and administrative expenses would have increased approximately $272,000,
or 19.3%, from $1.4 million in the 1997 Period to $1.7 million in the 1998
Period. As a percentage of revenue, selling, general and administrative expenses
would have decreased on an adjusted basis from 46.8% in the 1997 Period to 39.3%
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 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
23
<PAGE> 25
$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 $335,000 in the period from July 1, 1997 to May 4,
1998. Net cash used in investing activities was approximately $41,000 in 1997
and approximately $68,000 in the period from July 1, 1997 to May 4, 1998, for
purchases of property and equipment. At May 4, 1998, MOHR had working capital of
$1.2 million.
RESULTS OF OPERATIONS -- NOVATIONS
Novations assists clients in assessing their strategic direction and
implementing and managing change. 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>
YEAR ENDED JUNE 30, FOR THE PERIOD
------------------------------- ---------------------------------
JULY 1, 1997 TO MAY 5, 1998 TO
1996 1997 MAY 4, 1998 JUNE 30, 1998
-------------- -------------- ---------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................................... $9,039 100.0% $9,018 100.0% $9,228 100.0% $2,426 100.0%
Cost of revenue........................... 4,733 52.4 4,839 53.7 4,356 47.2 988 40.7
------ ----- ------ ----- ------ ----- ------ -----
Gross profit.............................. 4,306 47.6 4,179 46.3 4,872 52.8 1,438 59.3
Selling, general and administrative
expenses................................ 4,094 45.3 3,315 36.7 3,956 42.9 920 37.9
------ ----- ------ ----- ------ ----- ------ -----
Income from operations.................... $ 212 2.3% $ 864 9.6% $ 916 9.9% $ 518 21.4%
====== ===== ====== ===== ====== ===== ====== =====
Compensation differential................. $1,471 16.3% $ 661 7.3% $1,512 16.4% $ -- --%
</TABLE>
RESULTS FOR THE TWELVE MONTHS ENDED JUNE 30, 1998 (THE "1998 PERIOD") COMPARED
TO THE TWELVE MONTHS ENDED JUNE 30, 1997 (THE "1997 PERIOD") -- NOVATIONS
Revenue. Revenue increased $2.6 million, or 29.2%, from $9.0 million in
the 1997 Period to $11.7 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 $505,000, or
10.4% from $4.8 million in the 1997 Period to $5.3 million in the 1998 Period.
As a percentage of revenue, cost of revenue decreased from 53.7% in the 1997
Period to 45.9% in the 1998 Period, primarily due to the increased utilization
of the company's consultants.
Gross Profit. Gross profit increased $2.1 million, or 51.0%, from $4.2
million in the 1997 Period to $6.3 million in the 1998 Period. As a percentage
of revenue, gross profit increased from 46.3% in the 1997 Period to 54.1% in the
1998 Period, primarily due to the increased utilization rate described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.6 million, or 47.1%, from $3.3 million in
the 1997 Period to $4.9 million in the 1998 Period. Excluding the Compensation
Differential attributable to Novations of approximately $661,000 and $1.5
million in the 1997 Period and 1998 Period, respectively, selling, general and
administrative expenses would have increased approximately $710,000, or 26.8%,
from $2.7 million in the 1997 Period to $3.4 million in the 1998 Period. As a
percentage of revenue, selling, general and administrative expenses would have
decreased on an adjusted basis from 29.4% in the 1997 Period to 28.9% in the
1998 Period, primarily due to the company's larger revenue base.
24
<PAGE> 26
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.
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
$567,000 in the period from July 1, 1997 to May 4, 1998 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
used in investing activities was approximately $16,000 in the 1998 Period,
primarily due to purchases of property and equipment. 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 $78,000
in the 1998 Period, for the repayment of long-term debt and distributions to
stockholders. At May 4, 1998, Novations had working capital of approximately
$1.1 million and approximately $289,000 of long term debt.
RESULTS OF OPERATIONS -- STAR MOUNTAIN
Star Mountain provides customized work skills training, primarily to
federal, state and local government agencies. Star Mountain delivers its
courseware to clients in a variety of formats (including written materials and
interactive multimedia software), but typically does not directly train its
clients. Star Mountain's revenue is derived primarily from fees received from
the provision of training services as a contractor or subcontractor under
government contracts.
The following table sets forth certain selected financial data for Star
Mountain on a historical basis and as a percentage of revenue for the periods
indicated. For all periods presented below, selling, general and administrative
expenses include amounts classified as "Other, net" in Star Mountain's
historical financial statements.
<TABLE>
<CAPTION>
PERIOD FROM
----------------
YEAR ENDED DECEMBER 31, SIX MONTHS
--------------------------------------------------- ENDED JANUARY 1, 1998
1995 1996 1997 JUNE 30, 1997 TO MAY 4, 1998
--------------- --------------- --------------- --------------- ----------------
(UNAUDITED)
(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% $11,331 100.0% $11,052 100.0%
Cost of revenue...... 8,668 60.6 9,457 58.0 14,504 61.0 7,204 63.6 6,109 55.3%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross profit......... 5,638 39.4 6,856 42.0 9,271 39.0 4,127 36.4 4,943 44.7
Selling, general and
administrative
expenses............ 4,611 32.2 5,815 35.6 7,897 33.2 3,793 33.5 3,650 33.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from
operations.......... $ 1,027 7.2% $ 1,041 6.4% $ 1,374 5.8% $ 334 2.9% $ 1,293 11.7%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Compensation
differential........ $ 64 0.4% $ 304 1.9% $ 180 0.8% $ 90 0.8% $ 28 0.3%
<CAPTION>
PERIOD FROM
--------------
MAY 5, 1998
TO
JUNE 30, 1998
--------------
<S> <C> <C>
Revenue.............. $5,396 100.0%
Cost of revenue...... 3,159 58.5
------ -----
Gross profit......... 2,237 41.5
Selling, general and
administrative
expenses............ 2,030 37.6
------ -----
Income from
operations.......... $ 207 4.1%
====== =====
Compensation
differential........ $ -- --%
</TABLE>
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<PAGE> 27
RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 (THE "1998 PERIOD") COMPARED TO
THE SIX MONTHS ENDED JUNE 30, 1997 (THE "1997 PERIOD) -- STAR MOUNTAIN
Revenue. Revenue increased $5.1 million, or 45.2%, from $11.3 million in
the 1997 Period to $16.4 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 $2.1 million, or 28.7%, from
$7.2 million in the 1997 Period to $9.3 million in the 1998 Period. As a
percentage of revenue, cost of revenue decreased from 63.6% in the 1997 Period
to 56.3% in the 1998 Period, primarily due to better utilization of the
company's fixed costs.
Gross Profit. Gross profit increased $3.1 million, or 74.0%, from $4.1
million in the 1997 Period to $7.2 million in the 1998 Period. As a percentage
of revenue, gross profit increased from 36.4% in the 1997 Period to 43.7% in the
1998 Period, primarily due to the utilization improvements described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.9 million, or 49.8%, from $3.8 million in
the 1997 Period to $5.7 million in the 1998 Period. Excluding the Compensation
Differential of approximately $90,000 and approximately $28,000 attributable to
Star Mountain in the 1997 Period and the 1998 Period, respectively, selling,
general and administrative expenses would have been $3.7 million in the 1997
Period and $5.7 million in the 1998 Period. As a percentage of revenue, selling,
general and administrative expenses would have increased on an adjusted basis
from 32.7% in the 1997 Period to 34.3% in the 1998 Period.
RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER
31, 1996 -- STAR MOUNTAIN
Revenue. Revenue increased $7.5 million, or 45.7%, from $16.3 million in
the year ended December 31, 1996 to $23.8 million in the year ended December 31,
1997, primarily due to an increase in the number of federal government contracts
undertaken, as well as revenue of $5.6 million contributed by businesses
acquired during the third quarter of the year ended December 31, 1996 and the
first and fourth quarters of the year ended December 31, 1997. Revenue was
significantly lower during the first half of the year ended December 31, 1996 as
a result of a decline in new client engagements due to prolonged Congressional
budget negotiations.
Cost of Revenue. Cost of revenue increased $5.0 million, or 53.4%, from
$9.5 million in the year ended December 31, 1996 to $14.5 million in the year
ended December 31, 1997. As a percentage of revenue, cost of revenue increased
from 58.0% in the year ended December 31, 1996 to 61.0% in the year ended
December 31, 1997, primarily due to the increased use of subcontractors during
the year ended December 31, 1997.
Gross Profit. Gross profit increased $2.4 million, or 35.2%, from $6.9
million in the year ended December 31, 1996 to $9.3 million in the year ended
December 31, 1997. As a percentage of revenue, gross profit decreased from 42.0%
in the year ended December 31, 1996 to 39.0% in the year ended December 31,
1997, primarily due to increased subcontracting costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.1 million, or 35.8%, from $5.8 million in
the year ended December 31, 1996 to $7.9 million in the year ended December 31,
1997. Excluding the Compensation Differential of approximately $304,000 and
approximately $180,000 attributable to Star Mountain in the year ended December
31, 1996 and the year ended December 31, 1997, respectively, selling, general
and administrative expenses would have increased $2.2 million, or 40.0%, from
$5.5 million in the year ended December 31, 1996 to $7.7 million in the year
ended December 31, 1997. As a percentage of revenue, selling, general and
administrative expenses would have decreased on an adjusted basis from 33.8% in
the year ended December 31, 1996 to 32.5% in the year ended December 31, 1997,
primarily due to the company's larger revenue base.
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
26
<PAGE> 28
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 and approximately $115,000 in the year ended December 31, 1997 and the
period from January 1, 1998 to May 4, 1998, respectively. Net cash used in
investing activities was $2.3 million in the year ended December 31, 1997,
primarily in connection with acquisitions of businesses, and approximately
$264,000 in the period from January 1, 1998 to May 4, 1998, for acquisitions of
property and equipment. Net cash provided by financing activities was $1.8
million and approximately $129,000 in the year ended December 31, 1997 and the
period from January 1, 1998 to May 4, 1998, respectively, primarily from
borrowings on the company's line of credit.
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<PAGE> 29
BUSINESS
COMPANY OVERVIEW
We are a leading provider of performance improvement training services and
products. Our clients are Fortune 1000 companies, other large and medium-sized
corporations and government entities. We offer both customized and standardized
services and products that are designed to provide measurable improvement in
performance and productivity for both employees and organizations. We can
deliver these performance improvement solutions using various delivery methods
to satisfy our clients' needs, including traditional delivery methods such as
teaching employees in instructor-led classroom training and certifying client
employees as instructors ("train-the-trainer"), as well as technology-based
delivery methods such as CD-ROM, intranets and the Internet. In addition, we
offer management consulting and training management services. Our goal is to
become the leading single-source provider of high-quality performance
improvement services and products.
MARKET OVERVIEW
The performance improvement market is large and growing. According to
TRAINING magazine, domestic corporations with over 100 employees budgeted
approximately $60.7 billion on training in 1998, compared to approximately $48.2
billion in 1993, representing a compound annual growth rate of approximately
4.7%. We believe that growth in the training and development market has been and
will continue to be driven by:
- the evolution to a technology-driven, knowledge-based economy;
- the increasing recognition that employee training is a competitive
necessity rather than an optional expense;
- a constantly changing business environment which requires continuous
employee training; and
- the increased availability of technology-based delivery methods, such as
the Internet, that make it possible to offer training to a wider audience
on a more cost-effective and convenient basis.
The increasing need for corporate training recently was highlighted in a
1998 survey where 70% of the surveyed CEOs said they faced serious problems
finding skilled, experienced workers.
Corporations and government entities increasingly are utilizing external
providers to supplement and in some cases replace internal performance
improvement efforts. Expenditures on external providers of performance
improvement services and products by domestic corporations with over 100
employees have increased from approximately $9.4 billion in 1993 to a budgeted
$14.3 billion in 1998, representing a compound annual growth rate of 8.8%. These
expenditures have increased as a percentage of the total training budgets of
such corporations from approximately 19.5% in 1993 to a budgeted 23.6% in 1998.
We believe that organizations increasingly are using external suppliers for
their training requirements so that they can focus on their core competencies,
turn fixed training costs into variable costs, and obtain comprehensive training
content and delivery capabilities that may not be available internally.
Traditionally, performance improvement services and products have been
delivered primarily through instructor-led training, books, and audio and video
tapes. However, advances in technology now permit organizations to utilize a
broad range of technology-based training formats (such as CD-ROM, intranets and
the Internet) which facilitate broader dissemination of training within
organizations and allow for more convenient and efficient learning. For example,
training is increasingly being delivered through web-based formats that allow
convenient access to training content. Technology-based training formats
overcome many of the cost, time and space constraints of traditional
instructor-led training. We believe that corporations increasingly are using
technology-based alternatives to:
- accelerate learning and increase knowledge retention;
- minimize the costs of employees' time spent away from the job;
- allow employees to have convenient access to training "on demand";
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<PAGE> 30
- lower overall training costs, including travel expenses of employees;
- make training available to a broader range of employees;
- provide consistency in training; and
- better measure and track employees' progress.
The performance improvement industry is highly fragmented. We believe that
no company in the industry has more than a two percent share of the external
training market. Many companies in the industry provide a narrow range of
services and products through limited delivery methods. We believe that these
companies generally have made limited investments in content development,
marketing and the technology necessary to develop or utilize technology-based
delivery alternatives. As corporations and government entities increasingly use
external training providers, we believe that they will seek providers that can
meet a significant portion of their training and development needs by providing:
- a broad range of high-quality services and products in both customized
and standardized formats;
- specialized, industry-focused performance improvement expertise;
- effective technology-based training capable of reaching large and
geographically dispersed work forces; and
- web-based training management services for coordinating and tracking
performance improvement activities.
As a result, we believe that significant opportunities are available for
well-managed and well-capitalized companies capable of meeting these needs.
BUSINESS STRATEGY
Our objective is to become the leading single source provider of
high-quality performance improvement services and products to Fortune 1000
companies, other large and medium-sized corporations and government entities. To
achieve this objective, we are pursuing a business strategy with the following
key elements:
PROVIDE A BROAD RANGE OF SERVICES AND PRODUCTS. We offer a broad array of
customized and standardized services and products that are designed to provide
measurable improvements in performance and productivity for both employees and
organizations. In addition, we offer management consulting services that are
designed to improve our clients' overall corporate performance, and training
management services that enable our clients to better manage their performance
improvement programs. We believe that our comprehensive service and product
offerings will allow our clients the convenience of "one-stop shopping" so that
they can reduce their reliance on multiple vendors for training content and
delivery and maximize their overall performance improvement results.
UTILIZE MULTIPLE DELIVERY METHODS. We offer multiple delivery methods
including instructor-led classroom training, train-the-trainer programs, CD-ROM,
intranets, the Internet, books, and audio and video tapes. Our varied delivery
capabilities allow us to better serve the particular needs, cost objectives and
cultures of our clients.
OFFER VALUE-ADDED TRAINING. Our goal is to provide value-added services
and products that achieve measurable results for our clients. We seek to
differentiate our services and products by helping our clients assess the
returns generated by their performance improvement investments. We can perform
return-on-investment analyses for our clients, and frequently work with them to
develop key assessment metrics by which to measure outcomes.
PROVIDE SPECIALIZED INDUSTRY EXPERTISE. We have developed and continue to
develop industry-focused service and product offerings that can better satisfy
our clients' specific performance improvement needs. By leveraging our existing
industry-specific content and delivery capabilities, we can provide clients with
customized yet cost-effective performance improvement solutions. For example, we
have developed a standard point-of-sale simulator to assist companies in the
retail industry. With minor modifications, we can rapidly customize this product
to address the specific needs of other retailers who rely on point-of-sale
devices. We believe our experience and capabilities developed by serving clients
in certain industries, including the retail, automotive and telecommunications
industries, as well as the government sector, give us an important competitive
advantage in obtaining new clients in these areas.
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<PAGE> 31
GROWTH STRATEGY
Key elements of our growth strategy include:
CAPITALIZE ON CROSS-SELLING OPPORTUNITIES. We believe that significant
opportunities exist to cross-sell our services and products within our existing
client base. Most of our clients receive performance improvement services and
products from only one of the PROVANT companies. To aid in our cross-selling
efforts, we have established Greenhouse, a web-based corporate database that can
be accessed by each PROVANT company to review company-wide client relationships
and service and product capabilities. We believe that Greenhouse will allow our
salespeople to leverage these relationships and capabilities. We also have
instituted a compensation system designed to reward cross-selling. In addition,
we have assembled several cross-selling teams, comprised of individuals selected
from various PROVANT companies, to address the broad needs of major clients.
These teams recently have made proposals to clients such as Hewlett-Packard,
GMAC and K-Mart.
LEVERAGE INVESTMENTS IN TECHNOLOGY AND DEPLOY LEADING TECHNOLOGIES. A key
element of our strategy is to capitalize on the technology investments of the
PROVANT companies. Several of our companies have developed unique expertise in
content and delivery technology that can be drawn upon by other PROVANT
companies to improve their service and product capabilities. For example, we are
leveraging our investment and expertise in technology-based delivery methods to
produce CD-ROM versions of existing training content of many of the PROVANT
companies. We expect to deploy leading technologies in the delivery of many of
our services and products, including delivery through distance-based media, such
as intranets and the Internet, that can provide interactive training to
employees at multiple locations. One of our recently acquired companies is a
leading developer of web-based training. This company is helping us to deliver
web-based training systems designed to allow clients to manage training and
deliver content in a convenient, cost-effective manner.
CONTINUE TO EXPAND SALES AND MARKETING EFFORTS. We plan to establish new
client relationships and expand existing relationships. In particular, we plan
to:
- expand our sales force (which has grown from 65 individuals at the time
of the IPO to 140);
- sell more services and products through nationwide telemarketing and
e-commerce efforts;
- develop a high-level consultative sales force that can market our entire
portfolio of services and products to key accounts; and
- promote national brand identification for the PROVANT name while
preserving and enhancing the value of the established names of the
PROVANT companies.
EXPAND SERVICE AND PRODUCT OFFERINGS. We intend to continue broadening our
offering of performance improvement services and products by developing or
acquiring new or complementary services and products. We frequently ask our
clients to evaluate our service and product offerings to insure that we can
continue to effectively service their needs. Since the IPO, we have created new
services and products, including Bottom Line Buying Plus which teaches
negotiation skills to retail buyers, and our Valuing Inclusion seminar which
helps organizations' employees adapt to gender relations issues. In addition,
one of the companies we recently acquired has developed a new CD-ROM product for
its Just-in-Time Information series, which teaches managers solutions to common
management problems.
PURSUE STRATEGIC ACQUISITIONS. We intend to continue pursuing strategic
acquisitions in order to:
- broaden our existing line of services and products;
- access new technologies that expand the scope and quality of delivery
methods; and
- establish or enhance client relationships.
We seek to acquire companies with strong management, profitable operating
results and leading positions within their respective markets. We believe that
acquisitions of this nature will further enhance our ability to become the
leading single-source provider of high-quality performance improvement services
and products. Since the IPO we have completed five acquisitions, which have
given us access to new clients, performance improvement content and delivery
capabilities. In addition, we currently have letters of intent relating to two
additional acquisitions.
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<PAGE> 32
PERFORMANCE IMPROVEMENT SERVICES AND PRODUCTS
Through our services and products, our clients can provide training to
employees at virtually every level of an organization, access consulting
services that permit the organization as a whole to undergo change and utilize
web-based training management services to better manage and track their training
programs.
CUSTOMIZED AND STANDARDIZED SERVICES AND PRODUCTS. We offer customized and
standardized solutions which train employees in:
- Work skills;
- Recruitment, selection and retention;
- Customer service;
- Communications;
- Supervisory and leadership skills;
- Diversity;
- Decision making; and
- Negotiations.
Our customized services and products are designed to meet the specialized needs
of particular clients in a wide range of applications and can be accessed
through a wide variety of delivery methods.
Work Skills. We deliver a wide range of services and products to
numerous corporate and government entities that are designed to provide or
improve the skills necessary to perform a particular task or job.
Typically, our experts work closely with our clients to custom-design work
skills products, training courses and course materials. For example, we
have delivered specialized work skills training on how to operate a
manufacturing system for a paper products company, how to operate
communication switches for a telecommunications company, how to maintain
and repair equipment for a railroad, and how to provide and manage basic
medical care for Army and Navy healthcare personnel.
Recruitment, Selection and Retention. We offer services and products
designed to assist clients in hiring and retaining effective employees. In
particular, we help clients understand the skills required of their
employees, implement more effective recruitment, selection and retention
processes to maximize employee productivity, and reduce turnover rates. For
example, Behavioral Interviewing(R) teaches managers how to identify
specific job competencies required for success, interview prospective
candidates and evaluate their skills. Complementing this and similar
products are our outplacement services, which we provide to several federal
government agencies to assist in work force restructuring.
Customer Service. We offer services and products designed to increase
customer retention, customer service and sales. For example, several of our
products, including Creating Loyal Customers, Customer Service at the
Register and Professional Selling, are designed to improve customer service
in the retail workplace by simulating important retail situations and
environments in technology-based delivery formats.
Communications. We offer services and products designed to improve
public speaking/presentation and spoken communication skills. For example,
Effective Communicating 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.
Supervisory and Leadership Skills. We offer services and products
that are designed to improve employees' operational management, supervisory
and leadership skills. For example, Managing Individual and Team
Effectiveness is designed to provide managers in complex work environments
with "360-degree" feedback on their management skills, and the Just-in-Time
Information products provide solutions to common management problems on
CD-ROM.
Diversity. We offer services and products designed to help managers
and employees understand diversity issues, such as race and gender. For
example, Managing Inclusion is a multi-day session designed to help
individual managers and client companies enhance understanding of workplace
diversity,
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<PAGE> 33
build morale and satisfaction in the work force, and increase productivity
through more effective team relationships.
Decision Making. We offer services and products designed to help
improve managers' decision making skills. One way that we do this is by
creating simulations that focus on a number of objectives, including
strategic thinking, finance and sales. These interactive simulations enable
managers to "play out" important business decisions and receive immediate
feedback on their performance. For example, for a major healthcare
manufacturing client, we created a general management simulation that
helped managers from different functional areas think more interdependently
about delivering customer value.
Negotiations. We offer services and products designed to help
employees improve their negotiation skills. For example, Bottom Line Buying
Plus trains merchandise buyers to negotiate to both improve profitability
and strengthen vendor relationships.
CONSULTING AND DIAGNOSTICS. Our management consulting services are
designed to help improve overall corporate performance by assisting clients in,
among other things, assessing their strategic direction and implementing and
managing change. For example, we assisted a large trucking company in developing
alternative organization designs and cost reduction initiatives. By using our
recommendations, the company was able to undertake significant structural
changes and cost-cutting measures. We also provide our clients with a variety of
survey tools by which feedback can be gathered and analyzed on either an
organizational or individual basis. We develop the survey forms and
methodologies, conduct the surveys, and collect and analyze the data for our
corporate clients. For example, we assisted a large mortgage bank in identifying
critical areas for organizational change by administering an employee survey to
more than 10,000 employees.
TRAINING MANAGEMENT. We provide customized, organization-wide services
that allow clients to better manage a broad range of performance improvement
activities. Our web-based training management systems provide clients with an
automated approach to the enrollment, tracking and measurement of performance
improvement activities. We either install these systems at the client's site or
operate them from our site. For example, we developed a web-based training
management system for a manufacturing client that allows the client's 12,000
employees to access a course catalog, enroll in courses, take tests, review
transcripts and peruse company news and other information, and will eventually
deliver performance improvement content through the client's intranet.
DELIVERY METHODS
We offer multiple delivery methods for our performance improvement services
and products to better serve the particular needs, cost objectives and cultures
of our clients. Our primary delivery methods are described below.
INSTRUCTOR-LED TRAINING. We deliver our programs to clients' employees
primarily through the use of either salaried employees or certified contract
instructors. Most of our instructor-led training is delivered at clients'
facilities, although we also deliver certain programs at our own training
facilities. In some cases, our programs are delivered in a public seminar format
to a small group of individuals from multiple client companies or through video
conferencing. We typically provide textual materials as a part of our
instructor-led programs, and in some cases sell related supplemental materials.
We also develop custom courseware that ultimately is delivered by instructors
who are not affiliated with us. Our 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 our services and products, we train and
certify qualified employees of clients in an instructor-led program. The
certified client employees then are licensed to use our methodologies and
materials to train other employees of the client in instructor-led classes at
client sites. We supply training materials for these classes and on-going
training for the certified trainers. We receive fees for the employee-led
classes on either a per-participant or per-site basis.
TECHNOLOGY-BASED FORMATS. We increasingly deliver our products in
technology-based delivery formats, such as CD-ROM, intranets, the Internet and
other distance-based media. Because of the benefits of technology-based
training, we plan to convert some of our products to technology-based formats
that to date have been offered only in the instructor-led or train-the-trainer
formats.
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<PAGE> 34
BOOKS AND TAPES. We also deliver some of our training through books and
video and audio tapes. We offer approximately 400 titles of standardized books,
tapes and other written materials.
CLIENTS
We seek to establish long-term relationships with Fortune 1000 companies,
other large and medium-sized corporations and government entities with
substantial performance improvement needs. We have developed a broad client base
of over 1,500 corporate and government clients, with no client accounting for
more than 3% of our pro forma revenue during fiscal 1998. The following table
illustrates the wide range of industries represented by our client base:
[PROVANT CLIENT BASE GRAPHIC]
SALES AND MARKETING
Each PROVANT company maintains its own sales force. In addition, we are
implementing a national sales force of high-level consultative sales people that
can market our entire portfolio of services and products to key accounts. Our
sales force, which numbered 65 at the time of the IPO, has grown to 140 from
both acquisitions and internal growth. Through one of our acquisitions, we have
added a nationwide telesales organization, through which we intend to offer many
of our services and products. We also telemarketing through public seminars,
client referrals, direct marketing, the PROVANT companies' Web sites and trade
publications.
A key component of our marketing strategy is to cross-sell our various
services and products within our existing client base. To aid our cross-selling
efforts, we have instituted a compensation system designed to reward
cross-selling. We also have established Greenhouse, a web-based corporate
database that can be accessed by each PROVANT company to review company-wide
client relationships and service and product capabilities. Finally, we are
pursuing a marketing and advertising program to establish national brand
identification for the PROVANT name, while preserving and enhancing the value of
the established names of the PROVANT companies.
We generate 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. We may submit a proposal on our 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
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<PAGE> 35
and under Office of Personnel Management/Training Management Assistance ("OPM").
We are one of only a few training providers authorized under both funding
mechanisms. We benefit from our status as a preferred provider under certain
funding mechanisms (including the GSA and OPM vehicles) which allow us to
negotiate contracts without an RFP.
BOARD OF ADVISORS
In December 1998 we formed a Board of Advisors to guide us in identifying
emerging trends in the marketplace and areas where we should build strategic
capability through investment or acquisition. The Board of Advisors currently
consists of the following seven leaders in the performance improvement industry
who are focused on strategic consulting, leadership, executive development and
coaching, and knowledge management:
- - Frank Cespedes, Managing Partner, The Center for Executive Development and
former Harvard Business School Professor;
- - Marshall Goldsmith, Founding Director, Keilty, Goldsmith & Company;
- - Frances Hesselbein, President and Chief Executive Officer of The Peter F.
Drucker Foundation for Non-Profit Management;
- - Jerry Jasinowski, President and Chief Executive Officer of the National
Association of Manufacturers;
- - Jon Katzenbach, Author of Teams at the Top and Founder of Katzenbach Partners,
LLC;
- - Edward Lawler, III, Professor and Director of the Center for Effective
Organizations at the University of Southern California; and
- - David Ulrich, Consultant and Professor at the University of Michigan.
COMPETITION
The performance improvement industry is highly fragmented and competitive.
We believe 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 our competitors have
significantly greater financial, managerial, technical, marketing and other
resources than us. Moreover, we expect to face additional competition from new
entrants into the performance improvement market due, in part, to the evolving
nature of the market.
We compete 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 performance improvement services and products, including AchieveGlobal
(a subsidiary of the Times Mirror Company), Development Dimensions
International, EPS Solutions, The Forum Corporation, Wilson Learning
Corporation, and several large publishers of professional reference materials
who recently have entered the industry. We also occasionally compete with large
professional service companies that generally offer training services in
conjunction with strategic consulting and other client assignments of larger
scope. In addition, many of our clients and potential clients have internal
training departments.
Our competitors for government contracts include service companies such as
Booz-Allen & Hamilton, as well as contract suppliers of equipment to the
government such as Raytheon Company and Lockheed Martin Corporation.
INTELLECTUAL PROPERTY
We regard many of our performance improvement services and products as
proprietary and rely 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 our proprietary rights. There can be no assurance that third parties
will not claim that our current or future products and/or services infringe on
the proprietary rights of others.
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<PAGE> 36
EMPLOYEES
As of December 31, 1998, we employed approximately 1,060 full-time and
part-time employees. We believe that our relationships with our employees are
good. In addition, we provide certain of our services and products through
independent contractors, which as of December 31, 1998 numbered approximately
150.
FACILITIES
We lease our principal executive office located in Boston, Massachusetts,
and maintain additional leased offices in numerous locations in the United
States. We believe that our facilities are adequate to serve our current level
of operations, and that if additional facilities are required, we can find
suitable additional or alternative space on commercially reasonable terms.
LEGAL PROCEEDINGS
We are 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 our business, financial condition or results
of operations.
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<PAGE> 37
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning our directors and
executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- --------------------------------------------------------
<S> <C> <C>
Paul M. Verrochi..................... 49 Chairman and Chief Executive Officer
John H. Zenger....................... 67 President and Director
Dominic J. Puopolo................... 55 Executive Vice President, Chief Financial Officer and
Director
Rajiv Bhatt.......................... 41 Executive Vice President and Chief Operating Officer
Philip Gardner....................... 35 Vice President
Herbert A. Cohen..................... 62 Chairman - MOHR, Director
Bert Decker.......................... 58 Chairman - Decker, Director
Paul C. Green, Ph.D.................. 57 Chairman - BTI, Director
Joe Hanson........................... 41 Managing Director - Novations, Director
John F. King......................... 44 Chairman - LSS, Director
A. Carl von Sternberg................ 70 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....................... 65 Director
Esther T. Smith...................... 59 Director
</TABLE>
Paul M. Verrochi has been our Chairman of the Board and Chief Executive
Officer since May 1998. Prior to the IPO, Mr. Verrochi served as our President
and a director. 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 at the time of 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 our President and a director since May 1998. Prior
to the IPO, from May 1997 until May 1998, Mr. Zenger was a consultant to us.
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 co-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 our Executive Vice President, Chief Financial
Officer and a director since May 1998. Prior to the IPO, Mr. Puopolo served as
our Treasurer and a director. 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 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
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<PAGE> 38
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 our Executive Vice President and Chief Operating
Officer since December 1998. Mr. Bhatt also has served as our Treasurer and
Chief Accounting Officer since May 1998. From May 1998 until December 1998, Mr.
Bhatt also was our Senior Vice President. Prior to the IPO, from August 1997
until May 1998, Mr. Bhatt was a consultant to us. 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 our Vice President since May 1998. Prior to the
IPO, from February 1997 until May 1998, Mr. Gardner was a consultant to us. 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 one of our directors, 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 one of our directors 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 one of our directors, and Chairman of BTI,
since May 1998. Previously, from May 1979 until May 1998, Dr. Green was Chief
Executive Officer of BTI. 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 one of our directors 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
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<PAGE> 39
received his Masters in Business Administration degree from Brigham Young
University and his Bachelor of Science degree in Accounting from Brigham Young
University.
John F. King has been one of our directors, 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 one of our directors, 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, and
following Allen's acquisition by The Singer Company he continued to serve as
Allen's President until September 1987. Allen 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 one of our directors 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 one of our directors since May 1998. Mr. Davies
also has served as a consultant to us 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. Prior to joining The
Baltimore Sun, Mr. Davies was editor and publisher of The Hartford Courant. He
also was editor and president of The Kansas City Star and The Kansas City Times
and, before that, managing editor of The Courier Journal in Louisville,
Kentucky, and of The Louisville Times. 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 one of our directors 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. Since
May 1995, he has been a commissioner at the U.K. Monopolies and Mergers
Commission. Mr. Hammond is a director of BHI Corporation and BridgeStreet
Accommodations, Inc., and served as a director and Chairman of the Audit
Committee of AMR from 1993 until 1997.
John R. Murphy has been one of our directors 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.
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<PAGE> 40
Esther T. Smith has been one of our directors since May 1998. Since July
1998, Ms. Smith has been a principal of The Poretz Group, an investor relations
firm located in McLean, Virginia. 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 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
WomenCONNECT.com Corp.
BOARD OF DIRECTORS
The Board of Directors currently consists of 14 directors. The term of
office of each director ends at our next annual meeting of stockholders. 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 results of the
audit, including the adequacy of internal controls and financial accounting
policies, oversees or conducts special investigations or other functions on
behalf of the Board of Directors, reviews reports filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), reviews our policies and procedures with regard to our
compliance with all material applicable governmental rules and regulations and
makes recommendations with regard to strategic financial planning matters. The
Compensation Committee, consisting of Messrs. Hammond and Murphy and Ms. Smith,
makes recommendations to the Board of Directors with regard to all of our
material compensation arrangements with each of our officers and directors and,
at the request of the Board of Directors, advises the Board with respect to
matters of compensation policy of broad impact. The Compensation Committee
administers our employee equity incentive plans, determines, subject to the
provisions of our incentive plans, the directors, officers, employees and
consultants eligible to participate in any of the plans, determines the extent
of such participation and terms and conditions under which benefits may be
vested, received or exercised, and makes recommendations to the Board of
Directors with regard to the adoption of new incentive plans.
The Board of Directors also has established an Acquisition Committee
(consisting of Messrs. Puopolo, Verrochi, von Sternberg, Green and Davies), a
Strategic Planning Committee (consisting of Messrs. Zenger, Decker and Green),
and a Technology Development Committee (consisting of Ms. Smith and Messrs. King
and von Sternberg).
DIRECTOR COMPENSATION
Members of the Board of Directors who also serve us as officers or
full-time consultants 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.
In connection with the IPO, each director who was neither an employee nor
one of our stockholders as of the date of the final prospectus used in
connection with the IPO (i.e., Mr. Murphy and Ms. Smith) received an option to
purchase 7,500 shares of common stock at a per share exercise price equal to the
initial public offering price of $13.00. Each option currently is exercisable
with respect to all of the shares of common stock issuable thereunder, expires
ten years after the date of grant and is non-transferable except upon death
(unless otherwise approved by the Board of Directors). If the director dies or
otherwise ceases to be a director prior to the expiration of the option, the
option (if exercisable) remains exercisable for a period of one year (following
death) or three months (following other termination of the director's status as
a director), but in no event beyond the tenth anniversary of the date of grant.
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<PAGE> 41
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
Certain of our directors are compensated through the 1998 Stock Option Plan
for Outside Directors (the "Directors' Plan"). Subject to adjustment for stock
splits and similar events, a total of 100,000 shares of common stock are
reserved for issuance under the Directors' Plan.
The Directors' Plan is administered by the Board of Directors, which has
the power to construe and interpret the plan's terms and provisions. The
Directors' Plan permits the Board of Directors to delegate some or all of its
powers with respect to the Directors' Plan to a committee. Only directors who do
not otherwise serve us as employees or full-time consultants ("Outside
Directors") are eligible to participate in the Directors' Plan. Messrs. Hammond
and Murphy and Ms. Smith currently are the only Board members who are entitled
to participate.
On the date of each annual meeting of stockholders, each Outside Director
continuing in office will be granted an option to purchase a number of shares of
common stock to be determined by the Board of Directors on that date, and any
newly-elected Outside Director will be granted an option covering 7,500 shares
of common stock. The exercise price for each option granted under the Directors'
Plan will be the last sale price of a share of common stock as reported on
Nasdaq on the date the option is granted.
All options granted under the Directors' Plan will become fully exercisable
six months after the date of grant. Upon an Outside Director's departure from
the Board of Directors by reason of death, all options that are not then
exercisable will terminate and options that are exercisable on the date of death
may be exercised by the Outside Director's executor or administrator, or by the
person or persons to whom the option is transferred by will or the applicable
laws of descent and distribution, only during the subsequent one-year period. If
an Outside Director ceases to be a director for any other reason, all options
held by the Outside Director that are not then exercisable will terminate and
options that are exercisable at that time will continue to be exercisable only
during the subsequent three-month period. In the event that a transaction occurs
that results or will result in the common stock not being registered under
Section 12 of the Exchange Act, all options held by Outside Directors will
terminate. If the transaction is intended to be treated as a pooling-of-
interests for accounting purposes, the Board of Directors will cause the
acquiring or surviving corporation or one of its affiliates to grant replacement
options to participants. Otherwise, the Board of Directors may either accelerate
the exercisability of all outstanding options or terminate all options in
exchange for a cash payment. In all other events, options granted under the
Directors' Plan will remain exercisable until the tenth anniversary of the date
of grant. Generally, no option may be transferred other than by will or the laws
of descent and distribution.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table contains a summary of the compensation paid or accrued
during fiscal 1998 to our Chief Executive Officer and our three other most
highly compensated executive officers (collectively, the "Named Executive
Officers," and each, a "Named Executive Officer").
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION OPTIONS
--------------------------- ---- -------- ------------ ------------
<S> <C> <C> <C> <C>
Paul M. Verrochi................................... 1998 $ 8,333 $2,400(1) 43,298(2)
Chairman and Chief Executive Officer
John H. Zenger..................................... 1998 25,000 -- 100,000
President
Dominic J. Puopolo................................. 1998 8,333 2,400(1) 43,298(2)
Executive Vice President and Chief Financial
Officer
Rajiv Bhatt........................................ 1998 239,947(3) -- 50,000
Executive Vice President and Chief Operating
Officer
</TABLE>
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<PAGE> 42
- ---------------
(1) Consists of car allowance.
(2) Excludes 389,686 shares issuable upon the exercise of warrants described in
"Certain Transactions."
(3) Includes $206,614 in compensation paid prior to the IPO while Mr. Bhatt was
a full-time consultant to us.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to stock
options we granted during fiscal 1998 to each of the Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERMS
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------------
GRANTED(1) FISCAL YEAR ($/SHARE) DATE 5% 10%
---------- ------------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Paul M. Verrochi.......... 43,298 5.7% $13.00 4/28/05 $229,146 $ 534,008
John H. Zenger............ 100,000 13.3 13.00 4/28/05 529,231 1,233,332
Dominic J. Puopolo........ 43,298 5.7 13.00 4/28/05 229,146 534,008
Rajiv Bhatt............... 50,000 6.6 13.00 4/28/05 264,615 616,666
</TABLE>
- ---------------
(1) The options granted to Messrs. Zenger and Bhatt each become exercisable with
respect to one-third of the shares issuable thereunder on each of April 28,
1999, 2000 and 2001. Upon the occurrence of certain events constituting a
change in control, the options will be affected as discussed in "-- Equity
Incentive Plan."
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
There were no options exercised by any of the Named Executive Officers
during fiscal 1998. The following table indicates the aggregate value of all
options held by each Named Executive Officer as of June 30, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT JUNE 30, 1998 THE-MONEY OPTIONS AT
---------------------------- JUNE 30, 1998(1)
NUMBER OF NUMBER OF ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
SHARES SHARES VALUE VALUE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Paul M. Verrochi......................... 43,298 -- $232,727 $ --
John H. Zenger........................... -- 100,000 -- 537,500
Dominic J. Puopolo....................... 43,298 -- 232,727 --
Rajiv Bhatt.............................. -- 50,000 -- 268,750
</TABLE>
- ---------------
(1) Value of unexercised options based upon $18.375, the closing price of the
Common Stock on Nasdaq on June 30, 1998.
EMPLOYMENT AGREEMENTS
We have employment agreements with each of the Named Executive Officers.
Each such agreement 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
Board of Directors) and participation in our bonus and benefit plans. The base
salaries to be paid to Messrs. Verrochi, Zenger, Puopolo and Bhatt under their
employment agreements for fiscal 1999 are $50,000, $150,000 $50,000 and
$275,000, respectively. The salaries to be paid to Messrs. Verrochi and Puopolo
after the first year of the term of their employment agreements are not
specified in their respective employment agreement, but rather will be
determined by the Board of Directors in its sole discretion. Each agreement 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 Named Executive Officers
does not continue to be employed by us upon the expiration of his agreement, the
Named Executive Officer is entitled to receive six months' severance at his base
salary as in effect at the time of expiration. Each of the Named Executive
Officers has agreed not to compete with us for a period that expires on May 4,
2003.
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<PAGE> 43
EQUITY INCENTIVE PLAN
Our 1998 Equity Incentive Plan 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 of our directors and
employees, and all consultants and advisors, 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, 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 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.
As of December 31, 1998, options to purchase 1,021,619 shares of common
stock were outstanding under the Equity Incentive Plan.
NON-QUALIFIED STOCK OPTION PLAN
Our 1998 Non-Qualified Stock Option Plan provides for the award of up to
500,000 shares of common stock in the form of non-qualified stock options. All
of our employees who are neither directors nor officers are eligible to
participate in the Non-Qualified Plan.
The Non-Qualified Plan is administered and interpreted by the Committee,
which selects the recipients of options, determines the terms and conditions of
the options, prescribes the form or forms of instruments evidencing options from
time to time, and decides any questions and settles all controversies and
disputes that may arise in connection with the plan. 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 options granted under
the Non-Qualified Plan 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) shall cause the acquiring or
surviving corporation or one of its affiliates to grant replacement options to
participants. Otherwise, the Committee (or the Board) may either accelerate the
exercisability of all outstanding options (subject to completion of the
transaction) or terminate all options in exchange for cash payments.
As of December 31, 1998, options to purchase 294,900 shares of common stock
were outstanding under the Non-Qualified Plan.
STOCK PURCHASE PLAN
Our 1998 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 our stock, will be
eligible to
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<PAGE> 44
participate. Purchases 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 is 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 are reserved for issuance under the Employee
Stock Purchase Plan. As of December 31, 1998, 17,221 shares have been issued.
LIMITATION OF CERTAIN LIABILITY OF OFFICERS AND DIRECTORS
As permitted by the Delaware General Corporation Law (the "DGCL"), our
Certificate of Incorporation provides for the elimination, subject to certain
conditions, of the personal liability of our directors 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 us or
our stockholders. Our Certificate of Incorporation and By-laws also provide that
we will indemnify our directors and officers. In addition, we maintain an
indemnification insurance policy covering all of our directors and officers. In
general, our 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 our Certificate of Incorporation
and By-laws and the indemnification insurance policy, we will repay certain
expenses incurred by a director or officer in connection with any civil or
criminal action or proceeding, specifically including actions by us or in our
name (derivative suits), where the individual's involvement is by reason of the
fact that he or she is or was one of our directors or officers. 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, our best interests.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of January 11, 1999
regarding the beneficial ownership of our common stock by each of our directors,
the Named Executive Officers, and greater than 5% stockholders known to us.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
--------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
------------------------ --------- -------
<S> <C> <C>
Paul M. Verrochi(2)(3)...................................... 1,190,203 9.6
John H. Zenger(4)........................................... 196,197 1.6
Dominic J. Puopolo(2)(5).................................... 1,112,524 8.9
Rajiv Bhatt................................................. 99,567 *
Herbert A. Cohen(6)......................................... 183,459 1.5
Michael J. Davies(7)........................................ 371,632 3.0
Bert Decker................................................. 335,031 2.7
Paul C. Green, Ph.D(8)...................................... 529,940 4.3
David B. Hammond(9)......................................... 44,643 *
Joe Hanson.................................................. 96,935 *
John F. King(10)............................................ 327,732 2.7
John R. Murphy(11).......................................... 11,500 *
Esther T. Smith(11)......................................... 9,500 *
A. Carl von Sternberg(12)................................... 386,525 3.2
Marc S. Wallace............................................. 97,477 *
All executive officers and directors as a group (16
persons)(13).............................................. 5,332,686 41.9
</TABLE>
- ---------------
* Less than 1%
(1) Except as otherwise indicated, the persons named in this table have sole
investment and voting power with respect to the shares beneficially owned
by them. Percentages in the table are based upon 12,231,137 shares of
common stock outstanding.
(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
currently 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. Mr. Verrochi's address is c/o
PROVANT, Inc., 67 Batterymarch Street, Suite 600, Boston, MA 02110.
(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. Mr. Puopolo's address is c/o
PROVANT, Inc., 67 Batterymarch Street, Suite 600, Boston, MA 02110.
(6) Includes 91,229 shares held by Mr. Cohen's wife.
(7) Includes 50,000 shares issuable upon the exercise of an option that
currently is exercisable.
(8) Includes 900 shares held by members of Dr. Green's family.
(9) Shares are held by a corporation of which the sole stockholders are Mr.
Hammond and his wife.
(10) Shares are held jointly with Mr. King's wife.
(11) Includes 7,500 shares issuable upon the exercise of an option that
currently is exercisable.
(12) 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.
(13) See notes 2 through 12 above.
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<PAGE> 46
CERTAIN TRANSACTIONS
ORGANIZATION OF PROVANT
The Combination was accomplished through separate mergers of the seven
Founding Companies, all providers of performance improvement services and
products, with seven of our subsidiaries. As a result, all of the assets,
liabilities and business operations formerly held by each Founding Company
currently exist in a separate subsidiary.
The aggregate consideration paid by us at the closing of the Combination
was $69.4 million, consisting of $24.5 million in cash and 3,459,341 shares of
common stock. In addition, we assumed indebtedness of the Founding Companies
aggregating approximately $7 million as of March 31, 1998. Our agreements with
five of the Founding Companies provided for the payment of additional,
contingent consideration based on those companies' performance during fiscal
1998. Through January 11, 1998, we had issued as contingent consideration
901,115 shares of common stock pursuant to agreements with these companies.
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 EBIT are reached. J.
Howard's merger agreement contains a targeted pro forma EBIT amount for fiscal
1999 in excess of a baseline figure which, if achieved, will result in our
payment to the former stockholders of J. Howard of the maximum J. Howard
Contingent Consideration (consisting of a multiple of the excess EBIT amount).
To the extent J. Howard does not achieve the targeted amount, its former
stockholders will receive a lesser amount of J. Howard Contingent Consideration
proportionately related to the excess above the baseline figure. Shares of
common stock 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 the first public announcement of our
financial results for fiscal 1999.
For the seventh Founding Company, Star Mountain, we have agreed to make a
future payment in additional shares of common stock or cash (the "Star Mountain
Contingent Consideration") in accordance with a formula based on the amount by
which the EBIT of Star Mountain for fiscal 1999 exceeds a specified EBIT target.
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.
In connection with the Combination, the following individuals who became
directors upon the closing of the IPO and who were principal stockholders and
officers of the Founding Companies received the following amounts: Mr. Cohen,
$655,520 and 189,411 shares of common stock (including cash and shares issued to
his wife); Mr. Decker, $759,623 and 334,931 shares of common stock; Dr. Green,
$4,554,713 and 528,840 shares of common stock; Mr. Hanson, $498,753 and 96,935
shares of common stock; Mr. King, $1,569,714 and 327,732 shares of common stock;
Mr. von Sternberg, $2,559,234 and 496,693 shares of common stock (including cash
and shares issued to his wife); and Mr. Wallace, $754,890 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
us 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 our
subsidiaries. Each such agreement with 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 employer's sole discretion, and
in most cases participation in our 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 employer upon the expiration of the agreement, the individual
will be entitled to receive six months' severance at his base salary as in
effect at the time of expiration.
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<PAGE> 47
Certain indebtedness of the Founding Companies was personally guaranteed by
their respective stockholders. We repaid such indebtedness from the net proceeds
of the IPO and the guarantees were released. In particular, we 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.
The former stockholders of the Founding Companies have agreed that until
May 4, 2000 they will not sell any shares of common stock received by them in
connection with the Combination other than pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "Securities Act").
Our stockholders prior to the closing of the IPO and the Combination agreed to
identical restrictions on all shares of common stock held by them from time to
time. Except with respect to the shares issuable upon the exercise of the
warrants described below, we have no obligation to provide a registration
statement with respect to any of the shares held by our stockholders. However,
in the event we decide to register in an underwritten public offering any shares
received by any stockholder in the Combination, any shares of common stock
issued (or issuable pursuant to options and warrants granted by us) prior to the
date of the final prospectus used in connection with the IPO or certain shares
issued by us in post-IPO acquisitions, we must give the holders of these shares
and options the opportunity to register and sell in the offering a pro rata
amount of their shares.
OTHER TRANSACTIONS
Organization of PROVANT
In connection with the founding and organization of PROVANT, Messrs.
Verrochi, Zenger, Puopolo, Davies and Philip Gardner purchased the following
shares of common stock for an aggregate purchase price of approximately $2,900:
Mr. Verrochi, 977,461 shares; Mr. Zenger, 295,078 shares; Mr. Puopolo, 901,782
shares; Mr. Davies, 320,632 shares; and Mr. Gardner, 339,821 shares.
American Business Partners LLC
During 1997, certain members of the management team and certain of our
consultants were assembled by American Business Partners LLC ("ABP") to pursue
the formation of PROVANT. Mr. Verrochi, our Chairman of the Board and Chief
Executive Officer, and Mr. Puopolo, our Executive Vice President, Chief
Financial Officer and a director, are members of ABP. ABP provided us with
expertise regarding the consolidation process.
Expenses that we paid prior to the closing of and in connection with the
Combination and the IPO were financed with funds advanced to us by Messrs.
Verrochi and Puopolo. Amounts advanced accrued interest at an annual rate equal
to the prime rate of interest as from time to time published in The Wall Street
Journal. We 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 initial public offering 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 if and when the market
price of the common stock increases to $26, $39 and $52 per share, respectively,
and the remaining 40% of the total number of shares issuable under the
Contingent Warrant will become exercisable if and when the market price of the
common stock increases to $65 per share. However, under certain circumstances
involving the merger or sale of PROVANT, 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 May 4, 1998. Specifically,
the exercise price is equal to the initial public offering price of $13.00 for
the first 12 months following the closing of the IPO and, for each 12 month
period thereafter, is equal to $13.00 plus the product of $1.30 and the number
of full 12 month periods elapsed since May 4, 1998. 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
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<PAGE> 48
have the right to require us to register the resale of the shares they may
acquire upon exercise under the Securities Act.
In June 1997, Messrs. Verrochi and Puopolo sold us furniture and equipment
for our corporate executive offices for an aggregate purchase price of $150,000.
We believe that the purchase price approximated the fair market value of the
furniture and equipment.
OTHER TRANSACTIONS INVOLVING OFFICERS AND DIRECTORS
Michael J. Davies, who became one of our directors upon the consummation of
the IPO, also became a full-time consultant at that time. For the performance of
his consulting duties, we currently pay Mr. Davies an annual fee of $125,000. In
addition, in consideration for his agreement to become a consultant, we granted
Mr. Davies 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.
We 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 performance
improvement industry developed by Mr. Davies while he served as a Managing
Director at that company.
As a result of the Combination, one of our subsidiaries became a party to a
six-year lease of administrative offices, effective January 1, 1996, from Paul
C. Green, Ph.D., who is one of our directors. For the year ended June 30, 1998,
rent expense paid to Dr. Green pursuant to the lease was approximately $83,200.
We believe that the terms of the lease are no less favorable than what we could
have obtained from non-affiliated third parties.
As a result of the Combination, one of our subsidiaries 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 former stockholders of
Novations. Joe Hanson, one of the members of the LLC, is one of our directors.
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. That
subsidiary 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. We believe that the terms of the lease and sublease are no less
favorable than what we could have 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, one of our directors, 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 have been repaid by Mr. von
Sternberg.
In December 1997, Marc S. Wallace, one of our directors, 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 have been repaid by
Mr. Wallace.
PROVANT POLICY
Our policy is that any future transactions with directors, officers,
employees or affiliates be approved in advance by a majority of the Board of
Directors, including a majority of the disinterested members of the Board, and
be on terms no less favorable than what we could obtain from non-affiliated
parties.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
We are authorized to issue 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. As of January 11, 1999, we had outstanding 12,231,137
shares of common stock held of record by 163 stockholders, and no shares of
preferred stock.
COMMON STOCK
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 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 our affairs, holders of common stock will be
entitled to share ratably in our assets that are remaining after payment or
provision for payment of all of our 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 we have
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 PROVANT or an unsolicited
acquisition proposal.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS AND STOCKHOLDER NOMINATIONS
OF DIRECTORS
Our By-laws establish an advance notice procedure with regard to the
nomination by our stockholders of candidates for election as directors (the
"Nomination Procedure") and with regard to other matters to be brought by
stockholders before a meeting of our stockholders (the "Business Procedure").
The Nomination Procedure requires that a stockholder give written notice to
our Secretary, delivered to or mailed and received at our principal executive
offices neither less than 60 days nor more than 90 days prior to the meeting, in
proper form, of a planned nomination for the Board of Directors. Detailed
requirements as to the form and timing of that notice are specified in the
By-laws. If the Chairman determines that a person was not nominated in
accordance with the Nomination Procedure, such person will not be eligible for
election as a director.
Under the Business Procedure, a stockholder seeking to have any business
conducted at any meeting must give written notice to our Secretary, delivered to
or mailed and received at our principal executive offices neither less than 60
days nor more than 90 days prior to the meeting, in proper form, subject to the
requirements of the proxy solicitation rules under the Exchange Act. Detailed
requirements as to the form and timing of that notice are specified in the
By-laws. If the Chairman determines that the other business was not properly
brought before such meeting in accordance with the Business Procedure, such
business will not be conducted at such meeting.
Although the By-laws do not give the Board of Directors any power to
approve or disapprove of stockholder nominations for the election of directors
or of any other business desired by stockholders to be
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<PAGE> 50
conducted at an annual or any other meeting, the By-laws (i) may have the effect
of precluding nominations for the election of directors or precluding the
conduct of business at a particular annual meeting if the proper procedures are
not followed or (ii) may discourage or deter a third party from conducting a
solicitation of proxies to elect its own slate of directors or otherwise
attempting to obtain control of PROVANT, even if the conduct of such
solicitation or such attempt might be beneficial to us and our stockholders.
OTHER PROVISIONS
Special Meetings of Stockholders. Our By-laws provide that a special
meeting of our stockholders only may be called by the President, the Chairman of
the Board or by order of the Board of Directors. The By-laws do not authorize
the stockholders to call a special meeting of stockholders, potentially limiting
the stockholders' ability to offer proposals between annual meetings if no
special meetings are otherwise called by the President, Chairman or the Board.
No Action by Written Consent. Our Certificate of Incorporation does not
permit our stockholders to act by written consent. As a result, any action to be
taken by our stockholders must be taken at a duly called meeting of the
stockholders.
STATUTORY BUSINESS COMBINATIONS PROVISION
We are 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 common stock is BankBoston, N.A.
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<PAGE> 51
SHARES ELIGIBLE FOR FUTURE SALE
We currently have 12,231,137 shares of common stock issued and outstanding,
and as of December 31, 1998 had 1,687,907 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 one or more
of our "affiliates" (as that term is defined under the rules and regulations of
the Securities Act), 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, 1,100,000 shares are reserved for issuance under the
Equity Incentive Plan, 500,000 shares are reserved for issuance under the
Employee Stock Purchase Plan and 500,000 shares are reserved for issuance under
the Non-Qualified Plan. We have 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 Equity Incentive Plan,
Employee Stock Purchase Plan and Non-Qualified 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. We intend to file promptly a registration statement under
the Securities Act to register the 100,000 shares of common stock issuable
pursuant to the exercise of options granted and to be granted under the
Directors' Plan.
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
us and the date on which they were acquired from an affiliate, then the holder
of such restricted securities (including an affiliate) is entitled to sell that
number of shares within any three-month period that does not exceed the greater
of (i) one percent of the then outstanding shares of common stock or (ii) the
average weekly reported volume of trading of common stock during the four
calendar weeks preceding such sale. The shares of common stock issued as
contingent consideration in the Combination, as well as any shares of common
stock that may be issued as 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 us. 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 us 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.
Notwithstanding any ability they may have to sell common stock under Rule
144, the stockholders of the Founding Companies, all of our stockholders prior
to the IPO and stockholders who received substantially all of the shares of
common stock issued in connection with our post-IPO acquisitions to date have
agreed to certain transfer restrictions for a two-year period on all shares of
common stock held or (in some cases) to be held by them. See "Certain
Transactions -- Organization of PROVANT."
Sales or the availability for sale of substantial amounts of common stock
in the public market could adversely affect prevailing market prices and our
ability to raise equity capital in the future.
PLAN OF DISTRIBUTION
This prospectus relates to 3,000,000 shares of common stock that we may
offer and issue from time to time in connection with acquisitions. We have
issued 1,316,243 shares through December 31, 1998 and a currently undeterminable
number of shares may become issuable as contingent consideration under this
prospectus with respect to acquisitions completed before that date.
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We think most of our acquisitions will be within the performance
improvement industry. If the opportunity arises, however, we may make
complementary or advantageous acquisitions of companies in other lines of
business. We will pay for our acquisitions with shares of common stock, cash,
promissory notes, assumptions of liabilities or a combination, as determined by
negotiations between us and the owners or controlling persons of the companies
to be acquired. However, for acquisitions of companies whose ownership interests
are more widely held, we may make exchange offers to stockholders or solicit the
approval of statutory mergers, consolidations or sales of assets. The shares of
common stock issued in any acquisition typically will be valued at a price
related to the trading price of the common stock either at the time of the
agreement on the terms of an acquisition or at or about the time we deliver the
shares.
It is not expected that underwriting discounts or commissions will be paid
by us 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 in
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 us 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
those 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 us by Nutter, McClennen & Fish, LLP, Boston, Massachusetts.
EXPERTS
The financial statements of PROVANT, Inc. and Subsidiaries as of June 30,
1997 and 1998 and for the periods from November 16, 1996 (date of inception) to
June 30, 1997 and July 1, 1997 to June 30, 1998, 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 and for the period from January 1, 1998 to May 4, 1998), have been
included herein and in the registration statement we have filed with the SEC 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.
The financial statements of American Media Incorporated as of and for the
years ended June 30, 1997 and 1998 have been included in this prospectus in
reliance on the report of McGladrey & Pullen, LLP, certified public accountants,
appearing elsewhere herein, upon the authority of said firm as experts in giving
said reports.
The financial statements of KC Resources Creative Solutions, Inc. as of and
for the year ended June 30, 1998 have been included in this prospectus in
reliance on the report of KPMG Peat Marwick LLP, independent certified
independent accountants, appearing elsewhere herein, upon the authority of said
firm as experts in giving said reports.
The financial statements of Strategic Interactive, Inc. as of and for the
years ended June 30, 1997 and 1998 have been included in this prospectus in
reliance on the report of Plante & Moran, LLP, certified public accountants,
appearing elsewhere herein, upon the authority of said firm as experts in giving
said reports.
51
<PAGE> 53
AVAILABLE INFORMATION
We have filed with the SEC a registration statement on Form S-4 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 or in amendments, if any, to
the registration statement, and you should look at the registration statement
and the exhibits and schedules thereto for further information with respect to
PROVANT and the common stock offered hereby. Statements contained in this
prospectus concerning the provisions or contents of any contract, agreement or
any other document 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 the exhibit for a more complete description
of the matters involved. We file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
materials that we file at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. We file information
electronically with the SEC. The SEC maintains an Internet site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC. The address of the SEC's Internet
site is http://www.sec.gov.
The Company furnishes its stockholders with annual reports containing
audited consolidated financial statements and an opinion thereon expressed by an
independent public accounting firm.
52
<PAGE> 54
INDEX TO FINANCIAL STATEMENTS
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROVANT, INC. PRO FORMA:
Basis of Presentation..................................... F-4
Unaudited Pro Forma Consolidated Balance Sheet............ F-5
Unaudited Pro Forma Consolidated Statements of
Operations............................................. F-6
Notes to Unaudited Pro Forma Consolidated Financial
Statements............................................. F-8
PROVANT, INC. AND SUBSIDIARIES HISTORICAL:
Unaudited Consolidated Financial Statements
Unaudited Consolidated Balance Sheet...................... F-12
Unaudited Consolidated Statements of Operations........... F-13
Unaudited Consolidated Statements of Cash Flows........... F-14
Notes to Unaudited Consolidated Financial Statements...... F-15
Audited Consolidated Financial Statements
Independent Auditors' Report.............................. F-17
Consolidated Balance Sheets............................... F-18
Consolidated Statements of Operations..................... F-19
Consolidated Statements of Stockholders' Equity
(Deficit).............................................. F-20
Consolidated Statements of Cash Flows..................... F-21
Notes to Consolidated Financial Statements................ F-22
FOUNDING COMPANIES
- ------------------------------------------------------------
BEHAVIORAL TECHNOLOGY, INC.:
Independent Auditors' Report.............................. F-35
Balance Sheets............................................ F-36
Statements of Operations.................................. F-37
Statements of Stockholders' Equity........................ F-38
Statements of Cash Flows.................................. F-39
Notes to Financial Statements............................. F-40
DECKER COMMUNICATIONS, INC.:
Independent Auditors' Report.............................. F-43
Balance Sheets............................................ F-44
Statements of Operations.................................. F-45
Statements of Stockholders' Equity........................ F-46
Statements of Cash Flows.................................. F-47
Notes to Financial Statements............................. F-48
J. HOWARD & ASSOCIATES, INC.:
Independent Auditors' Report.............................. F-52
Balance Sheets............................................ F-53
Statements of Operations.................................. F-54
Statements of Stockholders' Equity........................ F-55
Statements of Cash Flows.................................. F-56
Notes to Financial Statements............................. F-57
</TABLE>
F-1
<PAGE> 55
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
LEARNING SYSTEMS SCIENCES (ROBERT STEINMETZ, PH.D., AND
ASSOCIATES, INC. ):
Independent Auditors' Report.............................. F-60
Balance Sheets............................................ F-61
Statements of Operations.................................. F-62
Statements of Stockholders' Equity........................ F-63
Statements of Cash Flows.................................. F-64
Notes to Financial Statements............................. F-65
MOHR RETAIL LEARNING SYSTEMS, INC.:
Independent Auditors' Report.............................. F-68
Balance Sheets............................................ F-69
Statements of Operations.................................. F-70
Statements of Stockholders' Equity........................ F-71
Statements of Cash Flows.................................. F-72
Notes to Financial Statements............................. F-73
NOVATIONS GROUP, INC.:
Independent Auditors' Report.............................. F-76
Balance Sheets............................................ F-77
Statements of Operations.................................. F-78
Statements of Stockholders' Equity........................ F-79
Statements of Cash Flows.................................. F-80
Notes to Financial Statements............................. F-81
STAR MOUNTAIN, INC. AND SUBSIDIARIES:
Independent Auditors' Reports............................. F-85
Consolidated Balance Sheets............................... F-87
Consolidated Statements of Operations..................... F-88
Consolidated Statements of Stockholders' Equity........... F-89
Consolidated Statements of Cash Flows..................... F-90
Notes to Consolidated Financial Statements................ F-92
COMPANIES ACQUIRED SUBSEQUENT TO MAY 4, 1998
- ------------------------------------------------------------
AMERICAN MEDIA INCORPORATED:
Independent Auditor's Report.............................. F-99
Balance Sheets............................................ F-100
Statements of Income...................................... F-101
Statements of Stockholders' Equity........................ F-102
Statements of Cash Flows.................................. F-103
Notes to Financial Statements............................. F-104
KC RESOURCES CREATIVE SOLUTIONS, INC.:
Independent Auditors' Report.............................. F-108
Balance Sheet............................................. F-109
Statement of Operations................................... F-110
Statement of Stockholders' Equity......................... F-111
Statement of Cash Flows................................... F-112
Notes to Financial Statements............................. F-113
</TABLE>
F-2
<PAGE> 56
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STRATEGIC INTERACTIVE, INC.:
Independent Auditor's Report.............................. F-118
Balance Sheets............................................ F-119
Statements of Operations.................................. F-120
Statements of Stockholders' Equity........................ F-121
Statements of Cash Flows.................................. F-122
Notes to Financial Statements............................. F-123
</TABLE>
F-3
<PAGE> 57
PROVANT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma consolidated statements of operations
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, (iii)
PROVANT's acquisition subsequent to the IPO of five additional performance
improvement companies (the "Acquired Companies") and (iv) certain other
transactions described in the notes to the unaudited pro forma consolidated
financial statements, as if all of those transactions had occurred on July 1,
1997.
The unaudited pro forma consolidated balance sheet gives effect to
PROVANT's acquisition of three companies during the second quarter of fiscal
1999 as if those acquisitions had occurred on September 30, 1998.
These pro forma financial statements are based on the historical financial
statements of PROVANT, the Founding Companies and the Acquired Companies and the
estimates and assumptions set forth in the notes to the unaudited pro forma
consolidated financial statements.
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 consolidated financial statements do not
purport to represent what PROVANT's results of operations actually would have
been had such events occurred at the beginning of the periods presented, as
assumed, or to project PROVANT's financial position or results of operations for
any future period or the future results of the Founding Companies or the
Acquired Companies. The unaudited pro forma consolidated financial statements
should be read in conjunction with the historical financial statements and
related notes included elsewhere in this prospectus.
F-4
<PAGE> 58
PROVANT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANIES ACQUIRED
SUBSEQUENT TO ACQUISITION PRO FORMA
PROVANT SEPTEMBER 30, 1998 TOTAL ADJUSTMENTS CONSOLIDATED
-------- ------------------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................... $ 2,811 $3,054 $ 5,865 $(5,594) $ 271
Accounts receivable, net....................... 13,728 2,344 16,072 (90) 15,982
Contracts receivable........................... 8,048 -- 8,048 -- 8,048
Inventory...................................... 3,495 19 3,514 -- 3,514
Deferred income taxes.......................... 2,146 -- 2,146 1,253 3,399
Costs in excess of billings.................... 867 738 1,605 -- 1,605
Prepaid and other current assets............... 1,425 98 1,523 (387) 1,136
-------- ------ -------- ------- --------
Total current assets........................ 32,520 6,253 38,773 (4,818) 33,955
Property and equipment, net...................... 3,224 1,547 4,771 (370) 4,401
Other assets..................................... 733 94 827 -- 827
Goodwill, net.................................... 65,482 -- 65,482 27,676 93,158
-------- ------ -------- ------- --------
Total assets................................ $101,959 $7,894 $109,853 $22,488 $132,341
======== ====== ======== ======= ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................... $ 3,599 $ 110 $ 3,709 $ -- $ 3,709
Accrued expenses............................... 7,336 99 7,435 2,109 9,544
Accrued compensation........................... 3,419 846 4,265 -- 4,265
Billings in excess of costs.................... 3,166 201 3,367 -- 3,367
Deferred revenue............................... 514 1,061 1,575 -- 1,575
Income taxes payable........................... 2,018 107 2,125 -- 2,125
Current portion of long term debt.............. 552 136 688 -- 688
-------- ------ -------- ------- --------
Total current liabilities................... 20,604 2,560 23,164 2,109 25,273
Long term debt, net of current portion........... 8,402 168 8,570 13,700 22,270
-------- ------ -------- ------- --------
Total liabilities........................... 29,006 2,728 31,734 15,809 47,543
Stockholders' Equity:
Common stock................................... 102 60 162 (49) 113
Additional paid-in capital..................... 74,513 478 74,991 11,356 86,347
Retained earnings (accumulated deficit)........ (1,662) 4,628 2,966 (4,628) (1,662)
-------- ------ -------- ------- --------
Total stockholders' equity.................. 72,953 5,166 78,119 6,679 84,798
-------- ------ -------- ------- --------
Total liabilities and stockholders'
equity.................................... $101,959 $7,894 $109,853 $22,488 $132,341
======== ====== ======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
F-5
<PAGE> 59
PROVANT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOUNDING COMPANIES -- PERIOD FROM JULY 1, 1997 TO MAY 4, 1998
PROVANT ---------------------------------------------------------------------
YEAR ENDED STAR
JUNE 30, 1998 BTI DECKER J. HOWARD LSS MOHR NOVATIONS MOUNTAIN
------------- ------- ------ --------- ------ ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue............... $14,189 $ 6,567 $8,729 $5,565 $5,632 $3,237 $9,228 $23,496
Cost of revenue............. 6,374 1,243 2,275 1,826 2,030 1,009 4,356 13,409
------- ------- ------ ------ ------ ------ ------ -------
Gross profit................ 7,815 5,324 6,454 3,739 3,602 2,228 4,872 10,087
Selling, general and
administrative expenses... 10,447 6,648 5,696 4,253 1,751 1,510 3,956 7,754
Goodwill amortization....... 245 -- -- -- -- -- -- 77
------- ------- ------ ------ ------ ------ ------ -------
Income (loss) from
operations................ (2,877) (1,324) 758 (514) 1,851 718 916 2,256
Other income (expense),
net....................... -- 2 3 -- -- -- -- --
Interest income (expense),
net....................... (220) 29 8 11 13 5 (196) (162)
------- ------- ------ ------ ------ ------ ------ -------
Income (loss) before income
taxes..................... (3,097) (1,293) 769 (503) 1,864 723 720 2,094
Income tax expense
(benefit)................. (203) 15 17 1 19 2 367 878
------- ------- ------ ------ ------ ------ ------ -------
Net income (loss)........... $(2,894) $(1,308) $ 752 $ (504) $1,845 $ 721 $ 353 $ 1,216
======= ======= ====== ====== ====== ====== ====== =======
Earnings per common share:
Basic.......................
Diluted.....................
Weighted average common
shares outstanding:
Basic.......................
Diluted.....................
<CAPTION>
COMPANIES ACQUIRED COMBINATION
SUBSEQUENT TO AND ACQUISITION PRO FORMA
MAY 4, 1998 TOTAL ADJUSTMENTS CONSOLIDATED
------------------ -------- --------------- ------------
<S> <C> <C> <C> <C>
Total revenue............... $37,265 $113,908 $ 1,419 $ 115,327
Cost of revenue............. 15,249 47,771 1,056 48,827
------- -------- ------- -----------
Gross profit................ 22,016 66,137 363 66,500
Selling, general and
administrative expenses... 17,024 59,039 (8,330) 50,709
Goodwill amortization....... -- 322 2,026 2,348
------- -------- ------- -----------
Income (loss) from
operations................ 4,992 6,776 6,667 13,443
Other income (expense),
net....................... (17) (12) -- (12)
Interest income (expense),
net....................... 49 (463) (1,261) (1,724)
------- -------- ------- -----------
Income (loss) before income
taxes..................... 5,024 6,301 5,406 11,707
Income tax expense
(benefit)................. 1,281 2,377 3,245 5,622
------- -------- ------- -----------
Net income (loss)........... $ 3,743 $ 3,924 $ 2,161 $ 6,085
======= ======== ======= ===========
Earnings per common share:
Basic....................... $ 0.54
===========
Diluted..................... $ 0.52
===========
Weighted average common
shares outstanding:
Basic....................... 11,311,801
===========
Diluted..................... 11,731,105
===========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
F-6
<PAGE> 60
PROVANT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANIES ACQUIRED
SUBSEQUENT TO ACQUISITION PRO FORMA
PROVANT MAY 4, 1998 TOTAL ADJUSTMENTS CONSOLIDATED
------- ------------------ ------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total revenue....................... $23,710 $7,694 $31,404 $ -- $ 31,404
Cost of revenue..................... 10,148 3,027 13,175 -- 13,175
------- ------ ------- ----- -----------
Gross profit................... 13,562 4,667 18,229 -- 18,229
Selling, general, and administrative
expenses.......................... 10,593 3,653 14,246 (172) 14,074
Goodwill amortization............... 380 -- 380 211 591
------- ------ ------- ----- -----------
Income (loss) from
operations................... 2,589 1,014 3,603 (39) 3,564
Interest expense, net............... 3 1 4 418 422
------- ------ ------- ----- -----------
Income (loss) before income
taxes........................ 2,586 1,013 3,599 (457) 3,142
Income tax expense (benefit)........ 1,187 (72) 1,115 378 1,493
------- ------ ------- ----- -----------
Net income (loss).............. $1,399 $1,085 $ 2,484 $(835) $ 1,649
======= ====== ======= ===== ===========
Earnings per common share:
Basic............................... $ 0.15
===========
Diluted............................. $ 0.13
===========
Weighted average common shares
outstanding:
Basic............................... 11,311,801
===========
Diluted............................. 12,376,184
===========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
F-7
<PAGE> 61
PROVANT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
Concurrently with the IPO, PROVANT, Inc. (the "Company") acquired the seven
Founding Companies in the Combination. Subsequent to the IPO, the Company
acquired five additional companies during the first two fiscal quarters of 1999.
The acquisitions have been accounted for using the purchase method of accounting
with the Company being treated as the accounting acquiror.
(2) ACQUISITIONS
The September 30, 1998 balance sheet includes the accounts of two companies
acquired during the quarter then ended. The pro forma adjustments to the
September 30, 1998 balance sheet reflect the acquisition of three companies
acquired after September 30, 1998 as if those acquisitions had occurred on such
date. The total consideration paid for the five companies consisted of cash of
$30.2 million and 1,516,243 shares of common stock valued at $17.0 million.
Shares used as consideration were valued at a discount of 20% from their
publicly-traded price due to restrictions on their transferability.
(3) UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS
The following table summarizes the adjustments to the unaudited pro forma
consolidated balance sheet (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENTS
------------------
(a) (B) TOTAL
------- ------- -------
<S> <C> <C> <C>
Assets
Cash and cash equivalents................................. $(5,594) $ -- $(5,594)
Accounts receivable, net.................................. (90) -- (90)
Deferred income taxes..................................... -- 1,253 1,253
Prepaid and other current assets.......................... (387) -- (387)
Property and equipment, net................................. (370) -- (370)
Goodwill.................................................... 28,929 (1,253) 27,676
------- ------- -------
Total assets........................................... $22,488 $ -- $22,488
======= ======= =======
Liabilities and Stockholders' equity
Accrued expenses.......................................... $ 2,109 $ -- $ 2,109
Long term debt, net of current portion...................... 13,700 -- 13,700
------- ------- -------
Total liabilities...................................... 15,809 -- 15,809
Stockholders' Equity:
Common stock.............................................. (49) -- (49)
Additional paid in capital................................ 11,356 -- 11,356
Accumulated deficit....................................... (4,628) -- (4,628)
------- ------- -------
Total stockholders' equity............................. 6,679 -- 6,679
------- ------- -------
Total liabilities and stockholders' equity............. $22,488 $ -- $22,488
======= ======= =======
</TABLE>
(a) Reflects the creation of approximately $28.9 million of goodwill from the
payment of the common stock and cash consideration for three companies
acquired during the second quarter of fiscal 1999 totaling approximately
$31.1 million less net assets of those companies of approximately $2.2
million.
(b) Records the deferred income taxes attributable to the temporary differences
between the financial reporting and tax basis of assets and liabilities
acquired.
F-8
<PAGE> 62
PROVANT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(4) UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS ADJUSTMENTS
The following table summarizes the adjustments to the unaudited pro forma
consolidated statement of operations for the year ended June 30, 1998 (in
thousands):
<TABLE>
<CAPTION>
ADJUSTMENTS
-----------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (I) ADJUSTMENTS
------- ------- ------- ------ ---- ------- ----- ----- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue........ $ -- $ -- $ -- 1,419 $ -- $ -- $ -- $ -- $ -- $ 1,419
Cost of revenue...... -- -- -- 1,056 -- -- -- -- -- 1,056
------- ------- ------- ------ ---- ------- ----- ----- ----- -------
Gross profit......... -- -- -- 363 -- -- -- -- -- 363
Selling general and
administrative
expenses........... (6,658) -- -- 352 -- -- (750) (686) (588) (8,330)
Goodwill
amortization....... -- 2,026 -- -- -- -- -- -- -- 2,026
------- ------- ------- ------ ---- ------- ----- ----- ----- -------
Income (loss) from
operations......... 6,658 (2,026) -- 11 -- -- 750 686 588 6,667
Interest expense..... -- -- -- (29) 541 (1,773) -- -- -- (1,261)
------- ------- ------- ------ ---- ------- ----- ----- ----- -------
Income (loss) before
income taxes....... 6,658 (2,026) -- (18) 541 (1,773) 750 686 588 5,406
Provision (benefit)
for income taxes... -- -- 3,745 (7) 216 (709) -- -- -- 3,245
------- ------- ------- ------ ---- ------- ----- ----- ----- -------
Net income (loss).... $ 6,658 $(2,026) $(3,745) $ (11) $325 $(1,064) $ 750 $ 686 $ 588 $ 2,161
======= ======= ======= ====== ==== ======= ===== ===== ===== =======
</TABLE>
(a) Reflects the reduction in salaries, bonuses and benefits of $6.7 million to
certain of the owners and key employees of the Founding Companies and
Acquired Companies to which they agreed prospectively. These reductions in
salaries, bonuses and benefits are in accordance with the terms of each
individual's employment agreement with the Company entered into in
connection with the relevant acquisition. These 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
acquisitions 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 and subsequent acquisitions, 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) Reflects the interest expense, net of income tax benefit, assumed to be
incurred in connection with the cash consideration paid for the Acquired
Companies.
(g) Reflects the elimination of a non-recurring fee for information related to
the performance improvement industry.
F-9
<PAGE> 63
PROVANT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(h) Reflects the elimination of non-cash compensation expense related to the
issuance of common stock and stock options to officers of and consultants to
the Company.
(i) Reflects the elimination of non-recurring legal and accounting fees related
to the Combination and the IPO.
The following table summarizes the adjustments to the unaudited pro forma
consolidated statement of operations for the three months ended September 30,
1998 (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------------------------------
TOTAL
(a) (b) (c) (D) ADJUSTMENTS
------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
Total revenue.................................. $ -- $ -- $ -- $ --
Cost of revenue................................ -- -- -- --
------- ------- ------- ------- ------
Gross profit................................... -- -- -- -- --
Selling, general and administrative expenses... (172) -- -- (172)
Goodwill amortization.......................... -- 211 -- 211
------- ------- ------- ------- ------
Income (loss) from operations.................. 172 (211) -- -- (39)
Other income (expense), net.................. -- -- -- --
Interest expense............................... -- -- -- (418) (418)
------- ------- ------- ------- ------
Income (loss) before income taxes.............. 172 (211) -- (418) (457)
Provision (benefit) for income taxes........... -- -- 545 (167) 378
------- ------- ------- ------- ------
Net income (loss).............................. $ 172 $ (211) $ (545) (251) $ (835)
======= ======= ======= ======= ======
</TABLE>
(a) Reflects the reduction in salaries, bonuses and benefits of $172,000 to
certain of the owners and key employees of the Acquired Companies to which
they agreed prospectively. These reductions in salaries, bonuses and
benefits are in accordance with the terms of each individual's employment
agreement with the Company entered into in connection with the relevant
acquisition. These 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
acquisitions completed subsequent to September 30, 1998 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
acquisitions completed subsequent to September 30, 1998, after considering
nondeductible goodwill amortization.
(d) Reflects the interest expense, net of income tax benefit, assumed to be
incurred in connection with the cash consideration paid for the Acquired
Companies.
(5) NET INCOME PER SHARE
The shares used in computing basic earnings per common share consist of (i)
3,346,217 shares outstanding prior to the Combination and the IPO, (ii)
3,459,341 shares issued in May 1998 to owners of the Founding Companies, (iii)
2,990,000 shares of Common Stock sold in the IPO and (iv) 1,516,243 shares of
Common Stock issued to owners of the Acquired Companies. The shares used in
computing diluted earnings per common share consist of those used in computing
basic earnings per common share for the year ended June 30, 1998 and the three
months ended September 30, 1998 plus 419,304 and 207,499 Common Stock
equivalents, respectively, computed using the treasury stock method. Shares used
in computing diluted
F-10
<PAGE> 64
PROVANT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
earnings per common share for the three months ended September 30, 1998 also
include 856,884 shares issuable as additional consideration to owners of the
Founding Companies.
(6) STOCK-BASED COMPENSATION
The Company currently has four stock-based compensation plans. The Company
has granted stock options under the Equity Incentive Plan, 1998 Non-Qualified
Stock Option Plan and Stock Option Plan for Outside Directors to purchase an
aggregate of 914,987 shares of Common Stock having per-share exercise prices
ranging from $11.50 to $19.375. The Company also has issued 17,221 shares under
its 1998 Employee Stock Purchase Plan. In addition, the Company also has granted
options under its Stock Plan for Non-Employee Directors to purchase an aggregate
of 15,000 shares of Common Stock at a per-share exercise price of $13.00. The
Stock Plan for Non-Employee Directors was terminated in November 1998 with
respect to the future grant of options.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation
expense is recognized for its fixed stock option plans and its stock purchase
plan, except for stock options granted to non-employees. 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 ("SFAS 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 and
that the compensation element of options with immediate vesting was recognized
during the year ended June 30, 1998 would have been reduced to the amounts
indicated below (Dollars in thousands except per share data):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
JUNE 30, SEPTEMBER 30,
1998 1998
---------- -------------
<S> <C> <C>
Net income:
Pro forma................................................. $6,085 $1,649
====== ======
Pro forma for SFAS No. 123................................ $3,902 $1,299
====== ======
Basic income per common share:
Pro forma................................................. $ 0.54 $ 0.15
====== ======
Pro forma for SFAS No. 123................................ $ 0.34 $ 0.11
====== ======
</TABLE>
The fair value of the stock options used to calculate the pro forma for
SFAS No. 123 amounts was determined using the Black-Scholes option-pricing model
with the following assumptions: volatility of 33%; expected dividend yield of
0%; risk-free interest rate of 6.0% and an expected life of 4 years.
F-11
<PAGE> 65
PROVANT, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 2,811
Accounts receivable, net............................... 13,728
Contracts receivable................................... 8,048
Inventory.............................................. 3,495
Deferred income taxes.................................. 2,146
Costs in excess of billings............................ 867
Prepaid expenses and other current assets.............. 1,425
--------
Total current assets.............................. 32,520
Property and equipment, net................................. 3,224
Other assets................................................ 733
Goodwill, net............................................... 65,482
--------
Total assets...................................... $101,959
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................... $ 3,599
Accrued expenses....................................... 7,336
Accrued compensation................................... 3,419
Billings in excess of costs............................ 3,166
Deferred revenue....................................... 514
Income taxes payable................................... 2,018
Current portion of long term debt...................... 552
--------
Total current liabilities......................... 20,604
Long term debt, net of current portion...................... 8,402
--------
Total liabilities................................. 29,006
Stockholders' Equity:
Preferred stock, $.01 par value; none issued........... --
Common stock, $.01 par value; 9,795,558 and 10,226,325
shares issued and outstanding, respectively........... 102
Additional paid-in capital............................. 74,513
Accumulated deficit.................................... (1,662)
--------
Total stockholders' equity........................ 72,953
--------
Total liabilities and stockholders' equity.................. $101,959
========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-12
<PAGE> 66
PROVANT, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1998
---------- -----------
<S> <C> <C>
Total revenue............................................... $ -- $ 23,710
Cost of revenue............................................. -- 10,148
---------- -----------
Gross profit................................................ -- 13,562
Selling, general and administrative expenses................ 200 10,593
Goodwill amortization....................................... -- 380
---------- -----------
Income (loss) from operations............................... (200) 2,589
Interest and other expense, net............................. (8) (3)
---------- -----------
Income (loss) before income taxes........................... (208) 2,586
Provision for income taxes.................................. -- 1,187
---------- -----------
Net income (loss)........................................... $ (208) $ 1,399
========== ===========
Earnings (loss) per common share:
Basic.................................................. $ (0.08) $ 0.14
========== ===========
Diluted................................................ $ (0.08) $ 0.13
========== ===========
Weighted average common shares outstanding:
Basic.................................................. 2,577,954 10,070,808
========== ===========
Diluted................................................ 2,577,954 11,124,260
========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-13
<PAGE> 67
PROVANT, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1998
------ ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(208) $ 1,399
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization.......................... -- 711
Changes in operating assets and liabilities:
Accounts receivable.................................. -- 981
Contracts receivable................................. -- (753)
Inventory............................................ -- (186)
Deferred income taxes................................ -- (109)
Costs in excess of billings.......................... -- (33)
Prepaid expenses and other current assets............ -- (446)
Other assets......................................... -- 207
Accounts payable and accrued expenses................ -- (2,125)
Accrued compensation................................. -- 491
Billings in excess of costs.......................... -- 141
Deferred revenue..................................... -- (155)
Income taxes payable................................. -- (230)
----- --------
Total adjustments................................. -- (1,506)
----- --------
Net cash used in operating activities............. (208) (107)
----- --------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired.......... -- (10,080)
Additions to property and equipment....................... -- (40)
----- --------
Net cash used in investing activities................ -- (10,120)
Cash flows from financing activities:
Increase in notes payable to stockholders................. 208 --
Net borrowings of long-term debt..................... -- 6,644
----- --------
Net cash provided by financing activities............ 208 6,644
----- --------
Net decrease in cash and cash equivalents................... -- (3,583)
Cash and cash equivalents, beginning of period.............. 1 6,394
----- --------
Cash and cash equivalents, end of period.................... $ 1 $ 2,811
===== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes.................................. $ -- $ 1,557
===== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-14
<PAGE> 68
PROVANT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
PROVANT, Inc., a Delaware corporation ("PROVANT" and collectively with its
subsidiaries, the "Company"), provides a broad range of performance improvement
training services and products primarily to Fortune 1000 companies, other large
and medium-sized corporations and government entities. The Company's objective
is to become the leading single source provider of high-quality performance
improvement services and products that are distributed through multiple delivery
methods.
On May 4, 1998, PROVANT completed its initial public offering (the "IPO")
of its common stock (the "Common Stock") and simultaneously acquired in separate
merger transactions (the "Combination") seven companies engaged in providing
performance improvement services and products (collectively referred to as the
"Founding Companies"). In the quarter ended September 30, 1998, the Company
acquired in separate transactions two additional companies engaged in providing
performance improvement services and products (collectively referred to with the
Founding Companies as the "Operating Companies"). Prior to the IPO, PROVANT did
not conduct any revenue generating activities of its own. For the period from
inception through May 4, 1998, all of PROVANT's activities had been related to
the completion of the IPO and the Combination. All references to the "Company"
include PROVANT and the Operating Companies.
Basis of Presentation
The information contained in the following notes to the accompanying
financial statements is condensed from that which would appear in the annual
audited financial statements; accordingly, the financial statements included
herein should be reviewed in conjunction with the financial statements and
related notes thereto as of and for the year ended June 30, 1998.
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments considered necessary to present fairly the
financial position of the Company as of September 30, 1998 and the results of
operations and cash flows for the periods presented. The Company prepares its
interim financial information using the same accounting principles as it does
for its annual financial statements.
For financial statement purposes, PROVANT has been identified as the
accounting acquiror. Accordingly, the consolidated financial statements include
the accounts of PROVANT since its inception, November 16, 1996, and the accounts
of the Operating Companies since their respective dates of acquisition. The
acquisitions of the Operating Companies were accounted for using the purchase
method of accounting. The allocations of the purchase prices to the assets
acquired and liabilities assumed of these companies have been recorded based on
preliminary estimates of fair value and may be changed as additional information
becomes available.
2. INVENTORY
Inventory consists primarily of film production and other costs associated
with a company acquired during the three months ended September 30, 1998.
3. ACQUISITIONS
During the quarter ended September 30, 1998, the Company acquired two
companies that provide performance improvement services and products. Initial
consideration paid by the Company was $17.5 million, consisting of $10.9 million
in cash and 430,767 shares of Common Stock. The allocation of the respective
purchase prices to assets acquired and liabilities assumed resulted in $12.9
million in goodwill for these acquisitions which were accounted for as purchase
transactions. Goodwill is amortized on a straight-line
F-15
<PAGE> 69
PROVANT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
basis over 40 years. The cash portion of the acquisitions was funded from cash
provided by operations and $7.5 million of borrowings from the Company's credit
facility.
In October 1998, the Company acquired an additional company that provides
performance improvement services and products. Initial consideration paid by the
Company was $12.0 million, consisting of $4.8 million in cash and 553,841 shares
of Common Stock. The cash portion of the acquisition was funded from cash
provided by operations and $2.2 million of borrowings from the Company's credit
facility. The acquisition will be accounted for as a purchase transaction.
4. CONTINGENT CONSIDERATION
The agreements between PROVANT and each of the Operating Companies and the
subsequently-acquired company provide for the payment of additional, contingent
consideration (the "Contingent Consideration"). With respect to five of the
Founding Companies, the former stockholders will receive Contingent
Consideration in the form of shares of Common Stock based on performance
criteria for the fiscal year ended June 30, 1998 and certain other adjustments.
The Company has estimated the number of shares to be issued to these
stockholders and has included those shares as outstanding in the calculation of
diluted weighted average common shares outstanding for the three months ended
September 30, 1998. The former stockholders of the remaining four Operating
Companies and the subsequently-acquired company are entitled to receive
Contingent Consideration of cash and/or shares of Common Stock if certain
performance criteria are met over future periods ranging from one to three
years. For the three companies with Contingent Consideration based on
performance criteria associated with the first year, the maximum Contingent
Consideration for two of the companies is $5.7 million in the form of shares of
Common Stock and the Contingent Consideration for the third Company is based
entirely on performance criteria for the year and is not currently determinable.
For the two remaining companies, the Contingent Consideration is based entirely
on performance criteria for the next three years and is not currently
determinable.
5. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of shares of Common Stock outstanding during the period.
Diluted EPS is computed by dividing net income by the weighted average number of
shares of Common Stock and dilutive securities outstanding during the period.
The following table summarizes weighted average shares outstanding for each
of the periods presented (with the pro forma combined data giving effect to the
Combination and the IPO as if they had occurred on July 1, 1997):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
1997 1997 1998
---------- ---------- ----------
PRO FORMA
HISTORICAL COMBINED HISTORICAL
---------- ---------- ----------
<S> <C> <C> <C>
Basic weighted average common shares
outstanding................................... 2,577,954 9,795,558 10,070,808
Shares to be issued as Contingent
Consideration................................. -- -- 856,884
Weighted average shares related to stock options
and warrants under the treasury stock
method........................................ -- 373,331 196,568
--------- ---------- ----------
Diluted weighted average common shares
outstanding................................... 2,577,954 10,168,889 11,124,260
========= ========== ==========
</TABLE>
F-16
<PAGE> 70
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders,
PROVANT, Inc.:
We have audited the accompanying consolidated balance sheets of PROVANT,
Inc. and subsidiaries as of June 30, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
period from November 16, 1996 (date of inception) to June 30, 1997 and for the
year ended June 30, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PROVANT,
Inc. and subsidiaries as of June 30, 1997 and 1998 and the results of their
operations and their cash flows for the period from November 16, 1996 (date of
inception) to June 30, 1997 and for the year ended June 30, 1998, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
August 10, 1998
F-17
<PAGE> 71
PROVANT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
----------------
1997 1998
----- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 1 $ 6,394
Accounts receivable, net of allowance for doubtful
accounts of $0 and $740, respectively................ -- 12,221
Contracts receivable................................... -- 7,295
Deferred taxes......................................... -- 2,127
Costs in excess of billings............................ -- 696
Prepaid expenses and other current assets.............. -- 1,359
----- -------
Total current assets.............................. 1 30,092
Property and equipment, net................................. 150 2,548
Other assets................................................ -- 776
Goodwill, net............................................... -- 52,942
----- -------
Total assets...................................... $ 151 $86,358
===== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................................... $ -- $ 3,346
Accrued expenses....................................... -- 7,361
Accrued compensation................................... -- 2,928
Billings in excess of costs............................ -- 2,896
Deferred revenue....................................... -- 669
Income taxes payable................................... -- 1,252
Current portion of long term debt...................... -- 533
Notes payable to stockholders.......................... 298 --
----- -------
Total current liabilities......................... 298 18,985
Long term debt, net of current portion...................... -- 874
----- -------
Total liabilities................................. 298 19,859
Stockholders' equity (deficit):
Preferred stock, $.01 par value; none issued........... -- --
Common stock, $.01 par value; 1,950,520 and 9,795,558
shares issued and outstanding at June 30, 1997 and
1998, respectively.................................... 20 98
Additional paid-in capital............................. -- 69,474
Translation adjustment................................. -- (12)
Accumulated deficit.................................... (167) (3,061)
----- -------
Total stockholders' equity (deficit).............. (147) 66,499
----- -------
Total liabilities and stockholders' equity (deficit)........ $ 151 $86,358
===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 72
PROVANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 16, 1996
(DATE OF
INCEPTION) TO YEAR ENDED
JUNE 30, 1997 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
Total revenue............................................... $ -- $ 14,189
Cost of revenue............................................. -- 6,374
---------- ----------
Gross profit................................................ -- 7,815
Selling, general and administrative expenses................ 149 10,447
Goodwill amortization....................................... -- 245
---------- ----------
Loss from operations........................................ (149) (2,877)
Interest expense, net....................................... -- (220)
---------- ----------
Loss before income taxes.................................... (149) (3,097)
Income tax benefit.......................................... -- (203)
---------- ----------
Net loss.................................................... $ (149) $ (2,894)
========== ==========
Loss per common share: basic and diluted.................... $ (0.08) $ (0.67)
========== ==========
Shares used in computing basic and diluted loss per common
share..................................................... 1,950,520 4,350,169
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE> 73
PROVANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------ PAID-IN TRANSLATION ACCUMULATED
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT TOTAL
--------- ------ -------- ----------- ----------- -------
<S> <C> <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........ 1,395,697 13 473 -- -- 486
Issuance of stock options and
warrants........................... -- -- 422 -- -- 422
Acquisition of Founding Companies.... 3,459,341 35 35,942 -- -- 35,977
Issuance of stock sold in initial
public offering.................... 2,990,000 30 32,637 -- -- 32,667
Translation adjustment............... -- -- -- (12) -- (12)
Net loss............................. -- -- -- -- (2,894) (2,894)
--------- --- ------- ---- ------- -------
Balance at June 30, 1998............. 9,795,558 $98 $69,474 $(12) $(3,061) $66,499
========= === ======= ==== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE> 74
PROVANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 16, 1996
(DATE OF
INCEPTION)
TO YEAR ENDED
JUNE 30, 1997 JUNE 30, 1998
------------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(149) $(2,894)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... -- 467
Allowance for doubtful accounts........................ -- 135
Charges related to issuance of common stock, warrants
and stock options.................................... -- 908
Changes in operating assets and liabilities:
Accounts receivable.................................. -- (1,731)
Contracts receivable................................. -- (581)
Deferred taxes....................................... -- (1,191)
Due from stockholders................................ -- 600
Costs in excess of billings.......................... -- (244)
Prepaid expenses and other current assets............ -- (154)
Other assets......................................... -- 110
Accounts payable and accrued expenses................ -- 1,636
Accrued compensation................................. -- (91)
Billings in excess of costs.......................... -- 1,119
Deferred revenue..................................... -- 228
Income taxes payable................................. -- 970
----- -------
Total adjustments................................. -- 2,181
----- -------
Net cash used in operating activities............. (149) (713)
----- -------
Cash flows from investing activities:
Acquisitions of businesses, net of acquired cash....... -- (19,302)
Additions to property and equipment.................... (150) (177)
----- -------
Net cash used in investing activities................ (150) (19,479)
----- -------
Cash flows from financing activities:
Issuance of common stock............................... 2 32,667
Increase (decrease) in notes payable to stockholders... 298 (298)
Repayment of long-term debt............................ -- (5,772)
----- -------
Net cash provided by financing activities............ 300 26,597
Effect of exchange rates on cash............................ -- (12)
----- -------
Net increase in cash and cash equivalents................... 1 6,393
Cash and cash equivalents, beginning of period.............. -- 1
----- -------
Cash and cash equivalents, end of period.................... $ 1 $ 6,394
===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE> 75
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND ORGANIZATION
PROVANT, Inc., a Delaware corporation ("PROVANT" and collectively with its
subsidiaries, 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. Founded on November 16, 1996, the
Company's objective is to become the leading single source provider of
high-quality training and development services and products that are distributed
through multiple delivery methods.
On May 4, 1998, PROVANT completed the initial public offering (the
"Offering" or "IPO") of its common stock (the "Common Stock") and simultaneously
acquired in separate merger transactions seven companies engaged in providing
training and development services and products (collectively referred to as the
"Founding Companies"). The Company provides services nationally, and has offices
in thirteen states.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
For financial statement purposes, PROVANT has been identified as the
accounting acquiror. Accordingly, the consolidated financial statements include
the accounts of PROVANT since its inception, November 16, 1996, and the accounts
of the Founding Companies since their acquisition date, May 4, 1998. The
acquisitions of the Founding Companies were accounted for using the purchase
method of accounting. The allocations of the purchase prices to the assets
acquired and liabilities assumed of these companies have been recorded based on
preliminary estimates of fair value and may be changed as additional information
becomes available.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
PROVANT and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Revenue Recognition
The Company recognizes revenue when services are performed and products are
provided except when work is being performed under a long-term contract.
Deferred revenue is recognized for payments received prior to services being
performed.
A significant portion of the Company's revenue results from services
performed under long-term U.S. Government contracts, either directly or through
subcontracts. The majority of the Company's long-term 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 for each contract. 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. Provisions for the total
estimated losses on uncompleted contracts are made in the period in which such
losses are determined.
Cash Flow Information
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Cash paid for interest in fiscal 1997 and 1998 was nil and $118,000,
respectively. Cash paid for taxes in fiscal 1997 and 1998 was nil and $14,000
respectively.
F-22
<PAGE> 76
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company recorded the following non-cash transactions during fiscal 1998
(Dollars in thousands):
<TABLE>
<S> <C>
Discount on indebtedness associated with issuance of stock
warrants.................................................. $221
Compensation expense in connection with sales of Company
stock..................................................... $485
Compensation expense in connection with stock options
granted to consultants to the Company..................... $201
</TABLE>
In addition, the following is a reconciliation of net cash paid for
acquisitions during fiscal 1998 (Dollars in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired............................... $82,386
Liabilities assumed......................................... (21,954)
Additional purchase price accrued but not yet paid.......... (755)
Estimated market value of stock consideration............... (35,977)
-------
Cash paid................................................... 23,700
Less cash acquired.......................................... (4,398)
-------
Net cash paid for acquisitions......................... $19,302
=======
</TABLE>
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, accounts receivable, contracts receivable, accounts
payable and accrued expenses approximate fair value due to the short term nature
of these instruments. The carrying value of the long term debt approximates fair
value based on current rates available to the Company for debt of similar
maturity and terms.
Property and Equipment
Property and equipment are stated at cost and include additions and major
replacements or betterments. Depreciation is computed using accelerated and
straight-line methods over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the expected life
of the lease or the estimated useful life of the asset. Maintenance and repairs
are expensed when incurred. Upon retirement or disposition of property and
equipment, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in the statement of
operations.
Goodwill
Goodwill represents the excess of the aggregate purchase price paid by the
Company over the fair value of the net assets acquired. Goodwill is amortized on
a straight-line basis over 40 years.
Recoverability of goodwill and intangible assets is measured by a
comparison of the carrying amount of the asset to future undiscounted net cash
flows expected to be generated by the acquired Company. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets.
Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for
impairment, based upon undiscounted future cash flows, and appropriate losses
are recognized whenever the carrying amount of an asset may not be recovered in
accordance with Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of.
Concentrations of Credit Risk
The Company provides services to customers located in a broad range of
geographical regions. The Company's credit risk primarily consists of
receivables from a variety of customers including U.S. Govern-
F-23
<PAGE> 77
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ment entities and commercial and industrial companies. The Company reviews its
accounts receivable and provides allowances as deemed necessary.
Income Taxes
The Company will file a consolidated return for federal income tax
purposes. 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, if any, on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Accounting for Stock-Based Compensation
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option plans.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Statement 123 addresses the accounting for the cost of stock-based compensation,
such as stock options, and permits either expensing the cost of stock-based
compensation over the vesting period or disclosing in the financial statement
footnotes what this expense would have been. This cost would be measured at the
grant date based upon estimated fair values, using option pricing models. The
Company has adopted the disclosure alternative of Statement 123 as of June 30,
1998.
Loss Per Share
In fiscal 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, Earnings Per Share, for calculating
earnings per share (EPS). Statement 128 requires the disclosure of basic EPS,
which is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding during the period.
Disclosure of diluted EPS, which gives effect to all dilutive potential common
shares outstanding, is also required. For fiscal 1997 and 1998, the number of
shares used in computation of basic EPS is the same as diluted EPS since the
inclusion of any potential common shares would be anti-dilutive as a result of
the net losses in those years.
The following securities that could potentially dilute basic EPS in the
future were not included in the computation of diluted EPS for 1998 because to
do so would have been antidilutive:
<TABLE>
<CAPTION>
JUNE 30,
1998
--------
<S> <C>
Stock options............................................... 42,942
Warrants.................................................... 18,400
------
Total.................................................. 61,342
======
</TABLE>
Contingently issuable shares (Note 10) have also been excluded from the
calculation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of revenues, expenses, assets,
liabilities and contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
F-24
<PAGE> 78
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) BUSINESS COMBINATIONS
Founding Company Acquisitions
Concurrently with the completion of its IPO on May 4, 1998, PROVANT
acquired the Founding Companies (the "Combination"). The companies acquired were
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 acquisition of each of the Founding Companies was accounted for using
the "purchase" method of accounting in accordance with APB Opinion No. 16,
Business Combinations. The aggregate consideration paid in these transactions
was $24.5 million in cash and 3,459,341 shares of Common Stock having a value at
the date of acquisition totaling $36.0 million.
The consolidated balance sheet as of June 30, 1998 includes allocations of
the respective purchase prices to the assets acquired and liabilities assumed
based on preliminary estimates of fair value and is subject to final adjustment.
The allocations resulted in $53.2 million of goodwill, which represents the
excess of purchase price over the estimated fair value of the net assets
acquired. In conjunction with the acquisitions, goodwill was determined as
follows (Dollars in thousands):
<TABLE>
<S> <C>
Cash paid, net of cash acquired............................. $ 19,302
Additional purchase price accrued but not yet paid.......... 755
Estimated market value of stock consideration............... 35,977
Liabilities assumed......................................... 21,954
Less fair value of tangible assets acquired, net of cash
acquired.................................................. (24,801)
--------
Goodwill.................................................... $ 53,187
========
</TABLE>
The unaudited pro forma combined financial data presented below consists of
the income statement data presented in these consolidated financial statements
plus income statement data for the Founding Companies as if they were acquired
effective July 1, 1996 (Dollars in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1997 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenue.............................................. $68,846 $78,062
Net income........................................... 4,221 5,060
Earnings per common share, basic..................... $0.43 $0.52
Earnings per common share, diluted................... $0.42 $0.50
</TABLE>
The unaudited pro forma combined financial data gives 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, (iii) the elimination of
a non-recurring fee of $750,000 in the year ended June 30, 1998 for information
related to the training industry, (iv) acquisitions completed by one of the
Founding Companies, (v) the elimination of non-cash compensation expense
totaling $686,000 for the year ended June 30, 1998 related to the issuance of
Common Stock and stock options to officers of and consultants to the Company,
(vi) a provision for income tax for those Founding Companies that were taxed as
S corporations during the relevant periods, (vii) the elimination of
non-recurring legal and accounting fees related to the Combination and the IPO
totaling $588,000 for the year ended June 30, 1998 and (viii) the compensation
differential. The compensation differential represents pro forma adjustments to
salary, bonuses and benefits paid to certain pre-Combination owners of the
Founding Companies to certain levels to which they have agreed prospectively.
For the years ended June 30, 1997 and 1998, the compensation differential was
approximately $5.6 million and $6.5 million, respectively.
F-25
<PAGE> 79
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited pro forma combined results presented above are not
necessarily indicative of actual results which might have occurred had the
operations and management teams of PROVANT and the Founding Companies been
combined at the beginning of the periods presented.
Subsequent Acquisition
On July 20, 1998, the Company completed the acquisition of KC Resources
Creative Solutions, Inc. ("KC Resources"), a training and instructional design
and development consulting firm based in the Washington, DC area. The
consideration paid by the Company was $6.0 million, consisting of $2.4 million
in cash and 200,000 shares of Common Stock. This acquisition will be accounted
for as a purchase transaction. The former sole stockholder of KC Resources will
be entitled to receive contingent consideration of up to $1.4 million if KC
Resources' earnings before interest and taxes for the year ending June 30, 1999
exceeds a specified base amount.
Pro forma data giving effect to the Combination and the KC Resources
acquisition for the year ended June 30, 1998 is as follows (Dollars in
thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1998
----------
(UNAUDITED)
<S> <C>
Revenue..................................................... $ 83,511
Net income.................................................. 5,419
Earnings per common share, basic............................ $ 0.54
Earnings per common share, diluted.......................... $ 0.52
</TABLE>
(4) CONTRACTS RECEIVABLE
Contracts receivable are summarized as follows (Dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1998
-----------
<S> <C>
U.S. Government customers:
Amounts due currently -- prime contractor................... $5,353
Amounts due currently -- subcontractor...................... 589
Recoverable costs and accrued profit on progress
completed -- not billed................................... 1,317
Retainage................................................... 36
------
Total....................................................... $7,295
======
</TABLE>
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. Receivable
balances billed but not paid by customers pursuant to retainage provisions in
contracts are due upon completion of the contracts and acceptance by the
customer. Based on the Company's experience with similar contracts in recent
years, the retention balance is billed and collected in the following fiscal
year.
All unbilled contract receivables, net of retainage, are expected to be
billed and collected within one year.
F-26
<PAGE> 80
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) NON-CURRENT ASSETS
A summary of property and equipment follows (Dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
USEFUL LIFE 1998
------------ --------
<S> <C> <C>
Equipment................................................... 5 - 7 years $ 322
Furniture and fixtures...................................... 3 - 7 years 2,290
Leasehold improvements...................................... 3 - 7 years 160
Less accumulated depreciation and amortization.............. (224)
------
Property and equipment, net................................. $2,548
======
</TABLE>
Depreciation expense was nil and $222,000 for fiscal 1997 and 1998,
respectively.
Goodwill amortization expense was nil and $245,000 for fiscal 1997 and
1998, respectively.
(6) ACCRUED EXPENSES
Accrued expenses consist of the following (Dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1998
--------
<S> <C>
Accrued lease abandonment costs............................. $1,160
Other accrued liabilities................................... 6,201
------
Total............................................. $7,361
======
</TABLE>
(7) REVOLVING CREDIT AGREEMENT
On April 8, 1998, the Company entered into a revolving credit facility with
Fleet National Bank (as agent), 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 significant wholly-owned
subsidiaries and secured by a pledge of the capital stock of each of the
Company's wholly-owned subsidiaries. The credit facility may be used for
refinancing of existing indebtedness, acquisitions, working capital and general
corporate purposes. Loans made under the credit facility bear interest, at the
Company's option, at a rate based on either a Eurodollar rate or the bank's
prime rate. In addition, a commitment fee is 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 consolidated total funded debt to consolidated
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 30, 1998), and all
amounts outstanding thereunder (if any) will be due at such time. The credit
facility (i) generally prohibits the payment of dividends and other
distributions by the Company, (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 30, 1998, there were no amounts
outstanding under the credit facility.
(8) LONG-TERM DEBT
Long-term debt consists primarily of amounts due to former stockholders of
the Founding Companies. These notes mature through June, 2009 and bear interest
at rates ranging from 7.5% to 8.75%.
F-27
<PAGE> 81
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) INCOME TAXES
The income tax expense (benefit) consists of (Dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1998
----------
<S> <C>
Current:
Federal................................................... $ 540
State..................................................... 158
-----
Total current..................................... 698
-----
Deferred:
Federal................................................... (860)
State..................................................... (41)
-----
Total deferred.................................... (901)
-----
Income tax benefit................................ $(203)
=====
</TABLE>
The income tax benefit was $203,000 for the year ended June 30, 1998, and
differed from the amounts computed by applying the U.S. federal income tax rate
of 35 percent to pretax income as a result of the following (Dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1998
----------
<S> <C>
Income tax benefit at the statutory rate.................... $(1,084)
Decrease in income tax benefit resulting from:
Reduction of valuation allowance due to interaction of
acquiror and acquired companies tax positions.......... 659
Amortization of goodwill.................................. 79
State income taxes, net of federal income tax benefit..... 75
Other, net................................................ 68
-------
Benefit at effective tax rate............................... $ (203)
=======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (Dollars in thousands).
<TABLE>
<CAPTION>
JUNE 30,
1998
--------
<S> <C>
Deferred tax assets:
Accrued liabilities....................................... $2,794
Allowance for doubtful accounts........................... 217
Start-up costs capitalized for tax purposes............... 735
Other..................................................... 139
------
Total gross deferred tax assets............................. 3,885
Less valuation allowance.................................. (140)
------
Net deferred tax assets................................... 3,745
------
Deferred tax liabilities:
Change from cash to accrual method for acquired
companies.............................................. 1,458
Other..................................................... 160
------
Total gross deferred liabilities............................ 1,618
------
Net deferred tax asset...................................... $2,127
======
</TABLE>
F-28
<PAGE> 82
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The valuation allowance for deferred tax assets was $52,000 and $140,000 as
of June 30, 1997 and 1998 respectively. The valuation allowance for deferred
income taxes increased by $88 from June 30, 1997 to June 30, 1998. Valuation
allowances at June 30, 1998 relate to potentially non-deductible expenses
recorded by certain of the Founding Companies.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Taxable income for the
year ended June 30, 1998 was $1,703,000. Although realization is not assured,
based upon the level of historical taxable income of the Founding Companies and
projections for PROVANT's future taxable income over the periods during which
the deferred tax assets are deductible, management believes it is more likely
than not the Company will realize the benefits of these deductible differences.
The amount of the deferred tax asset considered realizable, however, could be
reduced or increased in the near term if estimates of future taxable income
during the carryforward period are reduced or increased.
(10) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has several leases for its office space as well as for the
Founding Companies' operating space, vehicles, and equipment under cancelable
and non-cancelable operating leases that expire on various dates through fiscal
2005. 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 non-cancelable operating leases,
including leases to related parties, are as follows (Dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1999........................................................ $ 3,635
2000........................................................ 3,160
2001........................................................ 2,772
2002........................................................ 1,857
2003........................................................ 749
Thereafter.................................................. 1,136
-------
Total....................................................... $13,309
=======
</TABLE>
Rent expense for the years ended June 30, 1997 and 1998 was $51,000 and
$585,000, respectively.
U.S. Government Contracts
Substantially all of one Founding Company's revenue and costs for all
periods presented 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.
Government funding continues to be dependent on congressional approval of
program level funding and on contracting agency approval for the Company's work.
The extent to which projects will be funded in the future cannot be determined.
F-29
<PAGE> 83
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Environmental Liabilities
The Company has provided for the estimated costs associated with
environmental remediation activities at one of its current operating locations.
The Company provides for the estimated costs of the investigation and
remediation of these sites when such losses are probable and the amounts can be
reasonably estimated. The actual cost incurred may vary from these estimates due
to the inherent uncertainties involved. The Company believes that any additional
liability in excess of the amounts provided which may result from the resolution
of these matters will not have a material adverse impact on the financial
condition, liquidity, or cash flow of the Company.
Contingent Payments to Former Stockholders
The merger agreements between PROVANT and each of the Founding Companies
provide for the payment of additional, contingent consideration (the "Additional
Consideration"). With respect to six of the Founding Companies, the Additional
Consideration will be paid in shares of Common Stock, with the number of those
shares determined by a formula based on the relationship of the defined earnings
before interest and taxes ("EBIT") of that Founding Company (including its
successor following the closing of the Combination) for the fiscal year ending
June 30, 1998 (June 30, 1999 in the case of J. Howard & Associates, Inc. ("J.
Howard")) to a specified baseline EBIT target and certain other adjustments to
be calculated after the fiscal year ended June 30, 1998. In particular, each
merger agreement with a Founding Company (other than Star Mountain, Inc.)
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 (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
proportionately related to the excess above the baseline figure. Shares of
Common Stock issued as Additional Consideration to the former stockholders of
all Founding Companies other than Star Mountain, Inc. ("Star Mountain") and J.
Howard will be valued at the initial public offering price of $13.00 per share.
Shares issued to J. Howard as Additional 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. Other than shares which may be issuable to
the former stockholders of Star Mountain, a maximum of 969,218 shares of Common
Stock may be issued as Additional Consideration following June 30, 1998
(assuming, in the case of J. Howard's Additional Consideration, a per share
price of $13.00).
For the seventh Founding Company, Star Mountain, the stockholders will be
entitled to receive additional shares of Common Stock or cash in accordance with
a formula based on the amount by which the EBIT of Star Mountain for the fiscal
year ending June 30, 1999 exceeds a specified EBIT target. 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.
Other Matters
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.
F-30
<PAGE> 84
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) STOCKHOLDERS' EQUITY
Common and Preferred Stock
In connection with its organization and initial capitalization, the Company
issued 1,950,520 shares of its Common Stock, $.01 par value per share. In 1998,
the Company issued 1,395,697 additional shares to management. These share
amounts have been adjusted to reflect the stock split described below.
The Company, in connection with the IPO, 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 IPO (but giving effect to the Combination)
of 6,805,558. Holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders, and do not
have cumulative voting rights. All share and per share amounts have been
adjusted to reflect the stock split.
On May 4, 1998, the Company completed its IPO, issuing to the public
2,600,000 shares of its Common Stock at a price of $13.00 per share and on May
7, 1998, the Company sold 390,000 shares of Common Stock at a price of $13.00
per share pursuant to the over-allotment option granted to the underwriters. The
Company realized net proceeds from these sales of $32.7 million, net of the
underwriting commissions and discounts and other expenses of the offering.
As of June 30, 1998, the Company had 9,795,558 shares of Common Stock
issued and outstanding.
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. As of June 30, 1998, the Company had not issued any
shares of Preferred Stock.
(12) STOCK OPTION PLANS
Equity Incentive Plan
The Company adopted the 1998 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, non-qualified stock options, stock appreciation rights, performance
shares, restricted stock or stock units. All directors and employees of, and all
consultants and advisors to, the Company are eligible to participate.
In connection with the Offering, options to purchase 246,596 shares of
Common Stock at $13.00 per share were issued to certain executives of the
Company, of which options to purchase 86,596 shares vested upon the closing of
the IPO. Options to purchase the remaining shares vest equally over a three-year
period. All of these options expire seven years from the date of grant.
Options to purchase an additional 622,387 shares of Common Stock at $13.00
per share were awarded to employees of and consultants to the Founding Companies
and PROVANT. These options vest equally over a three year period and expire
seven years from the date of grant, with the exception of options to purchase
80,000 shares, which became exercisable upon the closing of the Offering.
Stock Plan for Non-Employee Directors
The Company adopted the Stock Plan for Non-Employee Directors whereby
100,000 shares of Common Stock have been reserved for issuance. Each
non-employee director of the Company who was not a stockholder prior to the
Offering received an option to purchase 7,500 shares of Common Stock at $13.00
per share. Any non-employee director of the Company elected after the IPO
generally will receive an option to purchase 7,500 shares of Common Stock at the
fair market value of the Common Stock at the date of grant. Each option expires
after 10 years and is exercisable six months following the date of grant. As of
June 30, 1998, options to purchase 15,000 shares of Common Stock were granted
under this plan.
F-31
<PAGE> 85
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan allows all employees who
work more than 20 hours per week, other than employees owning more than 5% or
more of the combined voting power of all classes of stock of the Company, to
purchase shares of Common Stock at a discount on a periodic basis.
Purchases can occur at the end of option periods, each of six months'
duration. The first such 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 day prior to the beginning of an
option period and the last sale price of the Common Stock on the day prior to
the end of the option period. Participants may elect under the Plan to have from
up to 2% to 10% of their pay applied to the purchase of shares at the end of the
option period.
A total of 500,000 shares are reserved for issuance under the Employee
Stock Purchase Plan. As of June 30, 1998, no shares have been issued.
Stock Purchase Warrants
The Company issued two warrants each to officers and directors of the
Company in exchange for these executives extending financing to the Company in
the period prior to the Offering. The first warrant entitles the holder to
purchase 173,194 shares of Common Stock at a per share exercise price equal to
$13.00. The second warrant entitles the holder to purchase 216,492 shares of
Common Stock which will become exercisable only if the market price of the
Common Stock increases to certain threshold levels (except as otherwise
described below) (the "Contingent Warrant"). Specifically, 20% of the total
number of shares issuable under the Contingent Warrant will become exercisable
on each of the three occasions that the market price of the Common Stock reaches
$26.00, $39.00 and $52.00, respectively, 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 reaches $65.00. 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 of $13.00 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. The
warrants expire on May 4, 2005. The 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 option activity under all plans during the periods indicated is as
follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at June 30, 1997 and prior.......................... --
Granted................................................ 883,983 $13.00
Exercised.............................................. --
Forfeited.............................................. 9,966 13.00
Expired................................................ --
-------
Balance at June 30, 1998.................................... 874,017 $13.00
=======
</TABLE>
F-32
<PAGE> 86
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements, except for stock options granted to
non-employees for which compensation expense of $201,000 has been recorded in
the year ended June 30, 1998. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net loss and loss per share would have been increased to the pro
forma amounts indicated below (Dollars in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1998
----------
<S> <C>
Net loss:
As reported............................................... $(2,894)
Pro forma for SFAS No. 123................................ $(3,679)
Basic and diluted loss per common share:
As reported............................................... $ (0.67)
Pro forma for SFAS No. 123................................ $ (0.85)
</TABLE>
At June 30, 1998, there were 325,983 additional shares available for grant
under the Company's stock option plans. The per share weighted-average fair
value of stock options granted during 1998 was $4.53 on the date of grant using
the Black Scholes option-pricing model with the following weighted average
assumptions: volatility of 33%; expected dividend yield 0%, risk-free interest
rate of 6.0%, and an expected life of 4 years.
The following is a summary of stock options outstanding at June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------- -----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING YEARS AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- --------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 5.00 10,000 2.84 $ 5.00 10,000 $ 5.00
$13.00 874,017 6.88 $13.00 168,596 $13.00
------- -------
$ 5.00-$13.00 884,017 6.83 $12.91 178,596 $12.55
</TABLE>
In addition to the options granted under the plans noted above, the Company
issued an option to purchase 10,000 shares of Common Stock at a purchase price
of $5.00 per share.
1998 Non-Qualified Stock Option Plan
In July 1998, the Company adopted the 1998 Non-Qualified Stock Option Plan
which provides for the award of up to 500,000 shares of Common Stock in the form
of non-qualified stock options. All employees who are not officers or directors
of the Company are eligible to participate. As of August 10, 1998, no options
were granted under the 1998 Non-Qualified Stock Option Plan.
(13) EMPLOYEE BENEFIT PLANS
The Founding Companies provide various retirement plans for eligible
employees. These plans consist of defined contribution plans and profit sharing
plans and cover employees at substantially all of the Company's operating
locations. The defined contribution plans provide for contributions ranging from
1.5% to 2.0% of covered employees' salaries or wages, or at the discretion of
the company. Total expense for contributions under all plans totaled $101,000
for fiscal 1998.
F-33
<PAGE> 87
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) RELATED PARTY TRANSACTIONS
Prior to the Combination, certain Founding Companies had entered into lease
arrangements with stockholders for facilities. These lease arrangements are for
periods ranging from three to five years. Related lease expense was $81,000 for
the year ended June 30, 1998. Future commitments with respect to these leases
are included in the schedule of minimum lease payments in Note 10.
Expenses paid by PROVANT prior to the closing of the Offering were advanced
under a $3 million line of credit issued on October 6, 1997 by two of the
Company's stockholders. As of June 30, 1998 this loan was repaid in its entirety
and the line of credit was terminated.
(15) SEGMENT REPORTING
The Company operates principally in one segment comprised of training and
development services and products designed to increase the productivity of
organizations. There was no single customer that accounted for 10% or more of
the Company's total revenue in fiscal 1998.
F-34
<PAGE> 88
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, 1996 and 1997, 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 and for the period from July 1, 1997 to May 4, 1998.
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, 1996 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended June 30, 1997, and
for the period from July 1, 1997 to May 4, 1998, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
August 10, 1998
F-35
<PAGE> 89
BEHAVIORAL TECHNOLOGY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
----------------
1996 1997
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 652 $1,254
Accounts receivable, net of allowance for doubtful
accounts of $89 at June 30, 1996 and 1997.............. 940 1,055
Prepaid expenses.......................................... 67 143
------ ------
Total current assets.............................. 1,659 2,452
------ ------
Property and equipment, net................................. 194 135
Other assets................................................ 8 7
------ ------
Total assets...................................... $1,861 $2,594
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 270 $ 268
Accrued expenses.......................................... 123 148
Accrued compensation...................................... 316 433
Deferred revenue.......................................... 12 43
Income taxes payable...................................... -- --
------ ------
Total current liabilities......................... 721 892
------ ------
Commitments and contingencies
Stockholders' equity:
Common stock, $10 par value; 1,000 shares authorized; 100
and 99 shares issued and outstanding at June 30, 1996
and June 30, 1997, respectively........................ 1 1
Additional paid-in capital................................ -- --
Translation adjustment.................................... -- (6)
Retained earnings......................................... 1,139 1,707
------ ------
Total stockholders' equity........................ 1,140 1,702
------ ------
Total liabilities and stockholders' equity........ $1,861 $2,594
====== ======
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE> 90
BEHAVIORAL TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JUNE 30, JULY 1, 1997
-------------------------- TO
1995 1996 1997 MAY 4, 1998
------ ------ ------ ------------
<S> <C> <C> <C> <C>
Revenue.............................................. $3,803 $5,685 $7,096 $ 6,567
Cost of revenue...................................... 1,049 1,495 1,488 1,243
------ ------ ------ --------
Gross profit............................... 2,754 4,190 5,608 5,324
Selling, general and administrative expenses......... 2,315 4,048 5,111 6,648
------ ------ ------ --------
Income (loss) from operations.............. 439 142 497 (1,324)
------ ------ ------ --------
Other income:
Royalties.......................................... 83 82 30 --
Interest........................................... 13 27 31 29
Other income, net.................................. 43 -- 10 2
------ ------ ------ --------
Total other income......................... 139 109 71 31
------ ------ ------ --------
Income (loss) before income taxes.................. 578 251 568 (1,293)
State income taxes................................. -- -- -- 15
------ ------ ------ --------
Net income (loss).......................... $ 578 $ 251 $ 568 $ (1,308)
====== ====== ====== ========
Basic income (loss) per share........................ $5,780 $2,510 $5,680 $(13,080)
====== ====== ====== ========
Weighted average shares outstanding.................. 100 100 100 100
====== ====== ====== ========
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE> 91
BEHAVIORAL TECHNOLOGY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN TRANSLATION RETAINED
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS TOTAL
------ ------ ---------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994.......... 100 $1 $ -- $-- $ 310 $ 311
Net income.................... -- -- -- -- 578 578
--- -- ---- --- ------- -------
Balance, June 30, 1995.......... 100 1 -- -- 888 889
Net income.................... -- -- -- -- 251 251
--- -- ---- --- ------- -------
Balance, June 30, 1996.......... 100 1 -- -- 1,139 1,140
Net income.................... -- -- -- -- 568 568
Translation adjustment........ -- -- -- (6) -- (6)
Stock surrender............... (1) -- -- -- -- --
--- -- ---- --- ------- -------
Balance, June 30, 1997.......... 99 1 -- (6) 1,707 1,702
Net loss...................... -- -- -- -- (1,308) (1,308)
Stock grant................... 5 -- 182 -- -- 182
--- -- ---- --- ------- -------
Balance, May 4, 1998............ 104 $1 $182 $(6) $ 399 $ 576
=== == ==== === ======= =======
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE> 92
BEHAVIORAL TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JUNE 30, JULY 1, 1997
---------------------- TO
1995 1996 1997 MAY 4, 1998
----- ----- ------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $ 578 $ 251 $ 568 $(1,308)
----- ----- ------ -------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 57 46 92 92
Non-cash compensation............................. -- -- -- 946
Changes in operating assets and liabilities:
(Increase) in accounts receivable.............. (176) (195) (115) (218)
(Increase) decrease in prepaid expenses........ -- (67) (76) (3)
(Increase) decrease in other assets............ -- -- 1 (1)
Increase (decrease) in accounts payable........ 90 47 (2) 253
Increase (decrease) in accrued expenses........ 19 172 142 (199)
Increase (decrease) in taxes payable........... -- -- -- 15
Increase (decrease) in deferred revenue........ 22 (48) 31 (42)
----- ----- ------ -------
Total adjustments............................ 12 (45) 73 843
----- ----- ------ -------
Net cash provided by (used in) operating
activities................................ 590 206 641 (465)
----- ----- ------ -------
Cash flows from investing activities:
Purchases of property and equipment.................... (157) (122) (42) (78)
Proceeds from sale of property and equipment........... -- 5 9 --
Net increase in amounts due from employees and related
parties............................................. -- -- -- (216)
Purchase of trademark.................................. -- (7) -- --
----- ----- ------ -------
Net cash used in investing activities........ (157) (124) (33) (294)
----- ----- ------ -------
Cash flows from financing activities:
Proceeds received on line of credit.................... -- -- 200 --
Principal payments on line of credit................... -- -- (200) --
----- ----- ------ -------
Net cash used in financing activities........ -- -- -- --
----- ----- ------ -------
Net increase (decrease) in cash and cash equivalents..... 433 82 608 (759)
Effect of exchange rate changes on cash.................. -- -- (6) --
Cash and cash equivalents, beginning of period........... 137 570 652 1,254
----- ----- ------ -------
Cash and cash equivalents, end of period................. $ 570 $ 652 $1,254 495
===== ===== ====== =======
Supplemental disclosure:
Cash paid for interest................................. $ -- $ -- $ 2 $ --
===== ===== ====== =======
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE> 93
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.
On May 4, 1998, PROVANT, Inc. ("PROVANT") acquired all of the outstanding
stock of the Company for cash and shares of PROVANT common stock, and the
Company became a wholly-owned subsidiary of PROVANT.
(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.
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.
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
F-40
<PAGE> 94
BEHAVIORAL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
terminated its S corporation status concurrently with the combination previously
described.
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 and for the period from July 1, 1997 to May 4, 1998
was $90, $76, $85 and $88, 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>
(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 and for the period from July 1,
1997 to May 4, 1998 was $57, $46, $92 and $92, respectively.
F-41
<PAGE> 95
BEHAVIORAL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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, $101, and $101 to the plan for the
years ended June 30, 1996 and 1997 and for the period from July 1, 1997 to May
4, 1998, 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.
F-42
<PAGE> 96
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, 1996 and 1997, 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, and for the period from July 1, 1997 to May 4, 1998.
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, 1996 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended June 30, 1997, and
for the period from July 1, 1997 to May 4, 1998, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
August 10, 1998
F-43
<PAGE> 97
DECKER COMMUNICATIONS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
----------------
1996 1997
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 314 $ 508
Investments............................................... 565 533
Accounts receivable, net of allowance for doubtful
accounts of $23 at June 30, 1996 and $31 at June 30,
1997................................................... 1,242 1,608
Prepaid expenses and other current assets................. 170 140
------ ------
Total current assets.............................. 2,291 2,789
------ ------
Property and equipment, net................................. 497 338
Other assets................................................ 47 59
------ ------
Total assets...................................... $2,835 $3,186
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 251 $ 111
Accrued expenses.......................................... 283 378
Accrued compensation...................................... 469 639
Taxes payable............................................. 6 --
Current portion of note payable........................... -- 416
Deferred revenue.......................................... 92 89
------ ------
Total current liabilities......................... 1,101 1,633
------ ------
Note payable, net of current portion........................ -- 623
Redeemable common stock..................................... -- 300
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; 750,000 shares authorized;
176,972 and 138,027 shares issued and outstanding at
June 30, 1996, and June 30, 1997, respectively......... 397 269
Unrealized gain on investments............................ 5 9
Note receivable from stock sales.......................... (92) (127)
Retained earnings......................................... 1,424 479
------ ------
Total stockholders' equity........................ 1,734 630
------ ------
Total liabilities and stockholders' equity........ $2,835 $3,186
====== ======
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE> 98
DECKER COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JUNE 30, JULY 1, 1997
------------------------ TO
1995 1996 1997 MAY 4, 1998
------ ------ ------ ------------
<S> <C> <C> <C> <C>
Revenue................................................. $8,550 $8,620 $8,410 $8,729
Cost of revenue......................................... 2,419 2,655 2,275 2,275
------ ------ ------ ------
Gross profit.......................................... 6,131 5,965 6,135 6,454
Selling, general and administrative expenses............ 5,670 5,716 6,446 5,696
------ ------ ------ ------
Income (loss) from operations......................... 461 249 (311) 758
Other (income) expense.................................. (54) (74) 9 (11)
------ ------ ------ ------
Income (loss) before income taxes..................... 515 323 (320) 769
State income taxes...................................... 67 30 33 17
------ ------ ------ ------
Net income (loss)..................................... $ 448 $ 293 $ (353) $ 752
====== ====== ====== ======
Basic income (loss) per share........................... $ 2.53 $ 1.63 $(2.55) $ 5.24
====== ====== ====== ======
Weighted average shares outstanding..................... 176,750 180,150 138,352 143,417
------ ------ ------ -----------
------ ------ ------ -----------
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE> 99
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............................ -- -- -- -- 752 752
------- ----- -- ----- ------ ------
Balance, May 4, 1998.................... 143,417 $ 313 $-- $(171) $ 881 $1,023
======= ===== == ===== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE> 100
DECKER COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JUNE 30, JULY 1, 1997
--------------------- TO
1995 1996 1997 MAY 4, 1998
----- ----- ----- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 448 $ 293 $(353) $ 752
----- ----- ----- ------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................ 127 223 194 152
Non-cash compensation................................ -- -- 825 --
(Gain) loss on disposal of property and equipment.... -- (3) 12 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable,
trade.......................................... (210) 62 (366) 413
(Increase) decrease in related party receivable... -- -- -- (199)
(Increase) decrease in prepaid expenses and other
current assets................................. 12 20 30 (29)
(Increase) decrease in other assets............... (18) 6 (12) 7
Increase (decrease) in accounts payable and
accrued expenses............................... 247 (30) 119 (283)
Increase (decrease) in deferred revenue........... (40) (61) (3) 31
Increase (decrease) in other current
liabilities.................................... -- -- -- 223
----- ----- ----- ------
Total adjustments............................... 118 217 799 315
----- ----- ----- ------
Net cash provided by operating activities....... 566 510 446 1,067
----- ----- ----- ------
Cash flows from investing activities:
Net change in investments................................. (344) 131 36 133
Purchases of property and equipment....................... (136) (443) (56) (167)
Proceeds from sale of property and equipment.............. -- 9 9 3
----- ----- ----- ------
Net cash (used in) provided by investing
activities.................................. (480) (303) (11) (31)
----- ----- ----- ------
Cash flows from financing activities:
Dividends................................................. (300) (215) (154) (544)
Repurchase of stock....................................... -- (67) (35) --
Payments of notes payable................................. (6) -- (52) (11)
Repayments of long-term debt.............................. -- -- -- (35)
----- ----- ----- ------
Net cash used in financing activities........... (306) (282) (241) (590)
----- ----- ----- ------
Net (decrease) increase in cash and cash equivalents........ (220) (75) 194 446
Cash and cash equivalents, beginning of period.............. 609 389 314 508
----- ----- ----- ------
Cash and cash equivalents, end of period.................... $ 389 $ 314 $ 508 $ 954
===== ===== ===== ======
Supplemental disclosure:
Cash paid for interest.................................... $ -- $ -- $ 80 $ 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-47
<PAGE> 101
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.
On May 4, 1998, PROVANT, Inc. ("PROVANT") acquired all of the outstanding
stock of the Company for cash and shares of PROVANT common stock, and the
Company became a wholly-owned subsidiary of PROVANT.
(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.
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 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.
F-48
<PAGE> 102
DECKER COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
terminated its S corporation status concurrently with the combination previously
described.
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-49
<PAGE> 103
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 and for the period from July 1,
1997 to May 4, 1998 was $127, $223, $194 and $152, 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 1, 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-50
<PAGE> 104
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 and for the
period from July 1, 1997 to May 4, 1998 was $505, $561, $510, and $427,
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, $28, and
$36 to the plan for the years ended June 30, 1995, 1996 and 1997 and for the
period from July 1, 1997 to May 4, 1998, 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.
F-51
<PAGE> 105
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, 1996 and 1997, 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 and for the period from January 1,
1998 to May 4, 1998. 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, 1996 and 1997, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
1997 and for the period from January 1, 1997 to May 4, 1998, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
August 10, 1998
F-52
<PAGE> 106
J. HOWARD & ASSOCIATES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 201 $ 208
Investments............................................... -- --
Accounts receivable, net of allowance for doubtful
accounts of $84 at December 31, 1996 and $74 at
December 31, 1997...................................... 724 1,166
Due from employees and related parties.................... 17 214
Prepaid expenses.......................................... 14 42
------ ------
Total current assets.............................. 956 1,630
------ ------
Property and equipment, net................................. 365 301
Other assets................................................ 44 138
------ ------
Total assets...................................... $1,365 $2,069
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 12 $ 59
Accrued expenses.......................................... 106 105
Accrued compensation...................................... 32 139
Deferred revenue.......................................... 135 88
Accrued state income taxes................................ 38 41
Distributions payable..................................... -- 103
Current portion of long-term debt......................... -- --
------ ------
Total current liabilities......................... 323 535
------ ------
Commitments and contingencies
Stockholders' equity:
Class A voting common stock, no par value; authorized
100,000 shares; issued and outstanding 72,533 shares at
December 31, 1996 and December 31, 1997................ 175 175
Class B non-voting common stock, no par value; authorized
25,000 shares; issued and outstanding 16,267 shares at
December 31, 1996 and December 31, 1997................ 97 97
Retained earnings......................................... 770 1,262
------ ------
Total stockholders' equity........................ 1,042 1,534
------ ------
Total liabilities and stockholders' equity........ $1,365 $2,069
====== ======
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE> 107
J. HOWARD & ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1998
------------------------ TO
1995 1996 1997 MAY 4, 1998
------ ------ ------ ---------------
<S> <C> <C> <C> <C>
Revenue................................................. $6,251 $7,110 $7,684 $2,041
Cost of revenue......................................... 1,964 2,166 2,346 670
------ ------ ------ ------
Gross profit.......................................... 4,287 4,944 5,338 1,371
Selling, general, and administrative expenses........... 4,158 4,559 4,748 1,476
------ ------ ------ ------
Income (loss) from operations......................... 129 385 590 (105)
------ ------ ------ ------
Other income (expense):
Interest and dividend income.......................... 6 31 15 3
Interest expense...................................... (9) -- -- --
Other income (expense)................................ -- 3 -- --
------ ------ ------ ------
Total other income (expense).................. (3) 34 15 3
------ ------ ------ ------
Income (loss) before
income taxes................................ 126 419 605 (102)
State income taxes...................................... 10 8 5 --
------ ------ ------ ------
Net income (loss)............................. $ 116 $ 411 $ 600 $ (102)
====== ====== ====== ======
Basic income (loss) per share........................... $ 1.45 $ 4.81 $ 6.76 $(1.15)
====== ====== ====== ======
Weighted average shares outstanding..................... 80,000 85,500 88,800 88,800
====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE> 108
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.......................... -- -- -- -- (102) (102)
------ ---- ------ ---- ------ ------
Balance, May 4, 1998................ 72,533 $175 16,267 $ 97 $1,160 $1,432
====== ==== ====== ==== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE> 109
J. HOWARD & ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1998
------------------------ TO
1995 1996 1997 MAY 4, 1998
------ ------ ------ ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 116 $ 411 $ 600 $(102)
----- ----- ----- -----
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 95 104 139 45
Non-cash compensation................................ -- 166 -- 152
Loss on sale of property and equipment............... -- -- 15 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable........ (116) 37 (442) (86)
(Increase) decrease in prepaid expenses........... 10 (10) (28) (5)
Increase in investments........................... -- -- -- (10)
(Increase) decrease in other assets............... 12 9 (94) 106
Increase (decrease) in accounts payable and
accrued expenses................................ 153 (282) 256 237
Increase in state income taxes.................... 8 11 3 --
Increase (decrease) in deferred revenue........... 91 18 (47) (65)
----- ----- ----- -----
Total adjustments............................... 253 53 (198) 374
----- ----- ----- -----
Net cash provided by (used in) operating
activities.................................. 369 464 402 272
----- ----- ----- -----
Cash flows from investing activities:
Purchases of property and equipment....................... (50) (299) (101) (81)
Proceeds from sale of property and equipment.............. -- -- 11 --
Net (increase) decrease in amounts due from employees and
related parties........................................ (8) 51 (197) 156
----- ----- ----- -----
Net cash used in investing activities........... (58) (248) (287) 75
----- ----- ----- -----
Cash flows from financing activities:
Proceeds (payments) on long-term debt..................... (42) -- -- 385
Distributions to stockholders............................. (335) (481) (108) (103)
----- ----- ----- -----
Net cash (used in) provided by financing
activities.................................. (377) (481) (108) 282
----- ----- ----- -----
Net increase (decrease) in cash and cash equivalents........ (66) (265) 7 629
Cash and cash equivalents, beginning of period.............. 532 466 201 208
----- ----- ----- -----
Cash and cash equivalents, end of period.................... $ 466 $ 201 208 $ 837
===== ===== ===== =====
Supplemental disclosure:
Cash paid for interest.................................... $ 9 $ -- $ -- $ --
===== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE> 110
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.
On May 4, 1998, PROVANT, Inc. ("PROVANT") acquired all of the outstanding
stock of the Company for cash and shares of PROVANT common stock, and the
Company became a wholly-owned subsidiary of PROVANT.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recognized as products and services are provided.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost and depreciated using accelerated
and straight-line methods over periods ranging from three to seven years.
Leasehold improvements are amortized over the term of the lease.
Fair Value of Financial Instruments
Financial instruments of the Company consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses. The
carrying value of these financial instruments approximates their fair value
because of the short maturity of these instruments.
Income Taxes
The Company has elected to be treated as an S corporation. Therefore, the
net income of the Company is reported by the stockholders. Accordingly, no
provision for federal income taxes has been included in the financial
statements. Only certain state taxes are paid by the Company. The Company
terminated its S corporation status concurrently with the combination previously
described.
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
F-57
<PAGE> 111
J. HOWARD & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 and for the period from January
1, 1998 to May 4, 1998 was $95, $104, $139 and $45, respectively.
(5) LINE OF CREDIT
The Company has a secured revolving line of credit agreement which permits
borrowings of up to $500 at the bank's base rate plus one percent. No amounts
were outstanding under this agreement at December 31, 1995, 1996 and 1997.
Substantially all assets of the Company are pledged as collateral under this
agreement.
(6) DISTRIBUTIONS TO STOCKHOLDERS
As discussed in note 2, the stockholders are taxed on their proportionate
share of the Company's taxable income. It has been the Company's policy to make
distributions to the stockholders for the purpose of funding these income tax
obligations.
(7) LEASE COMMITMENTS
The Company is committed under various noncancelable operating leases for
office space and equipment through June 2005. Lease expense charged to
operations was $256 in 1995, $247 in 1996 and $149 in 1997 and $55 for the
period from January 1, 1998 to May 4, 1998.
F-58
<PAGE> 112
J. HOWARD & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under all noncancelable operating leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998................................................ $ 344
1999................................................ 616
2000................................................ 617
2001................................................ 577
2002................................................ 554
Thereafter.......................................... 1,372
------
$4,080
======
</TABLE>
(8) STOCKHOLDERS' EQUITY
During the year ended December 31, 1996, 5,866 shares of Class A common
stock (voting) no par value and 2,934 shares of Class B common stock
(non-voting) no par value were issued 50% each to two new shareholders in
recognition of compensation expense of $111 and $55, respectively.
On June 30, 1995, the Company approved an increase in the authorized common
stock Class A (voting) from 12,500 shares to 100,000 shares and common stock
Class B (non-voting) from 1,000 shares to 25,000 shares. Additionally, the
Company approved an exchange of 40 shares of the newly authorized shares for
each share of the previously authorized shares (or a 40 for 1 stock split). All
share data has been retroactively adjusted to reflect the stock split.
(9) EMPLOYEE BENEFITS
The Company maintains a defined contribution retirement plan for all
eligible employees. Company contributions are at the discretion of the Board of
Directors, but cannot exceed the maximum amount deductible under applicable
provisions of the Internal Revenue Code.
Contributions to the plan amounted to $34 for each of the years ended
December 31, 1995, 1996 and 1997. For the period from January 1, 1998 to May 4,
1998, contributions to the plan were $12.
(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.
F-59
<PAGE> 113
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, 1996
and 1997 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,
and for the period from January 1, 1998 to May 4, 1998. 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, 1996 and
1997 and the results of its operations and its cash flows for each of the years
in the three-year period ended December 31, 1997, and for the period from
January 1, 1998 to May 4, 1998 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
August 10, 1998
F-60
<PAGE> 114
ROBERT STEINMETZ, Ph.D., AND ASSOCIATES, INC.
d/b/a LEARNING SYSTEMS SCIENCES
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 274 $ 174
Accounts receivable, net of allowance for doubtful
accounts of $88 at December 31, 1996 and 1997.......... 703 984
Costs in excess of billings............................... 267 561
Prepaid expenses and other current assets................. 53 43
------ ------
Total current assets.............................. 1,297 1,762
------ ------
Property and equipment, net................................. 129 153
Other assets................................................ 103 104
------ ------
Total assets...................................... $1,529 $2,019
====== ======
Current liabilities:
Accounts payable.......................................... $ 64 $ 185
Accrued expenses.......................................... 166 40
Accrued compensation...................................... 124 161
Billings in excess of costs............................... 710 414
------ ------
Total current liabilities......................... 1,064 800
------ ------
Commitments and contingencies
Stockholders' equity:
Common stock, stated value; 14,000,000 shares authorized,
issued and outstanding................................. 3 3
Retained earnings......................................... 462 1,216
------ ------
Total stockholders' equity........................ 465 1,219
------ ------
Total liabilities and stockholders' equity........ $1,529 $2,019
====== ======
</TABLE>
See accompanying notes to financial statements.
F-61
<PAGE> 115
ROBERT STEINMETZ, Ph.D., AND ASSOCIATES, INC.
d/b/a LEARNING SYSTEMS SCIENCES
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------------------ JANUARY 1, 1998
1995 1996 1997 TO MAY 4, 1998
---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C>
Revenue....................................... $ 3,332 $ 5,123 $ 5,681 $ 2,861
Cost of revenue............................... 1,390 1,696 2,202 909
---------- ---------- ---------- ----------
Gross profit................................ 1,942 3,427 3,479 1,952
Selling, general and administrative
expenses.................................... 1,767 3,079 2,226 633
---------- ---------- ---------- ----------
Income from operations.............. 175 348 1,253 1,319
---------- ---------- ---------- ----------
Other income (expense):
Other....................................... (49) -- -- --
Interest income, net........................ 2 9 15 5
---------- ---------- ---------- ----------
Total other income (expense)........ (47) 9 15 5
---------- ---------- ---------- ----------
Income before income taxes.......... 128 357 1,268 1,324
Income taxes.................................. 86 7 18 4
---------- ---------- ---------- ----------
Net income.......................... $ 42 $ 350 $ 1,250 $ 1,320
========== ========== ========== ==========
Basic income per share........................ $ -- $ .03 $ .09 $ .09
========== ========== ========== ==========
Weighted average shares outstanding........... 14,000,000 14,000,000 14,000,000 14,000,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-62
<PAGE> 116
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........................................ -- -- 1,320 1,320
---------- -- ------ ------
Balance, May 4, 1998................................ 14,000,000 $3 $2,257 $2,260
========== == ====== ======
</TABLE>
See accompanying notes to financial statements.
F-63
<PAGE> 117
ROBERT STEINMETZ, Ph.D., AND ASSOCIATES, INC.
d/b/a LEARNING SYSTEMS SCIENCES
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------- JANUARY 1, 1998
1995 1996 1997 TO MAY 4, 1998
------ ------ ------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 42 $ 350 $1,250 $1,320
----- ----- ------ ------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 48 43 62 20
Changes in operating assets and liabilities:
Increase in accounts receivable............. (467) (195) (281) (169)
(Increase) decrease in prepaid expenses and
other current assets...................... 12 (30) 10 (70)
(Increase) decrease in costs in excess of
billings.................................. (184) 14 (294) 109
(Increase) decrease in other assets......... (17) (19) (1) 14
Increase (decrease) in accounts payable and
accrued expenses.......................... 50 115 32 111
Increase in deferred revenue................ -- -- -- 93
Increase (decrease) in billings in excess of
costs..................................... 560 37 (296) (414)
----- ----- ------ ------
Total adjustments......................... 2 (35) (768) (309)
----- ----- ------ ------
Net cash provided by operating
activities............................. 44 315 482 1,011
----- ----- ------ ------
Cash flows from investing activity:
Purchases of property and equipment................. (84) (85) (86) (271)
----- ----- ------ ------
Cash flows from financing activity:
Dividend............................................ -- -- (496) (629)
----- ----- ------ ------
Net (decrease) increase in cash and cash
equivalents............................ (40) 230 (100) 111
Cash and cash equivalents, beginning of period........ 84 44 274 174
----- ----- ------ ------
Cash and cash equivalents, end of period.............. $ 44 $ 274 $ 174 $ 285
===== ===== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-64
<PAGE> 118
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.
On May 4, 1998, PROVANT, Inc. ("PROVANT") acquired all of the outstanding
stock of the Company for cash and shares of PROVANT common stock, and the
Company became a wholly-owned subsidiary of PROVANT.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company follows the percentage-of-completion method of accounting for
contracts. Accordingly, income is recognized in the ratio that costs incurred
bear to estimated total costs. Adjustments to cost estimates are made
periodically, and losses expected to be incurred on contracts in progress are
charged to operations in the period such losses are determined. The aggregate of
costs incurred and income recognized on uncompleted contracts in excess of
related billings is shown as a current asset, and the aggregate of billings on
uncompleted contracts in excess of related costs incurred and income recognized
is shown as a current liability.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost and depreciated using an
accelerated method over periods ranging from five to seven years. Leasehold
improvements are amortized over the term of the lease.
Fair Value of Financial Instruments
Financial instruments of the Company consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities. The
carrying value of these financial instruments approximates their fair value
because of the short maturity of these instruments.
Income Taxes
Effective August 31, 1995, the Company elected to be treated as an S
corporation. Therefore, the net income of the Company is reported by the
stockholders. Accordingly, no provision for federal income taxes has been
included in the financial statements for the periods subsequent to that date.
Only certain state
F-65
<PAGE> 119
ROBERT STEINMETZ, Ph.D., AND ASSOCIATES, INC.
d/b/a LEARNING SYSTEMS SCIENCES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
income taxes are paid by the Company. The Company terminated its S corporation
status concurrently with the combination previously described.
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 and for the period from January
1 to May 4, 1998 was $48, $43, $62 and $20, respectively.
(4) OPERATING LEASES
Operating lease commitments consist of facility and automobile rentals.
Future minimum lease payments under all noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1998................................................ $135
1999................................................ 39
----
$174
====
</TABLE>
Lease expense for the years ended December 31, 1995, 1996 and 1997 and for
the period from January 1 to May 4, 1998 totaled $93, $112, $136 and $50,
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, or for the period from
January 1 to May 4, 1998.
F-66
<PAGE> 120
ROBERT STEINMETZ, Ph.D., AND ASSOCIATES, INC.
d/b/a LEARNING SYSTEMS SCIENCES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(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) STOCK SPLIT
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-67
<PAGE> 121
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, 1996 and 1997, 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 and for the period from July 1, 1997 to May
4, 1998. 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, 1996 and 1997, and the results of its operations
and its cash flows for each of the years in the two-year period ended June 30,
1997, and for the period from July 1, 1997 to May 4, 1998, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
August 10, 1998
F-68
<PAGE> 122
MOHR RETAIL LEARNING SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
------------
1996 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $221 $260
Accounts receivable, net of allowance for doubtful
accounts of $46 at June 30, 1996 and 1997.............. 211 548
Inventory................................................. 99 133
Prepaid expenses.......................................... 11 14
---- ----
Total current assets.............................. 542 955
Property and equipment, net................................. 18 44
---- ----
Total assets...................................... $560 $999
==== ====
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $118 $ 74
Accrued expenses.......................................... 320 295
Accrued compensation...................................... 12 54
Deferred revenue.......................................... 48 73
---- ----
Total current liabilities......................... 498 496
---- ----
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; 2,500 shares authorized; 100
shares issued and outstanding.......................... 4 4
Retained earnings......................................... 58 499
---- ----
Total stockholders' equity........................ 62 503
---- ----
Total liabilities and stockholders' equity........ $560 $999
==== ====
</TABLE>
See accompanying notes to financial statements.
F-69
<PAGE> 123
MOHR RETAIL LEARNING SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
JUNE 30, JULY 1, 1997
---------------- TO
1996 1997 MAY 4, 1998
------ ------ ------------
<S> <C> <C> <C>
Revenue..................................................... $2,171 $3,015 $3,237
Cost of revenue............................................. 677 825 1,009
------ ------ ------
Gross profit.............................................. 1,494 2,190 2,228
Selling, general and administrative expenses................ 1,151 1,745 1,510
------ ------ ------
Income from operations.................................... 343 445 718
Interest income (expense)................................... (3) 3 5
------ ------ ------
Income before income taxes................................ 340 448 723
State income taxes.......................................... 1 7 2
------ ------ ------
Net income........................................ $ 339 $ 441 $ 721
====== ====== ======
Basic income per share...................................... $3,390 $4,410 $7,210
====== ====== ======
Weighted average shares outstanding......................... 100 100 100
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE> 124
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.................................. -- -- 721 721
--- --- ------- -------
Balance, May 4, 1998.......................... 100 $ 4 $ 1,220 $ 1,224
=== === ======= =======
</TABLE>
See accompanying notes to financial statements.
F-71
<PAGE> 125
MOHR RETAIL LEARNING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, PERIOD FROM
-------------- JULY 1, 1997 TO
1996 1997 MAY 4, 1998
----- ----- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 339 $ 441 $ 721
----- ----- -----
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................ 10 15 20
Changes in operating assets and liabilities:
Increase in accounts receivable................... (99) (337) (304)
(Increase) decrease in inventory.................. 4 (34) (5)
(Increase) decrease in prepaid expenses........... 3 (3) (31)
Increase (decrease) in accounts payable........... (1) (44) 21
Increase (decrease) in accrued expenses........... (15) 17 (218)
Increase (decrease) in deferred revenue........... (29) 25 131
----- ----- -----
Total adjustments............................... (127) (361) (386)
----- ----- -----
Net cash provided by operating activities....... 212 80 335
----- ----- -----
Cash flows from investing activities:
Purchases of property and equipment....................... (8) (41) (19)
Net increase in amounts due from employees and related
parties................................................ -- -- (49)
----- ----- -----
Net cash used in investing activities........... (8) (41) (68)
----- ----- -----
Net increase (decrease) in cash and cash equivalents........ 204 39 267
Cash and cash equivalents, beginning of period.............. 17 221 260
----- ----- -----
Cash and cash equivalents, end of period.................... $ 221 $ 260 $ 527
===== ===== =====
Supplemental disclosure:
Cash paid for interest.................................... $ -- $ 3 $ 7
===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-72
<PAGE> 126
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.
On May 4, 1998, PROVANT, Inc. ("PROVANT") acquired all of the outstanding
stock of the Company for cash and shares of PROVANT common stock, and the
Company became a wholly-owned subsidiary of PROVANT.
(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.
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.
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
F-73
<PAGE> 127
MOHR RETAIL LEARNING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
financial statements. Only certain state taxes are paid by the Company. The
Company terminated its S corporation status concurrently with the combination
previously discussed.
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, and $20 for
the period from July 1, 1997 to May 4, 1998.
(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. For the period from
July 1, 1997 to May 4, 1998 was $31. 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>
(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, $104 and $51
for the years ended June 30, 1996 and 1997, and for the period from July 1, 1997
to May 4, 1998 respectively.
F-74
<PAGE> 128
MOHR RETAIL LEARNING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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.
F-75
<PAGE> 129
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, 1996 and 1997, 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 and for the period from July 1, 1997 to May 4, 1998.
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, 1996 and 1997, and the results of its operations and its cash flows for
each of the years in the three-year period ended June 30, 1997 and for the
period from July 1, 1997 to May 4, 1998 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
August 10, 1998
F-76
<PAGE> 130
NOVATIONS GROUP, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
----------------
1996 1997
------ ------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 17 $ 88
Accounts receivable, net of allowance for doubtful
accounts of $158....................................... 1,976 2,202
Receivable from related parties........................... 179 414
Prepaid expenses.......................................... 63 115
------ ------
Total current assets.............................. 2,235 2,819
Property and equipment, net................................. 552 492
------ ------
Total assets...................................... $2,787 $3,311
====== ======
Current liabilities:
Current portion of notes payable.......................... 1,079 1,298
Accounts payable.......................................... 225 118
Accrued compensation...................................... 836 803
Accrued expenses.......................................... 275 177
Deferred income taxes..................................... -- 415
------ ------
Total current liabilities......................... 2,415 2,811
------ ------
Notes payable............................................... 459 361
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 and 1997, respectively........................ 1 1
Retained earnings (deficit)............................... (88) 138
------ ------
Total stockholders' equity (deficit).............. (87) 139
------ ------
Total liabilities and stockholders' equity........ $2,787 $3,311
====== ======
</TABLE>
See accompanying notes to financial statements.
F-77
<PAGE> 131
NOVATIONS GROUP, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, PERIOD FROM
-------------------------- JULY 1, 1997 TO
1995 1996 1997 MAY 4, 1998
------ ------ ------ ---------------
<S> <C> <C> <C> <C>
Revenue........................................... $7,175 $9,039 $9,018 $9,228
Cost of revenue................................... 3,885 4,733 4,839 4,356
------ ------ ------ ------
Gross profit............................ 3,290 4,306 4,179 4,872
Selling, general, and administrative expenses..... 3,167 4,094 3,315 3,956
------ ------ ------ ------
Income from operations.................. 123 212 864 916
Interest expense, net............................. 98 98 137 196
------ ------ ------ ------
Income before income taxes.............. 25 114 727 720
Income taxes...................................... 22 40 435 367
------ ------ ------ ------
Net income.............................. $ 3 $ 74 $ 292 $ 353
====== ====== ====== ======
Basic income per share............................ $ 3 $ 74 $ 292 $ 353
====== ====== ====== ======
Weighted average shares outstanding............... 1,000 1,000 1,000 1,000
</TABLE>
See accompanying notes to financial statements.
F-78
<PAGE> 132
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......................................... -- -- 353 353
Distributions to stockholders...................... -- -- (11) (11)
------ --- ----- -----
Balance, May 4, 1998................................. 1,000 $ 1 $ 480 $ 481
====== === ===== =====
</TABLE>
See accompanying notes to financial statements.
F-79
<PAGE> 133
NOVATIONS GROUP, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, PERIOD FROM
----------------------- JULY 1, 1997 TO
1995 1996 1997 MAY 4, 1998
----- ----- ----- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 3 $ 74 $ 292 $ 353
----- ----- ----- -------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 203 167 197 160
Deferred income taxes.................................. -- -- 415 333
Changes in operating assets and liabilities:
Increase (decrease) in current portion LT debt....... -- -- -- 475
(Increase) decrease in accounts receivable........... (670) (357) (226) (1,227)
Increase in inventory................................ -- -- -- (89)
(Increase) decrease in prepaid expenses.............. (250) 86 (287) 112
Increase (decrease) in income taxes payable..........
Increase (decrease) in accounts payable and accrued
expenses.......................................... 358 (88) (238) 450
----- ----- ----- -------
Total adjustments................................. (359) (192) (554) 214
----- ----- ----- -------
Net cash (used by) provided by operating
activities...................................... (356) (118) 153 567
----- ----- ----- -------
Cash flows from investing activities:
(Increase) decrease related party receivable.............. -- -- -- 45
Purchases of property and equipment....................... (217) (427) (137) (61)
----- ----- ----- -------
Cash used in investing activities......................... (217) (427) (137) (16)
----- ----- ----- -------
Cash flows from financing activities:
Net (repayments)/proceeds from long-term debt............. 340 117 121 (67)
Distribution to stockholders.............................. (40) (41) (66) (11)
----- ----- ----- -------
Net cash provided by (used in) financing
activities...................................... 300 76 55 (78)
----- ----- ----- -------
Net (decrease) increase in cash and cash equivalents........ (273) (469) 71 473
Cash and cash equivalents, beginning of period.............. 759 486 17 88
----- ----- ----- -------
Cash and cash equivalents, end of period.................... $ 486 $ 17 $ 88 $ 561
===== ===== ===== =======
Supplemental disclosure:
Cash paid for interest.................................... $ 120 $ 120 $ 151 $ 139
===== ===== ===== =======
</TABLE>
See accompanying notes to financial statements.
F-80
<PAGE> 134
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.
On May 4, 1998, PROVANT, Inc. ("PROVANT") acquired all of the outstanding
stock of the Company for cash and shares of PROVANT common stock, and the
Company became a wholly-owned subsidiary.
(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.
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.
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
F-81
<PAGE> 135
NOVATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 and 1997 was
$140 and $332, respectively. Also included in receivables from related parties
are employee advances of $39 and $82 at June 30, 1996 and 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, and for the period from July 1, 1997
to May 4, 1998, was $203, $167, $197 and $160, respectively.
(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.
F-82
<PAGE> 136
NOVATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate maturities required on these notes at June 30, 1997 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 and for the
period from July 1, 1997 to May 4, 1998, was $71, $211, $385 and $483,
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.
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>
F-83
<PAGE> 137
NOVATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, $75 and
$50 to the plan for the years ended June 30, 1995, 1996 and 1997, and for the
period from July 1, 1997 to May 4, 1998, 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.
F-84
<PAGE> 138
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-85
<PAGE> 139
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Star Mountain, Inc.:
We have audited the accompanying consolidated balance sheets of Star
Mountain, Inc. and subsidiaries as of December 31, 1996 and 1997, 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 and
for the period from January 1, 1998 to May 4, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Star
Mountain, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 1997 and for the period from January 1, 1998
to May 4, 1998, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
August 10, 1998
F-86
<PAGE> 140
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------ -------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 39 $ 358
Accounts receivable....................................... 4,395 6,091
Current portion of notes receivable, related parties...... 181 666
Inventory................................................. 100 129
Other current assets...................................... 71 100
Deferred income taxes..................................... 29 117
------ -------
Total current assets.............................. 4,815 7,461
------ -------
Property and equipment:
Furniture and fixtures.................................... 65 531
Office equipment.......................................... 746 1,444
Computer software......................................... 69 114
Leasehold improvements.................................... 16 87
Automobiles............................................... 31 73
------ -------
927 2,249
Less accumulated depreciation and amortization............ 423 1,303
------ -------
504 946
------ -------
Other assets:
Notes receivable, related parties, net of current
portion................................................ 267 --
Other assets.............................................. 140 459
Land held for investment.................................. 110 110
Goodwill, net of accumulated amortization of $23 and
$88.................................................... 147 1,701
------ -------
664 2,270
------ -------
Total assets...................................... $5,983 $10,677
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable, bank........................................ $ 905 $ 2,858
Current portion of notes payable.......................... 95 455
Accounts payable.......................................... 1,295 1,685
Accrued expenses.......................................... 573 1,152
Accrued compensation...................................... -- --
Billings in excess of costs and earnings.................. 1,076 1,247
Income taxes payable...................................... -- --
------ -------
Total current liabilities......................... 3,944 7,397
------ -------
Long-term liabilities:
Notes payable, net of current portion..................... -- 304
Deferred income taxes..................................... 29 198
------ -------
Total long-term liabilities....................... 29 502
------ -------
Total liabilities................................. 3,973 7,899
------ -------
Commitments and contingencies
Stockholders' equity:
Common stock.............................................. 8 2,147
Additional paid-in capital................................ 2,058 --
Retained earnings......................................... 529 1,257
------ -------
2,595 3,404
Less common stock held in treasury at cost................ (585) (626)
------ -------
Total stockholders' equity........................ 2,010 2,778
------ -------
Total liabilities and stockholders' equity........ $5,983 $10,677
====== =======
</TABLE>
See accompanying notes to consolidated financial statements
F-87
<PAGE> 141
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
--------------------------- JANUARY 1, 1998
1995 1996 1997 TO MAY 4, 1998
------- ------- ------- ---------------
<S> <C> <C> <C> <C>
Total revenue...................................... $14,306 $16,313 $23,775 $11,052
Cost of revenue.................................... 8,668 9,457 14,504 6,109
------- ------- ------- -------
Gross profit..................................... 5,638 6,856 9,271 4,943
Operating expenses................................. 4,411 5,476 7,591 3,650
------- ------- ------- -------
Income from operations............................. 1,227 1,380 1,680 1,293
------- ------- ------- -------
Other income (expense):
Interest income.................................. 19 25 44 15
Interest expense................................. (54) (65) (144) (120)
Other, net....................................... (200) (339) (306) (32)
------- ------- ------- -------
(235) (379) (406) (137)
------- ------- ------- -------
Income before income taxes......................... 992 1,001 1,274 1,156
Income taxes....................................... -- 397 546 457
------- ------- ------- -------
Net income......................................... $ 992 $ 604 $ 728 $ 699
======= ======= ======= =======
Basic income per share............................. $ 0.11 $ 0.07 $ 0.09 $ 0.09
======= ======= ======= =======
Diluted income per share........................... $ 0.11 $ 0.07 $ 0.08 $ 0.08
======= ======= ======= =======
Weighted average shares outstanding................ 8,825 8,422 8,078 8,074
======= ======= ======= =======
Weighted average shares and potentially dilutive
shares outstanding............................... 8,963 8,565 8,823 8,871
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-88
<PAGE> 142
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...................... -- -- -- 699 -- -- 699
--------- ------ ------- ------ --------- ----- ------
Balance, May 4, 1998............ 9,285,025 $2,159 -- $1,956 1,211,460 $(626) $3,489
========= ====== ======= ====== ========= ===== ======
</TABLE>
See accompanying notes to consolidated financial statements
F-89
<PAGE> 143
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PRIOR FROM
------------------------------ JANUARY 1, 1998
1995 1996 1997 TO MAY 4, 1998
-------- -------- -------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers............................. $ 13,419 $ 16,428 $ 23,529 $10,152
Cash paid to suppliers and employees..................... (12,620) (14,890) (22,083) (9,679)
Interest received........................................ 19 25 44 16
Interest paid............................................ (54) (65) (144) (122)
Income taxes paid........................................ -- (420) (482) (252)
-------- -------- -------- -------
Net cash provided by operating activities........ 764 1,078 864 115
-------- -------- -------- -------
Cash flows from investing activities:
Issuance of notes receivable............................. (64) (96) (218) --
Acquisition of property and equipment.................... (159) (61) (358) (264)
Business acquisitions.................................... (100) (300) (1,752) --
Purchase of land held for investment..................... -- (110) -- --
Other.................................................... (8) 2 -- --
-------- -------- -------- -------
Net cash used in investing activities............ (331) (565) (2,328) (264)
-------- -------- -------- -------
Cash flows from financing activities:
Net borrowings (payments) on line-of-credit.............. (15) (86) 1,953 403
Principal repayments on long-term debt................... -- -- (210) (286)
Proceeds from other notes payable........................ 25 95 -- --
Payments on other notes payable.......................... (34) (35) -- --
Proceeds from issuance of common stock................... 36 68 81 12
Purchase of treasury stock............................... (65) (520) (41) --
Distributions to shareholders............................ (379) -- -- --
Decrease in deferred income taxes........................ -- -- -- --
-------- -------- -------- -------
Net cash provided by (used in) financing
activities..................................... (432) (478) 1,783 129
-------- -------- -------- -------
Net (decrease) increase in cash............................ 1 35 319 (20)
Cash, and cash equivalents, beginning of period............ 3 4 39 358
-------- -------- -------- -------
Cash, and cash equivalents, end of period.................. $ 4 $ 39 $ 358 $ 338
======== ======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements
F-90
<PAGE> 144
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
-------------------------- JANUARY 1, 1998
1995 1996 1997 TO MAY 4, 1998
------- ------ ----- ---------------
<S> <C> <C> <C> <C>
Reconciliation of net income to net cash provided by
operating activities:
Net income............................................... $ 992 $ 604 $ 728 $ 699
------- ------ ----- -------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 96 139 314 136
Loss on sale of assets................................... -- 4 11 --
Deferred income taxes.................................... -- -- (9) (6)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable................................... (1,053) (637) (417) (2,094)
Inventory............................................. -- 18 (29) 37
Other current assets.................................. 47 (34) 24 440
Other assets.......................................... (25) (69) (237) (183)
Intercompany assets................................... -- -- -- (50)
Increase (decrease) in:
Accounts payable...................................... 425 168 90 335
Accrued expenses...................................... 116 133 218 271
Billings in excess of costs and anticipated profits... 166 752 171 530
------- ------ ----- -------
Total adjustments........................................ (228) 474 136 (584)
------- ------ ----- -------
Net cash provided by (used in) operating activities...... $ 764 $1,078 $ 864 $ 115
======= ====== ===== =======
</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-91
<PAGE> 145
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
Star Mountain, Inc. (together with its direct and indirect wholly-owned
subsidiaries 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 has 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.
On May 4, 1998, PROVANT, Inc. ("PROVANT") acquired all of the outstanding
stock of the Company for cash and shares of PROVANT common stock, and the
Company became a wholly-owned subsidiary of PROVANT.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
A major portion of the Company's revenue results from services performed
under U.S. government contracts, either directly or through subcontracts. The
majority of the Company's contracts are fixed-price contracts. Revenue on fixed
price contracts is recognized using the percentage of completion method based on
costs incurred in relation to total estimated costs. Revenue on
time-and-materials contracts is recognized to the extent of fixed billable rates
for hours delivered plus reimbursable costs. Revenue on cost-plus-fee contracts
is recognized based on reimbursable costs incurred plus estimated fees earned
thereon. At the time it is recognized that it is probable that a contract will
result in a loss and the loss can be reasonably estimated, the entire estimated
loss is included in the determination of net income. In accordance with industry
practice, amounts relating to long-term contracts are classified as current
assets although an indeterminable portion of these amounts is not expected to be
realized within one year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Credit Risk
The Company's accounts receivable consist principally of unsecured amounts
due from the U.S. Government.
Cash Equivalents
Cash equivalents are defined as highly liquid short-term investments whose
maturity dates do not extend past three months from the original date of
purchase. The Company has held no such instruments.
F-92
<PAGE> 146
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 $1.5
million. The net assets represent substantially all of the operating
F-93
<PAGE> 147
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets of the division. The excess of the purchase price over the book value of
the tangible assets acquired of approximately $930,000 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 (Dollars in
thousands, except per share data).
<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 (Dollars in thousands):
<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 (Dollars in thousands):
<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 $3.5 million in total. Advances bear interest at LIBOR plus 250 basis
points. The line is collateralized by substantially all of the Company's assets.
The agreement requires the Company to meet certain covenants including
limitations on dividends, and maintenance of adjusted tangible net worth, as
defined. The Company has been in compliance with the lender's covenants during
each of the periods presented. At December 31, 1996 and 1997, overdrafts in the
payroll and operating bank accounts amounting to $236,000 and $259,000,
respectively, have been included in the outstanding balance on the line since
such overdrafts are automatically covered by the bank as checks are presented
for payment.
F-94
<PAGE> 148
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LONG-TERM DEBT (DOLLARS IN THOUSANDS)
<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 and for the period ended May 4, 1998, was $121,000, $123,000,
$153,000 and $85,000, 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 and for the period ended May 4,
1998, totalled $557,000, $595,000, $868,000 and $396,000, respectively. Future
minimum lease commitments under non-cancellable operating leases for years
ending December 31, are as follows (Dollars in thousands):
<TABLE>
<CAPTION>
TOTAL
---------
<S> <C>
1999........................................................ $1,046
2000........................................................ 918
2001........................................................ 732
2002........................................................ 553
2003........................................................ 92
------
$3,341
======
</TABLE>
F-95
<PAGE> 149
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-96
<PAGE> 150
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 (Dollars in
thousands, except per share data):
<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: (Dollars in thousands, except
per share data)
<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
Period from January 1, 1998
to May 4, 1998............ $699 8,073,565 797,664 8,871,229 $0.09 $0.08
</TABLE>
F-97
<PAGE> 151
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) INCOME TAXES
Income tax expense consists of the following amounts (Dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, PERIOD FROM
---------------------------- JANUARY 1, 1998
1996 1997 MAY 4, 1998
------------ ------------ ----------------
<S> <C> <C> <C>
Current:
Federal................................... $313 $426 $393
State..................................... 84 123 64
Deferred:
Federal................................... -- (3) --
---- ---- ----
$397 $546 $457
==== ==== ====
</TABLE>
The differences between the effective income tax rate and the statutory
federal income tax rates are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, PERIOD FROM
------------ JANUARY 1, 1998
1996 1997 MAY 4, 1998
---- ---- ---------------
<S> <C> <C> <C>
Computed "expected" tax on income....................... 34.0% 34.0% 34.0%
State taxes, net of federal benefit..................... 4.1 4.1 4.1
Other, net.............................................. 1.6 4.7 1.4
---- ---- ----
Taxes on income......................................... 39.7% 42.8% 39.5%
==== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below (Dollars
in thousands):
<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>
F-98
<PAGE> 152
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
American Media Incorporated
West Des Moines, Iowa
We have audited the accompanying balance sheets of American Media
Incorporated as of June 30, 1998 and 1997, and the related statements of income,
stockholders' equity and cash flows for the years then ended. 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 American Media Incorporated
as of June 30, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
McGladrey & Pullen, LLP
Des Moines, Iowa
July 31, 1998, except for
Note 10 as to which the
date is August 10, 1998
F-99
<PAGE> 153
AMERICAN MEDIA INCORPORATED
BALANCE SHEETS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(NOTE 11)
<S> <C> <C>
ASSETS (Note 3)
Current Assets
Cash (Note 8)........................................... $ 5,457 $ 55,942
Receivables:
Trade, less allowance for doubtful accounts 1998
$110,000; 1997 $50,000........................... 2,107,936 1,786,207
Royalties.......................................... 69,950 110,000
Other.............................................. 1,955 37,559
Income tax refund claims........................... 239,262 --
Inventories:
Released film cost, net of accumulated amortization
1998 $4,017,312; 1997 $3,267,795................. 2,602,134 1,307,756
Films in progress, at cost......................... 425,538 203,060
Other.............................................. 565,471 330,500
Costs and estimated earnings in excess of billings on
uncompleted film production contracts (Note 2)......... 90,986 27,583
Prepaid advertising..................................... 287,344
Prepaid expenses........................................ 126,773 115,834
Deferred taxes (Note 5)................................. -- 150,000
---------- ----------
Total current assets........................... 6,522,806 4,124,441
---------- ----------
Rental Office Property, net of accumulated depreciation 1998
$340,453; 1997 $333,481 (Note 7).......................... 60,958 67,930
---------- ----------
Improvements and Equipment (Note 6)
Leasehold improvements.................................. 278,954 274,170
Furniture and equipment................................. 1,883,956 1,675,171
Automobiles............................................. 96,613 113,602
---------- ----------
2,259,523 2,062,943
Less accumulated depreciation........................... 1,392,585 1,287,176
---------- ----------
866,938 775,767
---------- ----------
$7,450,702 $4,968,138
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable (Note 3)................................... $1,049,000 $ 100,000
Current obligation under capital lease (Note 6)......... 11,556 12,407
Accounts payable........................................ 500,351 588,938
Accrued wages........................................... 415,727 249,051
Accrued royalties....................................... 236,060 193,471
Other accrued expenses.................................. 425,369 204,450
Income taxes payable.................................... -- 10,000
Billings in excess of costs and estimated earnings on
uncompleted film production contracts (Note 2)......... 112,333 55,004
Deferred taxes (Note 5)................................. 355,000 --
---------- ----------
Total current liabilities...................... 3,105,396 1,413,321
---------- ----------
Obligation Under Capital Lease, less current maturities
(Note 6).................................................. 51,823 4,981
---------- ----------
Deferred Taxes (Note 5)..................................... 60,000 --
---------- ----------
Stockholders' Equity
Participating common stock, voting, no par value;
authorized 2,000,000 shares; issued 1,900,000 shares... 22,000 22,000
Nonparticipating common stock, voting, no par value;
authorized 2,000,000 shares; issued 18,000 shares...... 8,526 8,526
Retained earnings....................................... 4,273,881 3,590,234
---------- ----------
4,304,407 3,620,760
Less cost of treasury stock:
Participating common stock, 20,000 shares.......... 50,000 50,000
Nonparticipating common stock, 15,900 shares....... 20,924 20,924
---------- ----------
4,233,483 3,549,836
---------- ----------
$7,450,702 $4,968,138
========== ==========
</TABLE>
See Notes to Financial Statements.
F-100
<PAGE> 154
AMERICAN MEDIA INCORPORATED
STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Operating revenues:
Film and video sales, rentals and previews............. $14,362,513 $12,089,974
Film production contracts.............................. 1,864,615 1,213,149
Royalties and commissions.............................. 594,929 650,169
Consulting............................................. 164,220 45,586
Other.................................................. 107,719 154,325
----------- -----------
17,093,996 14,153,203
----------- -----------
Operating expenses:
Cost of films and videos sold.......................... 1,876,199 1,128,472
Cost of film production contracts...................... 636,155 699,456
Royalties and commissions.............................. 2,009,278 2,043,156
Depreciation and amortization.......................... 939,096 920,214
Selling, general and administrative (Note 8)........... 10,522,860 8,528,931
----------- -----------
15,983,588 13,320,229
----------- -----------
Operating income............................. 1,110,408 832,974
----------- -----------
Nonoperating income (expense):
Interest income........................................ 3,773 24,324
Interest (expense)..................................... (62,221) (44,188)
Other income........................................... 16,812 77,671
----------- -----------
(41,636) 57,807
----------- -----------
Income before income taxes................... 1,068,772 890,781
----------- -----------
Federal and state income taxes (credits):
Current................................................ (179,875) 342,557
Deferred............................................... 565,000 (8,000)
----------- -----------
385,125 334,557
----------- -----------
Net income................................... $ 683,647 $ 556,224
=========== ===========
Basic income per share................................. $ 0.36 $ 0.30
=========== ===========
Weighted average shares outstanding.................... 1,882,100 1,881,600
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-101
<PAGE> 155
AMERICAN MEDIA INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
NON- NON-
PARTICIPATING PARTICIPATING PARTICIPATING PARTICIPATING
COMMON COMMON RETAINED TREASURY TREASURY
STOCK STOCK EARNINGS STOCK STOCK TOTAL
------------- ------------- ---------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996...... $22,000 $5,346 $3,034,010 $(50,000) $(18,774) $2,992,582
Net income.............. -- -- 556,224 -- -- 556,224
Purchase of 1,000 shares
of nonparticipating
common stock for the
treasury.............. -- -- -- -- (2,150) (2,150)
Issuance of 2,000 shares
of nonparticipating
common stock.......... -- 3,180 -- -- -- 3,180
------- ------ ---------- -------- -------- ----------
Balance, June 30, 1997...... 22,000 8,526 3,590,234 (50,000) (20,924) 3,549,836
Net income.............. -- -- 683,647 -- -- 683,647
------- ------ ---------- -------- -------- ----------
Balance, June 30, 1998...... $22,000 $8,526 $4,273,881 $(50,000) $(20,924) $4,233,483
======= ====== ========== ======== ======== ==========
</TABLE>
See Notes to Financial Statements.
F-102
<PAGE> 156
AMERICAN MEDIA INCORPORATED
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- --------
<S> <C> <C>
Cash Flows from Operating Activities
Net income............................................. $ 683,647 $556,224
----------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 189,579 245,950
Amortization...................................... 749,517 674,264
Provision for doubtful accounts................... 59,647 24,179
Deferred taxes.................................... 565,000 (8,000)
Dissolution of limited partnership................ -- 6,074
(Gain) loss on disposal of improvements and
equipment....................................... (8,568) 22,915
Change in assets and liabilities:
(Increase) in income tax refund claims
receivable................................. (239,262) --
(Increase) in other receivables.............. (305,722) (179,708)
(Increase) in inventories and
films-in-progress.......................... (2,501,344) (513,521)
(Increase) decrease in costs and estimated
earnings in excess of billings on
uncompleted film production contracts...... (63,403) 1,974
(Increase) in prepaid advertising and
expenses................................... (298,283) (81,576)
Increase in accounts payable and accrued
expenses................................... 351,892 333,118
(Decrease) in income taxes payable........... (10,000) (295,000)
Increase in billings in excess of costs and
estimated earnings on uncompleted film
production contracts....................... 57,329 22,518
----------- --------
Net cash provided by (used in) operating
activities........................... (769,971) 809,411
----------- --------
Cash Flows from Investing Activities
Purchase of improvements and equipment................. (234,314) (238,405)
Proceeds from sale of equipment........................ 36,123 17,910
----------- --------
Net cash (used in) investing
activities........................... (198,191) (220,495)
----------- --------
Cash Flows from Financing Activities
Borrowings on revolving line of credit................. 5,882,500 100,000
Payments on revolving line of credit................... (4,933,500) (200,000)
Principal payments on long-term borrowings, including
capital lease obligations............................. (21,028) (623,176)
Purchase of nonparticipating common stock for the
treasury.............................................. -- (2,150)
Proceeds from the issuance of nonparticipating common
stock................................................. -- 3,180
Payments for equipment purchased on account............ (10,295) (80,069)
----------- --------
Net cash provided by (used in) financing
activities........................... 917,677 (802,215)
----------- --------
Net (decrease) in cash.................. (50,485) (213,299)
Cash
Beginning.............................................. 55,942 269,241
----------- --------
Ending................................................. $ 5,457 $ 55,942
=========== ========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest.......................................... $ 62,221 $ 41,188
Income taxes...................................... 69,387 637,557
Supplemental Schedule of Noncash Investing and Financing
Activities
Purchase of equipment on account....................... $ -- $ 10,295
Capital lease obligation incurred for purchase of
equipment............................................. 67,019 --
</TABLE>
See Notes to Financial Statements.
F-103
<PAGE> 157
AMERICAN MEDIA INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: The Company is engaged in the production, sale and
rental of training films and videotapes nationally and internationally.
A summary of the Company's significant accounting policies follows:
Accounting estimates and assumptions: 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.
Inventories: Film cost inventories are stated at the lower of cost or
net realizable value. Amortization of film cost inventories is computed
primarily by the individual-film-forecast method which provides for
amortization of film costs in the ratio that current gross revenues bear to
estimated gross revenues over the life of the film. Estimates of
anticipated total gross revenues are reviewed periodically and revised when
necessary to reflect more current information. Unamortized film costs are
compared with net realizable value each reporting period on a film-by-film
basis. If estimated future gross revenues from a film are not sufficient to
recover the unamortized film costs, the unamortized film costs are written
down to net realizable value. It is reasonably possible that the Company's
estimates of anticipated future gross revenues and the recoverability of
the remaining estimated unamortized film cost, or both, could be sensitive
to change in the near term based upon changes in future market conditions.
Other inventories are stated at the lower of cost (first-in, first-out
method) or market.
Film production contracts: The Company reports income from film
production contracts using percentage-of-completion accounting based
primarily on actual costs incurred to date compared to total estimated
costs, commencing when progress reaches a point where experience is
sufficient to estimate final results with reasonable accuracy. Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
The asset, "costs and estimated earnings in excess of billings on
uncompleted film production contracts," represents revenues recognized in
excess of amounts billed. The liability, "billings in excess of costs and
estimated earnings on uncompleted film production contracts," represents
billings in excess of revenue recognized.
Advertising costs: The Company expenses the production costs of
advertising the first time the advertising takes place, except for
direct-response advertising, which is capitalized and amortized over the
expected period of future benefits.
Direct-response advertising consists primarily of the costs of direct
mail promotional pieces incurred to acquire new sales/rentals of the
Company's video products. The capitalized costs are amortized using the
actual sales received to date compared to total estimated sales as a result
of the mailing. Costs and related accumulated amortization are eliminated
as they become fully amortized.
Rental office property: Rental office property is stated at cost, net
of accumulated depreciation computed by the straight-line method over
estimated useful lives ranging from 15 to 31 years.
Improvements and equipment: Improvements and equipment are stated at
cost. Depreciation is computed primarily by accelerated methods over their
estimated useful lives. It is the Company's policy to include amortization
of assets acquired under capital leases with depreciation expense on owned
assets.
F-104
<PAGE> 158
AMERICAN MEDIA INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes: Deferred taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary
differences and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax basis.
Deferred tax assets are reduced by a valuation allowance, when, in the
opinion of management, it is more likely than not, that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
NOTE 2. UNCOMPLETED FILM PRODUCTION CONTRACTS
Information regarding uncompleted film production contracts follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Costs incurred on uncompleted film production
contracts......................................... $144,918 $ 43,155
Estimated earnings.................................. 228,670 136,069
-------- --------
373,588 179,224
Less billings to date............................... 394,935 206,645
-------- --------
$(21,347) $(27,421)
======== ========
</TABLE>
Included in accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Costs and estimated earnings in excess of billings
on uncompleted film production contracts.......... $ 90,986 $ 27,583
Billings in excess of costs and estimated earnings
on uncompleted film production contracts.......... (112,333) (55,004)
-------- --------
$(21,347) $(27,421)
======== ========
</TABLE>
NOTE 3. PLEDGED ASSETS AND LINE OF CREDIT AT JUNE 30, 1998
The Company has a bank line of credit in the amount of $1,400,000 due
October 31, 1998. Borrowings under the line bear interest at the bank's national
rate (8.5% at June 30, 1998) and are secured by substantially all assets of the
Company not otherwise pledged and the unlimited personal guarantee of the
majority stockholder. At June 30, 1998, borrowings of $1,049,000 were
outstanding under this agreement.
The line of credit agreement contains various restrictive covenants
including but not limited to debt to tangible net worth levels, borrowing base
requirements and adequate insurance coverage.
NOTE 4. PROFIT-SHARING PLAN AND 401(K) PLAN
The Company has a profit-sharing plan covering substantially all employees.
Contributions are made at the discretion of the Company and are allocated to
participants by a formula based on compensation. The Company's expense under
this plan was none and approximately $39,000 for the years ended June 30, 1998
and 1997, respectively.
The Company also has a salary reduction "401(k)" plan covering employees
who have completed three months of service and attained the age of 21. There
were no employer contributions for the years ended June 30, 1998 and 1997.
F-105
<PAGE> 159
AMERICAN MEDIA INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. INCOME TAX MATTERS
Net deferred tax assets (liabilities) consist of the following components:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1998 1997
--------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts............... $ 37,000 $ 17,000
Inventories................................... 113,000
Accrued expenses.............................. 24,000 18,000
Other......................................... 4,000 2,000
--------- --------
65,000 150,000
--------- --------
Deferred tax liabilities:
Prepaid expenses.............................. 98,000 --
Inventories................................... 318,000 --
Improvements and equipment.................... 64,000 --
--------- --------
480,000 --
--------- --------
$(415,000) $150,000
========= ========
</TABLE>
The components giving rise to the net deferred assets (liabilities) have
been included in the accompanying balance sheets as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
--------- --------
<S> <C> <C>
Current assets....................................... $ -- $150,000
--------- --------
Current liabilities.................................. 355,000 --
Long-term liabilities................................ 60,000 --
--------- --------
415,000 --
--------- --------
$(415,000) $150,000
========= ========
</TABLE>
NOTE 6. LEASES AND RENT EXPENSE
The Company leases office equipment that is being accounted for as a
capital lease with a cost of approximately $67,000 and related accumulated
amortization of $4,500 at June 30, 1998. The lease requires monthly payments of
$1,375 through February 2003. The assets and related liabilities under the lease
have been recorded at the present value of the future minimum lease payments
using a discount rate of 8.50%.
The Company leases office space under a noncancelable operating lease
agreement which requires monthly payments of approximately $43,000 and $1,700
through July 2000 and March 1999, respectively. The Company also leases two
automobiles under noncancelable operating lease agreements which require various
monthly payments expiring from January 1999 through January 2001.
F-106
<PAGE> 160
AMERICAN MEDIA INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Approximate future minimum lease payments, by year end in the aggregate,
under the capital lease and noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
------- ----------
<S> <C> <C>
Year ending June 30, 1999............................. $16,500 $ 537,000
2000................................................ 16,500 521,000
2001................................................ 16,500 38,000
2002................................................ 16,500 --
2003................................................ 11,000 --
------- ----------
Total minimum lease payments................ 77,000 $1,096,000
==========
Amount representing interest.......................... 13,621
-------
Present value of net minimum capital lease
payments.................................. $63,379
=======
</TABLE>
Total rent expense was approximately $536,000 and $401,000 for the years
ended June 30, 1998 and 1997, respectively.
NOTE 7. RENTAL OFFICE PROPERTY
The Company had a lease agreement for its rental office property requiring
monthly payments of $4,320 through June 1998. The tenant exercised the purchase
option subsequent to June 30, 1998 to purchase the property for $227,000.
NOTE 8. CASH IN EXCESS OF FDIC LIMITS
Throughout the years ended June 30, 1998 and 1997, the Company at times had
cash in excess of FDIC limits. The Company has not experienced any loss from
this.
NOTE 9. ADVERTISING COSTS
At June 30, 1998 and 1997, $287,344 and none, respectively, of direct
response advertising costs were reported as assets. Advertising expense for the
years ended June 30, 1998 and 1997, was approximately $4,033,000 and $1,836,000,
respectively.
NOTE 10. SUBSEQUENT EVENT
On August 10, 1998 the Company's majority stockholder signed a nonbinding
letter of intent to sell all the outstanding shares of stock of the Company.
NOTE 11. RECLASSIFICATION
Certain items on the balance sheet as of June 30, 1997 have been
reclassified with no effect on retained earnings to be consistent with the
classifications adopted for as of June 30, 1998.
F-107
<PAGE> 161
INDEPENDENT AUDITORS' REPORT
The Board of Directors
KC Resources Creative Solutions, Inc.:
We have audited the accompanying balance sheet of KC Resources Creative
Solutions, Inc. as of June 30, 1998 and the related statements of operations,
stockholders' equity and cash flows for the year then ended. 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 KC Resources Creative
Solutions, Inc. as of June 30, 1998 and the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
July 24, 1998
F-108
<PAGE> 162
KC RESOURCES CREATIVE SOLUTIONS, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
1998
--------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $1,248
Marketable securities..................................... 353
Accounts receivable, net of allowance for doubtful
accounts of $25........................................ 1,232
Costs in excess of billings............................... 138
Prepaid expenses and other current assets................. 4
------
Total current assets................................. 2,975
------
Property and equipment, net................................. 422
Other assets................................................ 34
------
Total assets......................................... $3,431
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 75
Accrued expenses.......................................... 207
Income taxes payable...................................... 558
Billings in excess of costs............................... 189
Deferred income taxes..................................... 379
Current portion of capital lease obligation............... 9
------
Total current liabilities............................ 1,417
------
Long-term capital lease obligation.......................... 13
------
Deferred income taxes....................................... 59
------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; 5,000 shares authorized; 1,000
shares issued and outstanding.......................... 1
Unrealized gain on marketable securities.................. 24
Retained earnings......................................... 1,917
------
Total stockholders' equity........................... 1,942
------
Total liabilities and stockholders' equity........... $3,431
======
</TABLE>
See accompanying notes to financial statements.
F-109
<PAGE> 163
KC RESOURCES CREATIVE SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1998
----------
<S> <C>
Revenue..................................................... $ 5,449
Cost of revenue............................................. 3,758
-------
Gross profit.............................................. 1,691
Selling, general and administrative expenses................ 980
-------
Income from operations............................... 711
-------
Other income (expense):
Dividend income........................................... 7
Interest income........................................... 34
Interest expense.......................................... (3)
-------
Total other income (expense)......................... 38
-------
Income before income taxes........................... 749
Income taxes................................................ 284
-------
Net income........................................... $ 465
=======
Basic income per share...................................... $464.76
=======
Weighted average shares outstanding......................... 1,000
=======
</TABLE>
See accompanying notes to financial statements.
F-110
<PAGE> 164
KC RESOURCES CREATIVE SOLUTIONS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK GAIN ON
---------------- MARKETABLE RETAINED
SHARES AMOUNT SECURITIES EARNINGS TOTAL
------ ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1997.......................... 1,000 $1 $ 8 $1,459 $1,468
Unrealized gain on marketable securities, net
of tax provision of $11.................... -- -- 16 -- 16
Dividends paid ($7.00 per share).............. -- -- -- (7) (7)
Net income.................................... -- -- -- 465 465
----- -- --- ------ ------
Balance, June 30, 1998.......................... 1,000 $1 $24 $1,917 $1,942
===== == === ====== ======
</TABLE>
See accompanying notes to financial statements.
F-111
<PAGE> 165
KC RESOURCES CREATIVE SOLUTIONS, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1998
----------
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 465
------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 163
Changes in operating assets and liabilities:
Increase in accounts receivable................... (464)
Decrease in costs in excess of billing............ 469
Decrease in prepaid expenses and other assets..... 56
Decrease in accounts payable...................... (67)
Decrease in accrued expenses...................... (252)
Increase in billings in excess of costs........... 54
Increase in income taxes payable.................. 176
Increase in deferred income tax liabilities....... 135
------
Total adjustments............................... 270
------
Net cash provided by operating activities....... 735
------
Cash flows from investing activities:
Purchases of property and equipment....................... (272)
Purchase of investments................................... (183)
Sale of investments....................................... 384
------
Net cash used in investing activities........... (71)
------
Cash flows from financing activities:
Dividends paid............................................ (7)
Payments on capital lease obligation...................... (6)
------
Net cash used in financing activities........... (13)
------
Net increase in cash and cash equivalents................... 651
Cash and cash equivalents, beginning of year................ 597
------
Cash and cash equivalents, end of year...................... $1,248
======
Supplemental cash flow disclosures:
Income taxes refunded..................................... $ (24)
======
Cash paid for interest.................................... $ 3
======
Non-cash investing activity:
Increase in fair value of marketable securities........... $ 27
======
</TABLE>
See accompanying notes to financial statements.
F-112
<PAGE> 166
KC RESOURCES CREATIVE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
JUNE 30, 1998
(1) NATURE OF OPERATIONS
KC Resources Creative Solutions, Inc. (the "Company") was incorporated in
December 1991. The Company is a training and instructional design consulting
firm, which analyzes clients' performance requirements and designs training
solutions using all appropriate media and technology including internet-based
training and performance support applications, multimedia computer-based
training and testing, and self-paced learning systems using various media. The
Company focused primarily on the needs of the telecommunications industry and
high-technology sector, and also has clients in the pharmaceuticals and
financial services industries.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
The Company follows the percentage-of-completion method of accounting for
contracts, including those that involve delivery of customized software
products. 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.
(b) 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.
(c) Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
(d) Marketable Securities
All marketable securities are classified as available-for-sale and are
available to support current operations or to take advantage of other investment
opportunities. These securities are stated at estimated fair value based upon
market quotes. Unrealized gains and losses, net of tax, are computed on the
basis of specific identification and are included as a component of
stockholders' equity. Realized gains, realized losses, and declines in value,
judged to be other than temporary, are included in other income. The cost of
securities sold is based on the specific identification method and interest and
dividends earned are included in other income.
(e) Accounts Receivable
Accounts receivable consist of progress billings to clients under long-term
contracts.
F-113
<PAGE> 167
KC RESOURCES CREATIVE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
JUNE 30, 1998
(f) Property and Equipment
Property and equipment are recorded at cost and depreciated using an
accelerated method over the following periods:
<TABLE>
<S> <C>
Software.................................................... 3 years
Equipment................................................... 5 years
Furniture and fixtures...................................... 7 years
</TABLE>
(g) Fair Value of Financial Instruments
Financial instruments of the Company consist primarily of cash and cash
equivalents, marketable securities, 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.
(h) Income Taxes
Income taxes are accounted for 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 and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(i) Advertising Costs
Advertising costs are expensed as incurred. Advertising costs amounted to
$54 in fiscal 1998.
(j) Income per Share
Effective June 30, 1998, 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.
(3) RELATED PARTY TRANSACTIONS
A member of the Company's Board of Directors served as a consultant to the
Company on various aspects of the Company's business and strategic issues. Fees
paid for such services amounted to $8 in fiscal 1998.
During fiscal 1998, an officer of the Company repaid an advance in the
amount of $80 which had been outstanding at June 30, 1997.
F-114
<PAGE> 168
KC RESOURCES CREATIVE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
JUNE 30, 1998
(4) MARKETABLE SECURITIES
Marketable securities at June 30, 1998 consist of the following:
<TABLE>
<CAPTION>
GROSS
UNREALIZED
HOLDING FAIR
COST GAINS VALUE
---- ---------- -----
<S> <C> <C> <C>
Certificate of deposit............................ $125 -- 125
Mutual funds...................................... 189 39 228
---- --- ---
$314 39 353
==== === ===
</TABLE>
At June 30, 1998, the certificate of deposit has a maturity of less than
one year.
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 1998:
<TABLE>
<S> <C>
Machinery and equipment..................................... $653
Furniture and fixtures...................................... 29
Software.................................................... 144
----
826
Less accumulated depreciation and amortization.............. 404
----
Property and equipment, net............................ $422
====
</TABLE>
Depreciation and amortization expense on property and equipment amounted to
$163 in fiscal 1998. Amortization expense on capitalized software amounted to
$48 in fiscal 1998. Unamortized software costs at June 30, 1998 are $96.
(6) ACCRUED EXPENSES
Accrued expenses at June 30, 1998 consist of the following:
<TABLE>
<S> <C>
Accrued payroll and payroll taxes........................... $ 95
Accrued benefit plan contribution........................... 58
Accrued vacation............................................ 38
Other accrued expenses...................................... 16
----
$207
====
</TABLE>
(7) LEASES
The Company leases office space and a vehicle under cancelable operating
leases. Lease expense amounted to $193 in fiscal 1998.
F-115
<PAGE> 169
KC RESOURCES CREATIVE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
JUNE 30, 1998
The Company also leases certain office equipment under a noncancelable
capital lease. Future minimum payments under this capital lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30
-------------------
<S> <C>
1999................................................... $ 9
2000................................................... 9
2001................................................... 8
---
Total minimum payments............................ 26
Less amounts representing interest..................... 4
---
Present value of minimum lease payments........... 22
Less current installments of capital lease payments.... 9
---
Long-term capital lease obligation..................... $13
===
</TABLE>
At June 30, 1998, the gross amount of equipment and related accumulated
amortization recorded under the capital lease were as follows:
<TABLE>
<S> <C>
Equipment.............................................. $35
Less accumulated amortization.......................... 22
---
$13
===
</TABLE>
Amortization of assets held under capital lease is included in depreciation
expense.
(8) INCOME TAXES
The provision for income taxes for fiscal 1998 consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Federal........................................... $124 $109 $233
State............................................. 25 26 51
---- ---- ----
$149 $135 $284
==== ==== ====
</TABLE>
The following is a reconciliation between the statutory federal income tax
rate and the Company's effective rate for fiscal 1998:
<TABLE>
<S> <C>
Statutory federal income tax rate........................... 34.0%
State income taxes.......................................... 4.8
Other....................................................... 1.1
----
39.9%
====
</TABLE>
F-116
<PAGE> 170
KC RESOURCES CREATIVE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
JUNE 30, 1998
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<S> <C>
Deferred tax liabilities:
Accounts receivable.................................... $476
Costs in excess of billings............................ 53
Property and equipment................................. 59
Unrealized gains on marketable securities.............. 15
----
Total gross deferred tax liabilities.............. $603
----
Deferred tax assets:
Accounts payable and accrued expenses.................. $ 86
Billings in excess of costs............................ 73
Timing of current state tax deduction.................. 6
----
Total gross deferred tax assets................... 165
----
Net deferred tax liability........................ $438
====
</TABLE>
F-117
<PAGE> 171
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Strategic Interactive, Inc.
We have audited the accompanying balance sheet of Strategic Interactive,
Inc. as of June 30, 1997 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. 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 audits 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 presents fairly,
in all material respects, the financial position of Strategic Interactive, Inc.
as of June 30, 1997 and 1998, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
PLANTE & MORAN, LLP
East Lansing, Michigan
October 12, 1998
F-118
<PAGE> 172
STRATEGIC INTERACTIVE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
---------------------- SEPTEMBER 30,
1997 1998 1998
---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.......................... $517,589 $ 759,472 $1,165,143
Accounts receivable:
Trade......................................... 293,837 887,940 552,959
Other......................................... -- 20,000 --
Prepaid expenses................................... -- 27,629 44,616
-------- ---------- ----------
Total current assets..................... 811,426 1,695,041 1,762,718
Property and Equipment (Note 2)......................... 168,208 334,589 384,975
-------- ---------- ----------
Total assets............................. $979,634 $2,029,630 $2,147,693
======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt (Note 4)......... $ 4,940 $ 5,850 $ 5,553
Accounts payable and other accrued liabilities..... 13,022 134,746 255,949
Accrued federal income tax......................... 124,159 92,244 58,696
Deferred revenue................................... 19,200 -- 6,750
-------- ---------- ----------
Total current liabilities................ 161,321 232,840 326,948
Long-term Debt (Note 4)................................. 21,699 16,444 15,047
Stockholders' Equity
Common stock -- $1 par value:
Class A voting:
Authorized -- 59,000 shares
Issued and outstanding -- 711 shares........ 711 711 711
Class B nonvoting:
Authorized -- 1,000 shares
Issued and outstanding -- 30 shares......... 30 30 30
Additional paid-in capital......................... 477,225 477,225 477,225
Retained earnings.................................. 318,648 1,302,380 1,327,732
-------- ---------- ----------
Total stockholders' equity............... 796,614 1,780,346 1,805,698
-------- ---------- ----------
Total liabilities and stockholders'
equity................................. $979,634 $2,029,630 $2,147,693
======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-119
<PAGE> 173
STRATEGIC INTERACTIVE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30 ENDED
------------------------ SEPTEMBER 30,
1997 1998 1998
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Sales................................................. $1,452,190 $4,669,335 $1,013,041
Cost of Sales......................................... 304,843 1,148,382 441,024
---------- ---------- ----------
Gross Profit.......................................... 1,147,347 3,520,953 572,017
Operating Expenses
Selling and administrative expenses.............. 712,655 1,986,484 206,576
Depreciation..................................... 24,740 65,995 334,804
---------- ---------- ----------
Total operating expenses.................... 737,395 2,052,479 541,380
---------- ---------- ----------
Operating Income...................................... 409,952 1,468,474 30,637
Other Income (Expenses)............................... (10,418) (2,282) --
Interest income.................................. 5,986 37,484 7,774
Other............................................ 78,348 20,446 --
---------- ---------- ----------
Total other income (expense)................ 73,916 55,648 7,774
---------- ---------- ----------
Income -- Before income taxes......................... 483,868 1,524,122 38,411
Income Taxes.......................................... 124,159 540,390 13,059
---------- ---------- ----------
Net Income............................................ $ 359,709 $ 983,732 $ 25,352
========== ========== ==========
Basic income per share................................ $ 538 $ 1,328 $ 34
========== ========== ==========
Weighted average shares outstanding................... 668 741 741
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-120
<PAGE> 174
STRATEGIC INTERACTIVE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON COMMON
STOCK -- CLASS A STOCK -- CLASS B ADDITIONAL
----------------- ----------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------ ------ ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- July 1, 1996............. 600 $600 -- $-- $ 5,586 $ 11,389 $ 17,575
Sale of Class A common stock for
cash.......................... 111 111 -- -- 471,639 -- 471,750
Issuance of Class B common
stock......................... -- -- 30 30 -- -- 30
Distributions to stockholders... -- -- -- -- -- (52,450) (52,450)
Net income...................... -- -- -- -- -- 359,709 359,709
--- ---- -- --- -------- ---------- ----------
Balance -- June 30, 1997............ 711 711 30 30 477,225 318,648 796,614
Net income...................... -- -- -- -- -- 983,732 983,732
--- ---- -- --- -------- ---------- ----------
Balance -- June 30, 1998............ 711 711 30 30 477,225 1,302,380 1,780,346
--- ---- -- --- -------- ---------- ----------
Net income...................... -- -- -- -- -- 25,352 25,352
--- ---- -- --- -------- ---------- ----------
Balance -- September 30, 1998
(unaudited)....................... 711 $711 30 $30 $477,225 $1,327,732 $1,805,698
=== ==== == === ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-121
<PAGE> 175
STRATEGIC INTERACTIVE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30 ENDED
---------------------- SEPTEMBER 30,
1997 1998 1998
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income........................................ $ 359,709 $ 983,732 $ 25,352
--------- --------- ----------
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation................................. 24,740 65,995 22,830
Loss on disposal of property and equipment... -- 16,470 --
(Increase) decrease in assets:
Accounts receivable..................... (185,718) (594,103) 354,981
Prepaid expenses........................ 9,732 (27,629) (16,987)
Other assets............................ 2,924 -- --
Increase (decrease) in liabilities:
Current portion, long term debt......... -- -- (297)
Accounts payable and other accrued
liabilities........................... 4,263 121,724 121,203
Accrued federal income tax.............. 124,159 (31,915) (33,548)
Deferred revenue........................ 19,200 (19,200) 6,750
--------- --------- ----------
Net cash provided by operating
activities....................... 359,009 515,074 480,284
Cash Flows from Investing Activities
Purchase of property and equipment................ (149,071) (268,846) (73,216)
Cash Flows from Financing Activities
Payments on bank note payable..................... (164,398) -- --
Proceeds (payments) long-term debt................ 28,500 -- (1,397)
Payments on long-term debt........................ (1,861) (4,345) --
Distributions to stockholders..................... (52,450) -- --
Proceeds from issuance of common stock............ 471,980 -- --
--------- --------- ----------
Net cash provided by (used in)
financing activities............. 281,771 (4,345) (1,397)
--------- --------- ----------
Net Increase in Cash and Cash Equivalents.............. 491,709 241,883 405,671
Cash and Cash Equivalents -- Beginning of year......... 25,880 517,589 759,472
--------- --------- ----------
Cash and Cash Equivalents -- End of year............... $ 517,589 $ 759,472 $1,651,143
========= ========= ==========
Supplemental Cash Flow Information -- Cash paid for
interest............................................. $ 10,418 $ 2,282 --
========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
F-122
<PAGE> 176
STRATEGIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Company provides web-based training, education, and other corporate
communication solutions. Approximately 65 percent of the Company's revenue is
from domestic automobile companies. The Company is privately held, employs
approximately 50 people, and is located in Lansing, Michigan.
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 revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Cash Equivalents -- The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
Accounts Receivable -- Trade accounts receivable represent amounts due from
major clients such as General Motors, General Motors Acceptance Corporation,
Ford Motor Company, and others. The majority of receivables result from revenue
generated from the sale of systems.
Property and Equipment -- Property and equipment are stated at cost. Assets
are depreciated over their estimated useful lives using the straight-line
method. Costs of repairs and maintenance are charged to expense as incurred.
Revenue Recognition -- Revenue is recognized based on the status of the
Company's projects, primarily based on hours incurred. Deferred revenue
represents funds collected in advance of performance and completion of certain
projects.
Retirement Plan -- The Company provides its employees with a qualified
retirement plan that allows employees to contribute to a personal investment
account. The Company also contributes 3 percent of participant salaries. The
Company contributed $9,142 and $34,622 for the years ended June 30, 1997 and
1998, respectively.
Income Taxes -- Prior to January 1, 1997, the Company was taxed as an "S"
corporation according to the Internal Revenue Code provisions. Generally, the
income of an "S" corporation is not subject to federal income tax at the
corporation level; rather, the stockholders are required to include a pro-rata
share of the Company's taxable income in their personal income tax returns,
irrespective of whether dividends have been paid. During 1997, this election was
revoked.
Effective with the change in tax status, the Company records current income
taxes based on amounts payable or refundable on tax returns for each year.
Deferred tax liabilities or assets are recognized for the estimated future tax
effects of temporary differences between financial reporting and tax accounting.
However, there are no significant temporary differences and deferred taxes have
not been recorded.
The provision for income taxes for the year ended June 30, 1997 differs
from amounts computed by applying the statutory United States federal tax rate
primarily as a result of income earned during the period prior to the change in
tax status that was not taxable to the Company.
F-123
<PAGE> 177
STRATEGIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997 AND 1998
NOTE 2 -- PROPERTY AND EQUIPMENT
Cost of property and equipment and depreciable lives are summarized as
follows:
<TABLE>
<CAPTION>
DEPRECIABLE
1997 1998 LIFE-YEARS
---- ---- -----------
<S> <C> <C> <C>
Computer equipment...................... $170,288 $357,751 5
Computer software....................... 8,841 23,972 3
Telephone equipment..................... 1,741 1,741 5
Furniture............................... 40,264 63,878 7
Total cost......................... 221,134 447,342
Accumulated depreciation................ 52,926 112,753
-------- --------
Net carrying amount................ $168,208 $334,589
======== ========
</TABLE>
NOTE 3 -- NOTE PAYABLE -- BANK
The Company has a $250,000 line of credit available with interest on
outstanding borrowings at .75 percent above of the Bank's prime rate. No amount
was outstanding as of June 30, 1997 and 1998. Accounts receivable are pledged as
collateral for borrowings.
NOTE 4 -- LONG-TERM DEBT
The Company has a note payable to a stockholder. The note is collateralized
by furniture and equipment, bears interest at 10.00 percent, and is due in
monthly installments of $603 including interest.
Minimum principal payments on the note payable to maturity as June 30,
1998, are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 5,850
2000........................................................ 5,805
2001........................................................ 6,413
2002........................................................ 4,226
-------
Total.................................................. $22,294
=======
</TABLE>
NOTE 5 -- LEASES
The Company leases office space and certain equipment under operating
leases in effect at June 30, 1998. The following is a schedule of future minimum
rental payments under these operating leases:
<TABLE>
<S> <C>
1999........................................................ $ 167,721
2000........................................................ 202,890
2001........................................................ 221,900
2002........................................................ 226,757
2003........................................................ 231,753
2004 and after.............................................. 234,905
----------
Total.................................................. $1,285,926
==========
</TABLE>
Lease expense charged to operations was $24,259 and $64,556 in 1997 and
1998, respectively.
F-124
<PAGE> 178
STRATEGIC INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997 AND 1998
Subsequent to June 30, 1998, the Company entered into various leases for
office facilities, furniture and equipment. Future rental payments under the
leases entered into subsequent to June 30, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $104,616
2000........................................................ 112,497
2001........................................................ 112,497
2002........................................................ 88,729
2003........................................................ 82,392
2004 and after.............................................. 5,207
--------
Total.................................................. $505,938
========
</TABLE>
F-125
<PAGE> 179
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3,000,000 SHARES
[PROVANT LOGO]
COMMON STOCK
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PROSPECTUS
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JANUARY 12, 1999
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