ITEM 1. BUSINESS
COMPANY OVERVIEW
Provant, Inc. (together with its subsidiaries, "Provant" or the "Company") is a leading provider of performance improvement training services and products. 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 through September 15, 2000, the Company has acquired 14 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 best-in-class 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 primary delivery methods can be combined in blended solutions to most efficiently and effectively address a client's needs.
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. For example, the Company has developed a standard point-of-sale simulator to assist companies in the retail industry. With minor modifications, the Company can rapidly customize this product to address the specific needs of other retailers who rely on point-of-sale devices. The Company believes that its experience and capabilities developed by serving clients in certain industries, including the retail, finance, automotive and telecommunications industries, as well as the government sector, gives it an important competitive advantage in obtaining new clients in these areas.
PERFORMANCE IMPROVEMENT SERVICES AND PRODUCTS
The Company's services and products enable the Company's clients to 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 as well as
training 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, implements more effective recruitment and retention processes to maximize employee productivity, which reduces 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 service and similar services 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 loyalty and 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 programs, 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.
COMMUNICATION. 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 improve employees' operational management, supervisory, leadership skills and decision making skills. For example, Managing Individual and Team Effectiveness is designed to provide managers in complex work environments with "360-degree" feedback on their management skills, and the Just-in-Time Information products provide solutions to common management problems on CD-ROM. For a major healthcare manufacturing client, the Company created a general management simulation that helped managers from different functional areas think more interdependently about delivering customer value.
DIVERSITY AND INCLUSION. 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 organizational needs given their strategic direction and implementing and managing change. For example, the Company assisted a large trucking company in developing alternative organization designs and cost reduction initiatives. By using Provant's recommendations, the company 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. The Company also provides project management training programs. 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, 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 and can be combined in blended solutions to most efficiently and effectively address a client's needs.
INSTRUCTOR-LED TRAINING. The Company delivers certain of 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.
BOOKS AND TAPES. The Company also delivers some of its training through books and video and audiotapes. 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. Except for sales to the U.S. Government entities, no single customer accounted for 10% or more of the Company's total revenue in fiscal 1998, 1999 or 2000. The Company's sales to U.S. Government entities accounted for approximately 23%, 12% and 15% of the Company's total revenue in fiscal 1998, 1999 and 2000, respectively.
SALES AND MARKETING
Each Provant company maintains its own sales force. In addition, the Company is implementing a national sales initiative including a corporate level sales force to market its entire portfolio of services and products to strategic accounts. The Company's sales force numbered 65 at the time of the Company's May 1998 initial public offering (the "IPO"). Since the IPO, the Company's sales force has grown to approximately 185 from both acquisitions and internal growth. 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 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 launched a corporate branding campaign to establish national brand identification for the Provant name, while leveraging 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 six 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;
- 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 (a subsidiary of Pearson Plc), 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, 2000, the Company employed 1,569 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, 2000 numbered approximately 220.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases its principal executive office located in Boston, Massachusetts, and maintains 42 additional leased office locations in 19 states, one in Canada and one in the United Kingdom. The remaining terms of the Company's leases are less than eight years. Provant's principal offices are located in: Alexandria, Virginia; Atlanta, Georgia; Boulder, Colorado; Charlotte, North Carolina; Columbia, Maryland; West Des Moines, Iowa; Lansing, Michigan; Lexington, Massachusetts; Long Beach, North Hollywood, and San Francisco, California; Memphis, Tennessee; Provo, Utah; and Ridgewood, New Jersey. 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.
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.
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, 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
John R. Murphy, age 66, has been Chairman of the Board of the Company and a consultant to the Company since March 2000. From May 1998 to March 2000, Mr. Murphy served as a director of the Company. Since March 1998, Mr. Murphy has served as Vice Chairman of the National Geographic Society ("National Geographic"). Mr. Murphy has served National Geographic in several capacities, including as its President and Chief Executive Officer from May 1995 until March 1998, and as its Executive Vice President from May 1993 until May 1995. Previously, from July 1981 until January 1991, Mr. Murphy served as President and publisher of The Baltimore Sun. Mr. Murphy is a past President of the United States Golf Association, and currently serves as a director of Omnicom Group and MSD&T Mutual Funds.
Curtis M. Uehlein, age 41, has been President, Chief Executive Officer and a director of the Company since March 2000. From November 1999 to March 2000, Mr. Uehlein served as President, Chief Operating Officer and a director of the Company. Prior to joining the Company, Mr. Uehlein spent more than 18 years at IBM, most recently as head of IBM Learning Services, Americas from 1998 to 1999. From 1995 to 1997, Mr. Uehlein served as IBM's Director of Multimedia and Interactive Solutions. From 1992-1994, Mr. Uehlein was Manager of Technology Solutions at IBM. Mr. Uehlein earned a B.S. in Business from Shippensburg University in 1981.
John H. Zenger, age 68, has been Vice Chairman of the Board of the Company since November 1999. From May 1998 to November 1999, Mr. Zenger served as President and a director of the Company. 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 57, has been Vice Chairman of the Board of the Company since November 1999. From May 1998 to November 1999, Mr. Puopolo served as Executive Vice President, Chief Financial Officer and a director of the Company. 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 American Business Partners LLC. In 1992, Mr. Puopolo co-founded American Medical Response, Inc. ("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 42, has been Executive Vice President and Chief Financial Officer of the Company since November 1999. From December 1998 to November 1999, Mr. Bhatt served as Executive Vice President and Chief Operating Officer of the Company. 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 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.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's 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 for the years ended June 30, 1999 and 2000 of each quarter for the Common Stock as reported by Nasdaq for the periods indicated.
On September 15, 2000, the last sale price of the Common Stock was $8.00 as reported by Nasdaq and there were 280 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 1, 2000, in connection with the acquisition of Resolution Software, Inc., the Company issued warrants to purchase an aggregate of 200,000 shares of Common Stock at an exercise price of $14.00 per share. The warrants become exercisable in full on the date of issuance and expire on June 1, 2003. The transaction was exempt from registration by virtue of Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act").
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial data for the Company which has been derived from the Company's historical consolidated financial statements included elsewhere in this Report on Form 10-K. For acquisitions accounted for under the purchase method of accounting, the operating results have been included from the date of acquisition. For the one acquisition accounted for under the pooling-of-interests method of accounting, the operating results for all periods presented include the results of Provant, Senn-Delaney Leadership Consulting Group, Inc. and Senn-Delaney Leadership Consulting U.K., Ltd. (together "Senn-Delaney Leadership").
- ---------------
(1) Through December 12, 1999, Senn-Delaney Leadership 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.
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.
- ---------------
(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.
ITEM 7.
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 the Combination.
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 to 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 fiscal 1999 and 2000, the Company recorded additional goodwill of $45.2 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, is not deductible for tax purposes.
PURCHASE ACQUISITIONS SINCE THE COMBINATION
Since the Combination, the Company has acquired 14 businesses. All of these acquisitions except one were accounted for under the purchase method of accounting. During fiscal 1999, the Company acquired in separate transactions 11 additional businesses engaged in providing performance improvement training services and products (collectively such companies are referred to as the "Fiscal 1999 Acquisitions"). During fiscal 2000, the Company acquired in separate transactions accounted for as purchases two additional businesses engaged in providing performance improvement training services and products (collectively such companies are referred to as the "Fiscal 2000 Purchase Acquisitions"). Also during fiscal 2000, the Company acquired Senn-Delaney Leadership in an acquisition accounted for as a pooling-of-interests.
Through August 31, 2000, the aggregate purchase price paid for the Fiscal 1999 Acquisitions was $127.6 million, consisting of $57.6 million in initial cash consideration, $9.0 million in contingent cash consideration, $7.3 million of convertible notes payable, 3,436,187 shares of Common Stock valued at $45.1 million, 582,806 shares of Common Stock issued as contingent consideration valued at $6.4 million and $2.2 million accrued at June 30, 2000 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.
Through August 31, 2000, the aggregate purchase price paid for the Fiscal 2000 Purchase Acquisitions was $8.2 million, consisting of $2.6 million in cash, $5.2 million of notes payable as consideration and warrants to purchase 200,000 shares of Common Stock valued at $0.4 million. The warrants to purchase 200,000 shares of Common Stock are exercisable at a per share exercise price of $14.00 per share. The warrants expire on June 1, 2003. None of the Fiscal 2000 Purchase Acquisitions provide for the payment of any contingent consideration.
Goodwill is being amortized as a non-cash charge to the Company's income statement over a 40-year period. The amount amortized, however, is not deductible for tax purposes.
POOLING OF INTERESTS
In December 1999, the Company acquired Senn-Delaney Leadership Consulting Group, Inc. and Senn-Delaney Leadership Consulting, U.K. Ltd. (together, "Senn-Delaney Leadership") for an aggregate purchase
price of 2,168,286 shares of Common Stock in an acquisition accounted for as a pooling-of-interests. In connection with the acquisition, the Company also assumed Senn-Delaney Leadership options that were converted into options to purchase an aggregate of 352,212 shares of the Company's Common Stock. As required under the pooling-of-interests method, the results of all periods presented include the results of Provant and Senn-Delaney Leadership.
REORGANIZATION PROGRAM
In fiscal 2000, the Company recorded charges related to its reorganization program of $11.7 million. Of this $11.7 million, approximately $1.4 million was recorded through cost of revenue, $2.0 million was recorded through selling, general and administrative expense and $8.3 million was recorded as a reorganization charge. The reorganization program includes the elimination of executive positions, a reduction in service delivery and administrative employees, the combination of certain redundant operating facilities, abandonment of certain property, equipment and leasehold improvements, and the elimination of certain services and products.
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 when the Company has no further obligations with respect to the license, which is usually upon delivery. The Company recognizes maintenance fees on our 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.
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. For acquisitions accounted for under the purchase method of accounting, the operating results have been included from the date of acquisition. For the one acquisition accounted for under the pooling-of- interests method of accounting, the operating results for all periods presented included the results of Provant and Senn Delaney Leadership.
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.
The following historical financial information for the years ended June 30, 1998, 1999 and 2000 include compensation of $9.9 million, $7.9 million and $3.3 million, respectively, related to certain employee owners of Senn-Delaney Leadership. When such amounts are referred to as compensation differential, this represents pro forma adjustments to salary, bonus, and benefits paid to certain employee owners of Senn-Delaney Leadership to certain levels to which they have contractually agreed prospectively.
This historical consolidated information has been derived from the audited financial statements of the Company included elsewhere herein.
RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1998 ("1998") COMPARED TO THE YEAR ENDED JUNE 30, 1999 ("1999")
Revenue. Revenue increased $128.7 million, from $36.9 million in 1998 to $165.6 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 $52.8 million, from $13.0 million in 1998 to $65.8 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 increased from 35.2% in 1998 to 39.7% in 1999 primarily due to a reduction in higher-margin license revenues during 1999 for Senn-Delaney Leadership.
Gross Profit. Gross profit increased $75.9 million, from $23.9 million in 1998 to $99.8 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. As a percentage of revenue, gross profit decreased from 64.8% in 1998 to 60.3% in 1999.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $48.8 million, from $33.0 million in 1998 to $81.7 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.
Included in selling, general and administrative expenses is $9.9 million and $7.9 million of Senn-Delaney Leadership compensation differential related expense for 1998 and 1999. Excluding the compensation
differential, as a percentage of revenue, selling, general and administrative expenses decreased from 62.5% in 1998 to 44.6 % in 1999.
Goodwill Amortization. Goodwill amortization increased $2.4 million, from $245,000 in 1998 to $2.6 million in 1999, due to additional goodwill recorded in connection with acquisitions completed during 1998 and 1999 and contingent consideration issued to five of the Founding Companies during 1999.
Other Income (Expense). Other income for 1999 consisted primarily of a non-recurring gain of $982,000 from the settlement of litigation by Senn-Delaney Leadership.
Interest Expense, net. Interest expense, net increased $89,000 from $42,000 in 1998 to $131,000 in 1999, due to increased borrowings under the line of credit and notes payable assumed in connection with certain of the 11 businesses acquired during 1999.
Net Income (Loss). Net income (loss) increased $17.0 million from a $(9.6) million loss in 1998 to a $7.4 million profit in 1999. Diluted earnings per common share increased $1.92 from a $(1.48) loss in 1998 to a $0.44 profit in 1999.
RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1999 ("1999") COMPARED TO THE YEAR ENDED JUNE 30, 2000 ("2000")
Revenue. Revenue increased $51.8 million, from $165.6 million in 1999 to $217.4 million in 2000. The increase was mainly attributable to the inclusion in 2000 of the operating results of the 11 businesses acquired during 1999 for an entire year as well as increased service revenue, train-the-trainer seminars, license fees and royalties.
Cost of Revenue. Cost of revenue increased $21.0 million, from $65.8 million in 1999 to $86.8 million in 2000. The increase was due to the inclusion in 2000 of the operating results of the 11 businesses acquired during 1999 for an entire year. Cost of revenue as a percentage of revenue increased from 39.7% in 1999 to 39.9% in 2000 primarily due to a $1.4 million reorganization charge recorded in 2000 related to the Company's reorganization program. Excluding the $1.4 million charge, cost of revenue as a percentage of revenue decreased from 39.7% in 1999 to 39.3% in 2000.
Gross Profit. Gross profit increased $30.8 million, from $99.8 million in 1999 to $130.6 million in 2000. The increase was due to the inclusion in 2000 of the operating results of the 11 businesses acquired during 1999 for an entire year. As a percentage of revenue, gross profit decreased from 60.3% in 1999 to 60.1% in 2000. Excluding the $1.4 million reorganization charge, gross profit as a percentage of revenue increased from 60.3% in 1999 to 60.7% in 2000.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $24.0 million, from $81.7 million in 1999 to $105.7 in 2000. The increase was primarily due to the inclusion in 2000 of the operating results of the 11 businesses acquired during 1999 for an entire year.
Included in selling, general and administrative expenses for 2000 is a $2.0 million charge related to the reorganization program. Included in selling, general and administrative expenses is $7.9 million and $3.3 million of Senn-Delaney Leadership compensation differential for 1999 and 2000, respectively. Excluding the compensation differential and reorganization charge, as a percentage of revenue, selling, general and administrative expenses increased from 44.6% in 1999 to 46.1% in 2000 due to the expansion of corporate infrastructure.
Pooling Costs. Pooling costs consist of accounting, legal, investment banker fees and due diligence expenses incurred in connection with the acquisition of Senn-Delaney Leadership.
Goodwill Amortization. Goodwill amortization increased $2.8 million, from $2.6 million in 1999 to $5.4 million in 2000, due to additional goodwill recorded in connection with acquisitions completed during 1999 and contingent consideration recorded during 1999 and 2000.
Other Income (Expense). Other income for 1999 consisted primarily of a non-recurring gain of $982,000 from the settlement of litigation by Senn-Delaney Leadership. Other income for 2000 consisted primarily of a $362,000 gain recorded on proceeds of $833,000 from the sale of a business.
Interest Expense, net. Interest expense, net increased $2.3 million from $131,000 in 1999 to $2.4 million in 2000, due to increased borrowings under the line of credit and higher interest rates during 2000.
Income Taxes. Provision for income taxes decreased from $8.8 million in 1999 to $5.9 million in 2000, due to decreased pre-tax income in fiscal 2000.
Net Income. Net income decreased $5.6 million from $7.4 million in 1999 to $1.8 million in 2000. Diluted earnings per common share decreased $0.36 from $0.44 in 1999 to $0.08 in 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company used approximately $5.5 million of cash in operating activities during 1998. The Company generated net cash from operating activities of approximately $6.4 million and $685,000 in 1999 and 2000, respectively. Net cash used in investing activities was $19.5 million in 1998 and $55.8 million in 1999, primarily for acquisitions of businesses and purchases of property and equipment. Net cash used in investing activities was $43.5 million in 2000, primarily for payment of contingent consideration, acquisitions of businesses and purchases of property and equipment.
As of June 30, 2000 the Company had cash of approximately $2.2 million and outstanding indebtedness under a credit facility of $38.0 million. The Company currently has a $105.0 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 15, 2000, $42.5 million was outstanding under the credit facility. The Company expects to pay $968,000 as additional contingent consideration to certain former stockholders of the acquired businesses through borrowings under the revolving credit arrangement in the second quarter of fiscal 2001.
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. Of those shares, 3,758,888 shares have been issued through September 15, 2000 and a currently undeterminable number of shares may become issuable as contingent consideration under the registration statements with respect to acquisitions completed before such date.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants, issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements," ("SAB 101"), which provides guidance on the ability to recognize revenue when it is realized or realizable and earned. Subsequently, the Staff issued SAB 101B, which delayed the required implementation until the fourth fiscal quarter for years beginning after December 15, 1999. SAB 101 requires companies currently not in compliance to retroactively apply the SAB to all periods presented. The Company is evaluating the impact the adoption of SAB 101 may have on the Company's financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 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. In June 2000, the FASB issued SFAS No. 138, which eases the implementation difficulties of SFAS No. 133; however, the effective date remains unchanged. The Company anticipates that the adoption of SFAS No. 133 will not have a material effect on its 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 an 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.
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.
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 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 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 the Company's corporate, sales, marketing and administrative personnel, and marketing and advertising expenses for the Company'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 salary 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 the company'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.
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
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 affect earnings or cash flow. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value, but do affect future earnings or cash flow. A one-percentage increase in interest rates would have a material effect on the Company's future earnings or cash flow. Based on the Company's borrowings of $38.0 million under the credit facility as of June 30, 2000, a one-percentage increase in interest rates would decrease cash flow by approximately $0.4 million and earnings, net of taxes, by approximately $0.2 million.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1999 and 2000 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three year period ended June 30, 2000. 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 auditing standards generally accepted in the United States of America. 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, 1999 and 2000 and the results of their operations and their cash flows for each of the years in the three year period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 8, 2000
PROVANT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
See accompanying notes to consolidated financial statements.
PROVANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
See accompanying notes to consolidated financial statements.
PROVANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
See accompanying notes to consolidated financial statements.
PROVANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
See accompanying notes to consolidated financial statements.
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's objective is to become the 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 acquired in separate transactions 14 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 19 states, one in Canada and one in the United Kingdom.
(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 accounted for under the purchase method. 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 for those accounted for using the purchase method. The allocations of the purchase prices to the assets acquired and liabilities assumed of certain of the companies acquired in fiscal 2000 have been recorded based on preliminary estimates of fair value and may be changed as additional information becomes available.
In December 1999, Provant acquired Senn-Delaney Leadership Consulting Group, Inc. and Senn-Delaney Leadership Consulting U.K., Ltd. (together, "Senn-Delaney Leadership") in an acquisition accounted for as a pooling-of-interests. As required under the pooling-of-interests method, the results of all periods presented include the results of Provant and Senn-Delaney Leadership.
The pro forma adjustments give effect to (i) the compensation differential, (ii) pooling-related costs, and (iii) provision for income taxes using an effective corporate tax rate of 41.5% for Senn-Delaney Leadership and 40% for Provant, adjusted for non-tax deductible goodwill. The compensation differential represents pro forma adjustments to salary, bonus and benefits paid to certain employee owners of Senn-Delaney Leadership to which they have contractually agreed prospectively. The aggregate compensation differential for the year ended June 30, 2000 was $3.3 million.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Provant, its wholly-owned subsidiaries and subsidiaries 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 related products are delivered. The Company recognizes revenue from a site license when the Company has no further obligations with respect to the license, which is usually upon delivery. A significant portion of the Company's revenue results from services performed under long-term contracts, either directly or through subcontracts. The majority of the Company's long-term contracts are fixed-price contracts. Revenue on fixed price contracts is recognized using
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 in excess of billings" represents revenues recognized in excess of amounts billed. The liability "billings in excess of costs" 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.
Cash paid for interest in fiscal 1998, 1999 and 2000 was $118,000, $345,000, and $2,037,000, respectively. Cash paid for taxes in fiscal 1998, 1999 and 2000 was $14,000, $8,744,000 and $7,645,000, respectively.
The Company recorded the following non-cash transactions during fiscal 1998, 1999 and 2000 (Dollars in thousands):
The following is a reconciliation of net cash paid for acquisitions during fiscal 1998, 1999 and 2000 (Dollars in thousands):
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.
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
The estimated fair value is based on the excess of the purchase price over the estimated fair value of the tangible and other intangible assets acquired and liabilities assumed. Recoverability of goodwill 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.
Capitalized Computer and Educational Software Development Costs
Capitalized computer and educational software development costs consist of costs to develop and purchase computer and educational software to be licensed or otherwise marketed to customers. Development costs incurred in the research and development of new computer and educational software products and enhancements to existing products are expensed in the period incurred, unless these costs qualify for capitalization in accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed. Capitalized computer and educational software development costs are amortized over the economic lives of the related products, typically three to five years, beginning at their initial shipment date. Capitalized computer and educational software development costs of $400,000 and $1,761,000 are included in other assets at June 30, 1999 and 2000, respectively.
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accumulated amortization was $85,000 and $277,000 as of June 30, 1999 and 2000, respectively. Amortization expense was $85,000 and $192,000 for fiscal 1999 and 2000, respectively.
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%, 12% and 15% of the Company's total revenue in fiscal 1998, 1999 and 2000, respectively. The Company had contract receivables as of June 30, 1999 and 2000 of approximately $6.1 million and $6.6 million from U.S Government entities.
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 follows the disclosure requirements of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation (Note 14). 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 when the effect is dilutive. Common equivalent shares result from 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. Common equivalent shares 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.
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications
Certain prior year amounts have been reclassified 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. During fiscal 1999, the Company acquired in separate transactions 11 additional businesses engaged in providing performance improvement training services and products (collectively such companies are referred to as the "Fiscal 1999 Acquisitions"). During fiscal 2000, the Company acquired in separate transactions that were accounted for as purchases two additional businesses engaged in providing performance improvement training services and products (collectively such companies are referred to as the "Fiscal 2000 Purchase Acquisitions"). Also during fiscal 2000, the Company acquired Senn-Delaney Leadership in an acquisition accounting for as a pooling-of-interests.
PURCHASE METHOD OF ACCOUNTING
The acquisition of each of the Founding Companies, the Fiscal 1999 Acquisitions and the Fiscal 2000 Purchase Acquisitions were 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 three of these acquired companies provided 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 12)
The aggregate purchase price for the Founding Companies was $105.5 million, consisting of $24.3 million in initial cash consideration, $25.8 million in cash Contingent Consideration, 3,459,341 shares of Common Stock issued as initial consideration valued at $36.0 million, and 1,768,448 shares of Common Stock issued as Contingent Consideration valued at $19.4 million.
The aggregate purchase price paid to date for the Fiscal 1999 Acquisitions was $127.6 million, consisting of $57.6 million in initial cash consideration, $9.0 million in cash Contingent Consideration, $7.3 million of convertible notes payable, 3,436,187 shares of Common Stock valued at $45.1 million, 582,806 shares of Common Stock issued as Contingent Consideration valued at $6.4 million and $2.2 million accrued at June 30, 2000 as contingent consideration.
The aggregate purchase price for the Fiscal 2000 Purchase Acquisitions is $8.2 million, consisting of $2.6 million in cash, $5.2 million of notes payable and warrants to purchase 200,000 shares of Common Stock valued at $0.4 million. The warrants to purchase 200,000 shares of Common Stock are exercisable at a per share exercise price of $14.00 per share. The warrants expire on June 1, 2003.
The consolidated balance sheet as of June 30, 2000 includes allocations of the respective purchase prices of the Founding Companies, Fiscal 1999 Acquisitions and Fiscal 2000 Purchase Acquisitions to the assets acquired and liabilities assumed based on estimates of fair value. The allocations for certain of the Fiscal 2000 Purchase Acquisitions were based on preliminary estimates of fair value and are subject to final adjustment. The allocations resulted in $53.2 million, $173.2 million and $7.2 million of goodwill recorded during fiscal 1998, 1999 and 2000, respectively, which represents the excess of purchase price over the estimated fair value
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the net assets acquired. In conjunction with these acquisitions, goodwill was determined as follows (Dollars in thousands):
The unaudited pro forma combined financial data presented below consists of the income statement data presented in these consolidated financial statements plus income statement data for the Founding Companies, Fiscal 1999 Acquisitions, and Fiscal 2000 Purchase Acquisitions as if they were acquired effective July 1, 1997 (Dollars in thousands, except per share data):
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 IPO and acquisition of the Operating Companies, (vii) the compensation differential and (viii) the elimination of pooling related costs incurred in connection with the acquisition of Senn-Delaney Leadership. 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.
POOLING OF INTERESTS METHOD
In December 1999, Provant acquired Senn-Delaney Leadership for an aggregate purchase price of 2,168,286 shares of Common Stock in an acquisition accounted for as a pooling-of-interests. In connection with the merger, the Company also assumed Senn-Delaney Leadership options that were converted into options to purchase an aggregate of 352,212 shares of the Company's Common Stock.
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with the pooling-of-interests method of accounting, the results of operations previously reported by the separate enterprises and the combined amounts presented in the accompanying consolidated financial statements are summarized below (Dollars in thousands):
(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 1998, 1999, and 2000 (Dollars in thousands):
The number of shares to be issued as contingent consideration are included as outstanding in the calculation of diluted weighted average common shares upon the related performance criteria having been met, the number of shares being determined, and the effect on basic earnings per common share is dilutive. (See Note 12)
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:
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) CONTRACT ACCOUNTING
Contract receivables are summarized as follows (Dollars in thousands):
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 in excess of billings and billings in excess of costs are summarized as follows (Dollars in thousands):
(6) INVENTORIES
Inventories consist of the following (Dollars in thousands):
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) NON-CURRENT ASSETS
Property and equipment consist of the following:
Depreciation expense was $315,000, $2,062,000 and $3,490,000 for fiscal 1998, 1999, and 2000 respectively.
Goodwill amortization expense was $245,000, $2,622,000, and $5,383,000 for fiscal 1998, 1999, and 2000 respectively. Accumulated amortization was $2,867,000 and $8,250,000 as of June 30, 1999 and 2000, respectively.
(8) ACCRUED EXPENSES
Accrued expenses consist of the following (Dollars in thousands):
Accrued profit distribution consists of Senn-Delaney Leadership's accrued profits for periods prior to being acquired by Provant. These amounts were distributed to certain former employee owners of Senn-Delaney Leadership during fiscal 2000.
(9) REORGANIZATION AND OTHER CHARGES
In fiscal 2000, the Company recorded charges related to its reorganization program of $11.7 million. Of this $11.7 million, approximately $1.4 million was recorded through cost of sales, $2.0 million was recorded through selling, general and administrative expenses and $8.3 million was recorded as a reorganization charge.
The reorganization program includes the elimination of executive positions, reduction in service delivery and administrative employees, the combination of certain redundant operating facilities, abandonment of certain property, equipment and leasehold improvements, and the elimination of certain services and products, which are not material to the Company's business. As part of the reorganization program, the Company plans on terminating approximately 190 employees, of which, 178 employees were terminated as of June 30, 2000.
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amounts recorded related to the reorganization program were as follows (Dollars in thousands):
The following table summarizes the activity related to the reorganization program costs at June 30, 2000 (Dollars in thousands):
The Company expects to make future cash payments of approximately $4.4 million in fiscal 2001 and beyond. The severance and lease obligations will be disbursed over a period based upon the terms of the severance and lease agreements.
(10) DEBT AND CREDIT ARRANGEMENTS
Borrowings are summarized as follows (Dollars in thousands):
Notes Payable to Former Stockholders
Notes payable to former stockholders consists primarily 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 14.2%.
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 at the conversion price of $16.125 per share into an aggregate of approximately 442,295 shares of Common Stock. The promissory notes were recorded at $6,328,000, the net present value, based on a 6% interest rate.
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 $105.0 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.
At June 30, 2000, future minimum payments on debt and capital lease obligations were as follows (Dollars in thousands):
Accrued Contingent Consideration
As of June 30, 1999, the Company had accrued $32.9 million of contingent consideration, which was expected to be paid in cash to the former stockholders of certain acquired businesses. The actual Contingent Consideration paid during fiscal 2000 in cash totaled $33.3 million.
As of June 30, 2000, the Company has accrued $968,000 of Contingent Consideration, which is expected to be paid in cash in the second quarter of fiscal 2001 to the former stockholder of a certain acquired business. (See Note 12)
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) INCOME TAXES
Income tax expense (benefit) consists of (Dollars in thousands):
Total income tax expense for the years ended June 30, 1998, 1999 and 2000 were allocated as follows:
The income tax expense 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):
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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).
The valuation allowance for deferred tax assets was $1,085,000 and $2,461,000 as of June 30, 1999 and 2000 respectively. The valuation allowance for deferred income taxes increased by $1,376,000 from June 30, 1999 to June 30, 2000. 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, 2000 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 the Company'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.
(12) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has several leases for its office space as well as for the Operating Companies' operating space, vehicles, and equipment under cancelable and non-cancelable operating leases that expire on various
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dates through fiscal 2008. Most of these leases generally provide for rent escalation based upon changes in real estate taxes and operating expenses.
Future minimum lease payments under all non-cancelable operating leases, including leases to related parties, are as follows (Dollars in thousands):
Rent expense for fiscal 1998, 1999 and 2000 was $1.1 million, $6.1 million, and $7.4 million, respectively. Sublease income for fiscal 1999 and 2000 was $219,000 and $621,000, respectively.
U.S. Government Contracts
A substantial portion of the Company's revenue and costs for all periods presented is 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 has been audited by agencies of the U.S. Government through April 30, 1998.
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.
Contingent Payments to Former Stockholders of the Operating Companies
The merger agreements between Provant and each of the Founding Companies provided 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 was paid in fiscal 2000 through the issuance of 867,333 shares of Common Stock valued at $10.0 million and cash payments of $25.9 million.
The acquisition agreements between Provant and all but one of the Fiscal 1999 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 three businesses acquired in fiscal 2000, the acquisition agreements did not provide for the payment of any Contingent Consideration.
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the two Fiscal 1999 Acquisitions with Contingent Consideration based on performance criteria associated with the year ended June 30, 1999, Contingent Consideration was paid in fiscal 2000 through the issuance of 582,806 of Common Stock valued at $6.4 million and cash payments of $7.5 million.
For one of the Fiscal 1999 Acquisitions with Contingent Consideration based on performance criteria associated with the year ended June 30, 2000, $2.2 million of Contingent Consideration has been accrued, consisting of $968,000 in cash and 228,089 shares of Common Stock valued at $1.3 million. The Contingent Consideration is expected to be paid in the second quarter of fiscal 2001.
For the remaining Fiscal 1999 Acquisitions, Contingent Consideration of cash and/or shares of Common Stock up to maximum amounts of $33.0 million could be payable based on performance criteria associated with the two years ended June 30, 2001. For one of the Fiscal 1999 Acquisitions, Contingent Consideration of cash and/or shares of common stock is payable based entirely on performance criteria over a three-year period and is not currently determinable.
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.
(13) 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. Of these shares, 3,758,888 shares have been issued through September 15, 2000 and a currently undeterminable number of shares may become issuable as contingent consideration under the registration statements with respect to acquisitions completed before such date.
As of June 30, 2000, 6,817,778 shares of Common Stock have been reserved for issuance upon the conversion of convertible notes payable, the exercise of options, warrants or in the employee stock purchase plan.
Holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of 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, 2000, the Company had not issued any shares of Preferred Stock.
As of June 30, 2000, the Company has recorded $1.3 million of Contingent Consideration to be issued in the form of stock to the former stockholders of a certain acquired business. (See Note 12) This amount was estimated based on the portion of Contingent Consideration to be paid in cash based upon preliminary
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
elections from the former stockholder. During fiscal 2000, 1,450,139 shares of Common Stock valued at $16.4 million were issued as Contingent Consideration.
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 entitling the holder to purchase 216,492 shares of Common Stock becomes exercisable only if the market price of the Common Stock increases to certain threshold levels (except as otherwise described below) (the "Contingent Warrant"). Specifically, 20% of the total number of shares issuable under the Contingent Warrant will become exercisable on each of the three occasions that the market price of the Common Stock reaches $26.00, $39.00 and $52.00, respectively, and the remaining 40% of the total number of shares issuable under the Contingent Warrant will become exercisable if the market price of the Common Stock reaches $65.00. However, under certain circumstances involving the merger or sale of the Company, the Contingent Warrant will become exercisable to purchase all of the warrant shares. The exercise price of the Contingent Warrant increases on each anniversary of the closing of the 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. 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. During fiscal 2000, 43,298 shares became exercisable under the terms of each of the second warrants described above.
During fiscal 2000, the Company issued four warrants in connection with the acquisition of a business acquired during fiscal 2000. The warrants entitle the holders to purchase 200,000 shares of Common Stock at a per share exercise price equal to $14.00. The warrants expire on June 1, 2003.
Shareholder Rights Plan
In July 2000, the Company adopted a Preferred Stock Purchase Rights Plan pursuant to which a dividend of one share purchase right for each share of Common Stock was distributed to stockholders of record as of the close of business on July 28, 2000. The rights, which expire on July 28, 2010, become exercisable only if a person or group acquires 15% or more of the Common Stock or announces a tender offer the consummation of which would result in ownership by a person or group of 15% or more of the Common Stock. Each right will entitle stockholders to buy one-hundredth of Series A Preferred Stock of the Company at an exercise price of $25 per one one-hundredth of a Series A Preferred Share. Until the rights become exercisable, they will trade with the Common Stock as a unit.
(14) 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 2,350,000 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 PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 2,000,000 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, 1999 and 2000, 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.
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 have been 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. During fiscal 2000, 59,006 shares of Common Stock at a weighted average price of $13.28 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 and 2000 would have been $3.09 and $4.02, respectively. 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.
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity under all plans during the periods indicated is as follows:
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 the year ended June 30, 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):
At June 30, 2000, there were 1,486,391 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, 1999, and 2000 was $4.53, $4.98, and $4.73 on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions for all three years: volatility of 33%; expected dividend yield 0%, risk-free interest rate of 6.0% and an expected life of 4 years.
PROVANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of stock options outstanding at June 30, 2000:
In addition to the options granted under the plans noted above, in 1998 the Company issued an option to purchase 10,000 shares of Common Stock at a purchase price of $5.00 per share. In fiscal 2000, all 10,000 of these options were exercised.
During fiscal 2000, the Company granted options to purchase 652,212 shares of Common Stock outside of the existing stock-based compensation plans, including options to purchase 300,000 shares of Common Stock that were granted in connection with the recruitment of executives to the Company and options assumed by the Company in connection with the acquisition of Senn-Delaney Leadership that were converted into options to purchase 352,212 shares of Common Stock.
(15) EMPLOYEE BENEFIT PLANS
The Operating Companies provide various retirement plans for eligible employees. These plans consist of defined contribution plans and profit sharing plans and cover employees at substantially all of the Company's operating locations. The defined contribution plans provide for contributions ranging from 1.5% to 2.0% of covered employees' salaries or wages, or at the discretion of the Company. Total expense for contributions under all plans totaled $308,000, $838,000, and $1.5 million for fiscal 1998, 1999 and 2000.
(16) 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 was $81,000, $404,000 and $471,000 for fiscal 1998, 1999, and 2000 respectively. Future commitments with respect to these leases are included in the schedule of minimum lease payments in Note 12.
Expenses paid by PROVANT 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. As of June 30, 1998, this loan was repaid in its entirety and the line of credit was terminated.
(17) SEGMENT REPORTING
The Company adopted SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information ("FAS 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 FAS 131.
Revenue from the federal government and its agencies accounted for 23%, 12%, and 15% of the Company's total revenue in fiscal 1998, 1999, and 2000 respectively. There was no other customer that accounted for 10% or more of the Company's total revenue in fiscal 1998, 1999 and 2000.
PROVANT, INC. AND SUBSIDIARIES
QUARTERLY RESULTS (UNAUDITED)
The following table presents the unaudited quarterly results of operations for fiscal 1998, 1999 and 2000:
INDEPENDENT AUDITORS' 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
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
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
See accompanying notes to consolidated financial statements
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying notes to consolidated financial statements
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
See accompanying notes to consolidated financial statements
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
See accompanying notes to consolidated financial statements
STAR MOUNTAIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
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
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.
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
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).
(4) ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (Dollars in thousands):
(5) NOTES RECEIVABLE
Notes receivable consist of the following (Dollars in thousands):
(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.
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LONG-TERM DEBT (DOLLARS IN THOUSANDS)
(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):
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) COMMON STOCK
Common stock consists of the following:
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.
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, compensation cost is the excess, if any, of the quoted market price of the stock at grant date over the amount
STAR MOUNTAIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
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:
(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)
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):
The differences between the effective income tax rate and the statutory federal income tax rates are as follows:
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):
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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, 2000, and such information is incorporated herein by reference.
ITEM 11.
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, 2000, and such information is incorporated herein by reference.
ITEM 12.
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, 2000, and such information is incorporated herein by reference.
ITEM 13.
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, 2000, and such information is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are included in Item 8.
(a)(2) The following consolidated financial statement schedule of PROVANT, Inc. and subsidiaries for the years ended June 30, 1998, 1999, and 2000 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 Form 10-K.
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
(b) The Company filed a Current Report on Form 8-K dated July 21, 2000, that disclosed under Item 5 that the Company had adopted a Shareholders Rights Plan, pursuant to which a dividend of one preferred share purchase right for each outstanding share of Common Stock of the Company was distributed to the stockholders of record as of the close of business on July 28, 2000.
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/ CURTIS M. UEHLEIN ------------------------------------ CURTIS M. UEHLEIN PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: September 27, 2000 --------------------------------------
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.
PROVANT, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
- --------------- (a) Amount established as component of accounts acquired in acquisition of the Operating Companies.
PRV-10K2-00