Exhibit 99.3
FIND/SVP, Inc. acquisition of Guideline Research Corp.
On April 1, 2003 (the "Closing Date"), Find/SVP, Inc. (the "Company") purchased
from Xxx X. Xxxxxxxxx and Xxxxxx Xx Terra (the "Sellers") all of the issued and
outstanding stock of Guideline Research Corp. pursuant to the terms of a Stock
Purchase Agreement dated as of April 1, 2003, among the Company, Xxxxx Xxxxx
(the Company's Chief Executive Officer), and Guideline Research Corp., Xxxxxx Xx
Terra and Xxx X. Xxxxxxxxx (the "Purchase Agreement"). Guideline Research Corp.,
together with its subsidiaries Guideline/Chicago, Inc., Advanced Analytics,
Inc., Guideline Consulting Corp., and Tabline Data Services, Inc.,
(collectively, "Guideline"). Guideline is a provider of custom market research.
The consideration for this acquisition consisted, among other things, of the
following:
o Approximately $4,504,000 paid in cash (including $775,000 of transaction
costs)
o 571,237 unregistered shares of the Company's common stock (the
"Consideration Shares"). 295,043 of the Consideration Shares were placed
in escrow to secure the indemnification obligations of the Sellers as
set forth in the Purchase Agreement through May 31, 2004, pursuant to an
escrow agreement among the Sellers, Xxxxxx Xxxxxxx, the Company and Xxxx
Xxxxxxx, P.C. (the "Escrow Agreement").
o Within thirty days from the first anniversary date of the acquisition, a
potential deferred consideration amount (the "One Year Deferred
Consideration") of $1 million contingent upon Guideline achieving
adjusted EBITDA (as defined in the Purchase Agreement) for the
twelve-month period following the acquisition ("One Year Adjusted
EBITDA") of at least $1.2 million. If One Year Adjusted EBITDA is less
than $1.2 million, but greater than $841,000, the One Year Deferred
Consideration shall be between $0 and $1.0 million based on a specific
formula set forth in the Purchase Agreement. Each of the Sellers may
separately elect to have up to fifty percent (50%) of the amount of any
One Year Deferred Consideration payable to such Seller in an amount of
duly authorized and non-assessable unregistered shares of Company common
stock.
o Within thirty days from the second anniversary date of the acquisition,
a potential deferred consideration amount (the "Two Year Deferred
Consideration") of $1.845 million contingent upon Guideline achieving
adjusted EBITDA (as defined in the Purchase Agreement) for the 24-month
period following the acquisition ("Two Year Adjusted EBITDA") of $2.65
million plus 25% of the amount by which Two Year Adjusted EBITDA exceeds
$2.65 million. If Two Year Adjusted EBITDA is less than $2.65 million,
but greater than $2.2 million, the Two Year Deferred Consideration shall
be between $0 and $1.845 million based on a specific formula set forth
in the Purchase Agreement.
The Consideration Shares are subject to certain put rights entitling the Sellers
to sell the Consideration Shares to the Company within the 120-day period
commencing on April 5, 2005, pursuant to the terms set forth in the Purchase
Agreement. Upon exercise of the Consideration Shares put, the Company shall
repurchase an amount of exercise shares for a price per share equal to the
greater of the (i) Average Closing Price, defined as the price equal to the
average closing price of the Company's stock quoted on the NASDAQ System for a
ten consecutive trading day period ending on the trading day immediately prior
to the Closing Date, and (ii) the Average Put Price, which is defined as the
price on the exercise date equal to the average closing price of the Company's
stock quoted on the NASDAQ System for a ten consecutive
19
trading day period ending on the trading day immediately prior to the exercise
date; provided that in no event shall such per share price exceed 150% of the
Average Closing Price. For purposes of this pro forma financial information, the
Company recorded the fair value of these shares at $759,745. The amount recorded
is based on an average closing price of $1.33 per share of the Company's stock
for the three trading days before and three trading days after the Closing Date.
The maximum value assigned to these shares is approximately $1,090,000, based on
150% of the Average Closing Price, pursuant to the Purchase Agreement.
Simultaneously with the acquisition, Guideline entered into new employment
agreements with each of the Sellers, as well as three other senior executives of
Guideline (collectively the "New Employees"). Immediately prior to the
acquisition, the Company amended its 1996 Stock Option Plan (as previously
amended and restated as of November 21, 2001). Pursuant to the terms of the new
employment agreements, one of the New Employees was granted options to purchase
shares of common stock of the Company having an exercise price at least equal to
the fair market value of the Company common stock on the date of grant.
This acquisition was financed at closing with the combination of the Company's
cash resources, the assumption of certain liabilities of Guideline and by the
receipt of cash of $3,303,000 (net of financing costs) obtained from Xxxxx
Xxxxxxxxx Fund, L.P. ("Petra") consisting of (a) a promissory note with a
$3,000,000 face value (the "Note"); (b) the issuance of 333,333 shares of
convertible, redeemable, Series A preferred stock ("Preferred Stock"); and (c)
the issuance of a warrant ("Warrant") to purchase 675,000 shares of the
Company's common stock.
The Note was issued pursuant to a loan agreement (the "Loan Agreement") dated
April 1, 2003, between Petra and the Company. Interest accrues on the
outstanding principal balance of the Note at the stated rate of 13.5% per year,
and is due and payable monthly. Principal payments in the amount of $250,000 are
due and payable quarterly, beginning March 31, 2006. The Company has the right
to prepay the Note in whole or in part, at any time and from time-to-time,
without premium or penalty. The Note is secured by a second lien and security
interest on substantially all of the assets of each of the Company and Guideline
pursuant to certain security agreements executed and delivered by the Company
and Guideline in favor of Petra (collectively, the "Security Agreements").
The Loan Agreement also contains customary covenants setting forth terms and
conditions applicable to certain aspects of the Company's conduct of its
business. The Loan Agreement also contains certain financial covenants related
to the Company's "fixed charge coverage" and "funded indebtedness to EBITDA"
ratios, as defined. Upon the occurrence of any event of default described in the
Loan Agreement, the indebtedness evidenced by the Note shall be immediately due
and payable in full.
The 333,333 shares of Preferred Stock were issued to Petra pursuant to a Series
A Preferred Stock Purchase Agreement (the "Preferred Stock Purchase Agreement")
dated April 1, 2003, between Petra and the Company. These shares were
independently valued by a third-party valuation consultant at $2.50 per share or
$833,000. The following assumptions were utilized: a) corporate yield curve of
4.34% above Treasury Rates; b) stock volatility of 137% per year based on last 3
years of closing stock prices of the Company; c) interest rate volatility of 2%;
d) common stock price at the Closing Date of $1.15; e) no dividend on common
stock; f) correlation between stock price and bond yield of zero; g) the Company
will pay out cash dividends on preferred stock rather than the issuance of
additional preferred shares ("PIK Dividend"). On the Closing Date, pursuant to
the Preferred Stock Purchase Agreement, the Company filed with the Secretary of
State, of the State of New York, a Certificate of Amendment to its Certificate
of Incorporation (the "Amended Certificate"), setting forth the preferences,
voting powers, qualifications and special or relative rights and privileges of
the Preferred Stock. The
20
Preferred Stock is immediately convertible into shares of the Company's common
stock one-for-one, subject to adjustment for certain dilutive issuances, splits
and combinations. The Preferred Stock is also redeemable at the option of the
holders of the Preferred Stock beginning April 1, 2009, at a redemption price of
$1.50 per share (the "Original Series A Issue Price") or $500,000, in the
aggregate, plus all accrued but unpaid dividends. The holders of the Preferred
Stock shall be entitled to receive cumulative dividends, prior and in preference
to any declaration or payment of any dividend on the common stock of the
Company, at the rate of 8% of the Original Series A Issue Price, per annum,
payable through the issuance of additional shares of Preferred Stock. The
holders of shares of Preferred Stock shall have the right to one vote for each
share of common stock into which shares of the Preferred Stock could be
converted into, and with respect to such vote, each holder of shares of
Preferred Stock shall have full voting rights and powers equal to the voting
rights and powers of the holders of the Company's common stock. In the event of
any liquidation, dissolution or winding up of the Company, either voluntary or
involuntary, the holders of the Preferred Stock shall be entitled to receive,
prior and in preference to any distribution of any of the assets of the Company
to the holders of common stock, an amount per share equal to $1.50 per share of
Preferred Stock and an amount equal to the accrued but unpaid dividends on such
shares.
In connection with the Loan Agreement and the Preferred Stock Purchase
Agreement, the Company issued to Petra, a Warrant to purchase 675,000 shares of
the Company's common stock, at an exercise price of $.01 per share, subject to
adjustment for reorganization or distribution of common stock, or the issuance
of convertible or option securities. This Warrant was valued at $893,000 using
the Black-Scholes option pricing model. The valuation of this Warrant was based
on the following assumptions: common stock valued at $1.33 per share, volatility
of 98.09%, an expected life of 6 years, and a risk-free interest rate of 3.24%.
The Warrant is immediately exercisable, and, for a four-year period commencing
in 2009, Petra shall have the right to cause the Company to use commercially
reasonable efforts to complete a private placement to sell the shares of the
Company's common stock issuable upon exercise of the Warrant (the "Warrant
Shares") to one or more third parties at a price equal to the market value of
the Warrant Shares based on the closing bid price of the Company's common shares
as of the date Xxxxx xx notifies the Company that it is exercising its put
right.
The Company also entered into an investor rights agreement (the "Investor Rights
Agreement") dated April 1, 2003 among Petra, Xxxxx Xxxxx and Xxxxxx Xxxxxxxx, a
director of the Company, pursuant to which, among other things, Petra was
granted certain rights with respect to common stock issuable upon conversion of
the Preferred Stock and Warrants. The Investor Rights Agreement also provides
Petra with certain registration, demand, piggyback and co-sale rights.
Amendment to Financing Arrangements with JPMorgan Chase Bank
On April 1, 2003, the Company also amended and restated its existing: (i) term
note with JPMorgan Chase Bank, due December 31, 2006 (the "Term Note") and (ii)
its line of credit with JPMorgan Chase Bank in the principal amount of
$1,000,000 (the "Line of Credit"). The amendment and restatement of the Term
Note had the effect of (i) reducing the principal amount of the Term Note to
$1,500,000, reflecting the current outstanding balance and (ii) changing the
final repayment date of the Term Note from December 31, 2006 to December 31,
2005. As a result, the Company will have a $500,000 balloon payment due at
December 31, 2005 instead of making payments of $100,000 each quarter in 2006.
In addition, JPMorgan Chase Bank consented to the Company's acquisition of
Guideline and the related financing transactions with Petra and amended various
financial covenants set forth in both the Term Note and the Line of Credit as
follows:
o The previous Debt to Consolidated Tangible Net Worth Covenant of 2.00
was replaced with a Senior Debt to Consolidated Tangible Net Worth plus
Subordinated Debt covenant of 0.75; and
21
o The previous Consolidated Tangible Net Worth covenant of $3,500,000 was
replaced with a Consolidated Tangible Net Worth plus Subordinated Debt
covenant of $3,300,000.
In connection with the above, on April 1, 2003, the Company and JPMorgan Chase
Bank entered into amendment no. 1 to their existing security agreement (the
"Security Agreement Amendment"). Also on April 1, 2003, Guideline executed and
delivered in favor JPMorgan Chase Bank: (i) a security agreement (the
"Subsidiary Security Agreement"), granting a first lien and security interest on
substantially all of their assets; and (ii) a guaranty agreement (the "Guaranty
Agreement"), guaranteeing the Company's payment and performance obligations
under the Term Note and the Line of Credit.
The following unaudited pro forma statement of operations for the year ended
December 31, 2002, give effect to the acquisition and the related financing as
if these had occurred on January 1, 2002. The unaudited pro forma balance sheet
as of December 31, 2002 gives effect to the acquisition and the related
financing as if they had occurred on December 31, 2002. The historical unaudited
balance sheet as of January 31, 2003 of Guideline is used in the following
unaudited pro forma balance sheet as combined with the balance sheet of the
historical financial information of the Company as of December 31, 2002. The
historical unaudited statement of operations for the twelve months ended January
31, 2003 of Guideline is used in the following unaudited pro forma statement of
operations as combined with the statement of operations of the historical
information of the Company for the twelve months ended December 31, 2002. The
unaudited pro forma combined financial information presented is based on, and
should be read in conjunction with, the historical financial statements and the
related notes thereto for both the Company and Guideline.
22
FIND/SVP, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2002
(IN THOUSANDS)
PRO FORMA PRO FORMA
ADJUSTMENTS- ADJUSTMENTS- PRO FORMA
ASSETS FIND/SVP GUIDELINE FINANCING NOTES ACQUISITION NOTES COMBINED
-------- --------- ----------- ------- ----------- ------- ---------
Current assets:
Cash and cash equivalents $ 968 $ 417 $ 3,303 (1) $(4,463) (3) $ 225
Accounts Receivable, net 1,953 895 2,848
Deferred tax assets 272 85 357
Prepaid expenses and other current assets 948 178 1,126
------- ------- ------- ------- -------
Total current assets 4,141 1,575 3,303 (4,463) 4,556
Equipment and leasehold improvements,
at cost, less accumulation depreciation
and amortization 2,334 111 2,445
Other assets:
Deferred tax assets 1,324 231 1,555
Rental assets 575 -- 575
Cash surrender value of life insurance 418 204 622
Non-marketable equity securities 185 -- 185
Goodwill and other intangibles -- -- 4,876 4,876
Other assets 561 63 (41) (3) 583
------- ------- ------- ------- -------
$ 9,538 $ 2,184 $ 3,303 $ 372 $15,397
======= ======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable $ 606 $ -- $ 606
Trade accounts payable 353 992 1,345
Accrued expenses and other 1,749 503 2,252
------- ------- -------
Total current liabilities 2,708 1,495 4,203
------- ------- -------
Unearned retainer income 1,476 301 1,777
Notes payable 1,200 -- $ 1,577 (2) 2,777
Deferred compensation 441 600 $ (600) (3) 441
Commitments and contingencies
Redemption value of redeemable
convertible preferred stock, -- -- 500 (2) 500
Initial redemption value of
redeemable common stock -- -- -- 760 (4) 760
Shareholders' equity (deficit):
Common stock 1 -- 1
Capital in excess of par value 7,332 -- 1,226 (2) 8,558
Guideline historical deficit -- (212) 212 (3) --
Accumulated deficit (3,620) -- -- (3,620)
------- ------- ------- ------- -------
Total shareholders' equity (deficit) 3,713 (212) 1,226 212 4,939
------- ------- ------- ------- -------
$ 9,538 $ 2,184 $ 3,303 $ 372 $15,397
======= ======= ======= ======= =======
See notes to unaudited pro forma combined financial information
23
FIND/SVP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA PRO FORMA
ADJUSTMENTS- ADJUSTMENTS- PRO FORMA
FIND/SVP GUIDELINE FINANCING NOTES ACQUISITION NOTES COMBINED
----------- --------- ----------- ------- ------------ ------- -----------
Revenues $ 20,828 $ 7,918 $ 28,746
----------- ------- -----------
Operating expenses:
Direct costs 10,027 5,448 15,475
$ (448) (9)
(273) (10)
Selling, general, and administrative expenses 11,808 2,447 (102) (11) 13,432
----------- ------- ------- -----------
Operating (loss) income (1,007) 23 823 (161)
Interest income 15 1 16
Other income -- 23 23
Interest expense (156) (15) $ (264) (5) (839)
(404) (6)
Impairment on investment (315) -- -- -- (315)
----------- ------- ------- ------- -----------
(Loss) income before benefit (provision)
for income taxes (1,463) 32 (668) 823 (1,276)
Benefit (provision) for income taxes 339 (5) 267 (7) (329) (12) 272
----------- ------- ------- ------- -----------
Net (loss) income $ (1,124) $ 27 $ (401) $ 494 $ (1,004)
=========== ======= ======= ======= ===========
Preferred dividends -- -- (40) (8) -- (40)
----------- ------- ------- ------- -----------
Earnings (loss) available to common
shareholders' $ (1,124) $ 27 $ (441) $ 494 $ (1,044)
=========== ======= ======= ======= ===========
Net loss per common share - basic & diluted $ (.11) $ (.09)
=========== ===========
Weighted average shares outstanding
-basic & diluted 10,138,703 11,043,273
=========== ===========
See notes to unaudited pro forma combined financial information
24
FIND/SVP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
1. Basis of Presentation
On April 1, 2003 (the "Closing Date"), Find/SVP, Inc. (the "Company")
purchased from Xxx X. Xxxxxxxxx and Xxxxxx Xx Terra (the "Sellers") all of
the issued and outstanding stock of Guideline Research Corp. pursuant to
the terms of a Stock Purchase Agreement dated as of April 1, 2003, among
the Company, Xxxxx Xxxxx (the Company's Chief Executive Officer) Guideline
Research Corp., Xxxxxx Xx Terra and Xxx X. Xxxxxxxxx (the "Purchase
Agreement"). Guideline, together with its subsidiaries Guideline/Chicago,
Inc., Advanced Analytics, Inc., Guideline Consulting Corp., and Tabline
Data Services, Inc., (collectively, "Guideline"). Guideline is a provider
of custom market research.
The consideration for this acquisition consisted, among other things, of
the following:
o Approximately $4,504,000 paid in cash (including $775,000 of
transaction costs)
o 571,237 unregistered shares of the Company's common stock (the
"Consideration Shares"). 295,043 of the Consideration Shares were
placed in escrow to secure the indemnification obligations of the
Sellers as set forth in the Purchase Agreement through May 31,
2004, pursuant to an escrow agreement among the Sellers, Xxxxxx
Xxxxxxx, the Company and Xxxx Xxxxxxx, P.C. (the "Escrow
Agreement").
o Within thirty days from the first anniversary date of the
acquisition, a potential deferred consideration amount (the "One
Year Deferred Consideration") of $1 million contingent upon
Guideline achieving adjusted EBITDA (as defined in the Purchase
Agreement) for the twelve-month period following the acquisition
("One Year Adjusted EBITDA") of at least $1.2 million. If One Year
Adjusted EBITDA is less than $1.2 million, but greater than
$841,000, the One Year Deferred Consideration shall be between $0
and $1.0 million based on a specific formula set forth in the
Purchase Agreement. Each of the Sellers may separately elect to
have up to fifty percent (50%) of the amount of any One Year
Deferred Consideration payable to such Seller in an amount of duly
authorized and non-assessable unregistered shares of Company common
stock.
o Within thirty days from the second anniversary date of the
acquisition, a potential deferred consideration amount (the "Two
Year Deferred Consideration") of $1.845 million contingent upon
Guideline achieving adjusted EBITDA (as defined in the Purchase
Agreement) for the 24-month period following the acquisition ("Two
Year Adjusted EBITDA") of $2.65 million plus 25% of the amount by
which Two Year Adjusted EBITDA exceeds $2.65 million. If Two Year
Adjusted EBITDA is less than $2.65 million, but greater than $2.2
million, the Two Year Deferred Consideration shall be between $0
and $1.845 million based on a specific formula set forth in the
Purchase Agreement.
The Consideration Shares are subject to certain put rights entitling the
Sellers to sell the Consideration Shares to the Company within the 120-day
period commencing on April 5, 2005, pursuant to the terms set forth in the
Purchase Agreement. Upon exercise of the Consideration Shares Put, the
Company shall repurchase an amount of exercise shares for a price per share
equal to the greater of the (i) Average Closing Price, defined as the price
equal to the average closing price of the Company's stock quoted on the
NASDAQ System for a ten consecutive trading day period ending on the
trading day immediately prior to
25
the Closing Date, and (ii) the Average Put Price, which is defined as the
price on the exercise date equal to the average closing price of the
Company's stock quoted on the NASDAQ System for a ten consecutive trading
day period ending on the trading day immediately prior to the exercise
date; provided that in no event shall such per share price exceed 150% of
the Average Closing Price. For purposes of this pro forma financial
information, the Company recorded the fair value of these shares at
$759,745. The amount recorded is based on an average closing price of $1.33
per share of the Company's stock for the three trading days before and
three trading days after the Closing Date. The maximum value assigned to
these shares is approximately $1,090,000, based on 150% of the Average
Closing Price, pursuant to the Purchase Agreement.
Simultaneously with the acquisition, Guideline entered into new employment
agreements with each of the Sellers, as well as three other senior
executives of Guideline (collectively the "New Employees"). Immediately
prior to the acquisition, the Company amended its 1996 Stock Option Plan
(as amended and restated as of November 21, 2001). Pursuant to the terms of
the new employment agreements, one of the New Employees was granted options
to purchase shares of common stock of the Company having an exercise price
at least equal to the fair market value of the Company common stock on the
date of grant.
This acquisition was financed at closing with the combination of the
Company's cash resources, the assumption of certain liabilities of
Guideline and by the receipt of cash of $3,303,000 (net of financing costs)
obtained from Xxxxx Xxxxxxxxx Fund, L.P. ("Petra") consisting of (a) a
promissory note with a $3,000,000 face value (the "Note"); (b) the issuance
of 333,333 shares of convertible, redeemable, Series A preferred stock
("Preferred Stock"); and (c) the issuance of a warrant ("Warrant") to
purchase 675,000 shares of the Company's common stock.
The Note was issued pursuant to a loan agreement (the "Loan Agreement")
dated April 1, 2003, between Petra and the Company. Interest accrues on the
outstanding principal balance of the Note at the stated rate of 13.5% per
year, and is due and payable monthly. Principal payments in the amount of
$250,000 are due and payable quarterly beginning March 31, 2006. The
Company has the right to prepay the Note in whole or in part, at any time
and from time-to-time, without premium or penalty. The Note is secured by a
second lien and security interest on substantially all of the assets of
each of the Company and Guideline pursuant to certain security agreements
executed and delivered by the Company and Guideline in favor of Petra
(collectively, the "Security Agreements").
The Loan Agreement also contains customary covenants setting forth terms
and conditions applicable to certain aspects of the Company's conduct of
its business. The Loan Agreement also contains certain financial covenants
related to the Company's "fixed charge coverage" and "funded indebtedness
to EBITDA" ratios, as defined. Upon the occurrence of any event of default
described in the Loan Agreement, the indebtedness evidenced by the Note
shall be immediately due and payable in full.
The 333,333 shares of Preferred Stock were issued to Petra pursuant to a
Series A Preferred Stock Purchase Agreement (the "Preferred Stock Purchase
Agreement") dated April 1, 2003, between Petra and the Company. These
shares were independently valued by a third-party valuation consultant at
$2.50 per share or $833,000. The following assumptions were utilized: a)
corporate yield curve of 4.34% above Treasury Rates; b) stock volatility of
137% per year based on last 3 years of closing stock prices of the Company;
c) interest rate volatility of 2%; d) common stock price at the Closing
Date of $1.15; e) no dividend on common stock; f) correlation between stock
price and bond yield of zero; g) the Company will pay out cash dividends on
preferred stock rather than the issuance of additional preferred shares
("PIK Dividend"). On the Closing Date, pursuant to the Preferred Stock
Purchase Agreement, the Company filed with the Secretary of State, of the
State of New York, a Certificate of Amendment to its Certificate of
Incorporation (the "Amended Certificate"), setting forth the preferences,
26
voting powers, qualifications and special or relative rights and privileges
of the Preferred Stock. The Preferred Stock is immediately convertible into
shares of the Company's common stock one-for-one subject to adjustment for
certain dilutive issuances, splits and combinations. The Preferred Stock is
also redeemable at the option of the holders of the Preferred Stock
beginning April 1, 2009, at a redemption price of $1.50 per share (the
"Original Series A Issue Price") or $500,000, in the aggregate, plus all
accrued but unpaid dividends. The holders of the Preferred Stock shall be
entitled to receive cumulative dividends, prior and in preference to any
declaration or payment of any dividend on the common stock of the Company,
at the rate of 8% of the Original Series A Issue Price, per annum, payable
through the issuance of additional shares of Preferred Stock. The holders
of shares of Preferred Stock shall have the right to one vote for each
share of common stock into which shares of the Preferred Stock could be
converted into, and with respect to such vote, each holder of shares of
Preferred Stock shall have full voting rights and powers equal to the
voting rights and powers of the holders of the Company's common stock. In
the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of the Preferred Stock shall
be entitled to receive, prior and in preference to any distribution of any
of the assets of the Company to the holders of common stock, an amount per
share equal to $1.50 per share of Preferred Stock and an amount equal to
the accrued but unpaid dividends on such shares.
In connection with the Loan Agreement and the Preferred Stock Purchase
Agreement, the Company issued to Petra, a Warrant to purchase 675,000
shares of the Company's common stock, at an exercise price of $.01 per
share, subject to adjustment for reorganization or distribution of common
stock, or the issuance of convertible or option securities. This Warrant
was valued at $893,000 using the Black-Scholes option pricing model. The
valuation of this Warrant was based on the following assumptions: common
stock valued at $1.33 per share, volatility of 98.09%, an expected life of
6 years, and a risk-free interest rate of 3.24%. The Warrant is immediately
exercisable, and, for a four-year period commencing in 2009, Petra shall
have the right to cause the Company to use commercially reasonable efforts
to complete a private placement to sell the shares of the Company's common
stock issuable upon exercise of the Warrant (the "Warrant Shares") to one
or more third parties at a price equal to the market value of the Warrant
Shares based on the closing bid price of the Company's common shares as of
the date Xxxxx xx notifies the Company that it is exercising its put right.
The Company also entered into an investor rights agreement (the "Investor
Rights Agreement") dated April 1, 2003 among Petra, Xxxxx Xxxxx and Xxxxxx
Xxxxxxxx, a director of the Company, pursuant to which, among other things,
Petra was granted certain rights with respect to common stock issuable upon
conversion of the Preferred Stock and Warrants. The Investor Rights
Agreement also provides Petra with certain registration, demand, piggyback
and co-sale rights.
Amendment to Financing Arrangements with JPMorgan Chase Bank
On April 1, 2003, the Company also amended and restated its existing: (i)
term note with JPMorgan Chase Bank, due December 31, 2006 (the "Term Note")
and (ii) its line of credit with JPMorgan Chase Bank in the principal
amount of $1,000,000 (the "Line of Credit"). The amendment and restatement
of the Term Note had the effect of (i) reducing the principal amount of the
Term Note to $1,500,000, reflecting the current outstanding balance and
(ii) changing the final repayment date of the Term Note from December 31,
2006 to December 31, 2005. As a result, the Company will have a $500,000
balloon payment due at December 31, 2005 instead of making payments of
$100,000 each quarter in 2006. In addition, JPMorgan Chase Bank consented
to the Company's acquisition of Guideline and the related financing
transactions with Petra and amended various financial covenants set forth
in both the Term Note and the Line of Credit as follows:
o The previous Debt to Consolidated Tangible Net Worth Covenant of
2.00 was replaced with a Senior Debt to Consolidated Tangible Net
Worth plus Subordinated Debt covenant of 0.75; and
27
o The previous Consolidated Tangible Net Worth covenant of $3,500,000
was replaced with a Consolidated Tangible Net Worth plus
Subordinated Debt covenant of $3,300,000.
In connection with the above, on April 1, 2003, the Company and JPMorgan
Chase Bank entered into amendment no. 1 to their existing security
agreement (the "Security Agreement Amendment"). Also on April 1, 2003,
Guideline executed and delivered in favor JPMorgan Chase Bank: (i) a
security agreement (the "Subsidiary Security Agreement"), granting a first
lien and security interest on substantially all of their assets; and (ii) a
guaranty agreement (the "Guaranty Agreement"), guaranteeing the Company's
payment and performance obligations under the Term Note and the Line of
Credit.
The accompanying unaudited pro forma financial information is presented for
illustrative purposes and is not necessarily indicative of the results of
operations that would have been reported if the combination had been
completed as presented in the accompanying unaudited pro forma combined
balance sheet and statement of operations. The results of operations of
Guideline will be consolidated with the results of operations of the
Company for all periods subsequent to the acquisition date of April 1,
2003. The unaudited pro forma combined financial information presented is
based on, and should be read in conjunction with, the historical financial
statements and the related notes thereto for both the Company and
Guideline.
The allocation of the purchase price consideration to the assets acquired
and liabilities assumed included in the pro forma combined financial
information was based upon preliminary estimates of the fair market value
of the acquired assets and assumed liabilities. These estimates of fair
market value may change based upon completion of the Company's final
valuation of the assets and liabilities of Guideline.
The following table sets forth the components of the purchase price:
Cash paid (including $775,000 of transaction costs) $ 4,504,000
Common stock issued 759,745
-----------
Total purchase price $ 5,263,745
===========
The following table provides the preliminary estimated fair value of the
acquired assets and liabilities assumed based upon Guideline's January 31,
2003 balance sheet:
Current assets $ 1,575,000
Property and equipment 111,000
Other assets 498,000
Liabilities assumed, current (1,495,000)
Liabilities assumed, long term (301,000)
-----------
Fair value of net assets acquired 388,000
-----------
Preliminary goodwill 4,875,745
-----------
Total estimated fair value of net assets
acquired and recorded goodwill $ 5,263,745
===========
In accordance with the provisions of SFAS No. 142 "Goodwill and other
Intangible Assets", the Company will not amortize goodwill and intangible
assets with indefinite lives recorded in connection with the acquisition of
Guideline. The Company expects to perform an annual impairment test of the
goodwill and indefinite lived intangible assets, once finalized, but has
not yet determined what effect these tests will have on the results of
operations or the financial position of the Company in future periods.
28
2. Explanation of pro forma adjustments:
The accompanying pro forma combined financial statements give effect to the
acquisition and the related financing. The following unaudited pro forma
statement of operations for the year ended December 31, 2002, give effect
to the acquisition and the related financing as if these had occurred on
January 1, 2002. The unaudited pro forma balance sheet as of December 31,
2002 gives effect to the acquisition and the related financing as if they
had occurred on December 31, 2002. The historical unaudited balance sheet
as of January 31, 2003 of Guideline is used in the following unaudited pro
forma balance sheet as combined with the balance sheet of the historical
financial information of the Company as of December 31, 2002. The
historical unaudited statement of operations for the twelve months ended
January 31, 2003 of Guideline is used in the following unaudited pro forma
statement of operations as combined with the statement of operations of the
historical information of the Company for the twelve months ended December
31, 2002. The unaudited pro forma combined financial information presented
is based on, and should be read in conjunction with, the historical
financial statements and the related notes thereto for both the Company and
Guideline.
Balance Sheet Adjustments:
A. Related to Financing
1) A promissory note with a $3,000,000 face value; the issuance of
333,333 shares of convertible redeemable preferred stock for
$500,000; and the issuance of a warrant to purchase 675,000
shares of the Company's common stock less closing and transaction
fees of $197,000 for net cash consideration of $3,303,000 ("Net
Proceeds").
2) The Net Proceeds were allocated to the three financial
instruments (as mentioned in No. 1 above) issued to Xxxxx as
follows:
(a) $893,000 of the Net Proceeds was allocated to the Warrant
based on its calculated fair value (see Note 1, "Basis of
Presentation").
(b) $833,000 of the Net Proceeds was allocated to the Preferred
Stock based on its calculated fair value (see Note 1, "Basis
of Presentation").
(c) $1,577,000 of the Net Proceeds was allocated to the Note.
This amount represents the remainder of the Net Proceeds
after first being allocated to the Warrant and second being
allocated to the Preferred Stock.
B. Related to Acquisition
3) The cash paid at closing was $4,463,000 (net of $41,000
previously paid transaction costs). Of this amount, $3,489,000
was paid to acquire all outstanding shares of Guideline and to
settle certain liabilities of Guideline, and approximately
$734,000 was paid at or subsequent to closing for transaction
costs, which included legal, accounting, and advisory fees.
4) Represents the issuance of 571,237 of Consideration shares to
former shareholders of Guideline valued at $759,745 based on an
average closing price of the Company's common stock of $1.33 (see
Note 1, "Basis of Presentation", for a discussion of this price).
Of these shares, 295,043 shares were placed in escrow to secure
the indemnification obligations of the Sellers set forth in the
Purchase Agreement to be released to the sellers on May 31, 2004
pursuant to the Escrow Agreement.
29
Income Statement Adjustments:
A. Related to Financing
5) As valued in number 2c) under "Balance Sheet Adjustments", the
recorded value of the Note of $1,577,000 is accreted to its face
value over the life of the Note, utilizing the effective interest
method. Therefore, the Company recorded an accretion amount of
$264,000 to interest expense for the twelve months ended December
31, 2002. The effective interest rate on the Note is
approximately 22%.
6) Represents cash interest expense of $404,000 on the face value of
the Note based upon an annual rate of 13.5%.
7) The $267,000 income tax benefit adjustment utilizes an estimated
effective tax rate of 40%.
8) Represents $40,000 of accrued PIK dividends on the Preferred
Stock at an annual rate of 8% of the Original Series A Issue
Price, per share.
B. Related to Acquisition
9) $448,000 of legal, accounting, and advisory fees, in addition to
other costs directly related to the acquisition, were previously
expensed by Guideline in their historical financial statements.
These costs have been excluded from the historical financial
statements of Guideline, as they would not have been incurred if
the acquisition had not been contemplated.
10) Simultaneously with the acquisition, Guideline entered into new
employment agreements with each of the Sellers. The new
employment agreements call for each of the Sellers to earn base
salaries of $150,000 per annum. The difference (inclusive of
respective payroll taxes) between this new compensation
arrangement and the arrangement prior to the closing of this
acquisition is an estimated savings of $273,000.
11) Represents the elimination of annual compensation of two former
administrative Guideline employees, and the bonus for one
employee, who were terminated as a result of the acquisition.
12) The $329,000 income tax provision adjustment utilizes an
estimated effective tax rate of 40%.
30
