<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
COMMISSION FILE NUMBER 000-23989
------------------------
PROVANT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-3395167
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
67 BATTERYMARCH STREET, SUITE 600, BOSTON, MASSACHUSETTS 02110
(Address of principal executive offices)
(617) 261-1600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of September 10, 1999, 17,158,782 shares of Common Stock were
outstanding, of which 13,341,686 were beneficially owned by non-affiliates. The
aggregate market value of shares held by non-affiliates was approximately
$171,148,482, based on the last sale price of the Common Stock on such date as
reported by the Nasdaq National Market.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of PROVANT's definitive Proxy Statement for its Annual Meeting of
Stockholders, which will be filed within 120 days of the end of PROVANT's fiscal
year ended June 30, 1999, are incorporated by reference into Part III hereof as
provided therein.
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
PROVANT, Inc. ("PROVANT" or "the Company") is a leading provider of
high-quality performance improvement training services and products that are
distributed through multiple delivery methods. PROVANT's clients include Fortune
1000 companies, other large and medium-sized corporations and government
entities. The Company offers both customized and standardized services and
products that are designed to improve the performance of a client's workforce.
In addition, the Company offers consulting, needs assessment and project
management services.
PROVANT resulted from the May 1998 acquisition, in separate combination
transactions (collectively, the "Combination"), of seven providers of
performance improvement services and products (collectively, the "Founding
Companies"). Subsequent to the Combination, the Company has acquired 11
businesses. The PROVANT companies are recognized leaders in their respective
fields and have developed a wide range of services and products, a substantial
knowledge base created from years of research and development, and a
well-established client base.
BUSINESS STRATEGY
The Company's objective is to become the leading single source provider of
high-quality performance improvement services and products to Fortune 1000
companies and comparably sized government entities. To achieve this objective,
the Company is pursuing a business strategy with the following key elements:
PROVIDE A BROAD RANGE OF SERVICES AND PRODUCTS. The Company offers 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, the Company offers management
consulting services that are designed to improve its clients' overall corporate
performance, project management services that help clients implement and
complete discrete projects efficiently, and training management services that
enable clients to better manage their performance improvement programs. The
Company believes that its comprehensive service and product offerings will allow
its 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. The Company offers multiple delivery
methods including instructor-led classroom training, train-the-trainer programs,
CD-ROM, intranets, the Internet, books, and audio and video tapes. The Company's
varied delivery capabilities allow it to better serve the particular needs, cost
objectives and cultures of the Company's clients.
OFFER VALUE-ADDED TRAINING. The Company's goal is to provide value-added
services and products that achieve measurable results for its clients. The
Company seeks to differentiate its services and products by helping its clients
assess the returns generated by their performance improvement investments. The
Company can perform return-on-investment analyses for its clients, and
frequently works with them to develop key assessment metrics by which to measure
outcomes.
PROVIDE SPECIALIZED INDUSTRY EXPERTISE. The Company has developed and
continues to develop industry-focused service and product offerings that can
better satisfy its clients' specific performance improvement needs. By
leveraging its existing industry-specific content and delivery capabilities, the
Company can provide clients with customized yet cost-effective performance
improvement solutions. The Company believes that its experience and capabilities
developed by serving clients in certain industries, including the retail,
automotive and telecommunications industries, as well as the government sector,
gives it an important competitive advantage in obtaining new clients in these
areas.
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PERFORMANCE IMPROVEMENT SERVICES AND PRODUCTS
Through the Company's services and products, the Company's 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, use project management services to effectively implement and complete
strategic initiatives, and utilize web-based training management services to
better manage and track their training programs. The Company offers the
following customized and standardized products and services:
PERFORMANCE SKILLS. The Company delivers 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, the Company's experts work closely with its clients to custom-design
performance skills products, training courses and course materials. For example,
the Company has delivered specialized performance 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, RETENTION AND CAREER DEVELOPMENT. The Company offers services
and products designed to assist clients in hiring and retaining effective
employees as well as in career development training for employees. In
particular, the Company helps clients understand the skills required of their
employees, implement more effective recruitment 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 the Company's
outplacement services, which the Company provides to several federal government
agencies to assist in work force restructuring.
SELLING SKILLS AND CUSTOMER SERVICE. The Company offers services and
products designed to increase customer retention, customer service and sales.
The Company's Solution Selling process is widely used by leading companies,
particularly where complex products and services are involved. Several of the
Company's specialized 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. The Company offers 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.
MANAGEMENT DEVELOPMENT AND LEADERSHIP. The Company offers services and
products that are designed to maximize results by improving supervisory,
management and leadership skills and strategies. For example, Managing
Individual and Team Effectiveness is designed to provide managers in complex
work environments with "360-degree" feedback on their management skills. The
Company is also developing a training program to teach the leadership model
described in Results Based Leadership, a recently published book co-authored by
Jack Zenger, the Company's President.
DIVERSITY. The Company offers 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,
build morale and satisfaction in the work force, and increase productivity
through more effective team relationships.
NEGOTIATIONS. The Company offers 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.
NEEDS ASSESSMENT, ORGANIZATIONAL DEVELOPMENT AND CHANGE MANAGEMENT. The
Company's 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, the
Company
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assisted a large trucking company in developing alternative organization designs
and cost reduction initiatives. By using PROVANT's recommendations, the client
was able to undertake significant structural changes and cost-cutting measures.
The Company's needs assessment services help clients to determine where in the
client's organization an improvement in the performance skills of the client's
employees or in the client's organizational culture will lead to a significant
increase in the client's overall performance. The Company also provides its
clients with a variety of survey tools by which feedback can be gathered and
analyzed on either an organizational or individual basis. The Company develops
the survey forms and methodologies, conducts the surveys, and collects and
analyzes the data for its corporate clients. For example, the Company assisted a
large mortgage bank in identifying critical areas for organizational change by
administering an employee survey to more than 10,000 employees.
PROJECT MANAGEMENT. The Company provides project management services to
help clients with complex project implementation efforts. These services are
designed to increase clients' profitability by managing the completion of a wide
variety of major projects in a timely and cost-effective basis. For example, the
Company assisted an airline in deploying multimedia equipment for the
computer-based training of its customer service personnel. The Company's
responsibilities in the project included developing the initial project
parameters, designing and managing the construction of training facilities,
procuring systems and coordinating computer equipment delivery and set-up.
TRAINING MANAGEMENT SYSTEMS. The Company provides customized,
organization-wide services that allow clients to better manage a broad range of
performance improvement activities. The Company's web-based training management
systems provide clients with an automated approach to the enrollment, tracking
and measurement of performance improvement activities. The Company can install
these systems at the client's site or operate them from the Company's facility.
For example, the Company 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
The Company offers multiple delivery methods for its performance
improvement services and products to better serve the particular needs, cost
objectives and cultures of the Company's clients. The Company's primary delivery
methods are described below.
INSTRUCTOR-LED TRAINING. The Company delivers its programs to clients'
employees through the use of either salaried employees or certified contract
instructors. Most of the Company's instructor-led training is delivered at
clients' facilities, although the Company also delivers certain programs at the
Company's own training facilities. In some cases, the Company's programs are
delivered in a public seminar format to a small group of individuals from
multiple client companies or through video conferencing. The Company typically
provides textual materials as a part of the Company's instructor led programs,
and in some cases sells related supplemental materials. The Company also
develops custom courseware that ultimately is delivered by instructors who are
not affiliated with the Company. The Company's courses and programs generally
range in length from a few hours to several days and include from one to
hundreds of participants.
TRAIN-THE-TRAINER. For several of the Company's services and products, the
Company trains and certifies qualified employees of clients in an instructor-led
program. The certified client employees then are licensed to use the Company's
methodologies and materials to train other employees of the client in
instructor-led classes at client sites. The Company supplies training materials
for these classes and ongoing training for the certified trainers. The Company
receives fees for the employee-led classes on either a per-participant or
per-site basis.
TECHNOLOGY-BASED FORMATS. The Company increasingly delivers its 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, the Company plans to convert an increased number of its products to
technology-based formats to capture the benefits of technology-based training.
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BOOKS AND TAPES. The Company also delivers some of its training through
books and video and audio tapes. The Company offers approximately 400 titles of
standardized books, tapes and other written materials.
CLIENT BASE
The Company seeks to establish long-term relationships with Fortune 1000
companies, other large and medium-sized corporations and government entities
with substantial performance improvement needs. The Company has developed a
broad client base of over 1,500 corporate and government clients. Revenue from
U.S. Government entities accounted for 23% and 12% of the Company's total
revenue in fiscal 1998 and 1999, respectively. There was no other customer that
accounted for 10% or more of the Company's total revenue in fiscal 1998 or 1999.
SALES AND MARKETING
Each PROVANT company maintains its own sales force. In addition, the
Company is implementing a national sales initiative through a corporate level
sales force to market its entire portfolio of services and products to strategic
accounts. The Company's sales force, at the operating company level, numbered 65
at the time of the Company's May 1998 initial public offering. It has grown from
both acquisitions and internal growth to approximately 150 internal salespeople
and 70 outside sales consultants. Through one of its acquisitions, the Company
has added a nationwide telesales organization, through which the Company intends
to offer many of its services and products. The Company also markets and sells
its services and products through public seminars, client referrals, direct
marketing, a Web site and trade publications.
A key component of the Company's marketing strategy is to cross-sell its
various services and products within its existing client base. To aid the
Company's cross-selling efforts, the Company has instituted a compensation
system designed to reward cross selling. The Company also has 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, the Company is pursuing a marketing and advertising
program through its new corporate marketing department in order to establish
national brand identification for the PROVANT name, while preserving and
enhancing the value of the established names of the PROVANT companies.
The Company generates significant revenues through sales of services and
products to government entities. Typically, these sales occur through a
competitive bidding process started by the entity's issuance of a request for
proposal ("RFP") for a contemplated project. The Company may submit a proposal
on its own behalf or as a subcontractor to another company. Many services and
products delivered to federal government agencies are provided through orders
placed under a General Services Administration ("GSA") Supply Schedule contract
and under Office of Personnel Management/Training Management Assistance ("OPM").
The Company is one of only a few training providers authorized under both
funding mechanisms. The Company benefits from its status as a preferred provider
under certain funding mechanisms (including the GSA and OPM vehicles), which
allow the Company to negotiate contracts without an RFP.
BOARD OF ADVISORS
The Company has formed a Board of Advisors to assist in identifying
emerging trends in the marketplace and areas where the Company should build
strategic capability through investment or acquisition. The Board of Advisors
currently consists of the following seven leaders in the performance improvement
industry:
-- 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;
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-- 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.
The Company believes the principal competitive factors in the industry are the
strength of client relationships, quality of services and products, breadth of
service and product offerings, quality and number of delivery methods,
reputation, and the ability to provide customized services and products.
The Company competes with thousands of privately held training companies,
most of which provide a limited range of services and products. In addition to
these small competitors, a number of larger companies are engaged in the
business of providing 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. The Company also occasionally competes
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 the Company's clients and potential clients have
internal training departments. Some of the Company's competitors have
significantly greater financial, managerial, technical, marketing and other
resources than the Company. Moreover, the Company expects to face additional
competition from new entrants into the performance improvement market due, in
part, to the evolving nature of the market.
The Company's 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
The Company regards many of its performance improvement services and
products as proprietary and relies primarily on a combination of statutory and
common law copyright, trademark, service mark and trade secret laws, customer
licensing agreements, employee and third-party nondisclosure agreements and
other methods to protect its proprietary rights. There can be no assurance that
third parties will not claim that the Company's current or future products
and/or services infringe on the proprietary rights of others.
EMPLOYEES
As of June 30, 1999, the Company employed approximately 1,500 full-time and
part-time employees. The Company believes that its relationships with its
employees are good. In addition, the Company provides certain of its services
and products through independent contractors, which as of June 30, 1999 numbered
approximately 220.
ITEM 2. PROPERTIES
The Company leases its principal executive office located in Boston,
Massachusetts, and maintains 63 additional leased office locations in 26 states
and one in Canada. The remaining terms of the Company's leases are less than
seven years. The PROVANT companies' principal offices are located in:
Alexandria, Virginia; Atlanta, Georgia; Boulder, Colorado; Brookline and
Lexington, Massachusetts; Columbia, Maryland; Charlotte, North Carolina; West
Des Moines, Iowa; Lansing, Michigan; Memphis, Tennessee; North Hollywood, San
Francisco and Del Mar, California; Provo, Utah; and Ridgewood, New Jersey.
Certain of the PROVANT
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companies also maintain branch offices. The Company believes that its facilities
are adequate to serve its current level of operations. If additional facilities
are required, the Company believes that suitable additional or alternative space
will be available as needed on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time a party to litigation arising in the
ordinary course of business. Management believes that no pending legal
proceeding will have a material adverse effect on the business, financial
condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended June 30, 1999.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Paul M. Verrochi, age 50, has been Chairman of the Board and Chief
Executive Officer of the Company since May 1998. Prior to the Company's initial
public offering of Common Stock (the "IPO"), Mr. Verrochi was President and a
director of the Company. Mr. Verrochi also is Chairman, co-founder and a
principal of American Business Partners LLC ("ABP"). In 1992, Mr. Verrochi
co-founded American Medical Response, Inc. ("AMR"), which 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. Mr. Verrochi received his Bachelor of Science degree from
the United States Merchant Marine Academy at Kings Point, New York.
John H. Zenger, age 67, has been President and a director of the Company
since May 1998. Prior to the IPO, from May 1997 until May 1998, Mr. Zenger was a
consultant to the Company. From April 1992 to November 1996, Mr. Zenger was
employed in various capacities, including Vice President and Chairman, by the
Times Mirror Training Group, one of the nation's largest training companies,
consisting of Kaset, Learning International and Zenger Miller, the company that
he founded in 1977. Mr. Zenger has taught at the University of Southern
California School of Business and the Stanford Graduate School of Business. Mr.
Zenger received his Doctorate degree in Business Administration from the
University of Southern California, his Masters in Business Administration from
the University of California, Los Angeles and his Bachelor of Science degree
from Brigham Young University.
Dominic J. Puopolo, age 56, has been Executive Vice President, Chief
Financial Officer and a director of the Company since May 1998. Prior to the
IPO, Mr. Puopolo also served as Treasurer and a director of the Company. Mr.
Puopolo is a co-founder and principal of ABP. In 1992, Mr. Puopolo co-founded
AMR. From August 1992 to January 1996, Mr. Puopolo served as Executive Vice
President, Chief Financial Officer, Treasurer and a member of the Board of
Directors of AMR. Mr. Puopolo serves as a member of the Board of Trustees of
Emerson College of Communications and is Chairman of its Resource Development
Committee. Mr. Puopolo also serves on the Executive Committee of the Boston
University School of Medicine and is a member of the Board of Trustees of
Northeastern University. Mr. Puopolo, a Certified Public Accountant, is a member
of the Massachusetts Society of Certified Public Accountants, The American
Institute of Certified Public Accountants and the National Association of
Accountants. Mr. Puopolo received his Masters in Business Administration degree
from Suffolk University and his Bachelor of Science degree in Business
Administration from Northeastern University.
Rajiv Bhatt, age 41, has been Executive Vice President and Chief Operating
Officer of the Company since December 1998. Mr. Bhatt also has served as
Treasurer and Chief Accounting Officer of the Company since May 1998. From May
1998 until December 1998, Mr. Bhatt also was Senior Vice President of the
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Company. Prior to the IPO, from August 1997 until May 1998, Mr. Bhatt was a
consultant to the Company. From September 1994 to August 1997, Mr. Bhatt was
Executive Vice President, Chief Financial Officer and Treasurer of Summit
Technology, Inc., a publicly-traded manufacturer of ophthalmic laser systems.
From September 1988 to September 1994, Mr. Bhatt was Chief Financial Officer,
Secretary and a member of the Board of Directors of Carlisle Plastics, Inc., a
publicly-traded plastics manufacturer. Also from September 1988 to September
1994, Mr. Bhatt was Chief Financial Officer of Carlisle Capital Corporation, a
privately held mergers and acquisitions company. Mr. Bhatt serves as a director
of Big Brothers Association of Boston. Mr. Bhatt, a Certified Public Accountant,
received his Masters in Business Administration degree from the University of
Michigan and his Bachelor of Commerce degree from the University of Bombay.
Philip Gardner, age 36, has been Vice President of the Company since May
1998. Prior to the IPO, from February 1997 until May 1998, Mr. Gardner was a
consultant to the Company. From August 1994 to December 1996, Mr. Gardner was a
consultant for McKinsey & Company ("McKinsey"), a management consulting firm.
Prior to joining McKinsey, from 1985 to 1992, Mr. Gardner was an officer and a
highly decorated strike fighter pilot in the United States Navy. Mr. Gardner
received his Masters in Business Administration degree from Harvard Graduate
School of Business Administration and his Bachelor of Arts degree in Government
from Harvard College.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock ("Common Stock") is quoted on the Nasdaq
National Market ("Nasdaq") under the symbol "POVT." The following table sets
forth the high and low sale prices for the Common Stock from April 29, 1998 (the
first day of trading on Nasdaq) through June 30, 1999 as reported by Nasdaq for
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998 HIGH LOW
------------------------ ---- ---
<S> <C> <C>
Fourth Quarter (from April 29, 1998)........................ $22.50 $16.00
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999 HIGH LOW
------------------------ ---- ---
<S> <C> <C>
First Quarter............................................... $19.00 $10.00
Second Quarter.............................................. 24.25 9.50
Third Quarter............................................... 24.75 15.25
Fourth Quarter.............................................. 19.13 12.13
</TABLE>
On September 10, 1999, the last sale price of the Common Stock was $12.83
as reported by Nasdaq and there were 254 holders of record of Common Stock.
DIVIDEND POLICY
The Company intends to retain all of its earnings to finance the expansion
of its business and for general corporate purposes, and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future. Any future
determination as to the payment of dividends on the Common Stock will be at the
discretion of the Board of Directors and will depend upon, among other things,
the Company's future earnings, operating and financial condition and capital
requirements, as well as general business conditions and any other factors the
Board of Directors of the Company may consider. In addition, the Company's
credit facility currently restricts the Company's ability to pay dividends
without the consent of the lenders.
RECENT SALES OF UNREGISTERED SECURITIES
On June 4, 1999, in connection with the acquisition of the Solution
Selling(R) business from Michael T. Bosworth, the Company issued convertible
promissory notes in the aggregate amount of $7,132,000 to Mr. Bosworth and
certain affiliates of Mr. Bosworth. The promissory notes were recorded at
$6,328,000, the net present value, based on an imputed interest rate of 6%. The
notes are convertible at the election of the holders after June 4, 2000 at a
conversion price of $16.125 per share into an aggregate of 442,295 shares of
Common Stock. The transaction was exempt from registration by virtue of Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act").
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial
data for the Company (including the accounts of each operating company from its
date of acquisition), which has been derived from the Company's historical
consolidated financial statements included elsewhere in this Report on Form
10-K.
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 16, 1996
(DATE OF INCEPTION) YEAR ENDED JUNE 30,
TO -------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) JUNE 30, 1997 1998 1999
--------------------------------------------- ------------------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue....................................... $ -- $ 14,189 $ 138,676
Cost of revenue..................................... -- 6,374 57,782
---------- ----------- -----------
Gross profit........................................ -- 7,815 80,894
Selling, general and administrative expenses........ 149 10,447 60,172
Goodwill amortization............................... -- 245 2,622
---------- ----------- -----------
Income (loss) from operations....................... (149) (2,877) 18,100
Interest expense, net............................... -- 220 165
---------- ----------- -----------
Income (loss) before income taxes................... (149) (3,097) 17,935
Provision (benefit) for income taxes................ -- (203) 8,224
---------- ----------- -----------
Net income (loss)................................... $ (149) $ (2,894) $ 9,711
========== =========== ===========
Earnings (loss) per common share:
Basic............................................. $ (0.08) $ (0.67) $ 0.74
========== =========== ===========
Diluted........................................... $ (0.08) $ (0.67) $ 0.68
========== =========== ===========
Weighted average common shares outstanding:
Basic............................................. 1,950,520 4,350,169 13,207,859
Diluted........................................... 1,950,520 4,350,169 14,283,087
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------
(DOLLARS IN THOUSANDS) 1998 1999
---------------------- ------- --------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................................ $11,107 $ 12,560
Total assets............................................................... 86,358 284,637
Long-term debt, net of current portion..................................... 874 9,242
Stockholders' equity....................................................... 66,499 204,207
</TABLE>
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STAR MOUNTAIN SELECTED FINANCIAL DATA
PROVANT reports operating results commencing with its inception on November
16, 1996. For the purpose of providing five full years of selected historical
financial data, as required under the Securities Act, the following historical
selected financial data for Star Mountain, a significant predecessor company, is
presented. 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 Report on Form 10-K. The data
presented below is neither comparable to nor indicative of Star Mountain's or
PROVANT's post-Combination financial position or results of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
--------------------------------- JANUARY 1, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1996 1997 TO MAY 4, 1998
--------------------------------------------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
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
Selling, general and administrative expenses.... 4,411 5,476 7,591 3,650
--------- --------- --------- ---------
Income from operations........................ 1,227 1,380 1,680 1,293
Interest and other income (expense), net...... (235) (379) (406) (137)
--------- --------- --------- ---------
Income before provision for income taxes...... 992 1,001 1,274 1,156
Provision for income taxes(1)................. -- 397 546 457
--------- --------- --------- ---------
Net income.................................... $ 992 $ 604 $ 728 $ 699
========= ========= ========= =========
Earnings per common share:
Basic...................................... $ 0.11 $ 0.07 $ 0.09 $ 0.09
========= ========= ========= =========
Diluted.................................... $ 0.11 $ 0.07 $ 0.08 $ 0.08
========= ========= ========= =========
Weighted average common shares outstanding:
Basic...................................... 8,825,000 8,422,000 8,078,000 8,074,000
Diluted.................................... 8,963,000 8,565,000 8,823,000 8,871,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997
---------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................... $ 942 $ 871 $ 64
Total assets.................................. 4,775 5,983 10,677
Long term debt, net of current portion........ -- -- 304
Stockholders' equity.......................... 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> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ significantly from the results discussed in the
forward-looking statements as a result of any number of factors, including the
risk factors set forth in the Company's Registration Statement on Form S-4 (File
No. 333-74725).
FOUNDING COMPANIES
The Company's operations in the performance improvement industry began in
May 1998 when the Company acquired the seven Founding Companies.
In July 1996, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 97 ("SAB 97"), relating to business combinations
immediately prior to an initial public offering, which required that business
combinations like the Combination be accounted for using the purchase method of
accounting. Under the purchase method, PROVANT was designated as the accounting
acquiror of the Founding Companies in the Combination. Approximately $53.2
million, representing the excess of the fair value of the consideration received
in the Combination over the fair value of the net assets acquired, was recorded
as goodwill on the Company's June 30, 1998 balance sheet. During 1999, the
Company recorded additional goodwill of $44.5 million with respect to the
acquisition of the Founding Companies, in connection with the contingent
consideration provisions of the Founding Company merger agreements. Goodwill is
being amortized as a non-cash charge to the Company's income statement over a
40-year period. The amount amortized, however, will not be deductible for tax
purposes.
ACQUISITIONS SINCE THE IPO
Since the Combination, the Company has acquired 11 businesses. Each
acquisition was accounted for under the purchase method of accounting. The
aggregate purchase price for these acquisitions was $126.0 million, consisting
of $57.6 million paid in cash, $7.7 million in cash accrued as contingent
consideration, $7.3 million in notes payable, and 3,378,047 shares of Common
Stock issued as initial consideration and valued at $44.5 million, and Common
Stock valued at $8.9 million that is issuable as contingent consideration. In
addition, the former owners of certain of these businesses are entitled to
receive contingent consideration based upon the future performance of these
businesses. For accounting purposes, any contingent consideration paid in these
acquisitions will be treated as additional purchase price.
REVENUES, COSTS AND EXPENSES
The Company receives revenue from five main sources: (i) instructor-led
and train-the-trainer seminars; (ii) license fees; (iii) custom services and
products; (iv) consulting and training management services; and (v) standardized
products. The Company recognizes revenue from instructor-led training and
train-the-trainer programs, usually on a participant basis, when the training is
delivered. From its train-the-trainer arrangements, the Company also recognizes
license fees on a per-participant basis when a certified client trainer delivers
the Company's courses and materials to other employees of the client. The
Company recognizes revenue from a site license at the time the license is
granted. The Company recognizes maintenance fees on its training management
services as they are performed over the life of the contract. The Company
generally recognizes revenue from its custom services and products based on the
percentage-of-completion method. The Company recognizes revenue from fees for
its consulting services, for which it charges an hourly or per diem rate, when
the consulting is provided. The Company also recognizes revenue for its
standardized products, such as books or videotapes, when the products are
delivered.
Cost of revenue primarily consists of: (i) salaries and benefits for the
Company's instructors, consultants and course designers and costs of independent
contractors; and (ii) the cost of developing, designing and producing training
courses and materials, including materials costs. As a result, the Company's
gross margins are affected by the number of instructors, consultants and course
designers and their utilization during any given period.
12
<PAGE> 13
Selling, general and administrative expenses consist primarily of salaries,
benefits and bonuses for the Company's corporate, sales, marketing and
administrative personnel, and marketing and advertising expenses for the
Company's services and products. Selling, general and administrative expenses
also include incentive and discretionary bonuses paid to 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.
RESULTS OF OPERATIONS
The following historical consolidated financial information represents the
operations of PROVANT and subsidiaries (from their date of acquisition) on a
historical basis. The following historical financial information for the year
ended June 30, 1998 includes a non-recurring fee of $750,000 paid upon
completion of the IPO for information related to the training industry, non-cash
compensation expense totaling $686,000 related to the issuance of Common Stock
and stock options to officers of and consultants to the Company, and
non-recurring Combination-related costs of $588,000, and reflects normal
recurring corporate costs of PROVANT subsequent to the IPO. This historical
consolidated information has been derived from the audited financial statements
of the Company included elsewhere herein.
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 16, 1996 YEAR ENDED JUNE 30,
(DATE OF INCEPTION) -------------------------------------
(DOLLARS IN THOUSANDS) TO JUNE 30, 1997 1998 1999
---------------------- ------------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Total revenue........................ $ -- $14,189 100.0% $138,676 100.0%
Cost of revenue...................... -- 6,374 44.9 57,782 41.7
----- ------- ----- -------- -----
Gross profit......................... -- 7,815 55.1 80,894 58.3
Selling, general and administrative
expenses........................... 149 10,447 73.7 60,172 43.4
Goodwill amortization................ -- 245 1.7 2,622 1.9
----- ------- ----- -------- -----
Income (loss) from operations........ $(149) $(2,877) (20.3)% $ 18,100 13.0%
===== ======= ===== ======== =====
Net income (loss).................... $(149) $(2,894) (20.4)% $ 9,711 7.0%
===== ======= ===== ======== =====
</TABLE>
RESULTS OF OPERATIONS FOR THE PERIOD FROM NOVEMBER 16, 1996 (DATE OF INCEPTION)
TO JUNE 30, 1997 (THE "1997 PERIOD") COMPARED TO THE YEAR ENDED JUNE 30, 1998
("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 to consummate the Combination and the IPO.
Net Income (Loss). Net loss increased $2.7 million from a $149,000 loss in
the 1997 Period to a $2.9 million loss in 1998. Diluted loss per common share
increased $0.59 from a $0.08 loss in the 1997 Period to a $0.67 loss in 1998.
13
<PAGE> 14
RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1998 ("1998") COMPARED TO THE
YEAR ENDED JUNE 30, 1999 ("1999")
Revenue. Revenue increased $124.5 million, from $14.2 million in 1998 to
$138.7 million in 1999. The increase was due to the inclusion in 1999 of the
operating results of the Founding Companies for an entire year and the inclusion
of the operating results for the 11 businesses acquired during 1999 from their
respective dates of acquisition.
Cost of Revenue. Cost of revenue increased $51.4 million, from $6.4
million in 1998 to $57.8 million in 1999. The increase was due to the inclusion
in 1999 of the operating results of the Founding Companies for an entire year
and the inclusion of the operating results for the 11 businesses acquired during
1999 from their respective dates of acquisition. Cost of revenue as a percentage
of revenue decreased from 44.9% in 1998 to 41.7% in 1999 primarily due to
revenue growth greater than the corresponding increase in costs and increased
higher-margin license revenues during 1999.
Gross Profit. Gross profit increased $73.1 million, from $7.8 million in
1998 to $80.9 million in 1999. The increase was due to the inclusion in 1999 of
the operating results of the Founding Companies for an entire year and the
inclusion of the operating results for the 11 businesses acquired during 1999
from their respective dates of acquisition. As a percentage of revenue, gross
profit increased from 55.1% in 1998 to 58.3% in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $49.7 million, from $10.4 million in 1998 to
$60.2 million in 1999. The increase was due to the inclusion of the operating
results of the Founding Companies for an entire year and the inclusion of the
operating results for the 11 businesses acquired during 1999 from their
respective dates of acquisition.
Goodwill Amortization. Goodwill amortization increased $2.4 million, from
$245,000 in 1998 to $2.6 million in 1999, due to the recording of amortization
expense for a full year in 1999 versus a two month period in 1998 following the
Combination and additional goodwill recorded in connection with acquisitions and
contingent consideration during 1999.
Net Income (Loss). Net income (loss) increased $12.6 million from a $(2.9)
million loss in 1998 to a $9.7 million profit in 1999. Diluted earnings per
common share increased $1.35 from a $(0.67) loss in 1998 to a $0.68 profit in
1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company used net cash of approximately $149,000 and $713,000 in
operating activities during fiscal 1997 and fiscal 1998, respectively. The
Company generated net cash from operating activities of approximately $2.3
million in fiscal 1999. Net cash used in investing activities was $150,000 in
fiscal 1997, primarily for purchases of property and equipment. Net cash used in
investing activities was $19.5 million in fiscal 1998 and $55.8 million in
fiscal 1999, primarily for acquisition of businesses and purchases of property
and equipment.
As of June 30, 1999, the Company had cash of approximately $2.2 million and
outstanding indebtedness under the credit facility of $1.5 million. The Company
has a $75.0 million credit facility, guaranteed by all of the Company's
subsidiaries and secured by a pledge of the capital stock of certain of the
Company's subsidiaries. The Company 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 the Company's option, based on either a
Eurodollar rate or the bank's prime rate. The credit facility, which terminates
on December 31, 2001, (i) generally prohibits the Company from paying dividends
and other distributions, (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 September 10, 1999, $5.0 million was outstanding
under the credit facility. The Company expects to pay $32.9 million as
additional contingent consideration to certain former stockholders of the
acquired businesses through borrowings under the revolving credit arrangement in
the first quarter of fiscal 2000.
14
<PAGE> 15
In February 1999, the Company completed a public offering of 3,022,750
shares of Common Stock, from which the Company received net proceeds of
approximately $54.4 million. Of this amount, $22.4 million was used to repay
outstanding indebtedness under the credit facility, $24.5 million was used for
acquisitions, $6.3 million was used to repay indebtedness of an acquired company
and $1.2 million was used for the Company's working capital needs. The Company
anticipates that its cash flow from operations and borrowings under the credit
facility will provide cash sufficient to satisfy the Company's future
acquisitions, working capital needs, debt service requirements and planned
capital expenditures for the next 12 months.
The Company has two effective shelf registration statements on Form S-4.
Each registration statement relates to the issuance of up to 3,000,000 shares of
Common Stock in connection with acquisitions. Under these registration
statements, 3,178,047 shares have been issued through June 30, 1999. The
remaining shares are expected to be issued to satisfy contingent consideration
and to fund future acquisitions.
The Company intends to pursue acquisition opportunities from time to time.
The timing, size or success of any acquisition and the associated potential
capital commitments are unpredictable. The Company expects to fund future
acquisitions through the issuance of shares of Common Stock, borrowings,
including use of amounts available under its revolving credit arrangement, and
cash flow from operations. To the extent the Company funds a significant portion
of the consideration for future acquisitions with cash, it may have to increase
the amount of the revolving credit arrangement or obtain other sources of
financing.
YEAR 2000
The Company uses information technology ("IT") systems, such as
applications used in client order processing, inventory management, financial
business systems and various administrative functions (primarily "off-the-shelf"
applications), and non-IT systems, such as voice and data communications systems
and elevator and climate control systems, in its internal operations. In
addition, the Company delivers several of its products on technology-based
platforms, such as CD-ROM, intranets and the Internet.
Management has completed the assessment of the Company's internal IT and
non-IT systems and products that it delivers on technology-based platforms. The
assessment indicated the need to replace some personal computers and to upgrade
two phone switches. The Company believes that the products that it delivers on
technology-based platforms do not contain internal factors that would result in
the products being non-compliant and that the ability of these products to
function correctly throughout the millennium change will principally be
dependent on the compliance of the host platforms, which are beyond the
Company's control.
To date, the Company has incurred approximately $80,000 to remediate Year
2000 issues by upgrading or replacing systems identified as non-compliant as a
result of the Company's Year 2000 assessment. As of June 30, 1999, the Company
has completed its assessment and remediation of Year 2000 issues.
To the extent that the source code of internal IT and non-IT systems and
products delivered on technology-based platforms may be deficient with respect
to Year 2000 issues despite the Company's assessment and remediation efforts to
date, the failure to make any required modifications in order to make the
systems and products Year 2000 compliant could have a material adverse effect on
the Company's business. In addition, while PROVANT considers a company's Year
2000 compliance when considering acquisitions, Year 2000 issues may nonetheless
arise after an acquisition is completed.
The Company derives a substantial amount of its revenues from services and
products delivered to entities affiliated with the federal government. The two
government agencies responsible for funding disbursements have not publicly
announced the status of their Year 2000 compliance efforts but have indicated
that such a public announcement will be made in September 1999. Failure by
government entities to make their respective computer software programs and
operating systems Year 2000 compliant could have a material adverse effect on
the Company's business.
The Company has not yet completed its evaluation of its vendors'
contingency planning with respect to their potential Year 2000 deficiencies. The
Company is also in the process of developing a contingency plan in an effort to
address disruptions to its operations that may result from the Year 2000 issue.
15
<PAGE> 16
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"), which requires that all
derivative instruments be recorded on the balance sheet at their fair values.
Changes in the fair value of derivatives are recorded in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. The
Company will adopt SFAS No. 133 in the first quarter of the Company's fiscal
year ending June 30, 2001, pursuant to SFAS No. 137, which delayed the
implementation date. The Company anticipates that the adoption of SFAS No. 133
will not have a material effect on its financial condition or results of
operations.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants, issued Statement of Position (SOP)
98-1, Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use, which requires the capitalization of certain internal costs
related to the implementation of computer software developed or obtained for
internal use. The Company has adopted this standard in fiscal 1999. The adoption
of SOP 98-1 did not have a material impact on the Company's financial condition
or results of operations.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-5, Reporting on the Costs of Start-up Activities, which requires the costs of
start-up activities and organization costs to be expensed as incurred. The
Company has adopted this standard in fiscal 1999. The adoption of SOP 98-5 did
not have a material impact on the Company's financial condition or results of
operations.
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>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------------------ JANUARY 1, 1998
(DOLLARS IN THOUSANDS) 1996 1997 TO MAY 4, 1998
---------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Revenue.............................. $16,313 100.0% $23,775 100.0% $11,052 100.0%
Cost of revenue...................... 9,457 58.0 14,504 61.0 6,109 55.3
------- ----- ------- ----- ------- -----
Gross profit......................... 6,856 42.0 9,271 39.0 4,943 44.7
Selling, general and administrative
expenses........................... 5,815 35.6 7,897 33.2 3,682 33.3
------- ----- ------- ----- ------- -----
Income from operations............... $ 1,041 6.4% $ 1,374 5.8% $ 1,261 11.4%
======= ===== ======= ===== ======= =====
Compensation differential............ $ 304 1.9% $ 180 0.8% $ 28 0.3%
</TABLE>
RESULTS FOR THE PERIOD FROM JANUARY 1, 1998 TO MAY 4, 1998 (THE "1998
PERIOD") -- STAR MOUNTAIN
Total Revenue. Revenue was $11.0 million in the 1998 Period. Revenue was
derived primarily from federal government contracts including: (i)
instructor-led and train-the-trainer seminars; (ii) license fees; (iii) custom
services and products; (iv) consulting services; and (v) off-the-shelf products.
16
<PAGE> 17
Cost of Revenue. Cost of revenue was $6.1 million in the 1998 Period. As a
percentage of revenue, cost of revenue was 55.3%. These costs consist primarily
of: (i) salaries and benefits for Star Mountain's instructors, consultants and
course designers and costs of independent contractors; and (ii) the cost of
developing, designing and producing training courses and materials, including
material costs.
Gross Profit. Gross profit was $4.9 million in the 1998 Period. As a
percentage of revenue, gross profit was 44.7%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $3.7 million in the 1998 Period. As a percentage of
revenue, selling, general and administrative expenses were 33.3%. These costs
consist primarily of salaries, benefits and bonuses for Star Mountain's
corporate, sales, marketing and administrative personnel, and marketing and
advertising expenses for Star Mountain's services and products.
RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 ("1997") COMPARED TO THE YEAR ENDED
DECEMBER 31, 1996 ("1996") -- STAR MOUNTAIN
Revenue. Revenue increased $7.5 million, or 45.7%, from $16.3 million in
1996 to $23.8 million in 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 1996 and the
first and fourth quarters of 1997. Revenue was significantly lower during the
first half of 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 1996 to $14.5 million in 1997. As a percentage of revenue, cost
of revenue increased from 58.0% in 1996 to 61.0% in 1997, primarily due to the
increased use of subcontractors during 1997.
Gross Profit. Gross profit increased $2.4 million, or 35.2%, from $6.9
million in 1996 to $9.3 million in 1997. As a percentage of revenue, gross
profit decreased from 42.0% in 1996 to 39.0% in 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
1996 to $7.9 million in 1997. The owners and key employees of Star Mountain
agreed in the Combination to certain adjustments in their annual historical
salaries, bonuses and benefits. The difference between the base salaries of the
owners and key employees immediately after the Combination and their salaries,
bonuses and benefits during a comparable period is referred to as the
"Compensation Differential." Excluding the Compensation Differential of
approximately $304,000 and approximately $180,000 attributable to Star Mountain
in 1996 and 1997, respectively, selling, general and administrative expenses
would have increased $2.2 million, or 40.0%, from $5.5 million in 1996 to $7.7
million in 1997. As a percentage of revenue, selling, general and administrative
expenses would have decreased on an adjusted basis from 33.8% in 1996 to 32.5%
in 1997, primarily due to Star Mountain's larger revenue base.
LIQUIDITY AND CAPITAL RESOURCES -- STAR MOUNTAIN
Star Mountain generated net cash from operating activities of approximately
$1.1 million and $864,000 in the years ended December 31, 1996 and 1997,
respectively, and generated approximately $115,000 in operating activities in
the 1998 Period. Net cash used in investing activities was $565,000 and $2.3
million in the years ended December 31, 1996 and 1997, respectively, primarily
in connection with acquisitions, and approximately $264,000 in the 1998 Period
for property and equipment capital expenditures. Net cash used in financing
activities was $478,000 in the year ended December 31, 1996. Net cash provided
by financing activities was $1.8 million and approximately $129,000 in the year
ended December 31, 1997 and the 1998 Period, respectively, primarily from
borrowings on the company's line of credit.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its cash in money market instruments. These investments
are denominated in U.S. dollars. Due to the conservative nature of these
instruments, the Company does not believe that it has a material exposure to
interest rate or market risk. The investment portfolio is used to preserve the
Company's
17
<PAGE> 18
capital until it is required to fund operations or acquisitions. None of these
instruments are held for trading purposes. The Company does not own derivative
financial instruments.
The Company is exposed to interest rate risk in the ordinary course of
business. For fixed rate debt, interest rate changes affect the fair value but
do not impact earnings or cash flow. Conversely, for floating rate debt,
interest rate changes generally do not affect the fair market value, but do
impact future earnings or cash flow. A one percentage increase in interest rates
would have an immaterial impact on the fair market value of the Company's debt
and future earnings or cash flow.
18
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROVANT, INC. AND SUBSIDIARIES:
Independent Auditors' Report.............................. 20
Consolidated Balance Sheets............................... 21
Consolidated Statements of Operations..................... 22
Consolidated Statements of Stockholders' Equity........... 23
Consolidated Statements of Cash Flows..................... 24
Notes to Consolidated Financial Statements................ 25
Quarterly Results (Unaudited)............................. 42
STAR MOUNTAIN, INC. AND SUBSIDIARIES:
Independent Auditors' Reports............................. 43
Consolidated Balance Sheets............................... 45
Consolidated Statements of Operations..................... 46
Consolidated Statements of Stockholders' Equity........... 47
Consolidated Statements of Cash Flows..................... 48
Notes to Consolidated Financial Statements................ 50
</TABLE>
19
<PAGE> 20
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, 1998 and 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for the period
from November 16, 1996 (date of inception) to June 30, 1997 and for the years
ended June 30, 1998 and 1999. In connection with our audits of the consolidated
financial statements, we also have audited the consolidated financial statement
schedule as listed in Item 14(a)2 of this report. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule 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, 1998 and 1999 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 years ended June 30, 1998 and 1999, in
conformity with generally accepted accounting principles. Also in our opinion,
the related consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Boston, Massachusetts
August 10, 1999
20
<PAGE> 21
PROVANT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 6,394 $ 2,216
Accounts receivable, net of allowance for doubtful
accounts of $740 and $692, respectively............... 12,221 28,455
Contract receivables................................... 7,295 6,103
Inventory.............................................. 177 4,470
Deferred taxes......................................... 2,127 2,791
Costs and estimated earnings in excess of billings..... 696 3,892
Prepaid expenses and other current assets.............. 1,182 2,958
-------- --------
Total current assets.............................. 30,092 50,885
Property and equipment, net................................. 2,548 7,244
Other assets................................................ 776 3,029
Goodwill, net............................................... 52,942 223,479
-------- --------
Total assets...................................... $ 86,358 $284,637
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 3,346 $ 8,039
Accrued expenses....................................... 7,361 16,183
Accrued compensation................................... 2,928 6,255
Billings in excess of costs and estimated earnings..... 2,896 2,449
Deferred revenue....................................... 669 1,480
Income taxes payable................................... 1,252 2,442
Current portion of long term debt...................... 533 1,477
-------- --------
Total current liabilities......................... 18,985 38,325
Accrued contingent consideration............................ -- 32,863
Long term debt, net of current portion...................... 874 9,242
-------- --------
Total liabilities................................. 19,859 80,430
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued and outstanding............... -- --
Common stock, $.01 par value; 40,000,000 shares
authorized; 9,795,558 and 17,157,607 shares issued and
outstanding at June 30, 1998 and 1999, respectively... 98 171
Additional paid-in capital............................. 69,462 178,505
Common stock issuable as contingent consideration...... -- 18,881
Retained earnings (deficit)............................ (3,061) 6,650
-------- --------
Total stockholders' equity........................ 66,499 204,207
-------- --------
Total liabilities and stockholders' equity.................. $ 86,358 $284,637
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 22
PROVANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 16, 1996 YEAR ENDED JUNE 30,
(DATE OF INCEPTION) -------------------------
TO JUNE 30, 1997 1998 1999
------------------- ---------- -----------
<S> <C> <C> <C>
Total revenue..................................... $ -- $ 14,189 $ 138,676
Cost of revenue................................... -- 6,374 57,782
---------- ---------- -----------
Gross profit................................. -- 7,815 80,894
Selling, general and administrative expenses...... 149 10,447 60,172
Goodwill amortization............................. -- 245 2,622
---------- ---------- -----------
Income (loss) from operations................ (149) (2,877) 18,100
Interest expense, net............................. -- 220 165
---------- ---------- -----------
Income (loss) before income taxes............ (149) (3,097) 17,935
Income tax expense (benefit)...................... -- (203) 8,224
---------- ---------- -----------
Net income (loss)............................ $ (149) $ (2,894) $ 9,711
========== ========== ===========
Earnings (loss) per common share:
Basic........................................ $ (0.08) $ (0.67) $ 0.74
========== ========== ===========
Diluted...................................... $ (0.08) $ (0.67) $ 0.68
========== ========== ===========
Weighted average common shares outstanding:
Basic........................................ 1,950,520 4,350,169 13,207,859
Diluted...................................... 1,950,520 4,350,169 14,283,087
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
PROVANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK ADDITIONAL ISSUABLE RETAINED
------------------- PAID-IN AS CONTINGENT EARNINGS
SHARES AMOUNT CAPITAL CONSIDERATION (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 stock:
Issuance of management
shares...................... 1,395,697 13 473 -- -- 486
Acquisition of founding
companies................... 3,459,341 35 35,942 -- -- 35,977
Issuance of shares sold in
initial public offering..... 2,990,000 30 32,625 -- -- 32,655
Issuance of stock options and
warrants....................... -- -- 422 -- -- 422
Net loss......................... -- -- -- -- (2,894) (2,894)
---------- ---- -------- ------- ------- --------
Balance at June 30, 1998......... 9,795,558 98 69,462 -- (3,061) 66,499
Issuance of stock:
Issuance of shares for
acquisitions................ 3,378,047 34 44,439 -- -- 44,473
Issuance of shares for
contingent consideration.... 901,115 9 9,363 -- -- 9,372
Issuance of shares sold in
public offering............. 3,022,750 30 54,402 -- -- 54,432
Issuance of shares under
employee stock purchase
plan........................ 52,636 -- 755 -- -- 755
Exercise of stock options and
grant of stock award........ 7,501 -- 84 -- -- 84
Common Stock issuable as
contingent consideration....... -- -- -- 18,881 -- 18,881
Net income....................... -- -- -- -- 9,711 9,711
---------- ---- -------- ------- ------- --------
Balance at June 30, 1999......... 17,157,607 $171 $178,505 $18,881 $ 6,650 $204,207
========== ==== ======== ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
PROVANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 16, 1996 YEAR ENDED JUNE 30,
(DATE OF INCEPTION) -------------------
TO JUNE 30, 1997 1998 1999
------------------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $(149) $(2,894) $ 9,711
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... -- 467 4,520
Allowance for doubtful accounts..................... -- 135 (48)
Charges related to issuance of common stock,
warrants and stock options........................ -- 908 --
Changes in operating assets and liabilities:
Accounts receivable............................... -- (1,731) (171)
Contract receivables.............................. -- (581) 1,192
Inventory......................................... -- -- (949)
Deferred taxes.................................... -- (1,191) (751)
Due from stockholders............................. -- 600 --
Costs and estimated earnings in excess of
billings....................................... -- (244) (1,651)
Prepaid expenses and other current assets......... -- (154) (2,770)
Other assets...................................... -- 110 (1,783)
Accounts payable and accrued expenses............. -- 1,636 (1,006)
Accrued compensation.............................. -- (91) (1,081)
Billings in excess of costs and estimated
earnings....................................... -- 1,119 (698)
Deferred revenue.................................. -- 228 (1,642)
Income taxes payable.............................. -- 970 (531)
----- ------- --------
Total adjustments.............................. -- 2,181 (7,369)
----- ------- --------
Net cash provided by (used in) operating
activities................................... (149) (713) 2,342
----- ------- --------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired.... -- (19,302) (52,856)
Proceeds from sale of property, plant and
equipment......................................... -- -- 214
Additions to property and equipment................. (150) (177) (3,156)
----- ------- --------
Net cash used in investing activities............. (150) (19,479) (55,798)
----- ------- --------
Cash flows from financing activities:
Issuance of common stock............................ 2 32,655 55,270
Increase (decrease) in notes payable to
stockholders...................................... 298 (298) --
Borrowings of long-term debt........................ -- -- 28,200
Repayment of long-term debt......................... -- (5,772) (34,192)
----- ------- --------
Net cash provided by financing activities......... 300 26,585 49,278
----- ------- --------
Net increase (decrease) in cash and cash equivalents..... 1 6,393 (4,178)
Cash and cash equivalents, beginning of period........... -- 1 6,394
----- ------- --------
Cash and cash equivalents, end of period................. $ 1 $ 6,394 $ 2,216
===== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND ORGANIZATION
PROVANT, Inc., a Delaware corporation (collectively with its subsidiaries,
"PROVANT" or the "Company"), provides a broad range of performance improvement
training services and products to Fortune 1000 companies, other large and
medium-sized corporations and government entities. The Company is a leading
single source provider of high-quality performance improvement training services
and products that are distributed through multiple delivery methods.
On May 4, 1998, PROVANT completed the initial public offering (the "IPO")
of its common stock (the "Common Stock") and simultaneously acquired in separate
merger transactions seven companies engaged in providing performance improvement
training services and products (collectively referred to as the "Founding
Companies"). Since the completion of the IPO, the Company has acquired in
separate transactions 11 additional businesses engaged in providing performance
improvement training services and products (collectively such companies are
referred to with the Founding Companies as the "Operating Companies"). The
Company provides services nationally, and has offices in 26 states and one in
Canada.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
For financial statement purposes, PROVANT has been identified as the
accounting acquiror in all of its acquisitions. Accordingly, the consolidated
financial statements include the accounts of PROVANT since its date of
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 certain of the companies acquired in 1999 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, its wholly-owned subsidiaries and a subsidiary in which a controlling
interest is held. All significant inter-company accounts and transactions have
been eliminated.
Revenue Recognition
The Company recognizes revenue when services are performed and products are
delivered. A significant portion of the Company's revenue results from services
performed under long-term contracts. 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. 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. Deferred revenue
is recognized for payments received prior to services being performed. The asset
"costs and estimated earnings in excess of billings" represents revenues
recognized in excess of amounts billed. The liability "billings in excess of
costs and estimated earnings" represents billings in excess of revenues
recognized. 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.
25
<PAGE> 26
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash paid for interest in fiscal 1997, 1998 and 1999 was nil, $118,000 and
$345,000, respectively. Cash paid for taxes in fiscal 1997, 1998 and 1999 was
nil, $14,000 and $8,744,000, respectively.
The Company recorded the following non-cash transactions during fiscal 1998
and 1999 (Dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1998 1999
-------- --------
<S> <C> <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>
The following is a reconciliation of net cash paid for acquisitions during
fiscal 1998 and 1999 (Dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Fair value of assets acquired.......................... $ 82,386 $197,131
Liabilities assumed.................................... (21,954) (26,661)
Additional purchase price payable or issuable.......... (755) (51,744)
Notes payable issued................................... -- (7,298)
Fair value of Common Stock consideration issued........ (35,977) (53,845)
-------- --------
Cash paid.............................................. 23,700 57,583
Less cash acquired..................................... (4,398) (4,727)
-------- --------
Net cash paid for acquisitions.................... $ 19,302 $ 52,856
======== ========
</TABLE>
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, accounts receivable, contract receivables, accounts
payable, accrued expenses and accrued contingent consideration 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.
Inventories
Film cost inventory is 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 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 average cost or market.
26
<PAGE> 27
PROVANT, 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 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 other 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. Government entities and
commercial and industrial companies. The Company reviews its accounts receivable
and provides allowances as deemed necessary.
The Company's sales to U.S. Government entities accounted for approximately
23% and 12% of the Company's total revenue in fiscal 1998 and 1999,
respectively. The Company had contract receivables from U.S. Government entities
of approximately $7.3 million and $6.1 million as of June 30, 1998 and 1999,
respectively.
Income Taxes
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 Accounting Principles Board ("APB") Opinion 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock option plans. Accordingly, compensation expense is
recorded for options issued to employees in fixed amounts to the extent that the
fixed exercise prices are less than the fair market value of the Company's
Common Stock at the date of grant. The Company
27
<PAGE> 28
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
follows the disclosure requirements of Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation. All
stock-based awards to non-employees are accounted for at their fair value in
accordance with SFAS No. 123.
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing income
(loss) available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings (loss) per common share
is based upon the weighted average number of common shares outstanding during
the period plus additional weighted average common equivalent shares outstanding
during the period and shares issuable as contingent consideration when the
effect is dilutive. Common equivalent shares result from the assumed conversion
of convertible notes payable and the assumed exercise of outstanding stock
options or warrants, the proceeds of which are then assumed to repurchase
outstanding stock using the treasury stock method. The shares to be issued as
contingent consideration are included as outstanding in the calculation of
diluted weighted average shares when the related performance criteria has been
met and the number of shares can be determined. Common equivalent shares and
shares issuable as contingent consideration are not included in the diluted
earnings (loss) per common share calculation if their effect would be
anti-dilutive.
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.
Reclassifications
Certain prior year amounts have been reclassifed to conform to the current
year presentation.
(3) BUSINESS COMBINATIONS
Concurrently with the completion of its IPO on May 4, 1998, PROVANT
acquired the Founding Companies. Since the completion of the IPO, the Company
has acquired in separate transactions 11 additional businesses engaged in
providing performance improvement training services and products (collectively
such companies are referred to as the "Subsequent Acquisitions"). The
acquisition of each of the Founding Companies and Subsequent Acquisitions was
accounted for using the "purchase" method of accounting. Accordingly, the
results of operations for the acquired businesses have been included since their
respective dates of acquisition. The purchase agreements between PROVANT and all
but one of the acquired companies provide for the payment of additional,
contingent consideration (the "Contingent Consideration") based upon the future
performance of these businesses. For accounting purposes, any Contingent
Consideration paid in these acquisitions is treated as additional purchase
price. (See Note 11)
The aggregate purchase price for the Founding Companies was $104.8 million,
consisting of $24.3 million in cash and 3,459,341 shares of Common Stock valued
at $36.0 million issued as initial consideration, and $25.2 million in cash
accrued at June 30, 1999 and Common Stock valued at $19.3 million issued or
issuable as Contingent Consideration.
The aggregate purchase price paid to date for the Subsequent Acquisitions
was $126.0 million, consisting of $57.6 million in cash, $7.3 million of
convertible notes payable and 3,378,047 shares of Common Stock valued at $44.5
million as initial consideration and $7.7 million in cash and Common Stock
valued at $8.9 million accrued at June 30, 1999 as Contingent Consideration.
28
<PAGE> 29
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The consolidated balance sheet as of June 30, 1999 includes allocations of
the respective purchase prices of the Founding Companies and Subsequent
Acquisitions to the assets acquired and liabilities assumed based on estimates
of fair value. The allocations for certain of the Subsequent Acquisitions were
based on preliminary estimates of fair value and are subject to final
adjustment. The allocations resulted in $53.2 million and $173.2 million of
goodwill recorded during fiscal 1998 and 1999, respectively, which represents
the excess of purchase price over the estimated fair value of the net assets
acquired. In conjunction with these acquisitions, goodwill was determined as
follows (Dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Cash paid, net of cash acquired............................. $ 19,302 52,856
Additional purchase price payable or issuable............... 755 51,744
Fair value of Common Stock consideration issued............. 35,977 53,845
Notes payable issued........................................ -- 7,298
Liabilities assumed......................................... 21,954 26,661
Less fair value of tangible assets acquired, net of cash
acquired.................................................. (24,801) (19,245)
-------- --------
Goodwill.................................................... $ 53,187 $173,159
======== ========
</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 Operating Companies as if they were acquired
effective July 1, 1997 (Dollars in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
1998 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue..................................................... $149,038 $181,999
Net income.................................................. 5,554 12,922
Earnings per common share:
Basic.................................................. $ 0.39 $ 0.84
Diluted................................................ $ 0.38 $ 0.80
</TABLE>
The unaudited pro forma combined financial data gives effect to (i) the
acquisition of the Operating 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 the Operating Companies that were taxed as S
corporations during the relevant periods, (vii) the elimination of non-recurring
legal and accounting fees related to the acquisition of the Operating Companies,
and (viii) the compensation differential. The compensation differential
represents pro forma adjustments to salary, bonuses and benefits paid to certain
owners of the Operating Companies to certain levels to which they have agreed
prospectively.
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 Operating Companies been
combined at the beginning of the periods presented.
29
<PAGE> 30
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per common share for fiscal 1997, 1998, and 1999 (Dollars in
thousands except per share data):
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 16, 1996 YEAR ENDED JUNE 30,
(DATE OF INCEPTION) ------------------------
TO JUNE 30, 1997 1998 1999
-------------------- ---------- -----------
<S> <C> <C> <C>
Numerator:
Basic net income (loss)....................... $ (149) $ (2,894) $ 9,711
Interest expense on convertible notes
payable.................................... -- -- 19
---------- ---------- -----------
Diluted net income (loss)..................... $ (149) $ (2,894) $ 9,730
========== ========== ===========
Denominator:
Basic weighted average common shares
outstanding................................ 1,950,520 4,350,169 13,207,859
Effect of dilutive securities: stock options,
warrants and convertible notes payable..... -- -- 300,209
Effect of securities under contingent
consideration arrangements................. -- -- 775,019
---------- ---------- -----------
Diluted weighted average common shares
outstanding................................ 1,950,520 4,350,169 14,283,087
========== ========== ===========
Basic earning (loss) per common share......... $ (0.08) $ (0.67) $ 0.74
========== ========== ===========
Diluted earnings (loss) per common share...... $ (0.08) $ (0.67) $ 0.68
========== ========== ===========
</TABLE>
The shares to be issued as Contingent Consideration are included as
outstanding in the calculation of diluted weighted average common shares when
the related performance criteria has been met, the number of shares can be
determined, and the effect on basic earnings per common share is dilutive. (See
Note 11)
The following securities that could potentially dilute future basic
earnings per common share were not included in the computations of diluted
earnings per common share because to do so would have been anti-dilutive:
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 16, 1996 YEAR ENDED JUNE 30,
(DATE OF INCEPTION) -----------------------
TO JUNE 30, 1997 1998 1999
-------------------- ---------- ----------
<S> <C> <C> <C>
Stock options.......................................... -- 42,942 66,152
Warrants............................................... -- 18,400 --
---------- ---------- ----------
Total.................................................. -- 61,342 66,152
========== ========== ==========
</TABLE>
30
<PAGE> 31
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) CONTRACT ACCOUNTING
Contract receivables are summarized as follows (Dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1998 1999
-------- ---------
<S> <C> <C>
U.S. Government customers:
Amounts due currently -- prime contractor................... $ 5,353 $ 4,568
Amounts due currently -- subcontractor...................... 589 928
Recoverable costs and accrued profit on progress
completed -- not billed................................... 1,317 481
Retainage................................................... 36 126
-------- ---------
Total....................................................... $ 7,295 $ 6,103
======== =========
</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.
Costs and estimated earnings in excess of billings and billings in excess
of costs and estimated earnings are summarized as follows (Dollars in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1998 1999
-------- ---------
<S> <C> <C>
Costs incurred and estimated earnings on uncompleted
contracts................................................. $ 38,215 $ 110,631
Less: billings to date...................................... (40,415) (109,188)
-------- ---------
$ (2,200) $ 1,443
======== =========
Included in the accompanying balance sheets under the
following captions:
Costs and estimated earnings in excess of billings........ $ 696 $ 3,892
======== =========
Billings in excess of costs and estimated earnings........ $ (2,896) $ (2,449)
======== =========
</TABLE>
(6) INVENTORIES
Inventories consist of the following (Dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1998 1999
-------- ---------
<S> <C> <C>
Released film costs......................................... $ -- $ 8,352
Accumulated amortization on released film costs............. -- (4,869)
Film in progress............................................ -- 21
Other inventory............................................. 177 966
-------- ---------
Total inventory............................................. $ 177 $ 4,470
======== =========
</TABLE>
31
<PAGE> 32
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) NON-CURRENT ASSETS
Property and equipment consist of the following (Dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------
USEFUL LIFE 1998 1999
------------ ------ ------
<S> <C> <C> <C>
Equipment................................................... 3 - 7 years $ 322 $6,517
Furniture and fixtures...................................... 3 - 7 years 2,290 2,104
Leasehold improvements...................................... 3 - 7 years 160 743
------ ------
Property and equipment...................................... 2,772 9,364
Less accumulated depreciation and amortization.............. (224) (2,120)
------ ------
Property and equipment, net................................. $2,548 $7,244
====== ======
</TABLE>
Depreciation expense was nil, $224,000 and $1,898,000 for fiscal 1997, 1998
and 1999, respectively.
Goodwill amortization expense was nil, $245,000 and $2,622,000 for fiscal
1997, 1998 and 1999, respectively. Accumulated amortization was $245,000 and
$2,867,000 as of June 30, 1998 and 1999, respectively.
(8) ACCRUED EXPENSES
Accrued expenses consist of the following (Dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------
1998 1999
------ -------
<S> <C> <C>
Accrued lease abandonment costs............................. $1,160 $ 792
Accrued taxes............................................... -- 5,603
Other accrued liabilities................................... 6,201 9,788
------ -------
Total....................................................... $7,361 $16,183
====== =======
</TABLE>
(9) DEBT AND CREDIT ARRANGEMENTS
Borrowings are summarized as follows (Dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------
1998 1999
------ -------
<S> <C> <C>
Notes payable to former stockholders........................ $1,376 $ 2,613
Convertible notes payable................................... -- 6,328
Revolving credit arrangement................................ -- 1,500
Capital lease obligations................................... 31 278
------ -------
$1,407 $10,719
Less current portion of debt and capital lease
obligations............................................... (533) (1,477)
------ -------
Long-term debt and capital lease obligations................ $ 874 $ 9,242
====== =======
</TABLE>
Notes Payable to Former Stockholders
Notes payable to former stockholders consists of amounts due to former
stockholders of the Operating Companies. These notes mature through June 2009
and bear interest at rates ranging from 7.0% to 8.75%.
32
<PAGE> 33
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Convertible Notes Payable
In connection with an acquisition, the Company issued an aggregate of
$7,132,000 of convertible non-interest bearing promissory notes ("promissory
notes"). The promissory notes are convertible at the election of the holders
after June 4, 2000 at the conversion price of $16.125 per share into an
aggregate of 442,295 shares of Common Stock. The promissory notes were recorded
at $6,328,000, the net present value, based on an imputed interest rate of 6%.
Revolving Credit Arrangement
The Company has entered into a revolving credit facility with Fleet
National Bank (as agent). The facility provides the Company with a revolving
line of credit of up to $75.0 million, guaranteed by all of the Company's
subsidiaries and secured by a pledge of the capital stock of certain of the
Company's 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 0.25% and 0.45% 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 on December 31, 2001 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. The weighted average
interest rate on short-term borrowings under the credit facility was 6.48% for
the year ended June 30, 1999.
At June 30, 1999, future minimum payments on debt and capital lease
obligations were as follows (Dollars in thousands):
<TABLE>
<CAPTION>
CAPITAL
YEAR ENDING JUNE 30, DEBT LEASES
-------------------- ------- --------
<S> <C> <C>
2000...................................................... $ 1,296 $ 202
2001...................................................... 3,177 73
2002...................................................... 5,449 17
2003...................................................... -- 17
2004...................................................... -- --
After 2004................................................ 519 --
------- -------
10,441 309
Less: amounts representing interest......................... -- (31)
------- -------
Total....................................................... $10,441 $ 278
======= =======
</TABLE>
Accrued Contingent Consideration
The Company has accrued $32.9 million of Contingent Consideration to be
paid in cash to the former stockholders of certain acquired businesses. (See
Note 11.) The accrued Contingent Consideration will be paid in the first quarter
of fiscal 2000 using borrowings under the Company's credit facility.
33
<PAGE> 34
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) INCOME TAXES
The income tax expense (benefit) consists of (Dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1998 1999
-------- ---------
<S> <C> <C>
Current:
Federal................................................... $ 540 $ 7,260
State..................................................... 158 1,679
------- -------
Total current..................................... 698 8,939
------- -------
Deferred:
Federal................................................... (860) (659)
State..................................................... (41) (56)
------- -------
Total deferred.................................... (901) (715)
------- -------
Income tax expense (benefit)...................... $ (203) $ 8,224
======= =======
</TABLE>
The income tax expense (benefit) 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 1999
------- ------
<S> <C> <C>
Income tax expense (benefit) at the statutory rate.......... $(1,084) $6,278
Increase in income tax expense or 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.................................. 79 822
State income taxes, net of federal income tax benefit..... 75 1,055
Other, net................................................ 68 69
------- ------
Income tax expense (benefit) at effective tax rate.......... $ (203) $8,224
======= ======
</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 1999
------ ------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities....................................... $2,794 $3,822
Allowance for doubtful accounts........................... 217 562
Start-up costs capitalized for tax purposes............... 735 957
Intangibles............................................... -- 85
Abandoned lease reserves.................................. -- 538
Film inventory............................................ -- 147
Other..................................................... 139 425
------ ------
Total gross deferred tax assets............................. 3,885 6,536
Less valuation allowance.................................. (140) (1,085)
------ ------
Net deferred tax assets................................... 3,745 5,451
------ ------
</TABLE>
34
<PAGE> 35
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
---------------
1998 1999
------ ------
<S> <C> <C>
Deferred tax liabilities:
Change from cash to accrual method for acquired
companies.............................................. 1,458 2,271
Other..................................................... 160 389
------ ------
Total gross deferred liabilities............................ 1,618 2,660
------ ------
Net deferred tax asset...................................... $2,127 $2,791
====== ======
</TABLE>
The valuation allowance for deferred tax assets was $140,000 and $1,085,000
as of June 30, 1998 and 1999, respectively. The valuation allowance for deferred
income taxes increased by $945,000 from June 30, 1998 to June 30, 1999. The
increase in the valuation allowance relates to deferred tax assets recorded in
connection with the acquisition of certain companies during the year ended June
30, 1999 and was recorded as an adjustment to goodwill. Reductions of the
valuation allowance, if any, will be recorded as a reduction to goodwill.
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. Although realization is
not assured, based upon the level of historical taxable income of the Company
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.
(11) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has various leases for office space, vehicles, and equipment
under cancelable and non-cancelable operating leases that expire on various
dates through fiscal 2005. Most of the facility 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>
2000........................................................ $ 6,692
2001........................................................ 5,196
2002........................................................ 3,768
2003........................................................ 2,555
2004........................................................ 2,113
Thereafter.................................................. 600
-------
Total....................................................... $20,924
=======
</TABLE>
Rent expense for fiscal 1997, 1998 and 1999 was $51,000, $585,000, and
$5,415,000, respectively. Sublease income for fiscal 1997, 1998 and 1999 was
nil, nil and $219,000, respectively.
35
<PAGE> 36
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. Government Contracts
A substantial portion 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.
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 of the Operating Companies
The merger agreements between PROVANT and each of the Founding Companies
provide for the payment of Contingent Consideration. With respect to five of the
Founding Companies, Contingent Consideration was paid in fiscal 1999 through the
issuance of 901,115 shares of Common Stock valued at $9.4 million. For the
remaining two Founding Companies, Contingent Consideration consisting of Common
Stock valued at $9.9 million and cash of $25.2 million was accrued at June 30,
1999. The accrued Contingent Consideration will be paid in the first quarter of
fiscal 2000 through the issuance of Common Stock and borrowings under the
Company's credit facility.
The merger agreements between PROVANT and all but one of the Subsequent
Acquisitions provide for the payment of 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. The Contingent Consideration will be
paid in shares of Common Stock or cash in accordance with a formula based on the
relationship of defined earnings before interest and taxes ("EBIT") or revenue
of the respective acquired business to a specified baseline EBIT or revenue
target and certain other adjustments.
For the two Subsequent Acquisitions with Contingent Consideration based on
performance criteria associated with the year ended June 30, 1999, Common Stock
valued at $9.0 million and cash of $7.7 million has been accrued at June 30,
1999. The accrued Contingent Consideration will be paid in the first quarter of
fiscal 2000 through the issuance of Common Stock and borrowings under the
Company's credit facility.
Contingent Consideration of cash and/or shares of Common Stock up to
maximum amounts of $1.5 million, $35.9 million and $18.3 million could be
payable based on performance criteria associated with the year ended December
31, 1999, the two years ended June 30, 2001 and the three years ended December
31, 2001, respectively. For two of the Subsequent Acquisitions, Contingent
Consideration of cash and/or shares of Common Stock is payable based entirely on
performance criteria over a three to four year period and is not currently
determinable.
36
<PAGE> 37
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(12) STOCKHOLDERS' EQUITY
Common and Preferred Stock
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.
On February 3, 1999, the Company completed a public offering of 3,022,750
shares of its Common Stock at a price of $19.50 per share. The Company realized
net proceeds from the sale of $54.4 million, net of the underwriting commissions
and discounts and other expenses of the offering.
The Company has two effective shelf registration statements on Form S-4.
Each registration statement relates to the issuance of up to 3,000,000 shares of
Common Stock in connection with acquisitions. Under these registration
statements, 3,178,047 shares have been issued through June 30, 1999. The
remaining shares are expected to be issued to satisfy Contingent Consideration
and to fund future acquisitions.
As of June 30, 1999, 3,972,530 shares of Common Stock have been reserved
for shares sold under the employee stock purchase plan, issuance upon the
conversion of convertible notes payable, and the exercise of stock options and
warrants.
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.
The preferred stock, if issued, could have priority over the Common Stock
with respect to dividends and other distributions, including the distribution of
assets upon liquidation. As of June 30, 1999, the Company had not issued any
shares of preferred stock.
The Company has recorded $18.9 million of Contingent Consideration
representing approximately 1.4 million shares to be issued in the form of Common
Stock to the former stockholders of certain Operating Companies. (See Note 11)
This amount was determined based on the portion of Contingent Consideration to
be issued in shares of Common Stock based upon preliminary elections from the
former stockholders. The shares of Common Stock issuable as Contingent
Consideration will be issued in the first quarter of fiscal 2000.
Stock Purchase Warrants
The Company issued two warrants to each of two officers and directors of
the Company in exchange for these executives extending financing to the Company
in the period prior to the IPO. 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 (the "Contingent 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). 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
37
<PAGE> 38
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Contingent Warrant will become exercisable to purchase all of the warrant
shares. The exercise price of the Contingent Warrant increases on each
anniversary of the closing of the IPO (May 4, 1998.) Specifically, the exercise
price is equal to the initial public offering price of $13.00 for the first 12
months following May 4, 1998 and, for each 12 month period thereafter, is equal
to $13.00 plus $1.30 multiplied by 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. 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.
(13) STOCK-BASED COMPENSATION PLANS
The Company has granted stock options under four stock-based compensation
plans: the 1998 Equity Incentive Plan, the 1998 Non-Qualified Stock Option Plan,
the Stock Plan for Non-Employee Directors, and the 1998 Stock Option Plan for
Outside Directors.
Equity Incentive Plan
The Company has 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. Options generally vest over a three year period and expire seven
years from date of grant.
1998 Non-Qualified Stock Option Plan
The Company has adopted the 1998 Non-Qualified Stock Option Plan which
provides for the award of up to 1,000,000 shares of Common Stock in the form of
non-qualified stock options. All employees, consultants and advisors of the
Company are eligible to participate. Except for non-qualified stock options
covering no more than 25,000 shares of Common Stock in the aggregate, directors
and officers of the Company are not eligible to participate.
Stock Plan for Non-Employee Directors
The Company has adopted the Stock Plan for Non-Employee Directors which
provided for the award of up to 100,000 shares of Common Stock in the form of
non-qualified options. Each non-employee director of the Company who was not a
stockholder prior to the IPO received an option to purchase 7,500 shares of
Common Stock at $13.00 per share. Each option expires after 10 years and is
exercisable six months following the date of grant. As of June 30, 1998 and
1999, options to purchase 15,000 shares of Common Stock were granted under this
plan. The Stock Plan for Non-Employee Directors was terminated in November 1998
with respect to the future grant of options.
1998 Stock Option Plan for Outside Directors
In November 1998, the Company adopted the 1998 Stock Option Plan for
Outside Directors which provides for the award of up to 100,000 shares of Common
Stock in the form of non-qualified stock options. The 1998 Stock Option Plan for
Outside Directors replaced the Stock Plan for Non-Employee Directors, except for
options currently outstanding. All directors who are not employees or full-time
consultants of the Company are eligible to participate.
38
<PAGE> 39
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee Stock Purchase Plan
The Company also has adopted the 1998 Employee Stock Purchase Plan that
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 is 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. During fiscal 1999, 52,636 shares of Common Stock at a
weighted average price of $14.36 were issued to employees under the plan. Had
the Company adopted SFAS No. 123, the weighted average fair value of each
purchase right granted during fiscal 1999 would have been $3.09. The fair value
was estimated at the beginning of the period with the following weighted average
assumptions: (1) expected life of one half year (2) expected volatility of 33%,
(3) risk-free interest rate of 6% and (4) no dividend yield.
Stock option activity under all plans during the periods indicated is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF 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
Granted................................................ 836,726 14.35
Exercised.............................................. (6,501) 13.00
Forfeited.............................................. (70,911) 13.58
Expired................................................ --
--------- ------
Balance at June 30, 1999.................................... 1,633,331 $13.14
========= ======
</TABLE>
In addition to the options granted under the plans noted above, in fiscal
1998, the Company issued an option to purchase 10,000 shares of Common Stock at
a purchase price of $5.00 per share.
39
<PAGE> 40
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its stock-based
compensation plans and, accordingly, no compensation cost has been recognized in
the financial statements, except for stock options granted to non-employees for
which compensation expense of $201,000 has been recorded in fiscal 1998. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock-based compensation plans under SFAS No. 123, the Company's net
income (loss) and earnings (loss) per share would have changed to the pro forma
amounts indicated below (Dollars in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1998 1999
-------- -------
<S> <C> <C>
Net income (loss):
As reported............................................... $(2,894) $9,711
Pro forma for SFAS No. 123................................ $(3,679) $7,751
Basic earnings (loss) per common share:
As reported............................................... $ (0.67) $ 0.74
Pro forma for SFAS No. 123................................ $ (0.85) $ 0.59
Diluted earnings (loss) per common share:
As reported............................................... $ (0.67) $ 0.68
Pro forma for SFAS No. 123................................ $ (0.85) $ 0.54
</TABLE>
At June 30, 1999, there were 660,168 additional shares available for grant
under the Company's stock option plans. The per share weighted-average fair
value of stock options granted during fiscal 1998 and 1999 was $4.53 and $4.98
on the date of grant using the Black Scholes option-pricing model with the
following weighted average assumptions for both years: volatility of 33%;
expected dividend yield 0%, risk-free interest rate of 6% and an expected life
of 4 years.
The following is a summary of stock options outstanding at June 30, 1999:
<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 1.84 $ 5.00 10,000 $ 5.00
$11.50 81,000 6.32 $11.50 -- $11.50
$13.00 1,195,918 6.05 $13.00 397,657 $13.00
$13.13--$21.75 356,413 6.67 $16.40 34,750 $14.77
--------- -------
1,643,331 442,407
========= =======
</TABLE>
(14) EMPLOYEE BENEFIT PLANS
The Company provides 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
eligible employees' salaries or wages, or at the discretion of the Company.
Total expense for contributions under all plans totaled $101,000 and $668,000
for fiscal 1998 and 1999.
(15) RELATED PARTY TRANSACTIONS
Prior to acquisition, certain Operating 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
40
<PAGE> 41
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
was $81,000 and $404,000 for fiscal 1998 and 1999, respectively. Future
commitments with respect to these leases are included in the schedule of minimum
lease payments in Note 11.
Expenses paid by the Company prior to the closing of the IPO were advanced
under a $3 million line of credit issued on October 6, 1997 by two of the
Company's stockholders. During fiscal 1998, this loan was repaid in its entirety
and the line of credit was terminated.
(16) SEGMENT REPORTING
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS 131")
as of June 30, 1999 and current year information has been presented in
conformity with this accounting standard. The Company has one reportable
business segment as defined by SFAS 131.
Revenue from the federal government and its agencies accounted for 23% and
12% of the Company's total revenue in fiscal 1998 and 1999, respectively. There
was no other customer that accounted for 10% or more of the Company's total
revenue in fiscal 1998 or 1999.
41
<PAGE> 42
PROVANT, INC. AND SUBSIDIARIES
QUARTERLY RESULTS (UNAUDITED)
The following table presents the unaudited quarterly results of operations
for fiscal 1998 and 1999:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1999
Revenue............................................. $23,710 $31,740 $36,213 $47,013
Gross profit........................................ $13,562 $18,426 $21,191 $27,715
Net income.......................................... $ 1,399 $ 1,840 $ 2,689 $ 3,783
Earnings per common share:
Basic.......................................... $ 0.14 $ 0.16 $ 0.19 $ 0.23
Diluted........................................ $ 0.13 $ 0.15 $ 0.18 $ 0.21
YEAR ENDED JUNE 30, 1998
Revenue............................................. $ -- $ -- $ -- $14,189
Gross profit........................................ $ -- $ -- $ -- $ 7,815
Net loss............................................ $ (208) $ (939) $ (342) $(1,405)
Loss per common share:
Basic.......................................... $ (0.08) $ (0.28) $ (0.10) $ (0.19)
Diluted........................................ $ (0.08) $ (0.28) $ (0.10) $ (0.19)
</TABLE>
42
<PAGE> 43
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
43
<PAGE> 44
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 LLP
Boston, Massachusetts
August 10, 1998
44
<PAGE> 45
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS 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
Billings in excess of costs and earnings.................. 1,076 1,247
------ -------
Total current liabilities......................... 3,944 7,397
------ -------
Long-term liabilities:
Notes payable, net of current portion..................... -- 304
Deferred income taxes..................................... 29 198
------ -------
Total long-term liabilities....................... 29 502
------ -------
Total liabilities................................. 3,973 7,899
------ -------
Commitments and contingencies Stockholders' equity:
Common stock.............................................. 8 2,147
Additional paid-in capital................................ 2,058 --
Retained earnings......................................... 529 1,257
------ -------
2,595 3,404
Less common stock held in treasury at cost................ (585) (626)
------ -------
Total stockholders' equity........................ 2,010 2,778
------ -------
Total liabilities and stockholders' equity........ $5,983 $10,677
====== =======
</TABLE>
See accompanying notes to consolidated financial statements
45
<PAGE> 46
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)
------- ------- ------- -------
Other expense, net.................................. (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
46
<PAGE> 47
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<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
47
<PAGE> 48
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS 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:
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
48
<PAGE> 49
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------- JANUARY 1, 1998
1995 1996 1997 TO MAY 4, 1998
------- ------ ---- ---------------
(DOLLARS IN THOUSANDS)
<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 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
49
<PAGE> 50
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.
50
<PAGE> 51
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
51
<PAGE> 52
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating 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.
52
<PAGE> 53
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>
53
<PAGE> 54
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,
54
<PAGE> 55
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>
55
<PAGE> 56
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> <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>
56
<PAGE> 57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item and not provided in Item 4A will be
contained in the Company's Proxy Statement, which the Company intends to file
within 120 days following the end of its fiscal year ended June 30, 1999, and
such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item will be contained in the Company's
Proxy Statement, which the Company intends to file within 120 days following the
end of its fiscal year ended June 30, 1999, and such information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item will be contained in the Company's
Proxy Statement, which the Company intends to file within 120 days following the
end of its fiscal year ended June 30, 1999, and such information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item will be contained in the Company's
Proxy Statement, which the Company intends to file within 120 days following the
end of its fiscal year ended June 30, 1999, and such information is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are included in Item 8.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROVANT, INC. AND SUBSIDIARIES:
Independent Auditors' Report.............................. 20
Consolidated Balance Sheets............................... 21
Consolidated Statements of Operations..................... 22
Consolidated Statements of Stockholders' Equity........... 23
Consolidated Statements of Cash Flows..................... 24
Notes to Consolidated Financial Statements................ 25
Quarterly Results (Unaudited)............................. 42
STAR MOUNTAIN, INC. AND SUBSIDIARIES:
Independent Auditors' Reports............................. 43
Consolidated Balance Sheets............................... 45
Consolidated Statements of Operations..................... 46
Consolidated Statements of Stockholders' Equity........... 47
Consolidated Statements of Cash Flows..................... 48
Notes to Consolidated Financial Statements................ 50
</TABLE>
(a)(2) The following consolidated financial statement schedule of PROVANT,
Inc. and subsidiaries for the period from November 16, 1996 (date of inception)
to June 30, 1997 and the years ended June 30, 1998 and 1999 is filed as part of
this Form 10-K and should be read in conjunction with the Company's Consolidated
Financial Statements included in Item 8 of this Report on Form 10-K.
57
<PAGE> 58
<TABLE>
<CAPTION>
SEQUENTIAL
SCHEDULE PAGE NO.
-------- ----------
<S> <C>
II VALUATION AND QUALIFYING ACCOUNTS........................ 62
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information to be set forth therein is
included in the Consolidated Financial Statements or Notes thereto.
(a)(3) Exhibits
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
------- ----------- ----------
<C> <S> <C>
***3.1 Certification of Incorporation of the Company...............
***3.2 By-laws of the Company......................................
***4.1 Form of Specimen Stock Certificate..........................
***10.1 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., Behavioral Acquisition Corp., Paul M. Verrochi,
Dominic J. Puopolo, Behavioral Technology, Inc. and Paul C.
Green, Ph.D.................................................
***10.2 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., Decker Acquisition Corp., Paul M. Verrochi, Dominic J.
Puopolo, Decker Communications, Inc., Bert Decker and
Kenneth Taylor..............................................
***10.3 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., Howard Acquisition Corp., Paul M. Verrochi, Dominic J.
Puopolo, J. Howard & Associates, Inc., Jeffrey P. Howard and
Marc S. Wallace.............................................
***10.4 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., LSS Acquisition Corp., Paul M. Verrochi, Dominic J.
Puopolo, Robert Steinmetz, Ph.D., and Associates, Inc.,
Edwin Bauch as Trustee of the Steinmetz Children's Trust
u/d/t dated December 31, 1996, Edwin Bauch as Trustee of the
King Children's Trust u/d/t dated December 31, 1996, John F.
King and Robert A. Steinmetz, Ph.D..........................
***10.5 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., MOHR Acquisition Corp., Paul M. Verrochi, Dominic J.
Puopolo, MOHR Retail Learning Systems, Inc., Herbert Cohen,
Judith Cohen and Michael Patrick............................
***10.6 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., Paul M. Verrochi, Dominic J. Puopolo, Star Mountain,
Inc., Star Acquisition Corp. and Carl von Sternberg.........
***10.7 Form of Agreement and Plan of Merger by and among PROVANT,
Inc., Novations Acquisition Corp., Paul M. Verrochi, Dominic
J. Puopolo, Novations Group, Inc., Joseph Folkman, Joseph
Hanson, Kurt Sandholtz, Norman Smallwood, Randy Stott and
Jonathan Younger............................................
***10.8 Form of First Amendment to Agreement and Plan of Merger (J.
Howard).....................................................
***10.9 1998 Equity Incentive Plan..................................
***10.10 Form of 1998 Employee Stock Purchase Plan...................
***10.11 Form of Warrants to Messrs. Verrochi and Puopolo............
***10.12 Form of Contingent Warrants to Messrs. Verrochi and
Puopolo.....................................................
***10.13 Form of Employment Agreement between Rajiv Bhatt and
PROVANT, Inc................................................
***10.14 Form of Employment Agreement between MOHR Acquisition Corp.,
Herbert A. Cohen, and PROVANT, Inc..........................
***10.15 Form of Employment Agreement between Decker Acquisition
Corp., Bert Decker, and PROVANT, Inc........................
***10.16 Form of Employment Agreement between Philip Gardner and
PROVANT, Inc................................................
***10.17 Form of Employment Agreement between Behavioral Acquisition
Corp., Paul C. Green, and PROVANT, Inc......................
***10.18 Form of Employment Agreement between Novations Acquisition
Corp., Joe Hanson, and PROVANT, Inc.........................
***10.19 Form of Employment Agreement between LSS Acquisition Corp.,
John F. King, and PROVANT, Inc..............................
***10.20 Form of Employment Agreement between Dominic J. Puopolo and
PROVANT, Inc................................................
</TABLE>
58
<PAGE> 59
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
------- ----------- ----------
<C> <S> <C>
***10.21 Form of Employment Agreement between A. Carl von Sternberg,
Star Acquisition Corp. and PROVANT, Inc.....................
***10.22 Form of Employment Agreement between Paul M. Verrochi and
PROVANT, Inc................................................
***10.23 Form of Employment Agreement between Howard Acquisition
Corp., Marc S. Wallace, and PROVANT, Inc....................
***10.24 Form of Employment Agreement between John H. Zenger and
PROVANT, Inc................................................
***10.25 Form of Consulting Agreement between Michael J. Davies and
PROVANT, Inc................................................
***10.26 Lease Agreement between Behavioral Technology, Inc. and Paul
C. Green, Ph.D..............................................
***10.27 Lease Agreement between Novations Group, Inc. and Novations
Partners, L.L.C.............................................
***10.28 Form of Consulting Agreement between Donald W. Glazer and
PROVANT, Inc................................................
**10.29 Revolving Credit Agreement dated April 8, 1998 between
PROVANT, Inc. and Fleet National Bank.......................
*10.30 Amendment No. 1 to Revolving Credit Agreement...............
****10.31 Amendment No. 2 to Revolving Credit Agreement...............
+10.32 Amendment No. 3 to Revolving Credit Agreement...............
+10.33 Amendment No. 4 to Revolving Credit Agreement...............
+10.34 Amendment No. 5 to Revolving Credit Agreement...............
+++10.35 1998 Non-Qualified Stock Option Plan........................
++10.36 1998 Stock Option Plan for Outside Directors................
+21 Subsidiaries of the Registrant..............................
+23.1 Consent of KPMG LLP.........................................
+23.2 Consent of Friedman & Fuller, P.C...........................
+27 Financial Data Schedule.....................................
</TABLE>
- ---------------
* Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998.
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the three months ended March 31, 1998.
*** Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-46157).
**** Incorporated by reference to Post Effective Amendment No. 2 to the
Company's Registration Statement on Form S-4 (File No. 333-57733).
+++ Incorporated by reference to the Company's Registration Statement on Form
S-8 (File No. 333-86379).
++ Incorporated by reference to the Company's Registration Statement on Form
S-8 (File No. 333-72857).
+ Filed herewith.
(b) The Company filed a Current Report on Form 8-K dated May 7, 1999 (as
amended July 6, 1999) that provided disclosure under Items 2 and 7 relating to
the acquisition by merger of Petrus 1961, Inc. by a wholly-owned subsidiary of
the Company. Financial Statements filed included consolidated balance sheets of
Petrus, 1961, Inc. and subsidiaries, d/b/a Project Management Services, Inc., as
of December 31, 1998 and June 30, 1998 and the related consolidated statements
of operations, stockholders' equity and cash flows for the period from inception
(April 21, 1998) to December 31, 1998, as well as combined balance sheets of
Project Management Services, Inc. and subsidiary and M&A Integration, Inc. as of
April 20, 1998 and December 31, 1997 and the related combined statements of
operations, stockholders' equity and cash flows for the period January 1 to
April 20, 1998 and for the year ended December 31, 1997.
59
<PAGE> 60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PROVANT, INC.
By: /s/ PAUL M. VERROCHI
------------------------------------
PAUL M. VERROCHI
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
Date: September 15, 1999
--------------------------------------
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ PAUL M. VERROCHI Chairman of the Board and September 15, 1999
- ----------------------------------------------------- Chief Executive Officer
PAUL M. VERROCHI
/s/ DOMINIC J. PUOPOLO Chief Financial Officer and September 15, 1999
- ----------------------------------------------------- Director
DOMINIC J. PUOPOLO
/s/ JOHN H. ZENGER President and Director September 15, 1999
- -----------------------------------------------------
JOHN H. ZENGER
/s/ RAJIV BHATT Chief Accounting Officer September 15, 1999
- -----------------------------------------------------
RAJIV BHATT
/s/ HERBERT A. COHEN Director September 15, 1999
- -----------------------------------------------------
HERBERT A. COHEN
/s/ BERT DECKER Director September 15, 1999
- -----------------------------------------------------
BERT DECKER
/s/ PAUL C. GREEN Director September 15, 1999
- -----------------------------------------------------
PAUL C. GREEN
/s/ JOE HANSON Director September 15, 1999
- -----------------------------------------------------
JOE HANSON
/s/ JOHN F. KING Director September 15, 1999
- -----------------------------------------------------
JOHN F. KING
/s/ CARL VON STERNBERG Director September 15, 1999
- -----------------------------------------------------
A. CARL VON STERNBERG
</TABLE>
60
<PAGE> 61
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ MARC S. WALLACE Director September 15, 1999
- -----------------------------------------------------
MARC S. WALLACE
/s/ MICHAEL J. DAVIES Director September 15, 1999
- -----------------------------------------------------
MICHAEL J. DAVIES
/s/ DAVID B. HAMMOND Director September 15, 1999
- -----------------------------------------------------
DAVID B. HAMMOND
/s/ JOHN R. MURPHY Director September 15, 1999
- -----------------------------------------------------
JOHN R. MURPHY
/s/ ESTHER T. SMITH Director September 15, 1999
- -----------------------------------------------------
ESTHER T. SMITH
</TABLE>
61
<PAGE> 62
PROVANT, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------- ---------- ---------- ---------- -----------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- ---------- ---------- ---------- -----------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Period from November 16, 1996 (date
of inception) to June 30, 1997:
Allowance for doubtful accounts.... $ -- $ -- $ -- $ -- $ --
Year ended June 30, 1998:
Allowance for doubtful accounts.... $ -- $135 $605(a) $ -- $740
Year ended June 30, 1999:
Allowance for doubtful accounts.... $740 $210 -- $258 $692
</TABLE>
- ---------------
(a) Amount established as component of accounts acquired in acquisition of the
Founding Companies.
62
<PAGE> 1
EXHIBIT 10.32
THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT
This Third Amendment to Revolving Credit Agreement ("Third Amendment")
is made as of March 31, 1999 by and among PROVANT, Inc. ("Borrower"), a Delaware
business corporation having its principal place of business at 67 Batterymarch
Street, Suite 500, Boston, Massachusetts 02110, Fleet National Bank, a national
banking association ("Fleet"), BankBoston, N.A., a national banking association
("BankBoston"), Norwest Bank Iowa, N.A., a national banking association
("Norwest"), State Street Bank and Trust Company, a Massachusetts trust company
("State Street"), and Fleet National Bank, as agent for itself and BankBoston,
Norwest and State Street (the "Agent").
RECITALS
WHEREAS, the Borrower, Fleet and the Agent have previously entered into
that certain Revolving Credit Agreement, dated as of April 8, 1998 (the
"Original Credit Agreement"), pursuant to which Fleet made available to the
Borrower a revolving credit loan facility having a maximum available borrowing
amount of $40,000,000 (the "Original Commitment"); and
WHEREAS, the Borrower, Fleet, the Agent and BankBoston previously
entered into that certain First Amendment to Revolving Credit Agreement dated as
of July 27, 1998 (the "First Amendment") pursuant to which Fleet assigned a
portion of the Original Commitment to BankBoston and the parties otherwise
amended certain provisions of the Original Credit Agreement; and
WHEREAS, the Borrower, Fleet, BankBoston, Norwest and the Agent have
also previously entered into that certain Second Amendment to Revolving Credit
Agreement, dated as of December 31, 1998 (the "Second Amendment"), which further
amended the Original Credit Agreement in certain respects in order to (i)
increase the total Commitment thereunder from $40,000,000 to $60,000,000, (ii)
allocate the enlarged Commitment among BankBoston, Fleet and Norwest (Norwest
being a new Bank), and (iii) make certain other modifications to the provisions
of the Original Credit Agreement (as amended by the First Amendment and the
Second Amendment, the "Credit Agreement"); and
WHEREAS, the parties hereto now desire to further amend the Credit
Agreement in certain respects in order to (i) increase the total Commitment
thereunder from $60,000,000 to $75,000,000, (ii) allocate the enlarged
Commitment among BankBoston, Fleet, Norwest and State Street (State Street being
a new Bank), and (iii) make certain other modifications to the provisions of the
Credit Agreement.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt of which is hereby acknowledged, the parties
hereto hereby agree to modify and amend the Credit Agreement as follows:
<PAGE> 2
Section 1. Definitions. All capitalized terms used herein without
definition shall have the respective meanings provided therefor in the Credit
Agreement.
Section 2. Amendment of Specific Provisions. The following specific
provisions of the Credit Agreement are hereby modified and amended:
(a) in the definition of "Commitment" in Section 1.1, the schedule
of each Bank's Commitment and Commitment Percentage shall be
set forth on a new Schedule I attached hereto, which shall
replace the existing Schedule I to the Credit Agreement;
(b) in the definition of "Total Commitment" appearing in
Section 1.1, the stated dollar amount from and after the date
hereof shall be $75,000,000 rather than $60,000,000; and
(c) State Street shall be deemed a "Bank" for all purposes under
the Credit Agreement and the other Loan Documents.
Section 3. Confirmation of Stock Pledge Agreement. The parties hereto
agree that all references to the "Credit Agreement" contained in the Stock
Pledge Agreement and all Supplements thereto shall mean or refer to the Credit
Agreement as amended and supplemented by this Third Amendment and as it may be
further amended, supplemented, modified and restated and in effect from time to
time, including without limitation any such amendment, supplement, modification
or restatement which increases the amount of Indebtedness owing by the Borrower
thereunder.
Section 4. Representations of State Street. State Street hereby
represents, warrants, confirms and acknowledges that (a) it has received a copy
of the Credit Agreement, together with copies of the most recent financial
statements delivered pursuant to SECTION 7.4 thereof, and such other documents
and information as it has deemed appropriate to make its own credit analysis and
decision to enter into this Third Amendment; (b) it will, independently and
without reliance upon the Agent or any other Bank and based upon such documents
and information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under the Credit Agreement;
(c) it qualifies as an Eligible Assignee under the Credit Agreement; (d) it
appoints and authorizes the Agent to take such action as agent on its behalf and
to exercise such powers under the Credit Agreement and the other Loan Documents
as are delegated to the Agent by the terms thereof, together with such powers as
are reasonably incidental thereto; (e) it will perform in accordance with their
terms all of the obligations which by the terms of the Credit Agreement are
required to be performed by it as a Bank; and (f) neither the Agent nor any of
the Banks is making any representation or warranty, express or implied, or
assuming any responsibility with respect to any statements, warranties or
representations made by the Borrower or any Subsidiary in or in connection with
the Credit Agreement or any of the other Loan
-2-
<PAGE> 3
Documents, or as to the execution, legality, validity, enforceability,
genuineness, sufficiency or value of the Credit Agreement, the other Loan
Documents or any other instrument or document furnished pursuant thereto or the
attachment, perfection or priority of any security interest or mortgage, and
further that neither the Agent nor any Bank makes any representation or warranty
or assumes any responsibility with respect to the financial condition of the
Borrower or any of its Subsidiaries.
Section 5. Confirmation of Banks' Commitments. Each Bank hereby
acknowledges that, as of the date hereof, there are no Revolving Credit Loans
and no Letters of Credit outstanding under the Credit Agreement.
Section 6. Loan Documents Ratified and Confirmed. The Credit Agreement,
the Notes and each of the other Loan Documents, as specifically supplemented or
amended by this Third Amendment and the other documents executed in connection
herewith, are and shall continue to be in full force and effect and are hereby
in all respects ratified and confirmed. Without limiting the generality of the
foregoing, the Security Documents and all of the collateral described therein
do, and shall continue to, secure the payment of all obligations under the Loan
Documents, in each case as amended or supplemented pursuant to this Third
Amendment.
Section 7. Conditions to Effectiveness. This Third Amendment shall
become effective only upon completion of the following actions: (i) the issuance
by the Borrower on the date hereof of a Note, substantially in the form attached
as Exhibit A hereto, to reflect the new Commitment of State Street as set forth
in Schedule I hereto; and (ii) the execution and delivery to the Agent of an
Amendment and Confirmation of Guaranty, dated the date hereof and substantially
in the form attached hereto as Exhibit B, by each of the Borrower's Subsidiaries
which is a Guarantor.
Section 8. Fees, Costs and Expenses.
(a) Borrower shall pay to State Street, at the closing of the
transactions contemplated hereby, a closing fee of $22,500.
(b) In addition to the foregoing closing fee, Borrower agrees to pay on
demand all reasonable costs and expenses of the Agent and the Banks, including
without limitation all reasonable fees and expenses of counsel, in connection
with the preparation, execution and delivery of this Third Amendment and the
other documents and instruments to be delivered herewith.
Section 9. Miscellaneous. This Third Amendment may be executed in several
counterparts and by each party on a separate counterpart, each of which when
executed and delivered shall be an original, and all of which together shall
constitute one instrument. In proving this Third Amendment, it shall not be
necessary to produce or account for more than one such counterpart signed by the
party against whom enforcement is sought. This Third
-3-
<PAGE> 4
Amendment is intended to take effect as a sealed instrument and shall for all
purposes be construed in accordance with and governed by the laws of The
Commonwealth of Massachusetts, (excluding the laws applicable to conflicts or
choice of law).
******
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment
to be duly executed as an instrument under seal as of the date first above
written.
PROVANT, INC.
By:/s/ Rajiv Bhatt
Title: Executive Vice President
BANKBOSTON, N.A.
By:/s/ John P. Dunne
Title: Director
FLEET NATIONAL BANK
By:/s/ Helen K. Balboni
Title: Vice President
NORWEST BANK IOWA, N.A.
By:/s/ Robert A. Gagne
Title: Vice President
STATE STREET BANK AND TRUST
COMPANY
By:/s/ Suzanne L. Dwyer
Title: Vice President
-5-
<PAGE> 6
FLEET NATIONAL BANK, as AGENT
By:/s/ Helen K. Balboni
Title: Vice President
-6-
<PAGE> 1
EXHIBIT 10.33
FOURTH AMENDMENT TO REVOLVING CREDIT AGREEMENT
This Fourth Amendment to Revolving Credit Agreement ("Fourth
Amendment") is made as of June 25, 1999, by and among PROVANT, Inc.
("Borrower"), a Delaware business corporation having its principal place of
business at 67 Batterymarch Street, Suite 500, Boston, Massachusetts 02110,
certain banks more particularly identified in the Revolving Credit Agreement, as
defined hereinbelow (collectively, the "Banks"), and Fleet National Bank, as
agent for itself and the other Banks (the "Agent").
RECITALS
WHEREAS, the Borrower, the Banks, and the Agent previously entered into
that certain Revolving Credit Agreement, dated as of April 8, 1998, and
subsequently entered into the First, Second and Third Amendments thereto (said
Revolving Credit Agreement, as so amended prior to the date hereof, the "Credit
Agreement"), pursuant to which the Banks have made available to the Borrower a
revolving credit loan facility having a maximum available borrowing amount of
$75,000,000; and
WHEREAS, the parties hereto now desire to further amend or modify the
Credit Agreement in certain respects to order to (i) permit a restructuring of
the direct and indirect ownership by the Borrower of its Subsidiaries,
(ii) provide for additional guaranties from certain Subsidiaries and a release
of existing pledges of stock of certain other Subsidiaries, and (iii) carry out
certain other waivers or modifications of, or consents under, the provisions of
the Credit Agreement.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt of which is hereby acknowledged, the parties
hereto hereby agree to modify, amend, and waive certain provisions of the Credit
Agreement and to provide for the consent of the Majority Banks as to certain
aspects of the transactions described above, in the following manner:
Section 1. Definitions. All capitalized terms used herein without
definition shall have the respective meanings provided therefor in the Credit
Agreement.
Section 2. Restructuring; Waiver or Consent Regarding Specific Provisions.
Notwithstanding the provisions of Sections 7.13(a), 8.5.1(a), 8.5.2 and 8.10 of
the Credit Agreement, the Majority Banks hereby grant their waiver of such
provisions, as necessary, and their consent in order to permit the contribution
by the Borrower of the outstanding capital stock of various of its Subsidiaries
(identified as the "Non-Pledged Subsidiaries" on Appendix I attached hereto and
made a part hereof), respectively, to KC Resources Creative Solutions, Inc.
("KC"), MOHR Learning Systems, Inc. ("MOHR"), Star Mountain, Inc. ("Star"), and
Gulliver Ritchie Associates, Inc. ("GRA") (KC, MOHR, Star and GRA all being
existing Subsidiaries of the Borrower and referred to collectively as the
"Intermediate Subsidiaries"). The transaction described in this Section 2 is
referred to as the "Restructuring."
-1-
<PAGE> 2
Section 3. Conditions to Effectiveness. This Fourth Amendment shall become
effective only upon completion of the following actions:
(a) the execution and delivery to the Agent of an Instrument of
Adherence to Guaranty, dated the date hereof and substantially in the form
attached hereto as Appendix II, by the existing Subsidiaries of the Borrower
more particularly specified therein;
(b) the delivery to the Agent and the other Banks of an opinion letter
of Nutter, McClennen & Fish, counsel to the Borrower and the Subsidiaries,
respecting the transactions contemplated by this Fourth Amendment, in a form and
addressing such specific matters as may be reasonably requested by the Banks;
(c) a certificate of an appropriate officer of the Borrower and each
Subsidiary which is a party to the documents contemplated by this Fourth
Amendment, certifying as to its charter documents and by-laws, the incumbency of
signing officers, and the adoption of necessary corporate votes; and
(d) such other documents or information as the Agent or any Bank may
reasonably request.
Section 4. Release of Certain Stock Pledges; Amendment. Contemporaneously
with the completion of all of the actions specified in Section 3 above which are
conditions to the effectiveness of this Fourth Amendment, the Agent is hereby
authorized by the Banks, and hereby agrees as Agent, that the existing pledges
previously granted by the Borrower in the capital stock of the Non-Pledged
Subsidiaries shall be deemed released and terminated. Pursuant to the foregoing,
the Agent shall promptly surrender to the Borrower all certificates of stock,
together with related stock powers endorsed in blank, previously delivered to
the Agent. All of the aforesaid stock of the Non-Pledged Subsidiaries was
previously pledged by the Borrower under the Stock Pledge Agreement, as it has
been supplemented from time to time. All other outstanding pledges of stock of
Subsidiaries other than the Non-Pledged Subsidiaries shall remain outstanding
and unaffected by this Section 4.
Annex A to the Stock Pledge Agreement is hereby amended and restated in
its entirety, in order to reflect the Restructuring. The form of Annex A which
is attached to this Fourth Amendment shall become Annex A to the Stock Pledge
Agreement for all purposes.
Section 5. Additional Modifications to Credit Agreement. The parties hereto
agree that the Credit Agreement shall be further modified and amended in the
following manner:
(a) In Section 1.1, the term "Material Subsidiary" and the definition
thereof shall be deleted in its entirety.
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<PAGE> 3
(b) In Section 7.13(b), the text of such subparagraph shall be amended
and restated in its entirety to read as follows:
"(b) The Borrower shall cause each Subsidiary which is not
a party on the Closing Date to the Guaranty to also
execute and deliver to the Agent, concurrently with
the organization or acquisition of any such
Subsidiary, an Instrument of Adherence to the
Guaranty, together with such supporting
documentation, including legal opinions and corporate
authority documents, as the Agent may reasonably
request."
Section 6. Additional Covenants of Borrower. As a condition to the
willingness of the Banks to enter into this Fourth Amendment, the Borrower
further covenants and agrees, for itself and all of its Subsidiaries, as
follows:
(a) No additional Subsidiaries may be formed or acquired directly or
indirectly by Borrower, except (i) pursuant to the provisions of the Credit
Agreement, or (ii) upon the prior written consent of the Majority Banks; and
(b) All of the capital stock of the Non-Pledged Subsidiaries, the
pledge of which stock is this day being released pursuant to the provisions of
Section 4 hereof, shall remain free and clear of all liens and encumbrances and
shall not be subjected to any pledge or assignment granted to any Person, other
than the Agent.
Section 7. Consent to New Subsidiary. Pursuant to the provisions of
Section 8.10 hereof, the Banks hereby consent to the creation of a new Delaware
corporation as a wholly-owned direct Subsidiary of the Borrower, known as
PROVANT Services, Inc. ("Services"). The Borrower represents and warrants that
Services is being formed for the purpose of carrying out certain administrative
functions for other Subsidiaries of the Borrower and not for any Permitted
Acquisition. The foregoing consent of the Banks shall be subject to the
condition that the Borrower shall promptly deliver or cause to be delivered to
the Agent (i) an Instrument of Adherence to Guaranty executed by Services, and
(ii) the pledged stock of Services, together with appropriate stock powers.
Section 8. Loan Documents Ratified and Confirmed. The Credit Agreement,
the Notes and each of the other Loan Documents, as specifically supplemented or
amended by this Fourth Amendment and the other documents executed in connection
herewith, are and shall continue to be in full force and effect and are hereby
in all respects ratified and confirmed. The waivers and consents embodied in
this Fourth Amendment are limited to the specific matters and circumstances
described herein, and no further or additional waiver as to any other
obligations under the Credit Agreement shall be deemed to be granted hereby.
Without limiting the generality of the foregoing, the Security Documents and all
of the collateral described therein do, and shall continue to, secure the
payment of all obligations under the
-3-
<PAGE> 4
Credit Agreement, in each case as amended or supplemented pursuant to this
Fourth Amendment.
Section 9. Bringdown. The Borrower hereby confirms that all
representations and warranties with respect to the Borrower and any Subsidiaries
contained in the Credit Agreement and each of the other Loan Documents and in
any other certificate or document delivered in connection therewith are true and
correct as of the date hereof, and that no Default or Event of Default is
outstanding or would be created by the consummation of the transactions
described herein.
Section 10. Costs and Expenses. Borrower agrees to pay on demand all
reasonable costs and expenses of the Agent and the Banks, including without
limitation all reasonable fees and expenses of counsel, in connection with the
preparation, execution and delivery of this Fourth Amendment and the other
documents and instruments to be delivered herewith.
Section 11. Miscellaneous. This Fourth Amendment may be executed in
several counterparts and by each party on a separate counterpart, each of which
when executed and delivered shall be an original, and all of which together
shall constitute one instrument. In proving this Fourth Amendment, it shall not
be necessary to produce or account for more than one such counterpart signed by
the party against whom enforcement is sought. This Fourth Amendment is intended
to take effect as a sealed instrument and shall for all purposes be construed in
accordance with and governed by the laws of The Commonwealth of Massachusetts,
(excluding the laws applicable to conflicts or choice of law).
[Remainder of Page Intentionally Left Blank]
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Amendment to be duly executed as an instrument under seal as of the date first
above written.
PROVANT, INC.
By:/s/ Rajiv Bhatt
Title: Executive Vice President
BANKBOSTON, N.A.
By:/s/ Pamela A. Kuong
Title: Vice President
FLEET NATIONAL BANK
By:/s/ Susan Mason
Title: Vice President
NORWEST BANK IOWA, N.A.
By:/s/ Robert A. Gagne
Title: Vice President
STATE STREET BANK AND TRUST
COMPANY
By:/s/ Suzanne L. Dwyer
Title: Vice President
FLEET NATIONAL BANK, as AGENT
By:/s/ Susan Mason
Title: Vice President
<PAGE> 1
EXHIBIT 10.34
FIFTH AMENDMENT TO REVOLVING CREDIT AGREEMENT
This Fifth Amendment to Revolving Credit Agreement ("Fifth Amendment")
is made as of June 29, 1999, by and among PROVANT, Inc. ("Borrower"), a Delaware
business corporation having its principal place of business at 67 Batterymarch
Street, Suite 500, Boston, Massachusetts 02110, certain banks consisting of
Fleet National Bank, a national banking association ("Fleet"), BankBoston, N.A.,
a national banking association ("BankBoston"), Norwest Bank Iowa, N.A., a
national banking association ("Norwest"), and State Street Bank and Trust
Company, a Massachusetts trust company ("State Street") (collectively, the
"Banks"), and Fleet National Bank, as agent for itself and the other Banks (the
"Agent").
RECITALS
WHEREAS, the Borrower, the Banks, and the Agent previously entered into
that certain Revolving Credit Agreement, dated as of April 8, 1998, and
subsequently entered into the First, Second, Third and Fourth Amendments thereto
(said Revolving Credit Agreement, as so amended prior to the date hereof, the
"Credit Agreement"), pursuant to which the Banks have made available to the
Borrower a revolving credit loan facility having a maximum available borrowing
amount of $75,000,000; and
WHEREAS, the parties hereto now desire to further amend or modify the
Credit Agreement in certain respects to order to (i) permit the restructuring of
the direct and indirect ownership by the Borrower of its Subsidiaries, (ii)
permit the incurring of certain inter-company debt, (iii) provide for the
creation of a new holding company Subsidiary, (iv) provide for additional or
confirmatory pledges of stock from certain Subsidiaries; and (v) carry out
certain other waivers or modifications of, or consents under, the provisions of
the Credit Agreement.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt of which is hereby acknowledged, the parties
hereto hereby agree to modify, amend, and waive certain provisions of the Credit
Agreement and to provide for the consent of the Majority Banks as to certain
aspects of the transactions described above, in the following manner:
Section 1. Definitions. All capitalized terms used herein without
definition shall have the respective meanings provided therefor in the Credit
Agreement.
Section 2. Restructuring; Waiver or Consent Regarding Specific
Provisions. Notwithstanding the provisions of Sections 7.13(a), 8.1, 8.3, 8.4
and 8.10 of the Credit Agreement, the Majority Banks hereby grant their waiver
of such provisions, as necessary, and their consent in order to permit the
following series of transactions:
(a) the creation of a new Subsidiary, PROVANT Utah, Inc., organized in
the State of Utah ("Newco"), as a wholly owned-direct Subsidiary of the
Borrower;
-1-
<PAGE> 2
(b) the contribution by the Borrower to Newco of all of the capital
stock of KC Resources Creative Solutions, Inc., MOHR Retail Learning Systems,
Inc., Star Mountain, Inc. and Gulliver Ritchie Associates, Inc., all being
existing Subsidiaries (the "Intermediate Subsidiaries"); and
(c) the payment by each of the Intermediate Subsidiaries of a dividend
in the form of a promissory note in the stated principal amounts of (i)
$18,000,000 as to KC, (ii) $16,000,000 as to MOHR, (iii) $34,000,000 as to Star,
and (iv) $25,200,000 as to GRA, respectively, each being an unsecured 10-year
term note with interest at the Prime Rate plus one and one-half percent (1.5%)
per annum, adjusted annually, and having no amortization of principal
(collectively, the "Inter-company Notes").
A chart of the new corporate structure of the Borrower and its
Subsidiaries is attached hereto as Appendix I and incorporated herein by
reference. The transactions described in this Section 2 are collectively
referred to as the "Newco Restructuring."
Section 3. Conditions to Effectiveness. This Fifth Amendment shall become
effective only upon completion of the following actions:
(a) the execution and delivery to the Agent of an Amendment and
Confirmation of Guaranty, dated the date hereof and substantially in the form
attached hereto as Exhibit A, by each of the Borrower's Subsidiaries;
(b) the execution and delivery to the Agent by the Borrower and Newco
of an Amended and Restated Stock Pledge Agreement, dated the date hereof (the
"Restated Pledge Agreement") and substantially in the form attached hereto as
Exhibit B, documenting or confirming the pledge to the Agent of (i) all of the
capital stock of the Intermediate Subsidiaries held by Newco, (ii) all of the
capital stock of Newco held by the Borrower, and (iii) all of the capital stock
of all other Subsidiaries which remain directly owned by the Borrower following
the Newco Restructuring;
(c) the physical delivery to, or possession by, the Agent of stock
certificates representing all of the outstanding capital stock being pledged in
accordance with clause (b) above, accompanied by new or substituted stock power
endorsements executed in blank;
(d) the delivery to the Agent and the other Banks of an opinion letter
of Nutter, McClennen & Fish, LLP, counsel to the Borrower and the Subsidiaries,
respecting the transactions contemplated by this Fifth Amendment, in a form and
addressing such specific matters as may be reasonably requested by the Banks;
(e) a certificate of an appropriate officer of the Borrower and each
Subsidiary which is a party to the documents referenced in clauses (a) - (c)
above, certifying as to its charter
-2-
<PAGE> 3
documents and by-laws, the incumbency of signing officers, and the adoption
of necessary corporate votes;
(f) a certificate of legal existence and good standing of PROVANT Utah,
Inc. from the Secretary of State of Utah;
(g) certified copies of the Inter-company Notes;
(h) a Subordination Agreement, dated the date hereof and substantially
in the form attached hereto as Exhibit C, pursuant to which the Inter-company
Notes are to be subordinated to the payment of all Indebtedness owing to the
Banks under the Loan Documents; and
(i) such other documents or information as the Agent or any Bank may
reasonably request.
Section 4. Additional Covenants of Borrower. As a condition to the
willingness of the Banks to enter into this Fifth Amendment, the Borrower
further covenants and agrees, for itself and all of its Subsidiaries, as
follows:
(a) The Borrower shall cause Newco to exist and operate solely for the
purposes of (i) owning all of the capital stock of the Intermediate
Subsidiaries, and (ii) providing administrative, marketing and related services
to the Borrower's Subsidiaries.
(b) No additional Subsidiaries may be formed or acquired directly or
indirectly by the Borrower, except (i) pursuant to the provisions of the Credit
Agreement, or (ii) upon the prior written consent of the Majority Banks.
Section 5. Additional Modifications to Credit Agreement. The parties hereto
agree that the Credit Agreement shall be further modified and amended in the
following manner:
(a) In Section 8.1, a new clause (j) shall be added to read as follows:
"(j) Indebtedness temporarily existing immediately following a
Permitted Acquisition, to the extent permitted by Section 8.5.1(c)."
(b) In Section 8.2, a new clause (ix) shall be added to read as follows:
"(ix) liens temporarily existing at the time of any Permitted
Acquisition which are not otherwise permitted pursuant to the
provisions of this Section 8.2, so long as such liens are terminated in
accordance with the provisions of Section 8.5.1(c)."
(c) In Section 8.5.1, a new clause (c) shall be added to read as follows:
-3-
<PAGE> 4
"(c) Notwithstanding the otherwise applicable provisions of
Sections 8.1 and 8.2 hereof dealing with permitted Indebtedness and
liens, the Borrower or any acquiring Subsidiary in a Permitted
Acquisition may temporarily allow to remain outstanding any existing
purchase money equipment financing arrangement, capital equipment lease
or secured or unsecured working capital credit facility which was
originated by the company or business which is being acquired as part
of the Permitted Acquisition and which is not otherwise permitted to
remain outstanding by the provisions of Sections 8.1 and/or 8.2,
provided, however, that the foregoing right shall be temporary only so
as to permit an orderly post-Acquisition payoff and termination by the
Borrower of all such arrangements or facilities not later than fifteen
(15) days following the date of the Permitted Acquisition."
(d) The term "Stock Pledge Agreement" appearing in the Credit Agreement
or the Loan Documents shall be deemed to mean and refer to the Restated Pledge
Agreement.
Section 6. Loan Documents Ratified and Confirmed. The Credit Agreement,
the Notes and each of the other Loan Documents, as specifically supplemented or
amended by this Fifth Amendment and the other documents executed in connection
herewith, are and shall continue to be in full force and effect and are hereby
in all respects ratified and confirmed. The waivers and consents embodied in
this Fifth Amendment are limited to the specific matters and circumstances
described herein, and no further or additional waiver as to any other
obligations under the Credit Agreement shall be deemed to be granted hereby.
Without limiting the generality of the foregoing, the Security Documents and all
of the collateral described therein do, and shall continue to, secure the
payment of all obligations under the Credit Agreement, in each case as amended
or supplemented pursuant to this Fifth Amendment.
Section 7. Bringdown. The Borrower hereby confirms that all
representations and warranties with respect to the Borrower and any Subsidiaries
contained in the Credit Agreement and each of the other Loan Documents and in
any other certificate or document delivered in connection therewith are true and
correct as of the date hereof, and that no Default or Event of Default is
outstanding or would be created by the consummation of the transactions
described herein.
Section 8. Costs and Expenses. The Borrower agrees to pay on demand all
reasonable costs and expenses of the Agent and the Banks, including without
limitation all reasonable fees and expenses of counsel, in connection with the
preparation, execution and delivery of this Fifth Amendment and the other
documents and instruments to be delivered herewith.
Section 9. Miscellaneous. This Fifth Amendment may be executed in
several counterparts and by each party on a separate counterpart, each of which
when executed and delivered shall be an original, and all of which together
shall constitute one instrument. In proving this Fifth Amendment, it shall not
be necessary to produce or account for more than
-4-
<PAGE> 5
one such counterpart signed by the party against whom enforcement is sought.
This Fifth Amendment is intended to take effect as a sealed instrument and shall
for all purposes be construed in accordance with and governed by the laws of The
Commonwealth of Massachusetts, (excluding the laws applicable to conflicts or
choice of law).
******
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment
to be duly executed as an instrument under seal as of the date first above
written.
PROVANT, INC.
By:/s/ Rajiv Bhatt
Title: Executive Vice President
BANKBOSTON, N.A.
By:/s/ Pamela Kuong
Title: Vice President
FLEET NATIONAL BANK
By:/s/ Susan Mason
Title: Vice President
NORWEST BANK IOWA, N.A.
By:_____________________________
Title:
STATE STREET BANK AND TRUST
COMPANY
By:/s/ Suzanne L. Dwyer
Title: Vice President
-6-
<PAGE> 7
FLEET NATIONAL BANK, as AGENT
By:/s/ Susan Mason
Title: Vice President
-7-
<PAGE> 1
Exhibit 21
PROVANT, Inc. Subsidiaries
PROVANT Services, Inc.*
Solution Selling, Inc.*
Educational Discoveries, Inc.*
PROVANT Utah, Inc.*
Sales Performance International, Inc.*
Project Mentors, Inc.*
KC Resources Creative Solutions,Inc.**
MOHR Retail Learning Systems, Inc.**
Star Mountain, Inc.**
Gulliver Ritchie Associates, Inc.**
Behavioral Technology, Inc.***
Decker Communications,Inc.***
Learning Systems Sciences, Inc.****
J. Howard & Associates, Inc.****
Star Media, Inc.+
Star Digital, Inc.+
Novations Group, Inc.+
Strategic Interactive, Inc.+
American Media Incorporated ++
Project Management Services, Inc.+++
Executive Perspectives, Inc.++++
Legend
* wholly owned subsidiary of PROVANT, Inc.
** wholly owned subsidiary of PROVANT Utah, Inc.
*** wholly owned subsidiary of KC Resources Creative Solutions, Inc.
**** wholly owned subsidiary of MOHR Retail Learning Systems, Inc.
+ wholly owned subsidiary of Star Mountain, Inc.
++ wholly owned subsidiary of Gulliver Ritchie Associates, Inc..
+++ wholly owned subsidiary of PMSI Acquisition Corp., itself a wholly
owned subsidiary of PROVANT, Inc.
++++ subsidiary of Gulliver Ritchie Associates, Inc.
All of PROVANT's direct and indirect subsidiaries are Delaware corporations
except Project Management Services, Inc. (GA) and American Media Incorporated
(IA).
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
PROVANT, Inc.
We hereby consent to the incorporation of our reports included in this Form
10-K into the Company's previously filed Registration Statements on Form S-8
(Nos. 333-53473, 333-62109, 333-72857 and 333-86379).
/s/ KPMG LLP
KPMG LLP
Boston, Massachusetts
September 14, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
PROVANT, Inc
We hereby consent to the incorporation of our report included in this Form
10-K into the Company's previously filed Registration Statements on Form S-8
(Nos. 333-53473, 333-62109, 333-72857 and 333-86379).
/s/ Friedman & Fuller, PC
Friedman & Fuller, PC
Rockville, Maryland
September 13, 1999
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