UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________TO_______________
FIND/SVP, INC.
NEW YORK 0-15152 13-2670985
State of Incorporation Commission File Number IRS Identification Number
625 AVENUE OF THE AMERICAS
NEW YORK, NY 10011
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 645-4500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK,
PAR VALUE $.0001 PER SHARE
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED: NONE
-------------------- -----------------------------------------
COMMON STOCK, $.0001 PAR VALUE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. []
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES [] NO [X]
AS OF JUNE 30, 2003, THE AGGREGATE MARKET VALUE OF THE VOTING COMMON STOCK
HELD BY NON-AFFILIATES OF THE REGISTRANT WAS $9,792,895 BASED ON THE AVERAGE BID
AND ASK PRICE PER SHARE OF THE COMMON STOCK ON THE OTC BULLETIN BOARD ON JUNE
30, 2003, WHICH WAS $1.54 PER SHARE.
ALL (I) EXECUTIVE OFFICERS AND DIRECTORS OR THE REGISTRANT AND (II) ALL
PERSONS FILING A SCHEDULE 13D WITH THE SECURITIES AND EXCHANGE COMMISSION IN
RESPECT TO REGISTRANT'S COMMON STOCK WHO HOLD 10% OR MORE OF THE REGISTRANT'S
OUTSTANDING COMMON STOCK, HAVE BEEN DEEMED, SOLELY FOR THE PURPOSE OF THE
FOREGOING CALCULATION, TO BE "AFFILIATES" OF THE REGISTRANT.
THERE WERE 13,257,348 SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK,
PAR VALUE $.0001 PER SHARE, AS OF MARCH 19, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2004 Annual Meeting of
Stockholders, which is anticipated to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days following the end
of the Company's fiscal year, are incorporated by reference into Part III.
FIND/SVP, INC.
INDEX TO FORM 10-K
PART I PAGE
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 37
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 38
Item 9A. Controls and Procedures 38
PART III
Item 10. Directors and Executive Officers of the Registrant 38
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 39
Item 14. Principal Accountant Fees and Services 40
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 41
Signatures 47
Index to Exhibits E-1
2
PART I
ITEM 1. BUSINESS
BUSINESS OVERVIEW
FIND/SVP, Inc. and its wholly-owned subsidiaries (collectively,
"FIND/SVP" or the "Company" which may be also referred to in this report as
"we", "us" or "our") provide a full range of custom research, consulting,
quantitative market research and outsourced information services that address
our customers' critical business information needs. In many cases, we function
as our customers' primary information and business intelligence resource on an
outsourced basis, especially among the growing universe of companies that have
downsized their internal research staffs and information resources. In other
cases, we serve as a reliable supplemental resource to customers' internal
capabilities. In addition, with our acquisitions in 2003 of Guideline Research
Corp. ("Guideline") and Teltech, as well as our internal development of new
service offerings, we also provide a range of specialized higher priced research
and consulting services, such as quantitative custom market research and due
diligence research services, that address a particular strategic business
information need within specific markets such as R&D, Healthcare, Marketing and
Private Equity/Money Management.
We were incorporated in the state of New York in 1969. In 1971,
we became affiliated with SVP International S.A. ("SVP") through a licensing
agreement (still in effect today) which gives us the right to use the SVP name,
provides us access to the resources of what are currently 8 additional SVP
affiliated companies located around the world, and prohibits SVP or its
affiliates from competing with us in the United States.
We sell research and consulting services to over 1,750 corporate
customers annually, approximately 1,450 of which subscribe under recurring
revenue contracts generally averaging twelve months in length. Our customer base
includes nearly 50% of the Fortune 100 companies, 25% of the Fortune 1000
companies and 500 customers with estimated annual revenues of $400 million or
more. We perform over 60,000 individual research assignments annually for our
customers.
We are organized into four business segments:
o QUICK CONSULTING SERVICE ("QCS") is a subscription-based
service that functions like a corporate research center for
our customers. Customers pay a fixed monthly or annual fee
for the right to access our in-house consulting staff on a
continuous, as-needed basis to answer short custom research
requests on virtually any business-related topic. This
service enables customers to satisfy their day-to-day
business information needs on an outsourced basis, which is
generally more effective and less expensive, than
performing the work in-house.
o STRATEGIC CONSULTING AND RESEARCH GROUP ("SCRG") provides
in-depth custom research and competitive intelligence
services which result in larger projects beyond the typical
scope of our QCS service.
o QUANTITATIVE MARKET RESEARCH, which commenced as a business
segment upon our acquisition of Guideline in 2003, provides
full service quantitative custom market research services,
such as large-scale consumer surveys, both domestically and
internationally. While Guideline has performed projects in
virtually every industry, it maintains specialties in
healthcare, consumer, legal, financial services and
apparel.
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o TELTECH ("TELTECH") provides a full range of outsourced
information and consulting services to customers in R&D and
related technical sectors. Teltech's services include
subscription-based information and research services,
in-depth strategic consulting services and outsourced
management of corporate information centers.
Together, these four business segments enable us to perform both
primary and secondary research, handle small, medium or large research
assignments, provide a full range of ancillary outsourced business information
services and offer wide industry coverage. We therefore believe that one of our
unique and compelling value propositions is that we can serve as an efficient
single source provider of a significant portion of our customers' business
information needs.
The research resources we use to service our customers' needs
include our in-house staff of 112 full-time researchers and consultants, access
to approximately 4,000 computer databases and subscription-paid websites, 8,000
internal information files, 5,000 books and reference works, 1,500 periodicals
and trade journals, and our internal database of over 500,000 previously
completed research assignments. In addition, through our licensing agreement
with SVP, we have access to approximately 1,000 additional SVP research
personnel worldwide.
Our growth strategy is to grow our base of customers, leverage
the untapped cross-selling opportunities from our recent acquisitions of
Guideline and Teltech, develop new products and services to increase our
revenues per customer and make selective acquisitions that add strategic value
and are accretive to earnings per share.
MARKET OVERVIEW
The market for our services covers a broad cross-section of
corporate America, including both a wide range of industries and company sizes.
The primary market for our QCS division is small to medium sized companies,
while Quantitative Market Research and Teltech sell more to large companies. In
terms of industry focus, we maintain seven formal industry practices as follows:
Healthcare, R&D/Engineering, Consumer Products, Industrial, Financial Services,
Technology and Business Management. However, we have also been successful in
selling to executives in various functional capacities, such as marketing
professionals, R&D professionals, market research professionals and information
professionals, which cut across industry lines and provide us with corporate
customers in virtually every major industry. Accordingly, we believe we are well
diversified, and not dependent on any one industry or market segment.
However, we do believe that there are certain macro trends which
are positively impacting the market for our services, generally including
o Continued corporate emphasis on maintaining low internal
cost structures, especially in non-core functions,
enhances the attractiveness of our outsourced business
model.
o The increased pace of business today, and the growing
operating and strategic complexity of business
decisions, require corporations to have greater access
to quality, real-time, usable business information.
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o Fierce competitive environments, coupled with the
increased availability of generic information products
and resources, are increasing demand for unique business
intelligence services that provide customers with a
competitive advantage.
o Corporations are being bombarded by an overwhelming
amount of raw, unfiltered, irrelevant and unreliable
information emanating from the internet and other public
sources. They are increasingly turning to outside firms
with expertise in particular industries or markets who
can more efficiently synthesize this data into relevant,
reliable business information.
In terms of size, the total available market for our services is
very large. The U.S. market for market research alone was over $6 billion in
2002 (according to Esomar), while the markets for both custom
research/consulting and published information are also significant. While large
overall, these markets are fragmented, with even the largest participants not
maintaining dominant market shares. For example, we believe our Guideline
subsidiary to be one of the top thirty-five custom market research firms in the
U.S.
BUSINESS AND GROWTH STRATEGY
Our goal is to fully leverage the assets of our four business
segments to offer more value to, and satisfy more of the business information
needs of, our existing customer base, while adding additional products and
services that further enhance our capabilities and allow us to expand our
customer base.
o MAINTAIN AND ENHANCE SUBSCRIPTION MODEL. We believe that
our subscription model, which accounts for approximately
60% of our revenues, is one of the keys to our financial
and operating success. It produces a predictable,
recurring revenue stream, as well as a close, ongoing
relationship with the customer. Through our recent
acquisitions of Guideline and Teltech, as well as
through internal product development efforts, we now
have additional products and services that can be
incorporated into our subscription service offerings to
make them more unique, enhance their value and increase
their price point.
o CROSS-SELL SERVICES TO OUR CUSTOMER BASE. We believe
that our recent acquisitions of Guideline and Teltech
have created cross-selling opportunities. For example,
over 1,500 individual cardholders of our QCS service
have the words "Market Research" in their title,
representing prime cross-selling candidates for
Guideline's market research services, which we did not
offer prior to 2003. Also, our 1,300 QCS client
companies include very few R&D departments, providing
cross-selling opportunities for Teltech, which
specializes and has a leading market position in the R&D
market.
o SATISFY A LARGER SHARE OF CUSTOMER BUSINESS INFORMATION
NEEDS. While our customers include some very large
companies, including nearly 50 of the Fortune 100, 250
of the Fortune 1000, and 500 with revenues of $400
million or more, we believe that our average revenue per
customer is small relative to their total business
information expenditures. Accordingly, with our expanded
line of service offerings, we believe we have
opportunities to increase our average revenue per
customer.
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o LEVERAGE EXISTING ASSETS TO CREATE NEW PRODUCTS AND
SERVICES. We derive most of our revenues from custom
research and consulting services provided for the
one-time use of individual customers. We believe there
are opportunities to leverage our database of over
500,000 previously completed research assignments, our
current volume of over 60,000 research assignments
annually, and our 112 in-house research and consulting
staff to produce and sell products such as syndicated
research and multi-client studies at very little
incremental cost.
o CONTINUE TO EVALUATE MAKING PRUDENT ACQUISITIONS THAT
ADD STRATEGIC VALUE AND ARE ACCRETIVE TO EARNINGS PER
SHARE
PRODUCTS & SERVICES
QUICK CONSULTING AND RESEARCH SERVICE ("QCS")
QCS provides customers with access to the staff and resources of
a large information center on an outsourced basis, providing customized answers,
in rapid turnaround time, to day-to-day research requests and business questions
on a wide variety of topics that require three hours or less of research time.
QCS is offered only on a retainer subscription basis. Retainer clients pay a
retainer fee in advance, monthly, quarterly, semi-annually or annually. In
return, client organizations receive Membership Cards for the use of designated
executives or employees. Each Membership Card entitles a specific individual to
use QCS, and also offers preferential use of, and/or discounts on, our other
services and products. We have several fixed and adjustable fee retainer pricing
programs in effect for our QCS service. Depending on the particular pricing
program, out-of-pocket expenses incurred to answer questions may or may not be
invoiced separately to the customer.
When a QCS customer has a business question or research request,
they contact us via telephone or email, give us their card number, and explain
their request. Based on the subject of the request, our customer service
operators connect the customer with our most qualified available consultant, who
speaks directly with the customer to better understand the customer's need and
help define a specific research request that best addresses that need. Our
consultant then performs the necessary research and prepares a formal written
research response, which answers the customer's question and includes additional
relevant attachments, articles and internet links. Our turnaround time is
determined by the needs of each client request, and ranges from same-day to
multi-day.
While the number of QCS subscription customers decreased in
2003, the average subscription rate increased, reflecting our emphasis on
generating more revenues per client. At December 31, 2003, there were 1,331 QCS
subscription customers, a 14.8% decrease from December 31, 2002, and 8,938
holders of the Membership Card, a 12.0% decrease from December 31, 2002.
However, the average annual QCS retainer subscription rate at December 31, 2003
was $12,300, an 8.8% increase from December 31, 2002. Revenues generated by QCS
represented approximately 58%, 88% and 85% of the Company's total revenues for
the years ended December 31, 2003, 2002 and 2001, respectively. The dramatic
change in QCS's share of total revenues in 2003 resulted from the acquisitions
of Guideline and Teltech.
STRATEGIC CONSULTING AND RESEARCH GROUP ("SCRG")
SCRG is designed to handle more in-depth custom market research
and competitive intelligence assignments. The service is most often used by the
Company's QCS retainer clients
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as a supplement to that service. Common project requests include customized
market and industry studies, executive interviews, competitive intelligence
data-gathering and analysis assignments, acquisition studies and large
information collection projects. Through SCRG, the Company provides research as
well as interpretation and analysis. All projects are quoted in advance and
billed separately.
QUANTITATIVE MARKET RESEARCH
Our Guideline subsidiary provides quantitative custom market
research (e.g., primary surveys of large numbers of consumers or groups of
respondents). Our studies, which have an average selling price of over $40,000,
typically involve interviewing large numbers of respondents, ranging from 100 to
over 1,000, to obtain primary market data that cannot be obtained through
secondary research sources. They are custom-designed for, and proprietary to,
each individual client.
Guideline is typically brought in by a customer to help refine a
strategic need into a specific research design. Then Guideline designs the
questionnaire or "script", which is used to interview respondents. Next
Guideline hires outside field contractors to conduct the actual interviews with
respondents, which may take place in malls, in stores, via telephone, via mail,
via the internet or a combination of the above. Then Guideline converts the raw
field responses into usable market research data. Finally, Guideline prepares a
formal report for the customer which contains Guideline's analysis of the data
and any strategic recommendations based on the data. Market applications for
Guideline studies include concept and product testing, positioning research,
tracking research, customer satisfaction surveys and legal claims
substantiation.
Guideline studies are quoted and billed on a project-by-project
basis.
TELTECH
Through our Teltech subsidiary, we provide scientific and
technical research, information and management consulting to corporate R&D
professionals and information centers. Customers apply Teltech's research,
analysis and advisory services to improve the speed and quality of their
decision-making and problem solving processes. Teltech partners with its
corporate clients to define their technical information needs, identify the best
sources for satisfying those needs, and implement the appropriate
information-management strategies.
Teltech directly addresses the growing demand for
cost-effective, user-focused, broad-based scientific and technical research, as
well as project and process consulting. Research results are obtained by
accessing, synthesizing and analyzing published materials, technical expertise
and primary research.
Teltech classifies its services in four main categories:
ON-DEMAND INFORMATION SERVICES. Teltech's product offering
includes services specifically designed to provide an
ongoing, proactive flow of critical information to the end
user. Services include quick turn-around analyst research,
monitoring services, document delivery, supplier research,
and access to expert consulting. Teltech has a network of
10,000 leading experts in over 30,000 technology and
industry areas that clients can access on-demand.
7
IN-DEPTH RESEARCH. Teltech conducts major custom research
projects on a wide range of science, technology, and
business topics to support strategic decision-making.
Applications for Teltech's in-depth research include market
assessments for new products, product feasibility analyses,
competitive intelligence studies, technology evaluations,
M&A evaluations and intellectual property analyses.
INFORMATION MANAGEMENT CONSULTING. Teltech provides
comprehensive solutions designed to improve the
effectiveness of information delivery, analysis,
application, and use throughout organizations. Teltech
provides consulting for information center optimization and
provides custom virtual library solutions designed to
improve an organization's ability to access external
information and expertise.
OUTSOURCED INFORMATION CENTERS AND INFORMATION PORTALS.
Teltech has long term contracts with nine corporate
customers pursuant to which Teltech actually serves as the
complete outsourced information center for those customers.
In these arrangements, Teltech typically builds and operates
an online information portal which serves as the official
virtual library for these customers. These portals are
private labeled with the customers' own names and logos, but
typically contain the notation "Powered by Teltech". These
tend to be large contracts, resulting in an average of
$300,000 of revenues each in 2003.
Teltech utilizes multiple contract forms and pricing
arrangements to sell its services, including annual subscription contracts,
long-term outsourcing contracts and per-transaction engagements. In 2003,
approximately 38% of its revenues resulted from annual subscription clients, 44%
resulted from eight long-term outsourcing contracts and 18% resulted from
transaction engagements.
SALES AND MARKETING
Our primary sales and marketing goals are to expand our QCS and
Teltech retainer client bases, and to cross sell services among the respective
customers of our four business segments. Growth in our retainer base provides us
increased opportunities to sell other products and services, as approximately
70% of the sales of our SCRG in-depth consulting business come from our retainer
clients. Our sales and marketing techniques include advertising, direct mail,
email, conference exhibits, sales promotion activities and our web site. The
direct costs of the Company's advertising and public relations efforts are
modest. Qualified leads are followed up by our direct sales force, and are
supplemented by referrals and telemarketing efforts. Neither Guideline nor
Teltech maintained direct sales forces before we acquired them, so we intend to
increase their sales and marketing efforts by applying our resources to sell
their products. We also maintain a staff of account development managers, whose
primary function is to interact regularly with our clients to ensure customer
satisfaction and promote our other products and services. This provides us with
an additional avenue to cross-sell Guideline, Teltech and new
internally-developed services to our existing retainer clients.
COMPETITION
We face significant competition in our individual business
segments, but we believe there are few direct competitors who offer our full
range of products and services. Our
8
competition comes primarily from three sources: (1) other research and
consulting companies who compete with us in particular products or industries;
(2) in-house corporate research centers; and (3) content aggregators and
information publishers that sell directly to individual end-users. Also, the
internet, on-line databases and CD-ROM products have increased the ability of
companies and individuals to perform information searches and basic research for
themselves. Consequently we also compete with a "do-it-yourself" approach.
However, we believe that our consultants deliver a value-added service based on
their technical expertise and their ability as expert researchers to search more
information products more quickly than most end users, thereby delivering a
faster, more thorough and more economical service. Also, our volume contracts
with information providers typically enable us to access paid databases and
published information sources less expensively than our clients can do
themselves. In addition, many of our services, such as quantitative custom
market research and in-depth consulting, cannot be performed in-house by a vast
majority of our customers.
We believe that the principal competitive factors in our market
include quality and timeliness of research and analysis, reliable delivery,
depth and quality of our industry knowledge, ability to meet changing customer
needs, customer service and perceived value. We believe we compete favorably
with respect to each of these factors.
We believe that the principal competitive factors that
differentiate us from our competitors are:
- quality, independence and objectivity of our research
and analysis; an efficient range of service offerings,
encompassing research, consulting and quantitative
custom market research, which allows us to satisfy both
the primary and secondary business intelligence needs of
our customers.
- a unique operating structure that allows us to offer
custom research services in almost any size range, from
$300 to $1 million, which enables us to satisfy a wide
spectrum of our customers' business information needs.
- Experience providing a total outsourced information
solution to some of the world's largest companies.
- One of the country's largest private business libraries
with access to approximately 4,000 computer databases
and subscription-paid websites, 8,000 internal
information files, 5,000 books and reference works,
1,500 periodicals and trade journals, and our internal
database of over 500,000 past completed research
assignments.
While we believe these competitive factors position us well in
the marketplace, many of our direct and indirect competitors are substantially
larger than we are and have the resources necessary to develop many of the same
capabilities. In addition, the barriers to entry for some of our products and
services are low. As a result, new competitors may emerge and existing
competitors may start to provide additional or complementary services which
would result in increased competition for us.
INTELLECTUAL PROPERTY
We utilize various trade names, trademarks, service marks,
copyrights and other intellectual property rights in each of our business
segments. While we do not believe that we are reliant on any one intellectual
property right overall, various intellectual property rights may be material to
individual business segments. Accordingly, we vigorously identify, create and
9
protect our intellectual property rights as we believe appropriate. We also
enter into agreements with our employees regarding the confidentiality and
ownership of our intellectual property.
SEASONALITY
Our business is somewhat seasonal both in terms of cash flow and
revenues. Our cash flow has traditionally been strongest in the first and second
quarters of the year due to the higher number of QCS and Teltech customers who
renew and prepay their annual subscriptions during this period. With regard to
revenues, while our historical QCS and SCRG segments are generally not seasonal,
the recently acquired Guideline and Teltech businesses have traditionally
experienced stronger revenues in the third and fourth quarters of the year. We
believe this results from customers who seek to fully utilize their annual
internal information budgets before the end of their fiscal years.
EMPLOYEES
As of December 31, 2003, we had 223 full-time employees,
including 39 marketing and sales employees, 112 consultants and research
analysts and 72 administrative and general personnel. Our ability to develop,
market and sell our services and to establish and maintain our competitive
position will depend, in part, on our ability to attract and retain qualified
personnel. While we believe that we have been successful to date in attracting
such personnel, there can be no assurance that we will continue to do so in the
future. We are not a party to any collective bargaining agreements with our
employees. We consider our relations with our employees to be good.
Our corporate headquarters are located at 625 Avenue of the
Americas, New York, NY 10011, and the telephone number is (212) 645-4500. We
make available free of charge through our website, www.findsvp.com, the annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and all amendments to those reports, and the proxy statement for the annual
meeting of stockholders, as soon as reasonably practicable after such material
is electronically filed with or furnished to the Securities and Exchange
Commission.
ITEM 2. PROPERTIES
At December 31, 2003 we leased office space as follows:
o Approximately 32,000 square feet of office space at 625
Avenue of the Americas, New York, New York, which has
been our main corporate office since 1987. This office
also serves as the principal offices of our QCS and SCRG
business segments. The lease is subject to standard
escalation clauses, and expires in June 2013. Basic
annual rent expense, determined on the straight-line
basis over the term of the lease, is approximately
$545,000.
o Approximately 20,000 square feet at 641 Avenue of the
Americas, New York, New York. This lease is subject to
standard escalation clauses, and expires in June 2005.
Basic annual rent expense, determined on the
straight-line basis over the term of the lease, is
approximately $497,000. We do not intend to renew or
replace this lease when it expires as we have sufficient
capacity at our offices at 625 Avenue of the Americas to
house all personnel and property current residing there.
Accordingly, we expect to save $497,000 of basic rent
expense annually beginning in July 2005, less
approximately $120,000 of net-sublease income.
10
o Approximately 11,400 square feet at 3 West 35th Street,
New York, NY, which is the principal location of our
Quantitative Market Research business segment.
o Approximately 7,500 square feet in Bloomington, MN which
is the principal location of our Teltech business
segment.
o Approximately 4,000 square feet in Chicago, IL which is
a satellite office of our Quantitative Market Research
business segment.
The future minimum lease payments under noncancellable operating
leases as of December 31, 2003 were as follows:
- --------------------------------------------------------------------------------
YEAR ENDING DECEMBER 31 OPERATING LEASES
2004 $ 1,108,000
2005 1,031,000
2006 1,029,000
2007 904,000
2008 874,000
Thereafter 4,417,000
-------------------
Total minimum lease payments $ 9,363,000
===================
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are subject to ordinary routine litigation
incidental to our normal business operations. We are not currently a party to,
and our property is not subject to, any material legal proceedings.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock, par value $.0001 per share ("Common Stock") is traded
on the Over The Counter Bulletin Board under the symbol "FSVP.OB". There were
approximately 815 common shareholders of record on March 19, 2004. We currently
do not and do not intend to pay cash dividends on our common stock in the
foreseeable future, and we are restricted from doing so under the terms of its
debt agreements. Cash generated from operations will be used for general
corporate purposes, including acquisitions and supporting organic growth.
The following table sets forth the range of high and low bids of our
Common Stock for the calendar quarters indicated. The quotes listed below
reflect inter-dealer prices or transactions solely between market-makers,
without retail mark-up, mark-down or commission and may not represent actual
transactions. In April 2001, due to its failure to comply with NASDAQ's $1.00
minimum bid price requirement, our shares of Common Stock were delisted. Trading
has since continued to be conducted on the Over The Counter Bulletin Board.
PRICE RANGE HIGH LOW
2003
1st Quarter 1.38 1.03
2nd Quarter 1.60 1.10
3rd Quarter 1.90 1.30
4th Quarter 1.85 1.28
2002
1st Quarter 1.80 0.80
2nd Quarter 1.75 1.05
3rd Quarter 1.50 0.97
4th Quarter 1.53 1.30
CHANGES IN SECURITIES AND USE OF PROCEEDS
During 2003, options to purchase 892,500 shares of common stock were
granted under the Plan, at prices ranging from $1.15 to $1.80, to various
employees, including 412,500 non-recurring option grants related to the
acquisitions of Guideline and Teltech. These were private transactions not
involving a public offering that were exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. At the
time of issuance, the foregoing securities were deemed to be restricted
securities for purposes of the Securities Act.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected financial data as of and
for the years ended December 31, 2003, 2002, 2001, 2000 and 1999. The selected
financial data set forth below has been derived from our audited consolidated
financial statements and related notes for the respective fiscal years. The
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
Part II of this Report as well as our consolidated financial statements and
notes thereto. These historical results are not necessarily indicative of the
results to be expected in the future.
STATEMENTS OF OPERATIONS
Years Ended December 31
-----------------------
(in thousands, except per share amounts)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Revenues $ 31,569 $20,828 $22,215 $23,800 $22,738
Operating income (loss) 928 (1,007) (1,148) (753) 348
Net income (loss) 205 (1,124) (945) (535) 883
Net income (loss) attributable to
common shareholders(1) (75) (1,124) (945) (535) 883
Net income (loss) per common share:
Basic (.01) (.11) (.12) (.06) .12
Diluted (.01) (.11) (.12) (.06) .12
Weighted average number of common shares:
Basic 11,766 10,139 7,880 7,450 7,121
Diluted 11,766 10,139 7,880 7,450 7,213
Cash dividends paid per
common share -- -- -- -- --
BALANCE SHEET DATA
As of December 31
-----------------
(in thousands)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Working capital (current assets
less current liabilities)(2) $ (2,066) $ (43) $ (401) $ (484) $ 770
Total Assets 23,602 9,538 10,692 11,012 11,443
Long-term notes payable,
excluding current amounts 3,170 1,200 895 1,685 3,039
Shareholders' equity 7,549 3,713 4,490 3,992 3,889
- -----------------------------------------------------------------------------------------------------------------------------
(1) Net Income (Loss) attributable to common shareholders is the result of
accretion on redeemable common stock and accrued preferred dividends for
2003 only. Accretion on redeemable common stock exists when the fair value
of redeemable common stock exceeds the original amount of $727,000 at the
balance sheet date. As of December 31, 2003, the fair value of the
redeemable common stock was $977,000, resulting in $250,000 of accretion
for the year then ended. The maximum fair value of the redeemable common is
$1,090,000, as defined. Beginning at April 1, 2003, the Guideline
acquisition date, preferred dividends are accrued at 8% per annum on the
$500,000 preferred stock redemption value. At December 31, 2003, accrued
dividends amounted to $30,000.
(2) Working Capital is reduced by $4,067,000, $1,476,000, $1,753,000,
$2,071,000 and $1,929,000 of unearned income as of December 31, 2003, 2002,
2001, 2000 and 1999, respectively. Such amounts reflect amounts billed, but
not yet earned.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with "Selected Financial Data" as well as our consolidated financial statements
and notes thereto appearing elsewhere in this Form 10-K.
GENERAL
FIND/SVP, Inc. and its wholly-owned subsidiaries provide a full range
of custom research, consulting, quantitative market research and outsourced
information services that are designed to address our customers' critical
business information needs. We function as many of our customers' primary
information and business intelligence resource on an outsourced basis,
especially among companies that have downsized their internal research staffs
and information resources. We also serve as a reliable supplemental resource to
customers' internal capabilities. As a result of our acquisitions in 2003 of
each of Guideline and Teltech, combined with further internal development of new
service offerings, we provide a range of specialized higher priced research and
consulting services. For example, we currently provide quantitative custom
market research and due diligence research services which serve to address
particular strategic business information needs within specific markets such as
R&D, healthcare, marketing and private equity/money management.
We are organized into four business segments: Quick Consulting Service
("QCS"), which is a subscription-based service that functions like an in-house
corporate research center for our customers; Strategic Consulting and Research
Group ("SCRG"), which provides in-depth custom research and competitive
intelligence services for larger projects; Quantitative Market Research,
effectively the Guideline business, which provides full service quantitative
custom market research services, such as large-scale consumer surveys; and
Teltech, which provides a full range of outsourced information and consulting
services to customers in R&D and related technical sectors. References to
"Corporate" and "Other" in our financial statements refer to the portion of
assets and activities that are not allocated to a segment.
On April 1, 2003, we acquired Guideline, and Guideline's results of
operations are included in our results of operations as of such date.
On July 1, 2003, we acquired Teltech, and Teltech's results of
operations are included in our results of operations as of such date.
RESULTS OF OPERATIONS - CALENDAR YEAR 2003 COMPARED TO CALENDAR YEAR 2002
REVENUES
Revenues increased from $20,828,000 in 2002 to $31,569,000 in 2003. The
increase in revenue was due to the acquisitions of Guideline on April 1, 2003,
and Teltech on July 1, 2003, which are described in "Acquisitions" below, offset
by declines in our QCS and SCRG segments. Specifically, QCS was affected by
cancellations of retainer accounts, which were not sufficiently offset by new
retainer sales during 2003. We believe that cancellations primarily resulted
from continued weak general economic conditions, as well as the perception among
certain customers that research can be conducted internally using the internet.
The primary factor contributing to the decline in SCRG revenue was the decline
in the number of new projects booked, which we believe resulted primarily from
weak general economic conditions.
14
QCS
QCS revenues, which result from annual retainer contracts paid by
clients on a monthly, quarterly, semi-annual or annual basis, decreased by
$233,000, or 1.3%, from $18,624,000 in 2002 to $18,391,000 in 2003. The decrease
from 2002 to 2003 was a result of cancellations that were not sufficiently
offset by new clients and increased rates. We believe that cancellations were
primarily a result of continued weak economic conditions, as well as the
perception among certain customers that research can be conducted internally
using the internet. At December 31, 2003, there were a greater number of annual
renewals which were billed than during the same period in the prior year, and
this contributed to a higher accounts receivable balance at December 31, 2003
than December 31, 2002. The monthly fees billed to retainer clients (the
retainer base) decreased from the beginning of 2003 to the end of 2003 by 9.9%,
from $1,488,338 to $1,341,285.
SCRG
SCRG revenues, which result from consulting engagements addressing
clients' business issues, decreased by $789,000, or 35.8%, from $2,204,000 in
2002 to $1,415,000 in 2003. The decrease from 2002 to 2003 was due to the
continued decline in new projects booked, which we believe resulted primarily
from weak general economic conditions. The Customer Satisfaction Survey and
Research Division accounted for 3.7% and 19.0% of SCRG's revenue for 2003 and
2002, respectively. The Customer Satisfaction Survey and Research Division was
taken over by the Quantitative Market Research segment during 2003.
QUANTITATIVE MARKET RESEARCH
Quantitative Market Research revenues, which result from custom market
research consulting engagements, such as conducting surveys and focus groups,
were $7,669,000 from the date of acquisition through December 31, 2003. We
acquired this line of business on April 1, 2003.
TELTECH
Teltech revenues, which result from on-demand research, outsourced
information services, and in-depth projects, were $4,094,000 from the date of
acquisition through December 31, 2003. We acquired this line of business on July
1, 2003.
COSTS OF PRODUCTS AND SERVICES SOLD
Direct costs, which are those costs directly related to generating
revenue, such as direct labor, expenses incurred on behalf of clients and the
costs of electronic resources and databases, increased by $7,103,000, or 70.8%,
from $10,027,000 in 2002 to $17,130,000 in 2003. Direct costs represented 48.4%
and 54.3% of revenues, respectively, in 2002 and 2003. The increase in total
direct costs was primarily the result of the acquisition of Guideline during the
quarter ended June 30, 2003 and the acquisition of Teltech during the quarter
ended September 30, 2003. Guideline's and Teltech's direct costs consist of both
direct labor and direct costs, such as subcontractors who perform fieldwork for
many of their projects, annual costs related to the use of external content
providers, and other necessary costs incurred in order to fulfill client
requests. Exclusive of Guideline and Teltech, direct costs decreased as a result
of decreased use of sub-contractors in SCRG, and more favorable pricing from our
use of outside electronic services. Excluding potential acquisitions and
factoring in the impact of a full twelve months results of Guideline and
Teltech, we expect direct costs as a percentage of sales in 2004 to be
consistent with 2003.
15
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $1,703,000,
or 14.4%, from $11,808,000, or 56.7% of revenue, in 2002 to $13,511,000, or
42.8% of revenue, in 2003. In 2003 and 2002, we recorded additional accruals of
$468,000 and $257,000, respectively, under a severance plan approved by our
Board of Directors. The increase in selling, general and administrative was due
primarily to the acquisitions of Guideline, which took place during the quarter
ended June 30, 2003 (total Guideline selling, general and administrative
expenses were $1,309,000), and Teltech, which took place during the quarter
ended September 30, 2003 (total Teltech selling, general and administrative
expenses were $453,000), offset by various cost containment measures implemented
during the year ended December 31, 2003. Excluding potential acquisitions, we
expect selling, general and administrative expenses to increase in line with
inflation in 2004.
INTEREST INCOME AND EXPENSE
Interest income decreased by $13,000 from $15,000 in 2002 to $2,000 in
2003. The decrease in 2003 was a result of lower cash balances in interest
bearing accounts throughout 2003.
Interest expense increased by $531,000 from $156,000 in 2002 to
$687,000 in 2003. The increase was a result of additional borrowings, related to
the acquisitions of Guideline and Teltech, during the year ended December 31,
2003, which were partially offset by repayments on existing debt. Included in
interest expense was non-cash interest expense of $182,000, which was accreted
as additional interest expense due to the difference between the initial
relative fair value and the stated value of the Petra debt.
OTHER INCOME
We have a 9.1% interest in Strategic Research Institute, L.P. ("SRI"),
and in March 2003, received an $87,000 distribution in respect of that interest.
We share in profits of SRI, but do not share in losses. This is the first
distribution that we received from this partnership interest, and the
distribution was recognized as other income. SRI is a business conference and
event company.
We received dividends of $30,000 related to our cash surrender value of
life insurance policies. This was reported as part of other income for the year
ended December 31, 2003.
OPERATING INCOME (LOSS)
Our results of operations improved by $1,935,000 from a loss of
($1,007,000) in 2002 to income of $928,000 in 2003. This is primarily the result
of the acquisitions of Guideline and Teltech during 2003, offset by decreases in
QCS and SCRG. See "Acquisitions" below for a description of the Guideline and
Teltech transactions.
INCOME TAXES
The $155,000 income tax provision for the year ended December 31, 2003
represents 43% of pre-tax income. The income tax provision was different than
the statutory rate because
16
expenses, such as meals and entertainment and key-man life insurance premiums,
which are not deductible for tax purposes, resulted in a different effective tax
rate than the statutory rate.
The $339,000 income tax benefit for the year ended December 31, 2002
represents 23% of pre-tax loss. In 2002, a valuation allowance was provided for
certain state and local carryforward net operating losses, as we determined that
it was a reasonable possibility that such assets would not be realized during
the carryforward period. We believe that it is reasonably possible that future
valuation allowances will need to be recorded contingent upon our ability to
produce future taxable income to offset deferred tax assets. The income tax
benefit was lower than the statutory rate due primarily to the recording of a
valuation allowance, and expenses, such as meals and entertainment and key-man
life insurance premiums, which are not deductible for tax purposes.
RESULTS OF OPERATIONS - CALENDAR YEAR 2002 COMPARED TO CALENDAR YEAR 2001
REVENUES
Revenues decreased from $22,215,000 in 2001 to $20,828,000 in 2002. The
decreases in revenue, in all aspects of our business, were related to the
weakened economy and the weakened market for our services, most notably since
the events of September 11, 2001. Specifically, QCS was affected by
cancellations of retainer accounts, which was not sufficiently offset by new
business, during 2002. We believe that cancellations were primarily a result of
weak economic conditions, where clients were constricting their budgets. The
primary factor which contributed to the decline in SCRG revenue was the decline
in the number of new projects booked as clients' budgets and initiatives could
not support commitments for the longer-term projects, which SCRG provides.
QCS
QCS revenues, which result from annual retainer contracts paid by
clients on a monthly, quarterly, semi-annual or annual basis, decreased by
$790,000, or 4.1%, from $19,414,000 in 2001 to $18,624,000 in 2002. The decrease
from 2001 to 2002 was a result of cancellations which were not sufficiently
offset by new clients and increased rates. We believe that cancellations were
primarily a result of weak economic conditions, with clients constricting their
budgets. At December 31, 2002, there were a greater number of annual renewals
which were billed than during the same period in the prior year, and this
contributed to a higher accounts receivable balance at December 31, 2002 than
December 31, 2001. The fees billed to retainer clients (the retainer base)
increased from the beginning of 2002 to the end of 2002 by 1.2% from $1,470,659
to $1,488,338.
SCRG
SCRG revenues, which result from consulting engagements addressing
clients' business issues, decreased by $597,000, or 21.3%, from $2,801,000 in
2001 to $2,204,000 in 2002. The decrease from 2001 to 2002 was due to the
continued decline in new projects booked as clients' budgets and initiatives
could not support commitments for the longer-term projects, which SCRG provides.
The Customer Satisfaction Survey and Research Division accounted for 19.0% and
16.7% of SCRG's revenue for 2002 and 2001, respectively.
17
COSTS OF PRODUCTS AND SERVICES SOLD
Direct costs, which are those costs directly related to generating
revenue, such as direct labor, expenses incurred on behalf of clients and the
costs of electronic resources and databases, decreased by $939,000, or 8.6%,
from $10,966,000 in 2001 to $10,027,000 in 2002. Direct costs represented 48.1%
and 49.4% of revenues, respectively, in 2002 and 2001. The decrease in total
direct costs was due primarily to a decrease in expenses incurred on behalf of
clients, in addition to a reduction in direct labor costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased by $589,000, or
4.8%, from $12,397,000, or 55.8% of revenue, in 2001 to $11,808,000, or 56.7% of
revenue, in 2002. In 2002 and 2001, we recorded additional accruals of $257,000
and $228,000, respectively, under a severance plan approved by our Board of
Directors. In 2001, selling, general and administrative expenses included
approximately $169,000 in negative effects related to the events of September
11, 2001. The decrease in selling, general and administrative expenses in terms
of dollars during 2002 was due primarily to reductions in labor costs and
general expenses in response to cost containment measures that began in the
second quarter of 2001. Bad debt expense decreased by $250,000 as a result of a
significant improvement in accounts receivable management during 2002. Also,
telecommunication costs decreased as a result of more favorable rates with
carriers.
INTEREST INCOME AND EXPENSE
Interest income decreased by $34,000 from $49,000 in 2001 to $15,000 in
2002. The decrease in 2002 was a result of lower cash balances in interest
bearing accounts throughout 2002.
Interest expense decreased by $90,000 from $246,000 in 2001 to $156,000
in 2002. The decrease was a result of the replacement of certain of our senior
subordinated notes with a term note bearing a lower interest rate.
IMPAIRMENT ON INVESTMENT
In 1999, we entered into an agreement with idealab! and Find.com, Inc.
whereby we assigned the domain name "find.com" and licensed the use of certain
rights to the trademarks "find.com" and "find" to Find.com, Inc. idealab! and
Find.com, Inc. are not otherwise related to FIND. Under terms of the agreement,
we received cash and non-marketable preferred shares in idealab!, and was
entitled to certain future royalties. The preferred shares received were valued
at $500,000, and carried various rights including the ability to convert them
into common shares of Find.com, Inc., and a put option to resell the shares to
idealab! The put option became exercisable in December 2002. Under the terms of
the put option, idealab! could either repurchase the preferred shares for
$1,500,000 in cash, or elect to return the find.com domain name to us. In the
latter case, we would retain the preferred shares.
In January 2003, we exercised our put option and idealab! declined to
repurchase the preferred shares. This information was considered by us in our
recurring evaluation of the carrying value of the preferred shares at the lower
of historical cost or estimated net realizable value. Using this information
together with other publicly available information about idealab!, we concluded
the net realizable value of its idealab! preferred shares had declined to an
18
estimated $185,000 at December 31, 2002, which resulted in a charge to
operations of $315,000 during the quarter ended December 31, 2002. Since the
idealab! preferred shares continue to be an investment in a start-up enterprise,
it is reasonably possible in the near term that our estimate of the net
realizable value of the preferred shares will be further reduced.
OPERATING (LOSS) INCOME
Our operating results improved by $141,000 from a loss of $1,148,000 in
2001 to a loss of $1,007,000 in 2002. This is primarily the result of decreases
in direct costs and selling, general and administrative expenses.
INCOME TAXES
The $339,000 income tax benefit for the year ended December 31, 2002
represents 23% of pre-tax loss. In 2002, a valuation allowance was provided for
certain state and local carryforward net operating losses, as we determined that
it was a reasonable possibility that such assets would not be realized during
the carryforward period. It is reasonably possible that future valuation
allowances will need to be recorded contingent upon our ability to produce
future taxable income to offset deferred tax assets. The income tax benefit was
lower than the statutory rate due primarily to the recording of a valuation
allowance, and expenses, such as meals and entertainment and key-man life
insurance premiums, which are not deductible for tax purposes.
The $400,000 income tax benefit for the year ended December 31, 2001
represents 29.7% of pre-tax loss. The income tax benefit was lower than the
statutory rate due primarily to expenses, such as meals and entertainment
expense and non-deductible goodwill, which are not deductible for tax purposes.
19
SEGMENT REPORTING
We operated in four segments in 2003, but operated in two segments
during 2002 and 2001. The increase in the number of segments is due to the
acquisitions of Guideline and Teltech.
Segment data, which is useful in understanding results, is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
2003 2002 2001
-------- -------- --------
REVENUES
QCS $ 18,391 $ 18,624 $ 19,414
SCRG 1,415 2,204 2,801
Quantitative Market Research 7,669 -- --
Teltech 4,094 -- --
-------- -------- --------
Total revenues $ 31,569 $ 20,828 $ 22,215
======== ======== ========
OPERATING INCOME (LOSS)
QCS $ 2,390 $ 4,127 $ 4,429
SCRG (499) (99) (314)
Quantitative Market Research 946 -- --
Teltech 421 -- --
-------- -------- --------
Segment operating income 3,258 4,028 4,115
Corporate and other (1) (2,330) (5,035) (5,263)
-------- -------- --------
Operating income (loss) $ 928 $ (1,007) $ (1,148)
======== ======== ========
DEPRECIATION AND AMORTIZATION
QCS $ 762 $ 460 $ 539
SCRG 120 59 66
Quantitative Market Research 41 -- --
Teltech 47 -- --
-------- -------- --------
Total segment depreciation and amortization 970 519 605
Corporate and other 173 420 482
-------- -------- --------
Total depreciation and amortization $ 1,143 $ 939 $ 1,087
======== ======== ========
TOTAL ASSETS
QCS $ 2,990 $ 3,161
SCRG 372 467
Quantitative Market Research 3,071 --
Teltech 2,377 --
-------- --------
Total segment assets 8,810 3,628
Corporate and other 14,792 5,910
-------- --------
Total assets $ 23,602 $ 9,538
======== ========
CAPITAL EXPENDITURES
QCS $ 133 $ 134 $ 119
SCRG 5 3 5
Quantitative Market Research -- -- --
Teltech -- -- --
-------- -------- --------
Total segment capital expenditures 138 137 124
Corporate and other 319 320 180
-------- -------- --------
Total capital expenditures $ 457 $ 457 $ 304
======== ======== ========
(1) Includes certain direct costs and selling, general and administrative
expenses not attributable to a single segment.
- --------------------------------------------------------------------------------
In 2003, we changed our internal overhead allocation methodology, which
resulted in greater amounts of corporate overhead being allocated to our
business segments in order to better gauge each segments contribution to our
profitability. Also, the acquisitions of Guideline
20
and Teltech triggered a reapportionment of corporate overhead allocations to
business segments. Had this methodology been in place during 2002 and 2001,
segment operating (loss) income and depreciation and amortization would have
been, on a pro forma basis, as follows:
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
2003 2002 2001
------- ------- -------
ACTUAL PRO FORMA PRO FORMA
OPERATING (LOSS) INCOME
QCS $ 2,390 $ 1,527 $ 1,586
SCRG (499) (358) (620)
Quantitative Market Research 946 -- --
Teltech 421 -- --
------- ------- -------
Segment operating income 3,258 1,169 966
Corporate and other (2,330) (2,176) (2,114)
------- ------- -------
Operating loss $ 928 $(1,007) $(1,148)
======= ======= =======
DEPRECIATION AND AMORTIZATION
QCS $ 762 $ 647 $ 750
SCRG 120 85 98
Quantitative Market Research 41 -- --
Teltech 47 -- --
------- ------- -------
Total segment depreciation and amortization 970 732 848
Corporate and other 173 207 239
------- ------- -------
Total depreciation and amortization $ 1,143 $ 939 $ 1,087
======= ======= =======
- -------------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA
The following table sets forth selected quarterly data for the years
ended December 31, 2003 and 2002 (in thousands, except per share data). The
operating results are not indicative of results for any future period.
Income (loss) Net income Income
before (loss) (loss) Income
Operating provision attributable per (loss) per
income (benefit) for to common share: share:
Quarter Ended Revenues (loss) income taxes shareholders basic diluted
------------- -------- ------ ------------- ------------- ------- -------
March 31, 2003 $ 5,102 $ 5 $ 65 $ 45 $ 0.00 $ 0.00
June 30, 2003 7,063 35 (150) (251) (0.02) (0.02)
September 30, 2003 9,168 771 565 196 0.02 0.01
December 31, 2003 10,236 117 (120) (65) (0.00) (0.00)
March 31, 2002 $ 5,044 $ (674) $ (674) $ (473) $ (0.05) $ (0.05)
June 30, 2002 5,226 (239) (267) (186) (0.02) (0.02)
September 30, 2002 5,209 113 79 55 0.01 0.00
December 31, 2002 5,349 (207) (600) (520) (0.05) (0.05)
In the fourth quarter of 2003, we recorded a charge of $309,000 related
to the retirement of our President. In the fourth quarter of 2003, 2002 and
2001, charges related to severance costs
21
of $127,000, $147,000 and $228,000, respectively, were recorded. Also,
approximately $217,000 and $80,000 was recorded related to bonus and commission
arrangements at December 31, 2003 and 2002, respectively. In the fourth quarter
of 2002, we recorded a charge to operations of $315,000 to write-down the
carrying value of our preferred shares of idealab!
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary sources of liquidity and capital resources
have been cash flow from retainer accounts (including prepaid retainer fees from
clients) and borrowings. Cash balances were $821,000 and $968,000 at December
31, 2003 and 2002, respectively. Our working capital position (current assets,
less current liabilities) at December 31, 2003 was $(2,066,000) as compared to
$(43,000) at December 31, 2002. Included in current liabilities is unearned
retainer income of $4,067,000 and $1,476,000 as of December 31, 2003 and 2002,
respectively. Such amounts reflect amounts billed, but not yet earned.
Cash provided by (used in) operating activities was $870,000,
$(677,000) and $299,000 in the years ended December 31, 2003, 2002 and 2001,
respectively.
Cash used in investing activities was $7,427,000, $319,000 and $167,000
in the years ended December 31, 2003, 2002 and 2001, respectively. The primary
use of cash was the acquisition of Guideline during the quarter ended June 30,
2003 for $3,895,000, and the acquisition of Teltech during the quarter ended
September 30, 2003 for $3,075,000. Capital expenditures during 2003, 2002 and
2001 were mainly for computer hardware upgrades and leasehold improvements.
Total capital expenditures were $457,000, $457,000 and $304,000 in the years
ended December 31, 2003, 2002 and 2001, respectively. During the year ending
December 31, 2004, we expect to spend approximately $500,000 for capital items,
the major portions of which will be used for computer hardware and software
upgrades and for leasehold improvements.
Cash provided by financing activities was $6,410,000, $13,000 and
$918,000 in the years ended December 31, 2003, 2002 and 2001, respectively. In
2003, the most significant items were: the net proceeds obtained from the
borrowings under notes payable of $2,786,000, related to the acquisitions of
Guideline and Teltech, offset by repayments of $435,000; the issuance of
preferred stock for $693,000; the issuance of warrants for $1,507,000; the
proceeds from the issuance of common stock of $1,707,000; and, the proceeds from
exercise of stock options of $152,000. In 2001, the most significant item was
the net proceeds obtained from the issuance of shares of common stock for
$1,443,000.
As of December 31, 2003, there was $1,200,000 outstanding on a term
note with JP Morgan Chase Bank (the "Term Note"), of which $400,000 is
classified as current. The Term Note bears interest at prime plus 1.25% (5.25%
at December 31, 2003), and is payable in quarterly installments through December
31, 2006. Interest expense related to the Term Note amounted to $79,000 for the
year ended December 31, 2003. The Term Note contains certain restrictions on the
conduct of our business, including, among other things, restrictions, generally,
on incurring debt, making investments, creating or suffering liens, tangible net
worth, current ratio, cash flow coverage, or completing mergers.
We maintain a $1,000,000 line of credit with JP Morgan Chase Bank (the
"Line of Credit"). The Line of Credit bears interest at prime plus 0.50% (4.50%
at December 31, 2003). As of December 31, 2003, $676,000 remains outstanding.
The Line of Credit contains certain
22
restrictions on the conduct of our business, including, among other things,
restrictions, generally, on incurring debt, and creating or suffering liens.
The Term Note and the Line of Credit are secured by a general security
interest in substantially all of the Company's assets.
On April 1, 2003, we amended and restated the Term Note and the Line of
Credit with JP Morgan Chase Bank. These amended and restated agreements had the
effect of reducing the Term Note principal amount from $2,000,000 to $1,500,000,
and accelerating the final repayment date of the Term Note from December 31,
2006 to December 31, 2005. As a result, we 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, JP Morgan Chase Bank consented to our acquisition of
Guideline and the related financing transactions with Petra Mezzanine Fund L.P.
("Petra"), and amended various financial covenants of both the Term Note and the
Line of Credit as follows:
1) 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
2) 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
together with its subsidiaries executed and delivered in favor of JPMorgan Chase
Bank: (i) a security agreement (the "Subsidiary Security Agreement"), granting a
lien and security interest on substantially all of our assets; and (ii) a
guaranty agreement (the "Guaranty Agreement"), guaranteeing our payment and
performance obligations under the Term Note and the Line of Credit.
On November 13, 2003, we obtained an amendment and waiver to the Term
Note ("Amendment No. 2") from JPMorgan Chase. Amendment No. 2 amended the debt
covenant regarding tangible net worth plus subordinated debt of both the Term
Note and Line of Credit by replacing the previous consolidated tangible net
worth plus subordinated debt covenant of $3,300,000 with a consolidated tangible
net worth plus subordinated debt covenant of $2,300,000.
On August 18, 2003, the Term Note was amended to change the definition
of consolidated current liabilities for purposes of calculating the ratio of
current assets to current liabilities under the Term Note, to exclude unearned
retainer income from the calculation.
We are in compliance with all of our loan agreements, as amended, with
JP Morgan Chase as of December 31, 2003.
On April 1, 2003, we issued a Promissory Note (the "Note") to Petra
with a face value of $3,000,000 and a stated interest rate of 13.5%, as a part
of the financing for the acquisition of Guideline. Quarterly principal payments
of $250,000 are due beginning March 31, 2006. The Note was recorded at its
initial relative fair value of $1,868,000. The difference between the initial
relative fair value and the stated value will be accreted as additional interest
expense over
23
the maturities of the Note, and the resulting effective interest rate is
approximately 25%. Related interest expense was $484,000 for the year ended
December 31, 2003, of which $164,000 related to the non-cash accretion of the
carrying value of the Note for the year ended December 31, 2003. We have the
right to prepay the Note at any time without premium or penalty. The Note is
secured by a security interest in substantially all assets of the Company, and
is subject to covenants relating to the conduct of our business including
financial covenants related to a defined fixed charge coverage and a defined
funded indebtedness to Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA") ratio. We were in compliance with this loan agreement as
of December 31, 2003.
On July 1, 2003, we issued a Second Promissory Note (the "Second Note")
also to Petra with a face value of $500,000 and a stated interest rate of 13.5%,
as a part of the financing for the acquisition of Teltech, the business unit of
Sopheon Corporation ("Teltech"). Quarterly principal payments of $42,000 are due
beginning March 31, 2006. The Second Note was recorded at its initial relative
fair value of $320,000. The difference between the initial relative fair value
and the stated value will be accreted as additional interest expense over the
maturities of the Second Note, and the resulting effective interest rate is
approximately 25%. Related interest expense was $52,000 for the year ended
December 31, 2003, of which $18,000 related to the non-cash accretion of the
carrying value of the Note for the year ended December 31, 2003. We have the
right to prepay the Second Note at any time without premium or penalty. The
Second Note is secured by a security interest in substantially all assets of the
Company, and is subject to covenants relating to the conduct of our business
including financial covenants related to a defined fixed charge coverage and a
defined funded indebtedness to EBITDA ratio. We were in compliance with this
loan agreement as of December 31, 2003.
Prior to their repayment in February 2002, we had Senior Subordinated
Notes under debt agreements with investors. Such notes accrued interest at an
annual rate of 12%. Interest expense under such notes was $12,000 and $112,000
in the years ended December 31, 2002 and 2001, respectively.
We believe that our cash and cash equivalents on hand, including
amounts drawn from the Term Note and the Line of Credit, cash generated from
operations and collections of our accounts receivable, and the availability of
the Line of Credit with JP Morgan Chase, will be sufficient to fund our
operations for the foreseeable future.
CONTRACTUAL OBLIGATIONS
The following table includes aggregate information about our
contractual obligations as of December 31, 2003 and the periods in which
payments are due.
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2003
(in thousands)
----------------------------------------------------------------------
Less than 1 - 3 3 - 5 After 5
Total 1 year years years years
----------------------------------------------------------------------
Notes payable $ 5,376 $1,076 $1,967 $2,333 $ --
Long term lease commitments 9,363 1,108 2,060 1,778 4,417
Deferred compensation and other 428 55 70 51 252
----------------------------------------------------------------------
$15,167 $2,239 $4,097 $4,162 $4,669
======================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
24
INFLATION
We have in the past been able to increase the price of our products and
services sufficiently to offset the effects of inflation on direct costs, and
anticipate that we will be able to do so in the future.
OFF-BALANCE-SHEET ARRANGEMENTS
As of December 31, 2003, we did not have any significant
off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC
Regulation S-K.
CRITICAL ACCOUNTING POLICIES
Our management's discussion and analysis of financial condition and
results of operations are based on our consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles
in the United States. Our preparation of our financial statements requires us to
make estimates and judgments that affect reported amounts of assets, liabilities
and revenues and expenses. On an ongoing basis, we evaluate our estimates,
including those related to revenue recognition, allowances for doubtful
accounts, useful lives of property, plant and equipment and intangible assets,
goodwill, deferred tax asset valuation allowances, valuation of non-marketable
equity securities and other accrued expenses. We base our estimates on
historical experience and on various other assumptions, which we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that may not
be readily apparent from other sources. Actual results may differ from these
estimates under different assumptions and conditions. We have identified the
accounting policies below as critical to our business operations and the
understanding of our results of operations.
REVENUE RECOGNITION
Approximately 60% of the Company's 2003 revenues were derived from
subscription contracts with customers, including all of the revenues of the QCS
business segment and approximately 40% of the revenues of the Teltech business
segment. The remaining 40% of the Company's 2003 revenues consisted of
quantitative market research projects, in-depth consulting projects and
outsourced information services.
The Company's subscription services are provided under two different
types of subscription contracts - retainer contracts and deposit contracts.
Retainer contracts, which are used primarily by QCS, charge customers fixed
monthly subscription fees to access QCS services, and revenues are recognized
ratably over the term of each subscription. Retainer fees are required to be
paid in advance by customers on either a monthly, quarterly or annual basis, and
all billed amounts relating to future periods are recorded as an unearned
retainer income liability on the Company's balance sheet. In the case of deposit
contracts, which are used primarily by Teltech, a customer pays a fixed annual
fee, which entitles it to access any of the Company's service offerings
throughout the contract period, up to the total amount of the annual deposit
fee. Since deposit account customers can "spend" their contract fee at any time
within the annual contract period, deposit account revenues are only recognized
within the contract period as services are actually provided to customers, with
any unused deposit amounts recognized as revenue in the final month of the
contract. As with retainer fees, deposit contract fees are required to be paid
in advance, primarily annually, and any billed amounts relating to
25
future periods are recorded as unearned retainer income, a current liability on
the Company's balance sheet.
With regard to the Company's non-subscription based services, including
quantitative market research, in-depth consulting and outsourced information
services, revenues are recognized primarily on a percentage-of-completion basis.
The Company typically enters into discrete contracts with customers for these
services on a project-by-project basis. Payment milestones differ from contract
to contract based on the client and the type of work performed. Generally, the
Company invoices a client for a portion of a project in advance of work
performed, with the balance invoiced throughout the fulfillment period and/or
after the work is completed. However, revenue and costs are only recognized to
the extent of each contract's percentage-of-completion. Any revenue earned in
excess of billings is recorded as a current asset on the Company's balance
sheet, while any billings in excess of revenue earned, which represent billed
amounts relating to future periods, are recorded as unearned revenue, a current
liability on the Company's balance sheet.
GOODWILL AND INTANGIBLES
Goodwill consists of the excess of the purchase price over the fair
value of identifiable net assets of businesses acquired. Effective January 1,
2002 we adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," under which goodwill is no longer
amortized. Instead, goodwill is evaluated for impairment using a two-step
process that is performed at least annually and whenever events or circumstances
indicate impairment may have occurred. The first step is a comparison of the
fair value an internal reporting unit with its carrying amount including
goodwill. If the fair value of the reporting unit exceeds its carrying value,
goodwill of the reporting unit is not considered impaired and the second step is
unnecessary. If the carrying value of the reporting unit exceeds its fair value,
a second test is performed to measure the amount of impairment by comparing the
carrying amount of the goodwill to a determination of the implied value of the
goodwill. If the carrying amount of the goodwill is greater than the implied
value, an impairment loss is recognized for the difference. The implied value of
the goodwill is determined as of the test date by performing a purchase price
allocation as if the reporting unit had just been acquired, using currently
estimated fair values of the individual assets and liabilities of the reporting
unit, together with an estimate of the fair value of the reporting unit taken as
a whole. The estimate of the fair value of the reporting unit is based upon
information available regarding prices of similar groups of assets, or other
valuation techniques including present value techniques based upon estimates of
future cash flow.
Intangible Assets, including customer relationships, trademarks and
other intangible assets are amortized over their estimated useful lives unless
they are deemed to have indefinite useful lives. Upon the adoption of SFAS 142,
intangible assets deemed to have indefinite useful lives, such as trade names,
are not amortized and are subject to annual impairment tests. An impairment
exists if the carrying value of the indefinite-lived intangible asset exceeds
its fair value. For other intangible assets subject to amortization, an
impairment is recognized if the carrying amount is not recoverable and the
carrying amount exceeds the fair value of the intangible asset. Amortizable
intangibles are tested for impairment if a triggering event occurs.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
26
basis and operating losses and tax credit carryforwards. Deferred tax assets and
liabilities are measured using currently enacted tax rates. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. We have tax loss
carryforwards that have been recognized as assets on our balance sheet. These
assets are subject to expiration from 2013 to 2023. Realization of the net
deferred tax assets is dependent on future reversals of existing taxable
temporary differences and adequate future taxable income, exclusive of reversing
temporary differences and carryforwards. In 2002, after we performed an analysis
of our deferred tax assets and projected future taxable income, a valuation
allowance was provided for certain state and local carryforward tax operating
loss assets, as we determined that it was more likely than not that these assets
would not be realized during the carryforward period. It is reasonably possible
that future valuation allowances will need to be recorded if we are unable to
generate sufficient future taxable income to realize such deferred tax assets
during the carryforward period.
NON-MARKETABLE EQUITY SECURITIES
The preferred share securities in idealab! is an investment in a
start-up enterprise. As of December 31, 2003, the carrying value of these
preferred share securities is $185,000. It is reasonably possible in the near
term that our estimate of the net realizable value of the preferred shares will
be less than the carrying value of the preferred shares.
NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity.
This Statement became effective for financial instruments entered into
or modified after May 31, 2003, and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003. For
financial instruments created before the issuance date of this Statement and
still existing at the beginning of the interim period of adoption, transition
shall be achieved by reporting the cumulative effect of a change in an
accounting principle by initially measuring the financial instruments at fair
value or other measurement attribute required by this Statement. The Company
adopted this statement in 2003, and has classified its redeemable convertible
preferred stock and redeemable common stock as mezzanine equity, as the
instruments are not mandatorily redeemable, but are redeemable at the option of
the holder.
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS
In November 2002, FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45), which requires that, for
guarantees within the scope of FIN 45 issued or amended after December 31, 2002,
a liability for the fair value of the obligation undertaken in issuing the
guarantee be recognized. On January 1, 2003, we adopted the recognition and
27
measurement provisions of FIN 45. The adoption of this interpretation did not
have a material impact on the consolidated results of operations or financial
position.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities". In December 2003, the FASB issued
FIN No. 46 (Revised) ("FIN 46-R") to address certain FIN 46 implementation
issues. This interpretation clarifies the application of Accounting Research
Bulletin ("ARB") No. 51, "Consolidated Financial Statements" for companies that
have interests in entities that are Variable Interest Entities (VIE) as defined
under FIN 46. According to this interpretation, if a company has an interest in
a VIE and is at risk for a majority of the VIE's expected losses or receives a
majority of the VIE's expected gains it shall consolidate the VIE. FIN 46-R also
requires additional disclosures by primary beneficiaries and other significant
variable interest holders. For entities acquired or created before February 1,
2003, this interpretation is effective no later than the end of the first
interim or reporting period ending after March 15, 2004, except for those VIE's
that are considered to be special purpose entities, for which the effective date
is no later than the end of the first interim or annual reporting period ending
after December 15, 2003. For all entities that were acquired subsequent to
January 31, 2003, this interpretation is effective as of the first interim or
annual period ending after December 31, 2003. The adoption of the provisions of
this interpretation did not have an impact on the Company's Consolidated
Financial Statements.
AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
clarifies under what circumstances a contract with an initial net investment
meets the characteristics of a derivative as discussed in SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". In addition, it
clarifies when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS No. 149 amends certain other
existing pronouncements. SFAS No. 149 is effective on a prospective basis for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of this statement did
not have an impact on the Company's Consolidated Financial Statements.
OTHER COMMITMENTS AND CONTINGENCIES
Within thirty days from the first anniversary date of the acquisition
of Guideline, 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
would be due. If One Year Adjusted EBITDA is less than $1.2 million, but greater
than $841,000, the One Year Deferred Consideration would 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;
Within thirty days from the second anniversary date of the acquisition
of Guideline, 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 would be due. If
Two Year Adjusted EBITDA is less than $2.65 million, but greater than $2.2
million, the Two Year Deferred Consideration would be between $0 and $1.845
million based on a specific formula set forth in the purchase agreement.
Contingent consideration of up to a maximum of $400,000 may become
payable to Sopheon in the first half of 2004 if certain customer subscription
renewal goals, as defined in the Teltech purchase agreement, are attained.
ACQUISITIONS
GUIDELINE
On April 1, 2003, we purchased all of the issued and outstanding stock
of Guideline. Guideline is a provider of quantitative custom market research.
Guideline's ability to provide high-level analytic survey research was a
strategic fit with our efforts to address our clients' critical business needs.
The integration of Guideline's services allowed us to address the requirements
of our many marketing and market research clients. The addition of Guideline
will also make us one of the first fully comprehensive research and advisory
firms to offer an inclusive suite of both primary and secondary specialized
business intelligence, strategic research and consulting services.
The consideration for this acquisition consisted of the following:
o Approximately $3,895,000 paid in cash, net of cash
acquired (includes $431,000 of paid transaction costs
as of December 31, 2003);
o 571,237 common shares (295,043 of the common shares
were placed in escrow to secure the indemnification
obligations of the sellers);
28
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 would 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 would be between $0 and $1.845
million based on a specific formula set forth in the
purchase agreement.
The 571,237 shares issued to the former owners of Guideline may be put
back to the Company during a 120-day period beginning April 5, 2005. Such shares
are classified in the balance sheet as redeemable common stock. If the shares
are put back to the Company, the cash to be paid by the Company will be the
greater of (i) $727,000, which was the defined initial redemption value of the
shares at the acquisition date of Guideline, or (ii) a defined average trading
price of the Company's common shares immediately prior to the exercise of the
put. However, in the latter case, the cash to be paid by the Company upon
exercise of the put is limited to 150% of the initial redemption value of the
shares, or $1,090,000. The redeemable common shares were recorded at their fair
value of $760,000 when issued. If the fair value of the shares at a balance
sheet date is in the range between the initial redemption value of the shares
and 150% of the original amount, the redemption value of such shares is accreted
or decremented as a charge or credit, respectively, to "Capital in excess of par
value" using the defined redemption value of the shares at each balance sheet
date. For the year ended December 31, 2003, the Company recorded accretion on
redeemable common stock of $250,000, resulting in redeemable common stock of
$977,000 at December 31, 2003.
Simultaneously with the acquisition, Guideline entered into new
employment agreements with each of the sellers, as well as three other senior
executives of Guideline.
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) consisting of (a)
a promissory note with a $3,000,000 face value; (b) the issuance of 333,333
shares of convertible, redeemable, Series A preferred stock ("Preferred Stock");
and (c) the issuance of a warrant.
The 333,333 shares of Preferred Stock were issued pursuant to a Series
A Preferred Stock Purchase Agreement (the "Preferred Stock Purchase Agreement")
dated April 1, 2003. These
29
shares have been recorded at estimated fair value of $693,000 using the relative
fair value method. The Preferred Stock is 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, or $500,000 in the aggregate, plus all
accrued but unpaid dividends. The holders of the Preferred Stock are 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% on
the $500,000 redemption value, per annum, payable in cash or through the
issuance of additional shares of Preferred Stock at the Company's discretion.
The holders of shares of Preferred Stock 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 has full voting rights and powers equal to the voting rights and
powers of the holders of the Company's common stock. For the year ended December
31, 2003, the Company recorded preferred dividends of $30,000, resulting in
Preferred Stock of $530,000 at December 31, 2003.
In connection with this loan agreement and the Preferred Stock Purchase
Agreement, the Company issued 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 (the "Warrant"). This Warrant was recorded
at its estimated fair value of $742,000 using the relative fair value method.
The Warrant is immediately exercisable, and, for a four-year period commencing
in 2009, the holder has 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 the holder so notifies the Company that it is exercising its put
right.
We also entered into an investor rights agreement (the "Investor Rights
Agreement") dated April 1, 2003 among Petra Mezzanine Fund, L.P. ("Petra"),
David Walke, the Company's CEO, and Martin Franklin, Chairman of the Board of
the Company, pursuant to which, among other things, Petra was granted certain
rights with respect to the Company's Common Stock issuable upon conversion of
the Preferred Stock and Warrant. The Investor Rights Agreement also provides
Petra with certain registration, demand, piggyback and co-sale rights.
We will finalize our valuation of the assets and liabilities we
acquired for our allocation of the purchase price of the Guideline transaction
by the end of the first quarter of 2004.
TELTECH
As of July 1, 2003, Ttech Acquisition Corp. ("Ttech"), a subsidiary of
the Company, purchased from Sopheon Corporation ("Sopheon") assets and assumed
certain specified liabilities of Sopheon's Teltech business unit ("Teltech").
Teltech is a provider of custom research and information services, focused on
R&D and engineering departments of larger corporations, markets into which the
Company would like to expand. This acquisition offered significant cross-selling
opportunities and cost synergies.
The consideration for this acquisition consisted of the following:
30
o Approximately $3,075,000 paid in cash (including $17,000
of transaction costs). As of December 31, 2003, of the
$163,000 in transaction costs, approximately $146,000 of
transaction costs remains accrued.
o 32,700 unregistered shares of the Company's Common Stock,
valued at $50,000. These shares were placed in escrow to
secure the indemnification obligations of the Sellers set
forth in the purchase agreement through June 25, 2004,
pursuant to an escrow agreement among Sopheon, the
Company, Ttech and Kane Kessler, P.C. (the "Escrow
Agreement").
o Contingent consideration of up to a maximum of $400,000
may become payable by the Company to Sopheon in the first
half of 2004 if certain customer subscription renewal
goals, as defined in the purchase agreement, are