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
attained.
The acquisition was funded at closing as follows:
o The Company's available cash resources
o A private placement whereby the Company raised $2,376,000
through the issuance of 1,616,685 shares of its common
stock and warrants to purchase 808,293 shares of its
common stock (the "Private Placement Warrants"). The
Private Placement Warrants are immediately exercisable
for a period of three years up to and including the close
of business on July 11, 2006, after which, the Private
Placement Warrants expire. The Private Placement Warrants
have an exercise price of $1.47 per share, subject to
adjustment for certain defined events to avoid dilution.
o The receipt of $416,000 of cash (net of financing costs)
from the issuance of a $500,000 promissory note with a
relative fair value of $320,000 and warrant to purchase
70,000 shares of the Company's common stock with a
relative fair value of $96,000.
The Company is in the process of finalizing its valuation of the assets
and liabilities it has acquired and assumed for its allocation of the purchase
price of the Teltech transaction. The Company expects to finalize its valuation
no later than the second quarter of 2004. The Company's preliminary allocation
of the purchase price of the Guideline and Teltech acquisitions is subject to
refinement based on the final determination of fair values.
The following table sets forth the components of the purchase price for
both the Guideline and Teltech acquisitions:
Guideline Teltech Total
--------- ------- -----
Cash paid (including transaction costs) $ 3,895,000 $ 3,075,000 $ 6,970,000
Accrued transaction costs -- 146,000 146,000
Common stock issued to sellers 760,000 50,000 810,000
---------------------------------------------------------
Total purchase consideration $ 4,655,000 $ 3,271,000 $ 7,926,000
=========================================================
The following table provides the preliminary estimated fair value of
the acquired assets and assumed liabilities:
31
- ------------------------------------------------------------------------------------------------------------------------------
Guideline Teltech Total
--------- ------- -----
Current assets $ 1,786,000 $ 1,235,000 $ 3,021,000
Property and equipment 102,000 287,000 389,000
Other assets 267,000 -- 267,000
Liabilities assumed, current (2,236,000) (3,358,000) (5,594,000)
Liabilities assumed, non-current (67,000) -- (67,000)
---------------------------------------------------------
Fair value of net liabilities assumed (148,000) (1,836,000) (1,984,000)
Preliminary goodwill 4,234,000 4,456,000 8,690,000
Amortizable intangible assets 421,000 527,000 948,000
Indefinite-lived intangible assets 148,000 124,000 272,000
---------------------------------------------------------
Total purchase consideration $ 4,655,000 $ 3,271,000 $ 7,926,000
=========================================================
- ------------------------------------------------------------------------------------------------------------------------------
In accordance with the provisions of SFAS No. 142 "Goodwill and other
Intangible Assets", we will not amortize goodwill and other intangible assets
with indefinite lives recorded in connection with the acquisitions of Guideline
and Teltech. We will perform an annual impairment test of goodwill and other
intangible assets, once finalized, but have not yet determined what effect these
tests will have on the results of operations or the financial position of the
Company in future periods.
Amortizable intangible assets are amortized over a period of 7 years.
Amortization of intangible assets was $83,000 for the year ended December 31,
2003.
The unaudited pro forma information below represents our consolidated
results of operations as if the acquisitions of Guideline and Teltech had
occurred as of January 1, 2003 and 2002. The unaudited pro forma information has
been included for comparative purposes and is not indicative of the results of
operations of the consolidated Company had the acquisition occurred as of
January 1, 2003 and 2002, nor is it necessarily indicative of future results.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------------------------
TWELVE MONTHS ENDED
DECEMBER 31,
2003 2002
---- ----
Total pro forma revenue $37,200,000 $ 37,975,000
Pro forma net income (loss) $ 134,000 $ (339,000)
Pro forma earnings (loss) per share
attributable to common shareholders:
Basic and diluted $ 0.01 $ (0.04)
- -------------------------------------------------------------------------------
On a pro forma basis, revenues are recorded primarily based on usage,
resulting in lower recognized revenue in 2003 than in 2002. On a pro forma
basis, content costs and various indirect costs were further streamlined,
resulting in greater cost synergies in 2003 than in 2002.
FORWARD-LOOKING STATEMENTS
In this report, and from time to time, we may make or publish
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products, and
similar matters. Such statements are necessarily estimates
32
reflecting management's best judgment based on current information. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. Such statements are usually identified by the use of
words or phrases such as "believes," "anticipates," "expects," "estimates,"
"planned," "outlook," and "goal." Because forward-looking statements involve
risks and uncertainties, our actual results could differ materially. In order to
comply with the terms of the safe harbor, we note that a variety of factors
could cause our actual results and experience to differ materially from the
anticipated results or other expectations expressed in forward-looking
statements. While it is impossible to identify all such factors, the risks and
uncertainties that may affect the operations, performance and results of our
business include the following:
FACTORS THAT COULD AFFECT OUR FUTURE RESULTS
WE ARE DEPENDENT ON CLIENT RENEWALS OF OUR RETAINER-BASED SERVICES.
We derived approximately 60% of our total revenues in 2003 from QCS,
our subscription-based retainer business. In the year ended December 31, 2003,
QCS experienced a 14.8% decrease in retainer clients, and a 12.0% decrease in
holders of it's the QCS membership card. We may not be successful in maintaining
retainer renewal rates or the size of its retainer client base. Also, our
ability to renew retainer accounts is subject to a number of risks, including
the following:
o We may be unsuccessful in delivering consistent, high quality and
timely analysis and advice to our clients.
o We may not be able to hire and retain a large and growing number
of highly talented professionals in a very competitive job market.
o We may be unsuccessful in understanding and anticipating market
trends and the changing needs of our clients.
o We may not be able to deliver products and services of the quality
and timeliness to withstand competition.
If we are unable to successfully maintain our retainer rates or sustain
the necessary level of performance, such an inability could have a material
adverse effect on our business and financial results, which may require us to
modify our business objectives or reduce or cease some of products and services
that we offer.
WE ARE DEPENDENT ON THE REVENUE WE RECEIVE FROM NON-RECURRING SCRG AND
QUANTITATIVE MARKET RESEARCH ENGAGEMENTS.
We derived approximately 5% of our revenues during the year ended
December 31, 2003, from SCRG and approximately 24% of our revenues during the
year ended December 31, 2003, from Quantitative Market Research. We currently
anticipate growth in revenues from SCRG and Quantitative Market Research as
projected demand increases for projects of longer duration and complexity. SCRG
and Quantitative Market Research engagements vary in number, size and scope and
typically are project based and non-recurring. Our ability to replace completed
SCRG and Quantitative Market Research engagements with new engagements is
subject to a number of risks, including the following:
o We may be unsuccessful in delivering consistent, high quality and
timely consulting services to our clients.
o We may not be able to hire and retain a large and growing number
of highly talented professionals in a very competitive job market.
33
o We may be unsuccessful in understanding and anticipating market
trends and the changing needs of our clients.
o We may not be able to deliver consulting services of the quality
and timeliness to withstand competition.
If we are not able to replace completed SCRG and Quantitative Market
Research engagements with new engagements, such an inability could have a
material adverse effect on our business and financial results, which may require
us to modify our business objectives or reduce or cease some of the products and
services that we offer.
OUR OPERATING RESULTS ARE SUBJECT TO POTENTIAL FLUCTUATIONS BEYOND OUR CONTROL.
Our operating results vary from quarter to quarter. We expect future
operating results to fluctuate due to several factors, many of which are out of
our control:
o The disproportionately large portion of our QCS retainers that
expire in the fourth quarter of each year.
o The level and timing of renewals of retainers and subscriptions of
our QCS and Teltech services.
o The mix of QCS and Teltech revenue versus SCRG and Quantitative
Market Research revenue.
o The number, size and scope of SCRG and Quantitative Market
Research engagements in which we are engaged, the degree of
completion of such engagements, and our ability to complete such
engagements.
o The timing and amount of new business generated by us.
o The timing of the development, introduction, and marketing of new
products and services and modes of delivery.
o The timing of hiring consultants and corporate sales personnel.
o Consultant utilization rates and specifically, the accuracy of
estimates of resources required to complete ongoing SCRG and
Quantitative Market Research engagements.
o Changes in the spending patterns of our clients.
o Our accounts receivable collection experience.
o Competitive conditions in the industry.
Due to these factors, we believe period-to-period comparisons of
results of operations are not necessarily meaningful and should not be relied
upon as an indication of future results of operations.
WE MAY NOT BE ABLE TO TIMELY RESPOND TO RAPID CHANGES IN THE MARKET OR THE
NEEDS OF OUR CLIENTS.
Our success depends in part upon our ability to anticipate rapidly
changing market trends and to adapt our products and services to meet the
changing needs of our clients. Frequent and often dramatic changes, including
the following, characterize our industry:
o Introduction of new products and obsolescence of others.
o Changing client demands concerning the marketing and delivery of
our products and services.
34
This environment of rapid and continuous change presents significant
challenges to our ability to provide our clients with current and timely
analysis and advice on issues of importance to them. We commit substantial
resources to meeting these challenges. If we fail to provide insightful timely
information in a manner that meets changing market needs, such a failure could
have a material and adverse effect on our future operating results.
WE ARE DEPENDENT ON OUR ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL.
We need to hire, train and retain a significant number of additional
qualified employees to execute our strategy and support our growth. In
particular, we need trained consultants, corporate sales specialists, and
product development and operations staff. We continue to experience intense
competition in recruiting and retaining qualified employees. The pool of
experienced candidates is small, and we compete for qualified employees against
many companies. If we are unable to successfully hire, retain, and motivate a
sufficient number of qualified employees, such an inability will have a material
adverse effect on our business and financial results.
WE FACE SEVERE COMPETITION.
The consulting industry is extremely competitive. We compete directly
with other independent providers of similar services and indirectly with the
internal staffs of current and prospective client organizations. We also compete
indirectly with larger electronic and print media companies and consulting
firms. Our indirect competitors, many of which have substantially greater
financial, information gathering and marketing resources than us, could choose
to compete directly against us in the future.
Our current and future competitors may develop products and services
that are more effective than our products and services. Competitors may also
produce their products and services at less cost and market them more
effectively. If we are unable to successfully compete against existing or new
competitors, such an inability will have a material adverse effect on our
operating results and would likely result in pricing pressure and loss of market
share.
WE MAY NOT BE SUCCESSFUL IN THE DEVELOPMENT AND MARKETING OF NEW PRODUCTS OR
SERVICES.
Our future success depends on our ability to develop or acquire new
products and services that address specific industry and business sectors and
changes in client requirements. The process of internally researching,
developing, launching and gaining client acceptance of a new product or service
is inherently risky and costly. Assimilating and marketing an acquired product
or service is also risky and costly. Currently, we have formed several strategic
alliances with other information providers and various business associations in
order to expand our client base and allow for the rollout of a new service
continuum. If we are unable to develop new products and services or manage our
strategic investments, such inabilities could have a material adverse effect on
our operating results.
WE ARE DEPENDENT ON KEY PERSONNEL, THE LOSS OF ANY MAY ADVERSELY AFFECT US.
We rely, and will continue to rely, in large part on our key
management, research, consulting, sales, product development and operations
personnel. Our success in part depends on our ability to motivate and retain
highly qualified employees. If a majority of the members of our Operating
Management Group leave the Company, such loss or losses could have a material
adverse effect on us.
35
OUR PRODUCT PRICING MAY LIMIT OUR POTENTIAL MARKET.
Our pricing strategy may limit the potential market for our QCS,
Teltech, SCRG, and Quantitative Market Research services. As a result, we may be
required to reduce prices for our various services or to introduce new products
and services with lower prices in order to expand or maintain our market share
or broaden our target market. These actions could have a material adverse effect
on our business and results of operations.
WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR GROWTH.
Growth places significant demands on our management, administrative,
operational and financial resources. Our ability to manage growth, should it
continue to occur, will require us to continue to improve our systems and to
motivate and effectively manage an evolving workforce. If our management is
unable to effectively manage a changing and growing business, the quality of our
products, our retention of key employees, and our results of operations could be
materially adversely affected.
ANY ACQUISITIONS THAT WE ATTEMPT OR COMPLETE COULD PROVE DIFFICULT TO
INTEGRATE OR REQUIRE A SUBSTANTIAL COMMITMENT OF MANAGEMENT TIME AND
OTHER RESOURCES.
As part of our business strategy, we look to buy or make investments in
complementary businesses, products and services. If we find a business we wish
to acquire, we could have difficulty negotiating the terms of the purchase,
financing the purchase, and integrating and assimilating the employees, products
and operations of the acquired business. Acquisitions may disrupt the ongoing
business of the Company and distract management. Furthermore, acquisition of new
businesses may not lead to the successful development of new products, or if
developed, such products may not achieve market acceptance or prove to be
profitable. A given acquisition may also have a material adverse effect on our
financial condition or results of operations. In addition, we may be required to
incur debt or issue equity to pay for any future acquisitions.
WE ARE VULNERABLE TO VOLATILE MARKET CONDITIONS.
The market prices of our common stock have been highly volatile. The
market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Please see the table contained in Item 5 "Market for Registrant's
Common Equity and Related Stockholder Matters" of Part II of this Report which
sets forth the range of high and low bids of our common stock for the calendar
quarters indicated.
WE DO NOT EXPECT TO PAY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
Although our shareholders may receive dividends if, as and when
declared by our board of directors, we do not intend to pay dividends on our
common stock in the foreseeable future. Therefore, you should not purchase our
common stock if you need immediate or future income by way of dividends from
your investment.
OUR SIGNIFICANT INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH.
We have significant indebtedness with a face value of approximately
$5.3 million, comprised of approximately $1.2 million of senior debt and $3.5
million of subordinated debt.
36
Additionally, we have approximately $320,000 of availability remaining under a
$1.0 million senior line of credit which would create additional indebtedness if
drawn down upon. The affirmative, negative and financial covenants of these debt
facilities could limit our future financial flexibility. The associated debt
service costs and principal repayment could impair future cash flow and
operating results. Our outstanding debt may limit the amount of cash or
additional credit available to us, which could restrain our ability to expand or
enhance products and services, respond to competitive pressures or pursue future
business opportunities requiring substantial investments of additional capital.
OUR COMMON STOCK IS SUBJECT TO RULES REGARDING "PENNY STOCKS" WHICH MAY AFFECT
ITS LIQUIDITY.
In April 2001, due to our failure to comply with NASDAQ's minimum bid
price, our common stock was delisted from the NASDAQ and is now traded on the
OTC Bulletin Board. Because the trading price of our common stock is currently
below $5.00 per share, trading is subject to certain other rules of the
Securities Exchange Act of 1934. Such rules require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
"penny stock." "Penny stock" is defined as any non-NASDAQ equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
Such rules require the delivery of a disclosure schedule explaining the penny
stock market and the risks associated with that market before entering into any
penny stock transaction. Disclosure is also required to be made about
compensation payable to both the broker-dealer and the registered representative
and current quotations for the securities. The rules also impose various sales
practice requirements on broker-dealers who sell penny stocks to persons other
than established customers and accredited investors. For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and must receive the purchaser's written consent to the
transaction prior to the sale. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stocks. The additional
burdens imposed upon broker-dealers by such requirements could discourage
broker-dealers from effecting transactions in our common stock. This could
severely limit the market liquidity of our common stock and your ability to sell
the common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary exposures to market risks include fluctuations in interest
rates on our short-term and long-term borrowings with a balance of $1,876,000 as
of December 31, 2003 under a credit facility. Management does not believe that
the risk inherent in the variable-rate nature of these instruments will have a
material adverse effect on our consolidated financial statements. However, no
assurance can be given that such a risk will not have a material adverse effect
on our financial statements in the future.
As of December 31, 2003, the outstanding balance on all of our
variable-rate credit facilities was $1,876,000. Based on this balance, an
immediate change of one percent in the interest rate would cause a change in
interest expense of approximately $20,000 on an annual basis. Our objective in
maintaining these variable rate borrowings is the flexibility obtained regarding
early repayment without penalties and lower overall cost as compared with
fixed-rate borrowings.
During 2003, we borrowed approximately $676,000 under the Line of
Credit, and as of December 31, 2003, approximately the same was outstanding
under this line. Interest expense related to this note amounted to approximately
$14,000 for the year ended December 31, 2003.
37
Except as set forth in the preceding paragraph, there has been no
material change in our assessment of our sensitivity to market risk as of
December 31, 2003, as compared to the information included in Part II, Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk", of our Form 10-K
for the year ended December 31, 2002, as filed with the Securities and Exchange
Commission on April 11, 2003.
We do not invest or trade in any derivative financial or commodity
instruments, nor do we invest in any foreign financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are submitted in a separate section of this
report on pages F-1 through F-33.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period
covered by this report. Based on such evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that, as of the end of such period,
the Company's disclosure controls and procedures are effective in recording,
processing, summarizing, and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act.
During the quarter ended June 30, 2003, we integrated the internal
controls of Guideline as a result of its acquisition by the Company on April 1,
2003. Our management, including the Chief Executive Officer and Chief Financial
Officer, also concluded that Guideline's controls and procedures were effective.
During the quarter ended September 30, 2003, we integrated the
internal controls of Teltech as a result of its acquisition by the Company on
July 1, 2003. Our management, including the Chief Executive Officer and Chief
Financial Officer, also concluded that Teltech's controls and procedures were
effective.
Except as mentioned above, there have been no significant changes in
our internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10, including information regarding
directors, membership and function of the audit committee, including the
financial expertise of its members, Section 16(a) compliance and the Company's
code of Ethics, appearing under the
38
captions "Election of Directors," "Committees of the Board," "Other Matters" and
"Code of Ethics" of our proxy statement for the 2004 Annual Meeting of
Stockholders is incorporated herein by reference. The proxy statement is
anticipated to be filed with the Commission on or about April 29, 2004.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 appearing under the caption
"Executive Compensation" of our proxy statement for the 2004 Annual Meeting of
Stockholders is incorporated herein by reference. The proxy statement is
anticipated to be filed with the Commission on or about April 29, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information regarding compensation plans
under which equity securities of the Company are authorized for issuance as of
December 31, 2003:
- -----------------------------------------------------------------------------------------------------------------------------------
Number of securities to Number of
be issued upon exercise securities
of outstanding options, Weighted-average available for
Plan category warrants, and rights exercise price future issuance
------------- ----------------------- ---------------- ---------------
EQUITY COMPENSATION PLANS APPROVED BY
SECURITY HOLDERS:
FIND/SVP, Inc. 1996 Stock Incentive Plan 1,825,900 $ 0.94 723,938
FIND/SVP, Inc. 2003 Stock Incentive Plan 812,500 1.33 687,500
--------- -------- ---------
Total 2,638,400 $ 1.06 1,411,438
========= ======== =========
- -----------------------------------------------------------------------------------------------------------------------------------
For a description of the equity compensation plans above, see Note 8 of
Item 8. Financial Statements and Supplementary Data appearing elsewhere in this
Form 10-K.
The information required by Item 12 appearing under the captions
"Executive Compensation - Equity Compensation Plans" and "Security Ownership of
Certain Beneficial Owners and Management" of our proxy statement for the 2004
Annual Meeting of Stockholders is incorporated herein by reference. The proxy
statement is anticipated to be filed with the Commission on or about April 29,
2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 appearing under the caption
"Certain Relationships and Related Transactions" of our proxy statement for the
2004 Annual Meeting of Stockholders is incorporated herein by reference. The
proxy statement is anticipated to be filed with the Commission on or about April
29, 2004.
39
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 appearing under the caption
"Principal Accountant Fees and Services" of our proxy statement for the 2004
Annual Meeting of Stockholders is incorporated herein by reference. The proxy
statement is anticipated to be filed with the Commission on or about April 29,
2004.
40
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Location
In 10-K
--------------------
Index to Consolidated Financial Statements and Schedule F-1
Independent Auditors' Report F-2
Consolidated balance sheets - December 31, 2003 and 2002 F-3
Consolidated statements of operations - Years ended December 31, 2003,
2002 and 2001 F-4
Consolidated statements of changes in shareholders' equity - Years ended
December 31, 2003, 2002 and 2001 F-5
Consolidated statements of cash flows - Years ended December 31, 2003,
2002 and 2001 F-6
Notes to consolidated financial statements F-7
(2) Financial Statement Schedule:
Independent Auditors' Report on Supplemental Schedule F-32
Valuation and Qualifying Accounts on Schedule II F-33
(b) Reports on Form 8-K
In a Form 8-K filed on November 17, 2003, the Company filed a press
release announcing its third quarter 2003 earnings.
(c) Exhibits:
Exhibit Number Description of Exhibit
-------------- -----------------------
3.1 Certificate of Incorporation of the Company (incorporated by reference to the
Company's Registration Statement on Form S-18 (Reg. No. 33-8634-NY) which became
effective with the Securities and Exchange Commission on October 31, 1986)
3.2 Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to the Company's Registration Statement on Form S-18
(Reg. No. 33-8634-NY) which became effective with the Securities and Exchange
Commission on October 31, 1986)
41
3.3 Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to the Company's Registration Statement on Form S-18
(Reg. No. 33-8634-NY) which became effective with the Securities and Exchange
Commission on October 31, 1986)
3.4 Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to the Company's Definitive Proxy Statement, filed on
May 2, 1995)
3.5 Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to the Company's Definitive Proxy Statement, filed on
May 13, 1998)
3.6 Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to the Company's Definitive Proxy Statement, filed on
May 27, 1998)
3.7 Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to the Company's Definitive Proxy Statement, filed on
May 10, 2002)
3.8 Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to the Company's Form 8-K filed on April 16, 2003).
3.9 By-laws of the Company (incorporated by reference to the Company's Form 10-K
filed for the year ended December 31, 1987)
3.10 Amendment to the By-laws of the Company (incorporated by reference to the
Company's Form 10-K filed for the year ended December 31, 2002)
4.1 Specimen of the Company's Common Stock Certificate (incorporated by reference to
the Company's Registration Statement on Form S-18 (Reg. No. 33-8634-NY) which
became effective with the Securities and Exchange Commission on October 31, 1986)
10.1 License Agreement, dated October 11, 1971, between the Company and SVP
International (incorporated by reference to the Company's Registration Statement
on Form S-18 (Reg. No. 33-8634-NY) which became effective with the Securities
and Exchange Commission on October 31, 1986)
10.2 Amendment to License Agreement, dated March 23, 1981, between the Company and
SVP International (incorporated by reference to the Company's Registration
Statement on Form S-18 (Reg. No. 33-8634-NY) which became effective with the
Securities and Exchange Commission on October 31, 1986)
10.3 Amendment to License Agreement, dated November 21, 2001, between the Company and
SVP International (incorporated by reference to the Company's Form 10-K filed
for the year ended December 31, 2002)
10.4 Lease, dated March 15, 1995, between Urbicum Associates, L.P. and the Company,
related to premises on 4th floor at 641 Avenue of the Americas, New York, NY
(incorporated by reference to the Company's Form 10-K filed for the year ended
December 31, 1994)
10.5 Lease, dated December 15, 1986, between Chelsea Green Associates and the Company,
related to premises at 625 Avenue of the Americas, New York, NY (incorporated by
reference to the Company's Form 10-K filed for the year ended December 31, 1992)
42
#10.6 The Company's 401(k) and Profit Sharing Plan (incorporated by reference to the
Company's Form S-8, filed on March 29, 1996)
#10.7 The Company's 1996 Stock Option Plan (incorporated by reference to the Company's
Definitive Proxy Statement, filed on May 10, 2002)
10.8 Collaboration Agreement, dated as of December 19, 1999, by and among Bill Gross'
idealab!, the Company, and find.com, Inc. (incorporated by reference to the
Company's Form 10-K filed for the year ended December 31, 1999)
10.9 $2,000,000 Term Note, dated February 20, 2002, by the Company in favor of
JPMorgan Chase Bank (incorporated by reference to the Company's Form 10-K filed
for the year ended December 31, 2001)
10.10 $1,000,000 Senior Grid Promissory Note, dated June 18, 2002, by the Company in favor
of JPMorgan Chase Bank (incorporated by reference to the Company's Form 10-K filed
for the year ended December 31, 2002)
10.11 Stock Purchase Agreement, dated January 15, 1998, between SVP, S.A. and the
Company (incorporated by reference to the Company's Form 10-K filed for the year
ended December 31, 1999)
#10.12 Amended and restated Employment Agreement, dated November 21, 2001, between the
Company and Andrew P. Garvin (incorporated by reference to the Company's Form 10-K
filed for the year ended December 31, 2001)
#10.13 Amendment No. 1 to Amended and Restated Employment Agreement, dated December 31,
2002, between the Company and Andrew P. Garvin (incorporated by reference to the
Company's Form 10-K filed for the year ended December 31, 2002)
#10.14 Employment Agreement, dated November 21, 2001, between the Company and David Walke
(incorporated by reference to the Company's Form 10-K filed for the year ended
December 31, 2001)
#10.15 Employment Agreement, dated February 6, 2002, between the Company and Martin E.
Franklin (incorporated by reference to the Company's Form 10-K filed for the year
ended December 31, 2001)
#10.16 Employment Agreement, dated May 13, 2002, between the Company and Peter M. Stone
(incorporated by reference to the Company's Form 10-Q filed for the quarter ended
June 30, 2002)
#10.17 Employment Agreement, dated May 13, 2002, between the Company and Daniel S.
Fitzgerald (incorporated by reference to the Company's Form 10-Q filed for the
quarter ended June 30, 2002)
*10.18 Separation Agreement, dated December 31, 2003, between the Company and Andrew P.
Garvin
10.19 Stock Purchase Agreement, dated as of April 1, 2003, by and among Jay L.
Friedland, Robert La Terra, Guideline Research Corp. and the Company
(incorporated by reference to the Company's Form 8-K filed on April 16, 2003)
10.20 Escrow Agreement, dated as of April 1, 2003, by and among Jay L. Friedland,
Robert La Terra, Morris Whitcup, the Company, Inc. and Kane Kessler, P.C.
(incorporated by reference to the Company's Form 8-K filed on April 16, 2003)
43
10.21 Employment Agreement, dated as of April 1, 2003, by and between Jay L. Friedland
and Guideline Research Corp. (incorporated by reference to the Company's Form
8-K filed on April 16, 2003)
10.22 Employment Agreement, dated as of April 1, 2003, by and between Robert La Terra
and Guideline Research Corp. (incorporated by reference to the Company's Form
8-K filed on April 16, 2003)
10.23 Stock Option Agreement, dated April 1, 2003, by and between the Company and
Robert La Terra (incorporated by reference to the Company's Form 8-K filed on
April 16, 2003)
10.24 Promissory Note, dated as of April 1, 2003, made by the Company in favor of
Petra Mezzanine Fund, L.P. (incorporated by reference to the Company's Form 8-K
filed on April 16, 2003)
10.25 Loan Agreement, dated as of April 1, 2003, by and between Petra Mezzanine Fund,
L.P. and the Company (incorporated by reference to the Company's Form 8-K filed
on April 16, 2003)
10.26 Security Agreement, dated as of April 1, 2003, made by the Company in favor of
Petra Mezzanine Fund, L.P. (incorporated by reference to the Company's Form 8-K
filed on April 16, 2003)
10.27 Trademark and Patent Security Agreement, dated as of April 1, 2003, made by the
Company in favor of Petra Mezzanine Fund, L.P. (incorporated by reference to the
Company's Form 8-K filed on April 16, 2003)
10.28 Security Agreement, dated as of April 1, 2003, made by Guideline Research Corp.,
Tabline Data Services, Inc., Guideline/Chicago, Inc., Advanced Analytics, Inc.
and Guideline Consulting Corp. in favor of Petra Mezzanine Fund, L.P.
(incorporated by reference to the Company's Form 8-K filed on April 16, 2003)
10.29 Guaranty Agreement, dated as of April 1, 2003, made by Guideline Research Corp.,
Tabline Data Services, Inc., Guideline/Chicago, Inc., Advanced Analytics, Inc.
and Guideline Consulting Corp. in favor of Petra Mezzanine Fund, L.P.
(incorporated by reference to the Company's Form 8-K filed on April 16, 2003)
10.30 Series A Preferred Stock Purchase Agreement, dated as of April 1, 2003, by and
between Petra Mezzanine Fund, L.P. and the Company (incorporated by reference to
the Company's Form 8-K filed on April 16, 2003)
10.31 Stock Purchase Warrant issued as of April 1, 2003, by the Company to Petra
Mezzanine Fund, L.P. (incorporated by reference to the Company's Form 8-K filed
on April 16, 2003)
10.32 Investor Rights Agreement, dated as of April 1, 2003, by and among the Company,
Petra Mezzanine Fund, L.P., Martin E. Franklin and David Walke (incorporated by
reference to the Company's Form 8-K filed on April 16, 2003)
10.33 Amended and Restated Term Promissory Note, dated as of April 1, 2003, made by
the Company in favor of JPMorgan Chase Bank (incorporated by reference to the
Company's Form 8-K filed on April 16, 2003)
44
10.34 Amended and Restated Senior Grid Promissory Note, dated as of April 1, 2003, made by
the Company in favor of JPMorgan Chase Bank (incorporated by reference to the
Company's Form 8-K filed on April 16, 2003)
10.35 Amendment No. 1 to Security Agreement, dated as of April 1, 2003, made by the
Company and JPMorgan Chase Bank (incorporated by reference to the Company's Form
8-K filed on April 16, 2003)
10.36 Subordination Agreement, dated as of April 1, 2003, Petra Mezzanine Fund, L.P.,
the Company, Guideline Research Corp., Tabline Data Services, Inc.,
Guideline/Chicago, Inc., Advanced Analytics, Inc., Guideline Consulting Corp.,
and JPMorgan Chase Bank. (incorporated by reference to the Company's Form 8-K
filed on April 16, 2003)
10.37 Subsidiary Security Agreement, dated as of April 1, 2003, made by Guideline
Research Corp., Tabline Data Services, Inc., Guideline/Chicago, Inc., Advanced
Analytics, Inc. and Guideline Consulting Corp. in favor of JPMorgan Chase Bank
(incorporated by reference to the Company's Form 8-K filed on April 16, 2003)
10.38 Subsidiary Guaranty Agreement, dated as of April 1, 2003, made by Guideline
Research Corp., Tabline Data Services, Inc., Guideline/Chicago, Inc., Advanced
Analytics, Inc. and Guideline Consulting Corp. in favor of JPMorgan Chase Bank
(incorporated by reference to the Company's Form 8-K filed on April 16, 2003)
10.39 Amended and Restated Asset Purchase Agreement, dated as of June 25, 2003, by and
between TTech Acquisition Corp., the Company, Sopheon Corporation, and Sopheon PLC
(incorporated by reference to the Company's Form 8-K filed on July 16, 2003)
10.40 Escrow Agreement, dated as of July 1, 2003, by and between TTech Acquisition
Corp., the Company, Sopheon Corporation, Sopheon PLC, and U.S. BANK NATIONAL
ASSOCIATION (incorporated by reference to the Company's Form 8-K filed on July
16, 2003)
10.41 Promissory Note, dated as of July 1, 2003, made by the Company in favor of Petra
Mezzanine Fund, L.P. (incorporated by reference to the Company's Form 8-K filed
on July 16, 2003)
10.42 Amended and Restated Loan Agreement, dated July 1, 2003, by and between Petra
Mezzanine Fund, L.P. and the Company (incorporated by reference to the Company's
Form 8-K filed on July 16, 2003)
10.43 First Amendment to Security Agreement, dated July 1, 2003, by and between the
Company and Petra Mezzanine Fund, L.P. (incorporated by reference to the
Company's Form 8-K filed on July 16, 2003)
10.44 Amended and Restated Security Agreement, dated July 1, 2003, by and between
Guideline Research Corp., Tabline Data Services, Inc., Guideline/Chicago, Inc.,
Advanced Analytics, Inc., Guideline Consulting Corp., and TTech Acquisition
Corp. in favor of Petra Mezzanine Fund, L.P. (incorporated by reference to the
Company's Form 8-K filed on July 16, 2003)
45
10.45 Amended and Restated Guaranty Agreement, dated July 1, 2003, by and between
Guideline Research Corp., Tabline Data Services, Inc., Guideline/Chicago, Inc.,
Advanced Analytics, Inc., Guideline Consulting Corp., and TTech Acquisition
Corp. in favor of Petra Mezzanine Fund, L.P. (incorporated by reference to the
Company's Form 8-K filed on July 16, 2003)
10.46 Stock Purchase Warrant issued as of July 1, 2003, by the Company to Petra
Mezzanine Fund, L.P. (incorporated by reference to the Company's Form 8-K filed
on July 16, 2003)
10.47 Amendment No. 1 to Investor Rights Agreement, dated as of July 1, 2003, by and
among the Company, Petra Mezzanine Fund, L.P., Martin E. Franklin and David
Walke (incorporated by reference to the Company's Form 8-K filed on July 16, 2003)
10.48 Amendment No. 1 to Amended And Restated Term Promissory Note, dated as of July
1, 2003, made by the Company in favor of JPMorgan Chase Bank (incorporated by
reference to the Company's Form 8-K filed on July 16, 2003)
10.49 Amendment No. 1 to Amended And Restated Senior Grid Promissory Note, dated as of
July 1, 2003, made by the Company in favor of JPMorgan Chase Bank (incorporated
by reference to the Company's Form 8-K filed on July 16, 2003)
10.50 First Amendment to Subordination Agreement, dated July 1, 2003, by and among
Petra Mezzanine Fund, L.P., the Company, Guideline Research Corp., Tabline Data
Services, Inc., Guideline/Chicago, Inc., Advanced Analytics, Inc., Guideline
Consulting Corp., and TTech Acquisition Corp., and JPMorgan Chase Bank
(incorporated by reference to the Company's Form 8-K filed on July 16, 2003)
10.51 Subsidiary Security Agreement, dated as of July 1, 2003, made by TTech
Acquisition Corp. in favor of JPMorgan Chase Bank (incorporated by reference to
the Company's Form 8-K filed on July 16, 2003)
10.52 Subsidiary Guaranty Agreement, dated as of July 1, 2003, made by TTech
Acquisition Corp. in favor of JPMorgan Chase Bank (incorporated by reference to
the Company's Form 8-K filed on July 16, 2003)
*21.1 List of Subsidiaries
*23.1 Consent of Independent Auditors
*31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
*31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
*32.1 Certifications Pursuant to 18 U. S. C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
* Filed herewith.
# This exhibit represents a management contract or a compensatory plan.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIND/SVP, INC.
(Registrant)
By: /s/ DAVID WALKE
---------------------------------------
David Walke,
Chief Executive Officer
March 26, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
(1) Principal Executive Officer:
/s/ DAVID WALKE Chief Executive Officer
--------------------------------------------- March 26, 2004
David Walke
(2) Principal Financial Officer and Principal
Accounting Officer:
/s/ PETER M. STONE Chief Financial Officer
--------------------------------------------- March 26, 2004
Peter M. Stone
(3) Board of Directors:
/s/ ANDREW P. GARVIN Founder and Director
--------------------------------------------- March 26, 2004
Andrew P. Garvin
/s/ MARTIN E. FRANKLIN Chairman of Board of Directors
--------------------------------------------- March 26, 2004
Martin E. Franklin
/s/ MARC L. REISCH Director
--------------------------------------------- March 26, 2004
Marc L. Reisch
/s/ DENISE L. SHAPIRO Director
--------------------------------------------- March 26, 2004
Denise L. Shapiro
/s/ ROBERT J. SOBEL Director
--------------------------------------------- March 26, 2004
Robert J. Sobel
/s/ WARREN STRUHL Director
--------------------------------------------- March 26, 2004
Warren Struhl
47
EXHIBIT INDEX
Exhibit Number Description of Exhibit
-------------- -----------------------
3.1 Certificate of Incorporation of the Company (incorporated by reference to the
Company's Registration Statement on Form S-18 (Reg. No. 33-8634-NY) which became
effective with the Securities and Exchange Commission on October 31, 1986)
3.2 Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to the Company's Registration Statement on Form S-18
(Reg. No. 33-8634-NY) which became effective with the Securities and Exchange
Commission on October 31, 1986)
3.3 Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to the Company's Registration Statement on Form S-18
(Reg. No. 33-8634-NY) which became effective with the Securities and Exchange
Commission on October 31, 1986)
3.4 Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to the Company's Definitive Proxy Statement, filed on
May 2, 1995)
3.5 Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to the Company's Definitive Proxy Statement, filed on
May 13, 1998)
3.6 Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to the Company's Definitive Proxy Statement, filed on
May 27, 1998)
3.7 Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to the Company's Definitive Proxy Statement, filed on
May 10, 2002)
3.8 Certificate of Amendment of Certificate of Incorporation of the Company (incorporated
by reference to the Company's Form 8-K filed on April 16, 2003).
3.9 By-laws of the Company (incorporated by reference to the Company's Form 10-K
filed for the year ended December 31, 1987)
3.10 Amendment to the By-laws of the Company (incorporated by reference to the
Company's Form 10-K filed for the year ended December 31, 2002)
4.1 Specimen of the Company's Common Stock Certificate (incorporated by reference to
the Company's Registration Statement on Form S-18 (Reg. No. 33-8634-NY) which
became effective with the Securities and Exchange Commission on October 31, 1986)
10.1 License Agreement, dated October 11, 1971, between the Company and SVP
International (incorporated by reference to the Company's Registration Statement
on Form S-18 (Reg. No. 33-8634-NY) which became effective with the Securities
and Exchange Commission on October 31, 1986)
10.2 Amendment to License Agreement, dated March 23, 1981, between the Company and
SVP International (incorporated by reference to the Company's Registration
Statement on Form S-18 (Reg. No. 33-8634-NY) which became effective with the
Securities and Exchange Commission on October 31, 1986)
E-1
10.3 Amendment to License Agreement, dated November 21, 2001, between the Company and
SVP International (incorporated by reference to the Company's Form 10-K filed
for the year ended December 31, 2002)
10.4 Lease, dated March 15, 1995, between Urbicum Associates, L.P. and the Company, related
to premises on 4th floor at 641 Avenue of the Americas, New York, NY (incorporated by
reference to the Company's Form 10-K filed for the year ended December 31, 1994)
10.5 Lease, dated December 15, 1986, between Chelsea Green Associates and the
Company, related to premises at 625 Avenue of the Americas, New York, NY
(incorporated by reference to the Company's Form 10-K filed for the year ended
December 31, 1992)
#10.6 The Company's 401(k) and Profit Sharing Plan (incorporated by reference to the
Company's Form S-8, filed on March 29, 1996)
#10.7 The Company's 1996 Stock Option Plan (incorporated by reference to the Company's
Definitive Proxy Statement, filed on May 10, 2002)
10.8 Collaboration Agreement, dated as of December 19, 1999, by and among Bill Gross'
idealab!, the Company, and find.com, Inc. (incorporated by reference to the
Company's Form 10-K filed for the year ended December 31, 1999)
10.9 $2,000,000 Term Note, dated February 20, 2002, by the Company in favor of
JPMorgan Chase Bank (incorporated by reference to the Company's Form 10-K filed
for the year ended December 31, 2001)
10.10 $1,000,000 Senior Grid Promissory Note, dated June 18, 2002, by the Company in favor
of JPMorgan Chase Bank (incorporated by reference to the Company's Form 10-K filed for
the year ended December 31, 2002)
10.11 Stock Purchase Agreement, dated January 15, 1998, between SVP, S.A. and the
Company (incorporated by reference to the Company's Form 10-K filed for the year
ended December 31, 1999)
#10.12 Amended and restated Employment Agreement, dated November 21, 2001, between the
Company and Andrew P. Garvin (incorporated by reference to the Company's Form 10-K
filed for the year ended December 31, 2001)
#10.13 Amendment No. 1 to Amended and Restated Employment Agreement, dated December 31,
2002, between the Company and Andrew P. Garvin (incorporated by reference to the
Company's Form 10-K filed for the year ended December 31, 2002)
#10.14 Employment Agreement, dated November 21, 2001, between the Company and David Walke
(incorporated by reference to the Company's Form 10-K filed for the year ended
December 31, 2001)
#10.15 Employment Agreement, dated February 6, 2002, between the Company and Martin E.
Franklin (incorporated by reference to the Company's Form 10-K filed for the year
ended December 31, 2001)
#10.16 Employment Agreement, dated May 13, 2002, between the Company and Peter M. Stone
(incorporated by reference to the Company's Form 10-Q filed for the quarter ended June
30, 2002)
E-2
#10.17 Employment Agreement, dated May 13, 2002, between the Company and Daniel S.
Fitzgerald (incorporated by reference to the Company's Form 10-Q filed for the
quarter ended June 30, 2002)
*10.18 Separation Agreement, dated December 31, 2003, between the Company and Andrew P.
Garvin
10.19 Stock Purchase Agreement, dated as of April 1, 2003, by and among Jay L.
Friedland, Robert La Terra, Guideline Research Corp. and the Company
(incorporated by reference to the Company's Form 8-K filed on April 16, 2003)
10.20 Escrow Agreement, dated as of April 1, 2003, by and among Jay L. Friedland,
Robert La Terra, Morris Whitcup, the Company, Inc. and Kane Kessler, P.C.
(incorporated by reference to the Company's Form 8-K filed on April 16, 2003)
10.21 Employment Agreement, dated as of April 1, 2003, by and between Jay L. Friedland
and Guideline Research Corp. (incorporated by reference to the Company's Form
8-K filed on April 16, 2003
10.22 Employment Agreement, dated as of April 1, 2003, by and between Robert La Terra
and Guideline Research Corp. (incorporated by reference to the Company's Form
8-K filed on April 16, 2003)
10.23 Stock Option Agreement, dated April 1, 2003, by and between the Company and
Robert La Terra (incorporated by reference to the Company's Form 8-K filed on
April 16, 2003)
10.24 Promissory Note, dated as of April 1, 2003, made by the Company in favor of
Petra Mezzanine Fund, L.P. (incorporated by reference to the Company's Form 8-K
filed on April 16, 2003)
10.25 Loan Agreement, dated as of April 1, 2003, by and between Petra Mezzanine Fund,
L.P. and the Company (incorporated by reference to the Company's Form 8-K filed
on April 16, 2003)
10.26 Security Agreement, dated as of April 1, 2003, made by the Company in favor of
Petra Mezzanine Fund, L.P. (incorporated by reference to the Company's Form 8-K
filed on April 16, 2003)
10.27 Trademark and Patent Security Agreement, dated as of April 1, 2003, made by the
Company in favor of Petra Mezzanine Fund, L.P. (incorporated by reference to the
Company's Form 8-K filed on April 16, 2003)
10.28 Security Agreement, dated as of April 1, 2003, made by Guideline Research Corp.,
Tabline Data Services, Inc., Guideline/Chicago, Inc., Advanced Analytics, Inc.
and Guideline Consulting Corp. in favor of Petra Mezzanine Fund, L.P.
(incorporated by reference to the Company's Form 8-K filed on April 16, 2003)
10.29 Guaranty Agreement, dated as of April 1, 2003, made by Guideline Research Corp.,
Tabline Data Services, Inc., Guideline/Chicago, Inc., Advanced Analytics, Inc.
and Guideline Consulting Corp. in favor of Petra Mezzanine Fund, L.P.
(incorporated by reference to the Company's Form 8-K filed on April 16, 2003)
E-3
10.30 Series A Preferred Stock Purchase Agreement, dated as of April 1, 2003, by and
between Petra Mezzanine Fund, L.P. and the Company (incorporated by reference to
the Company's Form 8-K filed on April 16, 2003)
10.31 Stock Purchase Warrant issued as of April 1, 2003, by the Company to Petra
Mezzanine Fund, L.P. (incorporated by reference to the Company's Form 8-K filed
on April 16, 2003)
10.32 Investor Rights Agreement, dated as of April 1, 2003, by and among the Company,
Petra Mezzanine Fund, L.P., Martin E. Franklin and David Walke (incorporated by
reference to the Company's Form 8-K filed on April 16, 2003)
10.33 Amended and Restated Term Promissory Note, dated as of April 1, 2003, made by
the Company in favor of JPMorgan Chase Bank (incorporated by reference to the
Company's Form 8-K filed on April 16, 2003)
10.34 Amended and Restated Senior Grid Promissory Note, dated as of April 1, 2003, made by
the Company in favor of JPMorgan Chase Bank (incorporated by reference to the
Company's Form 8-K filed on April 16, 2003)
10.35 Amendment No. 1 to Security Agreement, dated as of April 1, 2003, made by the
Company and JPMorgan Chase Bank (incorporated by reference to the Company's Form
8-K filed on April 16, 2003)
10.36 Subordination Agreement, dated as of April 1, 2003, Petra Mezzanine Fund, L.P.,
the Company, Guideline Research Corp., Tabline Data Services, Inc.,
Guideline/Chicago, Inc., Advanced Analytics, Inc., Guideline Consulting Corp.,
and JPMorgan Chase Bank. (incorporated by reference to the Company's Form 8-K
filed on April 16, 2003)
10.37 Subsidiary Security Agreement, dated as of April 1, 2003, made by Guideline
Research Corp., Tabline Data Services, Inc., Guideline/Chicago, Inc., Advanced
Analytics, Inc. and Guideline Consulting Corp. in favor of JPMorgan Chase Bank
(incorporated by reference to the Company's Form 8-K filed on April 16, 2003)
10.38 Subsidiary Guaranty Agreement, dated as of April 1, 2003, made by Guideline
Research Corp., Tabline Data Services, Inc., Guideline/Chicago, Inc., Advanced
Analytics, Inc. and Guideline Consulting Corp. in favor of JPMorgan Chase Bank
(incorporated by reference to the Company's Form 8-K filed on April 16, 2003)
10.39 Amended and Restated Asset Purchase Agreement, dated as of June 25, 2003, by and
between TTech Acquisition Corp., the Company, Sopheon Corporation, and Sopheon PLC
(incorporated by reference to the Company's Form 8-K filed on July 16, 2003)
10.40 Escrow Agreement, dated as of July 1, 2003, by and between TTech Acquisition
Corp., the Company, Sopheon Corporation, Sopheon PLC, and U.S. BANK NATIONAL
ASSOCIATION (incorporated by reference to the Company's Form 8-K filed on July
16, 2003)
10.41 Promissory Note, dated as of July 1, 2003, made by the Company in favor of Petra
Mezzanine Fund, L.P. (incorporated by reference to the Company's Form 8-K filed
on July 16, 2003)
E-4
10.42 Amended and Restated Loan Agreement, dated July 1, 2003, by and between Petra
Mezzanine Fund, L.P. and the Company (incorporated by reference to the Company's
Form 8-K filed on July 16, 2003)
10.43 First Amendment to Security Agreement, dated July 1, 2003, by and between the
Company and Petra Mezzanine Fund, L.P. (incorporated by reference to the
Company's Form 8-K filed on July 16, 2003)
10.44 Amended and Restated Security Agreement, dated July 1, 2003, by and between
Guideline Research Corp., Tabline Data Services, Inc., Guideline/Chicago, Inc.,
Advanced Analytics, Inc., Guideline Consulting Corp., and TTech Acquisition
Corp. in favor of Petra Mezzanine Fund, L.P. (incorporated by reference to the
Company's Form 8-K filed on July 16, 2003)
10.45 Amended and Restated Guaranty Agreement, dated July 1, 2003, by and between
Guideline Research Corp., Tabline Data Services, Inc., Guideline/Chicago, Inc.,
Advanced Analytics, Inc., Guideline Consulting Corp., and TTech Acquisition
Corp. in favor of Petra Mezzanine Fund, L.P. (incorporated by reference to the
Company's Form 8-K filed on July 16, 2003)
10.46 Stock Purchase Warrant issued as of July 1, 2003, by the Company to Petra
Mezzanine Fund, L.P. (incorporated by reference to the Company's Form 8-K filed
on July 16, 2003)
10.47 Amendment No. 1 to Investor Rights Agreement, dated as of July 1, 2003, by and
among the Company, Petra Mezzanine Fund, L.P., Martin E. Franklin and David
Walke (incorporated by reference to the Company's Form 8-K filed on July 16, 2003)
10.48 Amendment No. 1 to Amended And Restated Term Promissory Note, dated as of July
1, 2003, made by the Company in favor of JPMorgan Chase Bank (incorporated by
reference to the Company's Form 8-K filed on July 16, 2003)
10.49 Amendment No. 1 to Amended And Restated Senior Grid Promissory Note, dated as of
July 1, 2003, made by the Company in favor of JPMorgan Chase Bank (incorporated
by reference to the Company's Form 8-K filed on July 16, 2003)
10.50 First Amendment to Subordination Agreement, dated July 1, 2003, by and among
Petra Mezzanine Fund, L.P., the Company, Guideline Research Corp., Tabline Data
Services, Inc., Guideline/Chicago, Inc., Advanced Analytics, Inc., Guideline
Consulting Corp., and TTech Acquisition Corp., and JPMorgan Chase Bank
(incorporated by reference to the Company's Form 8-K filed on July 16, 2003)
10.51 Subsidiary Security Agreement, dated as of July 1, 2003, made by TTech
Acquisition Corp. in favor of JPMorgan Chase Bank (incorporated by reference to
the Company's Form 8-K filed on July 16, 2003)
10.52 Subsidiary Guaranty Agreement, dated as of July 1, 2003, made by TTech
Acquisition Corp. in favor of JPMorgan Chase Bank (incorporated by reference to
the Company's Form 8-K filed on July 16, 2003)
*21.1 List of Subsidiaries
*23.1 Consent of Independent Auditors
*31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
E-5
*31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
*32.1 Certifications Pursuant to 18 U. S. C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
* Filed herewith.
# This exhibit represents a management contract or a compensatory plan.
E-6
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIND/SVP, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedule
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-3
Consolidated Statements of Operations
for the years ended December 31, 2003, 2002 and 2001 F-4
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2003, 2002 and 2001 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 2003, 2002 and 2001 F-6
Notes to Consolidated Financial Statements F-7
Schedule:
Independent Auditors' Report on Supplemental Schedule F-32
Valuation and Qualifying Accounts on Schedule II F-33
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of FIND/SVP, Inc.
We have audited the accompanying consolidated balance sheets of FIND/SVP, Inc.
and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2003
and 2002, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for goodwill to conform to Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ Deloitte & Touche LLP
New York, New York
March 25, 2004
F-2
FIND/SVP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31
(in thousands, except share and per share data)
ASSETS 2003 2002
Current assets:
Cash and cash equivalents $ 821 $ 968
Accounts receivable, less allowance for doubtful accounts of
$271 and $150 in 2003 and 2002, respectively 6,645 1,953
Deferred tax assets 505 272
Prepaid expenses and other current assets 920 948
--------- --------
Total current assets 8,891 4,141
Equipment, software development and leasehold improvements, at cost,
less accumulated depreciation and amortization 2,368 2,500
Goodwill, net 8,765 75
Intangibles, net 1,137 --
Deferred tax assets 1,090 1,324
Deferred rent 398 575
Cash surrender value of life insurance 214 418
Non-marketable equity securities 185 185
Other assets 554 320
---------- ----------
$ 23,602 $ 9,538
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable $ 1,076 $ 606
Trade accounts payable 2,609 353
Accrued expenses and other 3,205 1,749
Unearned retainer income 4,067 1,476
---------- ----------
Total current liabilities 10,957 4,184
Notes payable 3,170 1,200
Deferred compensation and other liabilities 419 441
---------- ----------
Total liabilities 14,546 5,825
---------- ----------
Redeemable convertible preferred stock, $.0001 par value.
Authorized 2,000,000 shares; issued and outstanding
333,333 shares in 2003 530 --
--------- --------
Redeemable common stock, $.0001 par value. Issued and
outstanding 571,237 shares in 2003 977 --
--------- --------
Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock, $.0001 par value. Authorized 100,000,000 shares;
issued and outstanding 12,641,295 shares in 2003;
issued and outstanding 10,214,102 shares in 2002 1 1
Capital in excess of par value 10,983 7,473
Deferred stock-based compensation (20) (141)
Accumulated deficit (3,415) (3,620)
---------- ----------
Total shareholders' equity 7,549 3,713
---------- ----------
$ 23,602 $ 9,538
========== ==========
See accompanying notes to consolidated financial statements.
F-3
FIND/SVP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31
(in thousands, except share and per share data)
2003 2002 2001
Revenues $ 31,569 $ 20,828 $ 22,215
---------- ---------- ---------
Operating expenses:
Direct costs 17,130 10,027 10,966
Selling, general and administrative expenses 13,511 11,808 12,397
---------- ---------- ---------
Total operating expenses 30,641 21,835 23,363
---------- ---------- ---------
Operating income (loss) 928 (1,007) (1,148)
Interest income 2 15 49
Other income 117 -- --
Interest expense (687) (156) (246)
Impairment on investment -- (315) --
---------- ---------- ---------
Income (loss) before provision (benefit)
for income taxes 360 (1,463) (1,345)
Provision (benefit) for income taxes 155 (339) (400)
---------- ---------- ---------
Net income (loss) 205 (1,124) (945)
Less: Preferred dividends (30) -- --
Less: Accretion on redeemable common shares (250) -- --
---------- ---------- ---------
Net loss attributable to common shareholders $ (75) $ (1,124) $ (945)
========== ========== =========
Loss per common share - basic and diluted: $ (0.01) $ (.11) $ (.12)
========== ========== =========
Weighted average number of common shares outstanding:
Basic and diluted 11,765,619 10,138,703 7,879,744
========== ========== =========
See accompanying notes to consolidated financial statements.
F-4
FIND/SVP, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31
(in thousands, except share amount)
- --------------------------------------------------------------------------------
Capital in Deferred Total
Common Stock excess of Accumulated stock-based shareholders'
Shares Amount par value Deficit Compensation Equity
------ ------ --------- ------- ------------ ------
BALANCE AT JANUARY 1, 2001 7,605,943 $ 1 $ 5,542 $ (1,551) $ -- $ 3,992
Net loss -- -- -- (945) -- (945)
Deferred stock-based compensation -- -- 362 -- (362) --
Common stock issued 2,437,500 -- 1,443 -- -- 1,443
--------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 10,043,443 1 7,347 (2,496) (362) 4,490
Net loss -- -- -- (1,124) -- (1,124)
Exercise of stock options and warrants 108,159 -- 49 -- -- 49
Common stock issued 62,500 -- 50 -- -- 50
Stock-based compensation -- -- 27 -- 221 248
--------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 10,214,102 1 7,473 (3,620) (141) 3,713
Net income -- -- -- 205 -- 205
Exercise of stock options and warrants 742,809 -- 379 -- -- 379
Common stock issued in connection
with the Teltech acquisition 1,649,384 -- 1,663 -- -- 1,663
Common stock issued to a vendor 35,000 -- 44 -- -- 44
Preferred stock issued -- -- 193 -- -- 193
Warrants issued in connection with the
Guideline acquisition -- -- 742 -- -- 742
Warrants issued in connection with the
Teltech acquisition -- -- 763 -- -- 763
Stock-based compensation -- -- 6 -- 121 127
Preferred stock dividends -- -- (30) -- -- (30)
Accretion on redeemable common stock -- -- (250) -- -- (250)
--------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 12,641,295 $ 1 $ 10,983 $ (3,415) $ (20) $ 7,549
======================================================================================
See accompanying notes to consolidated financial statements
F-5
FIND/SVP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31
(in thousands)
2003 2002 2001
Cash flows from operating activities:
Net income (loss) $ 205 $(1,124) $ (945)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,143 939 1,087
Allowance for doubtful accounts 110 128 454
Unearned retainer income 222 (277) (318)
Deferred income taxes 105 (339) (398)
Compensation from option grants 127 248 --
Impairment on investment -- 315 --
Deferred compensation (114) 61 57
Non-cash interest 224 -- --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (2,080) (666) 651
Decrease (increase) in prepaid expenses
and other current assets 167 (120) 131
Decrease (increase) in rental asset 177 5 (206)
Decrease (increase) in cash surrender value of life insurance 408 329 (44)
Increase in other assets (394) (29) (76)
Increase (decrease) in accounts payable and accrued expenses 570 (147) (94)
------- ------- -------
Net cash provided by (used in) operating activities 870 (677) 299
------- ------- -------
Cash flows from investing activities:
Purchase of Guideline, net of related transaction costs paid (3,895) -- --
Purchase of Teltech, net of related transaction costs paid (3,075) -- --
Capital expenditures (457) (457) (304)
Repayment of notes receivable -- 138 137
------- ------- -------
Net cash used in investing activities (7,427) (319) (167)
------- ------- -------
Cash flows from financing activities:
Principal borrowings under notes payable, net of closing costs 2,786 3,230 200
Principal payments under notes payable (435) (3,243) (725)
Proceeds from exercise of stock options and warrants 152 49 --
Issuance of preferred stock 693 -- --
Issuance of warrant 1,507 -- --
Issuance of common stock 1,707 50 1,443
Increase in deferred financing fees -- (73) --
------- ------- -------
Net cash provided by financing activities 6,410 13 918
------- ------- -------
Net (decrease) increase in cash
and cash equivalents (147) (983) 1,050
Cash and cash equivalents at beginning of year 968 1,951 901
------- ------- -------
Cash and cash equivalents at end of year $ 821 $ 968 $ 1,951
======= ======= =======
See accompanying notes to consolidated financial statements.
F-6
FIND/SVP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(1) ORGANIZATION AND NATURE OF OPERATIONS
FIND/SVP, Inc. and its wholly-owned subsidiaries (collectively,
"FIND/SVP" or the "Company") provides a full range of custom
research, consulting, quantitative market research and outsourced
information services that address its customers' critical business
information needs. In many cases, the Company functions as its
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, the Company serves as a
reliable supplemental resource to customers' internal
capabilities. In addition, with its acquisitions in 2003 of
Guideline Research Corp. ("Guideline") and Teltech, as well as its
internal development of new service offerings, the Company also
provides 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.
The Company is 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 its
customers; Strategic Consulting and Research Group ("SCRG"), which
provides in-depth custom research and competitive intelligence
services for larger projects; Quantitative Market Research, 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 the financial statements
refer to the portion of assets and activities that are not
allocated to a segment.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
FIND/SVP, Inc. and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
On April 1, 2003, the Company acquired Guideline, and Guideline's
results of operations are included in results of operations from
the date of acquisition.
On July 1, 2003, the Company acquired Teltech, and Teltech's
results of operations are included in results of operations from
the date of acquisition.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts
F-7
of revenue and expenses during the reporting period. Significant
accounting estimates used relate principally to allowance for
doubtful accounts and valuation reserves on deferred tax assets.
Actual results could differ from those estimates.
EQUIPMENT, SOFTWARE DEVELOPMENT AND LEASEHOLD IMPROVEMENTS
Equipment, software development and leasehold improvements are
stated at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Electronic equipment and
computer software are primarily depreciated over five years, and
proprietary management information software system is depreciated
over ten years. Leasehold improvements are amortized by the
straight-line method over the shorter of the term of the lease or
the estimated life of the asset.
The Company recognizes software development costs on its website
development and cost tracking systems in accordance with EITF
00-02, "Accounting for Website Development Costs" and Statement of
Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Uses", respectively.
Accordingly, the Company expenses all costs incurred that relate
to the planning and post implementation phases of development.
Costs incurred in the development phase are capitalized and
recognized over the product's estimated useful life if the product
is expected to have a useful life beyond one year. Costs
associated with repair or maintenance of the existing site is
expensed as incurred. The Company has capitalized approximately
$161,000 and $136,000 of internal development and internal use
software costs incurred at December 31, 2003 and 2002,
respectively.
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 the Company 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.
Prior to adoption of SFAS No. 142, the Company amortized goodwill
on a straight-line basis, resulting in the recording of
approximately $10,000 of expense in each of the years ended
F-8
December 31, 2001 and 2000. At December 31, 2003, there is
$8,765,000 of goodwill on the balance sheet, for which no
impairment has been identified.
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. These assets are tested
for impairment if a triggering event occurs. Amortization of
intangible assets for the year ended December 31, 2003 amounted to
$83,000.
DEFERRED CHARGES
Deferred charges, included in other assets on the balance sheet,
primarily are comprised of the cost of acquired library
information files and electronic databases, which are amortized to
expense over the estimated period of benefit of three years using
the straight-line method.
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 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. 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.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing
net income (loss) by a diluted weighted average number of common
shares outstanding. Diluted net income (loss) per share reflects
the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into
common stock, unless they are anti-dilutive. In computing basic
and diluted earnings per share for the years ended December 31,
2003, 2002 and 2001, the Company used a weighted average number of
common shares outstanding of 11,765,619, 10,138,703 and 7,879,744,
respectively. In the years ended December 31, 2003, 2002 and 2001
there was no dilutive effect.
Options, warrants and redeemable convertible preferred shares,
including accrued preferred dividends, to purchase 5,117,248,
3,320,522 and 3,460,472 common shares during the years ended
December 31, 2003, 2002 and 2001, respectively, were anti-dilutive
and were therefore excluded from the computation of diluted
earnings per share.
F-9
REVENUE RECOGNITION
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 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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes all highly liquid investments
with original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating the
fair value of financial instruments:
The carrying values reported in the balance sheets for cash,
accounts receivable, prepaid expenses and other current assets,
accounts payable and accrued expenses approximate fair values.
Non-marketable equity securities are valued at the lower of
historical cost or estimated net realizable value.
F-10
The fair value of notes payable considered to be senior debt,
which approximates its carrying value, is estimated based on the
current rates offered to us for debt of the same remaining
maturities. Subordinated debt is recorded at its initial relative
fair value, and the difference between the initial relative fair
value and the stated value will be accreted as additional interest
expense over the maturities.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." The adoption of
this standard did not affect the current financial position or
results of operations of the Company.
Long-lived assets of the Company (other than goodwill,
indefinite-lived intangibles, deferred tax assets and financial
instruments) including equipment, software development and
leasehold improvements, finite-lived intangibles, rental asset,
and deferred charges, are reviewed for impairment whenever events
or changes in circumstances indicate that the net carrying amount
may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an
asset to undiscounted future net cash flows expected to be
generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
STOCK-BASED EMPLOYEE COMPENSATION COSTS
The Company applies Accounting Principles Board Opinion No. 25
when accounting for stock options, and no compensation cost is
recognized for grants made to employees or directors when the
grant price is greater than or equal to the market price of a
common share on the date of grant. Had the Company determined
compensation cost based on the fair value at the grant date for
its stock options under SFAS No. 123, "Accounting for Stock-Based
Compensation", as amended by SFAS No. 148, net loss would have
been increased to the pro forma amounts indicated below:
- ------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
Net loss, attributable to common shareholders, as reported $ (75,000) $(1,124,000) $ (945,000)
Add: Stock-based employee compensation expense
included in reported net loss, net of tax related
effects 83,000 174,000 --
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (372,000) (296,000) (299,000)
--------- ----------- -----------
Pro forma net loss $(364,000) $(1,246,000) $(1,244,000)
========= =========== ===========
Loss per share:
Basic and Diluted
As reported $(0.01) $(0.11) $(0.12)
====== ====== ======
Pro forma $(0.03) $(0.12) $(0.16)
====== ====== ======
- ------------------------------------------------------------------------------------------------------------------------------------
F-11
The per share weighted-average fair value of stock options granted
during 2003, 2002 and 2001 was $1.05, $0.96 and $0.30,
respectively. Such amounts were determined using the Black-Scholes
option pricing model with the following weighted-average
assumptions: 2003 - expected dividend yield of 0%, risk-free
interest rate of 3.24%, volatility of 107% and an expected life of
5 years; 2002- expected dividend yield of 0%, risk-free interest
rate of 6%, volatility of 111% and an expected life of 5 years;
2001 - expected dividend yield of 0%, risk-free interest rate of
6%, volatility of 93.0% and an expected life of 5 years.
Volatility is calculated over the five preceding years.
NEW ACCOUNTING PRINCIPLES
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.
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, the
Company adopted the recognition and measurement provisions of FIN
45. The adoption of this interpretation did not have a material
impact on the Company's consolidated results of operations or
financial position.
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.
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.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with
current year presentation.
(3) ACQUISITIONS
GUIDELINE
On April 1, 2003, the Company 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 the Company's efforts to address its clients' critical
business needs. The integration of Guideline's services allowed
the Company to address the requirements of its many marketing and
market research clients. The addition of Guideline will also make
the Company one of the first fully comprehensive research and
F-12
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);
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 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;
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 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.
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.
F-13
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 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.
The Company 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.
The Company will finalize its valuation of the assets and
liabilities acquired for the allocation of the purchase price of
the Guideline transaction by the end of the first quarter of 2004.
F-14
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:
o Approximately $3,075,000 paid in cash (including $17,000 of
transaction costs). As of December 31, 2003, of the $163,000
in total 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 attained.
The acquisition was funded at closing as follows:
o The Company's available cash resources
o A private placement whereby the Company raised $2,376,000
through the issuance of 1,616,685 shares of its common stock
and warrants to purchase 808,293 shares of its common stock
(the "Private Placement Warrants"). The Private Placement
Warrants are immediately exercisable for a period of three
years up to and including the close of business on July 11,
2006, after which, the Private Placement Warrants expire. The
Private Placement Warrants have an exercise price of $1.47 per
share, subject to adjustment for certain defined events to
avoid dilution.
o The receipt of $416,000 of cash (net of financing costs) from
the issuance of a $500,000 promissory note with a relative
fair value of $320,000 and warrant with a relative fair value
of $96,000.
The Company is in the process of finalizing its valuation of the
assets and liabilities it has acquired and assumed for its
allocation of the purchase price of the Teltech transaction. The
Company expects to finalize its valuation no later than the second
quarter of 2004. The Company's preliminary allocation of the
purchase price of the Guideline and Teltech acquisitions is
subject to refinement based on the final determination of fair
values.
The following table sets forth the components of the purchase
price for both the Guideline and Teltech acquisitions:
F-15
- ------------------------------------------------------------------------------------------------------------------------------
Guideline Teltech Total
--------- ------- -----
Cash paid (including transaction costs) $ 3,895,000 $ 3,075,000 $ 6,970,000
Accrued transaction costs -- 146,000 146,000
Common stock issued to sellers 760,000 50,000 810,000
---------------------------------------------------
Total purchase consideration $ 4,655,000 $ 3,271,000 $ 7,926,000
====================================================
- ------------------------------------------------------------------------------------------------------------------------------
The following table provides the preliminary estimated fair value
of the acquired assets and assumed liabilities:
- ------------------------------------------------------------------------------------------------------------------------------
Guideline Teltech Total
--------- ------- -----
Current assets $ 1,786,000 $ 1,235,000 $ 3,021,000
Property and equipment 102,000 287,000 389,000
Other assets 267,000 -- 267,000
Liabilities assumed, current (2,236,000) (3,358,000) (5,594,000)
Liabilities assumed, non-current (67,000) -- (67,000)
---------------------------------------------------
Fair value of net liabilities assumed (148,000) (1,836,000) (1,984,000)
Preliminary goodwill 4,234,000 4,456,000 8,690,000
Amortizable intangible assets 421,000 527,000 948,000
Indefinite-lived intangible assets 148,000 124,000 272,000
---------------------------------------------------
Total purchase consideration $ 4,655,000 $ 3,271,000 $ 7,926,000
====================================================
- ------------------------------------------------------------------------------------------------------------------------------
In accordance with the provisions of SFAS No. 142 "Goodwill and
other Intangible Assets", the Company will not amortize goodwill
and other intangible assets with indefinite lives recorded in
connection with the acquisitions of Guideline and Teltech. The
Company will perform an annual impairment test of goodwill and
other intangible assets, once finalized, but have not yet
determined what effect these tests will have on the results of
operations or the financial position of the Company in future
periods.
Amortizable intangible assets are amortized over a period of 7
years. Amortization of intangible assets was $83,000 for the year
ended December 31, 2003.
The unaudited pro forma information below represents consolidated
results of operations as if the acquisitions of Guideline and
Teltech had occurred as of January 1, 2003 and 2002. The unaudited
pro forma information has been included for comparative purposes
and is not indicative of the results of operations of the
consolidated Company had the acquisition occurred as of January 1,
2003 and 2002, nor is it necessarily indicative of future results.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------
TWELVE MONTHS ENDED DECEMBER 31,
2003 2002
------- --------
Total pro forma revenue $37,200,000 $ 37,975,000
Pro forma net income (loss) $ 134,000 $ (339,000)
Pro forma earnings (loss) per share attributable to common shareholders:
Basic and diluted $ 0.01 $ (0.04)
- ----------------------------------------------------------------------------------------------------------------------
F-16
On a pro forma basis, revenues are recorded primarily based on
usage, resulting in lower recognized revenue in 2003 than in 2002.
On a pro forma basis, content costs and various indirect costs
were further streamlined, resulting in greater cost synergies in
2003 than in 2002.
(4) NON-MARKETABLE EQUITY SECURITIES
In 1999, the Company entered into an agreement with idealab! and
Find.com, Inc. whereby the Company 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 the Company. Under
terms of the agreement, the Company received cash and
non-marketable preferred shares in idealab!, and are 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, the Company would retain the preferred
shares.
In January 2003, the Company exercised its put option and idealab!
declined to repurchase the preferred shares. This information was
considered in the 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!, the Company
concluded the net realizable value of its idealab! preferred
shares had declined to an estimated $185,000 at December 31, 2002,
which resulted in a charge to operations of $315,000 during the
quarter ended December 31, 2002. Based on all available
information at December 31, 2003, the Company maintains its
current valuation of the preferred stock investment in idealab! at
$185,000. 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 could be further reduced.
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. The value of this investment is zero.
(5) EQUIPMENT, SOFTWARE DEVELOPMENT AND LEASEHOLD IMPROVEMENTS, NET
At December 31, 2003 and 2002, equipment, software development and
leasehold improvements consist of the following:
- -------------------------------------------------------------------------------------
2003 2002
Furniture, fixtures and equipment $ 7,346,000 $ 6,720,000
Software development 3,072,000 2,953,000
Leasehold improvements 2,075,000 1,987,000
----------- -----------
12,493,000 11,660,000
Less: accumulated depreciation and amortization 10,125,000 9,160,000
----------- -----------
$ 2,368,000 $ 2,500,000
=========== ===========
- -------------------------------------------------------------------------------------
Depreciation expense amounted to approximately $1,016,000,
$848,000 and $969,000 for the years ended December 31, 2003, 2002
and 2001, respectively.
F-17
(6) OTHER ASSETS
At December 31, 2003 and 2002, other assets consist of the following:
- ------------------------------------------------------------------------------------
2003 2002
Deferred charges, net $ 77,000 $112,000
Security deposits 196,000 132,000
Employee loan receivable 50,000 50,000
Deferred financing fees, net 217,000 26,000
Other 14,000 --
-------- --------
$554,000 $320,000
======== ========
- -------------------------------------------------------------------------------------
Amortization of deferred charges was $44,000 and $91,000 for the
years ended December 31, 2003 and 2002, respectively. Amortization
of deferred financing fees was $42,000 and $6,000 for the years
ended December 31, 2003 and 2002, respectively, and is included in
interest expense.
(7) COMMITMENTS AND CONTINGENCIES
The Company has an operating lease agreement for its principal
offices, which expires in 2013, under which rental payments
decline over the term of the lease. Rental expense under this
lease is recorded on a straight-line basis. Rental payments
through December 31, 2003 and 2002 exceeded rental expense
recorded on this lease through such dates by $506,000 and
$741,000, respectively.
The Company has an operating lease for additional office space
that expires in 2005, under which rental payments increase over
the term of the lease. Rental expense on these leases is recorded
on a straight-line basis. Accordingly, rent recorded through
December 31, 2003 and 2002 exceeded scheduled payments through
such dates by $108,000 and $166,000, respectively.
The Company's leases of office space include standard escalation
clauses. Rental expense under leases for office space was
$1,854,000, $1,504,000 and $1,587,000 in 2003, 2002 and 2001,
respectively.
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
===============
- --------------------------------------------------------------------------------
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 1 - 3 3 - 5 After 5
Total 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
========================================================================
- -------------------------------------------------------------------------------------------------------------
See Note 3 for information regarding contingent payments related
to the acquisitions of Guideline and Teltech. See Note 8 for
information related to accrued severance and retirement amounts.
See Note 9 for information related to notes payable. See Note 13
for information related to Deferred Compensation.
F-18
(8) ACCRUED EXPENSES
Accrued expenses at December 31, 2003 and 2002 consisted of the
following:
- --------------------------------------------------------------------------------
2003 2002
Accrued bonuses and employee benefits $ 790,000 $ 327,000
Accrued expenses incurred on behalf of clients 282,000 27,000
Accrued SVP royalty 1,048,000 954,000
Accrued severance 449,000 211,000
Other accrued expenses 636,000 230,000
------------------------
$3,205,000 $1,749,000
========================
- --------------------------------------------------------------------------------
On November 12, 2003, the Company's President and Founder, Andrew
Garvin, announced he would be retiring as of December 31, 2003.
Mr. Garvin will continue to serve his term on the Board of
Directors, and will be a consultant to the Company in 2004. In the
fourth quarter of 2003, the Company recorded a charge of
approximately $309,000 triggered by Mr. Garvin's retirement, and
consisting of certain early-retirement benefits provided for in
his employment agreement as well as certain other negotiated
benefits. Payments will be completed by the end of September 2004.
During 2003 and 2002, the Company recorded additional accruals of
$196,000 and $257,000, respectively, under a severance plan
approved by the Board of Directors and communicated to employees.
In 2003, the Company paid $268,000 related to both severance
plans. As of December 31, 2003, a balance of $140,000 remains
accrued. Payments related to the remaining severance accrual at
December 31, 2003 will be completed by the end of October 2004.
(9) NOTES PAYABLE
Notes payable as of December 31, 2003 and 2002 consist of the
following:
- ------------------------------------------------------------------------------------------------------
2003 2002
Bank borrowings under Term Note $1,200,000 $1,600,000
Bank borrowings under Line of Credit 676,000 176,000
Borrowings under debt agreements with investors:
$3,000,000 Promissory Note, net of unamortized
discount of $968,000 as of December 31, 2003, due
December 31, 2008 2,032,000 --
$500,000 Promissory Note, net of unamortized
discount of $162,000 as of December 31, 2003, due
December 31, 2008 338,000 --
Note payable to landlord, due 2003 -- 30,000
----------- -----------
Total notes payable 4,246,000 1,806,000
Less current installments 1,076,000 606,000
----------- -----------
Notes payable, excluding current
installments $3,170,000 $1,200,000
=========== ===========
- ------------------------------------------------------------------------------------------------------
F-19
DEBT AGREEMENTS WITH BANK
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 beginning March 31, 2002. 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.
The Company maintains 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. Interest expense
related to the Line of Credit amounted to $14,000 for the year
ended December 31, 2003. The Line of Credit contains certain
restrictions on the conduct of its business, including, among
other things, restrictions, generally, on incurring debt, and
creating or suffering liens.
The Term Note and Line of Credit are secured by a general security
interest in substantially all of the Company's assets.
On April 1, 2003, the Company amended and restated the Term Note
and 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 moving up the
final repayment date of the Term Note from December 31, 2006 to
December 31, 2005. As a result, the Company will have a $500,000
balloon payment due at December 31, 2005 instead of making
payments of $100,000 each quarter in 2006. In addition, JP Morgan
Chase Bank consented to the acquisition of Guideline Research
Corp. ("Guideline") and the related financing transactions with
Petra Mezzanine Fund, L.P. ("Petra"), and amended various
financial covenants of both the Term Note and 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 JPMorgan Chase Bank: (i) a security
agreement (the "Subsidiary Security Agreement"), granting a lien
and security interest on substantially all of the Company's
assets; and (ii) a guaranty agreement (the "Guaranty Agreement"),
guaranteeing the Company's payment and performance obligations
under the Term Note and the Line of Credit.
On November 13, 2003, the Company 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
F-20
$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.
The Company is in compliance with all of its loan agreements, as
amended, with JP Morgan Chase as of December 31, 2003.
DEBT AGREEMENTS WITH INVESTORS
On April 1, 2003, the Company issued a Promissory Note (the
"Note") 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 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. The Company has 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.
The Company is in compliance with this loan agreement as of
December 31, 2003.
On July 1, 2003, the Company issued a Second Promissory Note (the
"Second Note") 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. The Company has 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. The Company is in compliance with this loan agreement as of
December 31, 2003.
Prior to their repayment in February 2002, the Company 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.
The aggregate principal maturities of notes payable for the next
five years, including full amortization of discounts, are as
follows:
F-21
- --------------------------------------------------------------------------------
Year Ending December 31,
2004 $ 1,076,000
2005 800,000
2006 1,167,000
2007 1,167,000
2008 1,166,000
Thereafter --
--------------
$ 5,376,000
=============
- --------------------------------------------------------------------------------
(10) SHAREHOLDERS' EQUITY
SALE OF COMMON STOCK
During 2003, the Company issued 2,255,621 shares. Cash proceeds
received for stock issuances during 2003 totaled approximately
$2,376,000. Of the amount issued in 2003, 571,237 shares were
deemed redeemable common stock and is classified as mezzanine
equity. See Note 3 "Acquisitions" in connection with the Guideline
acquisition.
In November 2001, the Company issued 2,437,500 shares for net cash
proceeds of $1,443,000, after transaction costs of $557,000. This
transaction resulted in a triggering of the change in control
provisions of certain employment and severance agreements (see
Note 13).
COMMON STOCK WARRANTS
During 2003, warrants to purchase 1,553,293 of the Company's
common shares were issued at exercise prices ranging from $0.01 to
$1.47, with an aggregate recorded value of $1,505,000.
At December 31, 2003 and 2002, warrants to purchase 2,125,515 and
572,222, respectively, of the Company's common shares remain
outstanding.
STOCK OPTION PLAN
At the Annual Meeting of Shareholders held on June 12, 2003,
shareholders ratified and approved the FIND/SVP, Inc. 2003 Stock
Incentive Plan (the "2003 Incentive Plan"), which was adopted by
the Company's Board of Directors on April 30, 2003. The 2003
Incentive Plan authorizes the issuance of up to 1,500,000 shares
of the Company's Common Stock upon the exercise of stock options
or in connection with the issuance of restricted stock and stock
bonuses. Options granted under our other equity plans remain
outstanding according to their terms.
The Company's 1996 Stock Option Plan (the "1996 Plan"), as amended
in 1998, 2000 and 2001, authorizes grants of options to purchase
up to 3,500,000 shares of common stock, issuable to employees,
directors and consultants of the Company.
The options to be granted under both plans will be designated as
incentive stock options or non-incentive stock options by our
Board of Directors' Stock Option Committee. Options granted under
both plans are exercisable during a period of no more than ten
years from the date of the grant (five years for options granted
to holders of 10% or more of the outstanding shares of common
stock). All options outstanding at December 31, 2003 expire within
the next ten years
F-22
if not exercised. Options that are cancelled or expire during the
term of both plans are eligible to be re-issued under both plans
and, therefore, are considered available for grant.
Activity under the stock option plans is summarized as follows:
- --------------------------------------------------------------------------------
Weighted
Available average
for Options exercise
grant granted price
--------- ------- --------
January 1, 2001 475,500 1,275,650 $1.74
Additional authorized 1,850,000 -- --
Granted (1,872,050) 1,872,050 0.49
Exercised -- -- --
Cancelled 259,450 (259,450) 1.84
No longer available under 1986 Plan (166,200) -- --
---------- ---------- -----
December 31, 2001 546,700 2,888,250 0.92
Granted (353,000) 353,000 1.10
Exercised -- (142,850) 0.76
Cancelled 350,100 (350,100) 1.99
---------- ---------- -----
December 31, 2002 543,800 2,748,300 0.82
Additional authorized 1,500,000 -- --
Granted (892,500) 892,500 1.32
Exercised -- (742,262) 0.39
Cancelled 260,138 (260,138) 1.13
---------- ---------- -----
December 31, 2003 1,411,438 2,638,400 $1.06
========== ========== =====
Exercisable at December 31, 2003 1,488,495 $1.12
========== =====
Exercisable at December 31, 2002 1,351,724 $0.92
========== =====
Exercisable at December 31, 2001 863,779 $1.25
========== =====
- --------------------------------------------------------------------------------
During 2003, options to purchase 892,500 shares of common stock
were granted under the 1996 Plan and the 2003 Incentive Plan at
prices ranging from $1.15 to $1.80, including 412,500
non-recurring option grants related to the acquisitions of
Guideline and Teltech. The options issued qualified as incentive
stock options whereby the price of the options were at fair market
value at the time of grant.
Stock options were granted in November 2001 for future services to
be rendered to the Company by the Chief Executive Officer, the
Chairman and a consultant. In 2003, our Board approved the
acceleration of the vesting of 105,000 and 117,000 options granted
to the Chairman and CEO, respectively, which the CEO and Chairman
then exercised for cash.
As of December 31, 2003, there were 2,638,400 options outstanding,
having exercise prices ranging from $0.41 to $3.6875, with an
average remaining contractual life of 6.87 years. As of December
31, 2003, there were 1,488,495 exercisable options, having
exercise prices ranging from $0.41 to $3.6875, with an average
remaining contractual life of 6.81 years.
F-23
REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has authorized preferred stock consisting of 2,000,000
shares at $.0001 par value. At December 31, 2003, there were
333,333 shares of redeemable convertible preferred stock
outstanding. See footnote (3) "Acquisitions" for a further
explanation of redeemable convertible preferred stock issued
during 2003 in connection with the Guideline acquisition.
(11) SVP INTERNATIONAL
The Company has an agreement with SVP International S.A. ("SVP
International"), a subsidiary of Amalia S.A. Prior to November
2001, SVP International and its affiliates owned 37% of the common
shares of the Company. The agreement provides that SVP
International will aid and advise us in the operation of an
information service and permit access to other global SVP
information centers, and the use of the SVP trademark and logo.
The agreement shall continue in perpetuity, unless amended by the
parties. The Company pays royalties to SVP International computed
using a formula based on percentages of service and product
revenues, subject to certain limitations, as defined.
Royalty expense under the agreement was $117,000, $133,000 and
$118,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
The Company receives and renders information services to other
members of the SVP network. Charges for such services are made at
rates similar to those used for other clients. As of December 31,
2003 and 2002, the Company's net liability to SVP International
was $497,000 and $427,000, respectively.
(12) INCOME TAXES
The provision (benefit) for income taxes consists of the
following:
- --------------------------------------------------------------------------------
2003 2002 2001
Current:
Federal $ 114,000 $ -- $ --
State and local 41,000 -- --
---------------------------------------
$ 155,000 -- --
---------------------------------------
Deferred:
Federal -- (455,000) (348,000)
State and local -- (127,000) (52,000)
---------------------------------------
(582,000) (400,000)
Change in valuation allowance
-- 243,000 --
---------------------------------------
-- (339,000) (400,000)
---------------------------------------
$ 155,000 $(339,000) $(400,000)
========================================
- --------------------------------------------------------------------------------
In 2002, a valuation allowance was provided for certain state and
local carryforward net operating losses, as the Company determined
that it was more likely than not that such assets would not be
realized during the carryforward period. It is reasonably possible
that future valuation allowances will need to be recorded if the
Company is unable to generate sufficient future taxable income to
realize such deferred tax assets during the carryforward period.
F-24
Income tax provision (benefit) differs from the amount computed by
multiplying the statutory rate of 34% to income before income
taxes due to the following:
- -------------------------------------------------------------------------------------------------------
2003 2002 2001
Income tax provision (benefit) at statutory rate $ 126,000 $(494,000) $(457,000)
Increase (reduction) in income taxes resulting
from:
Change in valuation allowance -- 243,000 --
State and local taxes (benefit), net of
federal income tax benefit 26,000 (127,000) (52,000)
Taxable (nontaxable) income resulting from decrease
(increase) in cash surrender value of life insurance (17,000) -- --
Nondeductible expenses 20,000 22,000 66,000
Other -- 17,000 43,000
--------- --------- ---------
$ 155,000 $(339,000) $(400,000)
========= ========= =========
- -------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets, net of deferred
tax liabilities at December 31, 2003 and 2002 are presented below:
- ----------------------------------------------------------------------------------
2003 2002
Deferred tax assets:
Federal net operating loss carryforwards $ 407,000 $ 653,000
State and local net operating loss carryforwards 315,000 402,000
Deferred compensation 137,000 184,000
Royalty expenses 103,000 179,000
Depreciation and amortization 337,000 139,000
Stock compensation expense 49,000 104,000
Write-down of non-marketable equity securities 132,000 132,000
Severance and separation charges 140,000 --
Accrued bonus 81,000 --
Deferred tax assets acquired from Guideline 50,000 --
Other, net 87,000 46,000
----------- -----------
Deferred tax asset 1,838,000 1,839,000
Valuation allowance (243,000) (243,000)
----------- -----------
Net deferred tax asset 1,595,000 1,596,000
Less current portion 505,000 272,000
----------- -----------
Net deferred tax asset, excluding current portion $ 1,090,000 $ 1,324,000
=========== ===========
- ----------------------------------------------------------------------------------
Of the net deferred tax asset, $505,000 and $272,000 as of
December 31, 2003 and 2002, respectively, are classified as
current.
Federal net operating loss carryforwards expire from 2020 to 2021.
Of the state and local tax loss carryforward assets, approximately
$215,000 expire in 2012, with the remainder expiring from 2020 to
2021.
F-25
(13) EMPLOYEE BENEFITS AND DEFERRED COMPENSATION
EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) and profit sharing plan under which
eligible participants may elect to defer eligible compensation up
to governmental limitations. The Company contributes 20% of the
employees' contributions up to 1% of their annual compensation and
may contribute additional profit sharing amounts at its
discretion. Expense relating to the 401(k) and profit sharing plan
was $104,000, $79,000 and $88,000 for the years ended December 31,
2003, 2002 and 2001, respectively.
DEFERRED COMPENSATION
The Company has a deferred compensation arrangement with Andrew
Garvin, the founder and former President of the Company. In
November 2003, Mr. Garvin announced his early retirement as of
December 31, 2003. The Company has revised the calculation of Mr.
Garvin's accrued deferred compensation to reflect his announced
date of retirement. Accordingly, the Company reduced the liability
for accrued deferred compensation by $146,000 in the quarter ended
September 30, 2003. After this adjustment, the present value of
the obligation is approximately $243,000 at December 31, 2003,
which will be paid over the contractual term of 10 years.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with David Walke, the CEO
of the Company, which expires in November 2004. The employment
agreement provides for the issuance of 700,000 options to purchase
shares of the Company's common stock. The options are to vest
ratably over the first three years of the term of the employment
agreement, and such vesting shall accelerate and vest immediately
upon certain conditions. The employment agreement also contains
certain severance provisions entitling the CEO to receive
compensation and certain benefits for various lengths of time upon
termination without cause, or voluntary termination upon certain
conditions, which includes the acquisition by a party of 30% or
more of the outstanding shares of common stock of the Company or a
change in the majority of incumbent Board members, and certain
other occurrences.
The Company has an employment agreement with Peter Stone, the CFO
of the Company, which expires in May 2005. The employment
agreement provides for the issuance of 75,000 options to purchase
shares of the Company's common stock. The options are to vest
ratably over the first three years of the term of the employment
agreement, and such vesting shall accelerate and vest immediately
upon certain conditions. The employment agreement also contains
certain severance provisions entitling the CFO to receive
compensation and certain benefits for various lengths of time upon
termination without cause, or voluntary termination upon certain
conditions, which includes the
F-26
acquisition by a party of 30% or more of the outstanding shares of
common stock of the Company and certain other occurrences.
The Company has an employment agreement with Martin Franklin, the
Chairman of the Board of Directors of the Company, which expires
in November 2004. The employment agreement provides for the
issuance of 630,000 options to purchase shares of the Company's
common stock. The options are to vest ratably over the term of the
employment agreement, and such vesting shall accelerate and vest
immediately upon certain conditions, which includes the
acquisition by a party of 30% or more of the outstanding shares of
common stock of the Company or a change in the majority of
incumbent Board members, or upon his termination of employment
without cause or upon his death or disability.
A severance arrangement for one member of the Operating Management
Group ("OMG") was authorized by the Board of Directors on January
25, 1999. In the event of certain changes of control, the
severance agreement with this member of the OMG would be
triggered. The agreement provides for (a) a normal severance
benefit for one (1) year in the event the employee's services are
terminated without cause, and (b) a severance benefit of one (1)
year in the event the separation from service is due to (i) a
change in control, and (ii) the employee suffers, within one (1)
year thereafter, either (A) a discontinuation of duties, or (B) an
office change of at least 50 miles, or (C) a reduction in
compensation, or (D) a termination of employment other than for
cause. Following the change in control in November 2001, the
Company estimated at December 31, 2001 that $134,000 would be
payable under these provisions. In March 2002, the Company accrued
an additional liability of $188,000 related to contractual
severance payments due to the former Chief Financial Officer, a
former member of the OMG. Severance benefits relating to the
resignation of our former Chief Financial Officer were reduced by
$93,000 during the quarter ended September 30, 2002, as the result
of a revised and signed agreement between the Company and the
former Chief Financial Officer.
Pursuant to the employment agreements described above, salary
commitments for the next five years are as follows:
- -------------------------------------------------------------------------------
Year ending December 31,
2004 $ 400,000
2005 81,000
2006 --
2007 --
2008 --
------------
Total salary commitments $ 481,000
============
- -------------------------------------------------------------------------------
(14) SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes during the years ended
December 31, 2003, 2002 and 2001 was as follows:
- --------------------------------------------------------------------------------
2003 2002 2001
Interest $447,000 $217,000 $236,000
======== ======== ========
Income taxes $ 49,000 $ 6,000 $ 12,000
======== ======== ========
- --------------------------------------------------------------------------------
Non-cash operating activities:
In January 2003, the Company issued 35,000 shares of the Company's
common stock to a vendor, valued at approximately $44,000.
Non-cash financing activities:
In connection with the Guideline acquisition, the Company issued
571,237 unregistered shares of the Company's common stock that
were fair valued at $760,000, redeemable at the option of the
holder during a specified period of time (see Note 3).
F-27
In connection with the Teltech acquisition, the Company issued
32,700 unregistered shares of the Company's common stock that were
fair valued at $50,000 (see Note 3).
During 2003, the Company recorded preferred dividends of $30,000.
During 2003, the Company recorded accretion on redeemable common
shares, issued in connection with the Guideline acquisition, of
$250,000.
In September 2003, the Company purchased certain equipment under a
capital lease arrangement for approximately $48,000, with payments
on a monthly basis over a 48-month period commencing October 1,
2003.
During 2003, the Company recorded the cashless exercise of 83,663
options at prices ranging from $0.62 to $1.062, in exchange for
44,312 shares of common stock at prices ranging from $1.25 to
$1.90. Such shares were held for a period of at least six months
before the respective exchange. The value of these transactions
was $76,000.
During 2002, the Company recorded the cashless exercise of 79,000
options at prices ranging from $0.50 to $1.062, in exchange for
34,691 shares of common stock at prices ranging from $1.40 to
$1.71. Such shares were held for a period of at least six months
before the respective exchange. The value of these transactions
was $59,000.
F-28
(15) SEGMENT REPORTING
The Company manages its consulting and business advisory services
in the following four business segments: Quick Consulting ("QCS"),
Strategic Consulting ("SCRG"), Quantitative Market Research and
Teltech. The Company operates primarily in the United States.
Quantitative Market Research was added as a segment as a result of
the acquisition of Guideline on April 1, 2003. Teltech was added
as a segment as a result of its acquisition by the Company on July
1, 2003. See footnote 3 "Acquisitions" for a more detailed
description of these acquisitions. References to "Corporate" and
"Other" in our financial statements refer to the portion of assets
and activities that are not allocated to a segment.
- -----------------------------------------------------------------------------------
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, the Company changed its internal overhead allocation
methodology, which resulted in greater amounts of corporate overhead
being allocated to the business segments in order to better gauge
each segments contribution to profitability. Also, the acquisitions
of Guideline
F-29
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
=============================
- -----------------------------------------------------------------------------------------------------
(16) UNAUDITED QUARTERLY 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
before (loss) Income Income
Operating provision attributable (loss) 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)
- --------------------------------------------------------------------------------
As discussed in Note 8, in the fourth quarter of 2003, the Company
recorded a charge to operations of $309,000 related to the retirement
of the Company's President. Also, the Company recorded a charge of
$127,000 related to severance payments to be made to 5 former
employees.
F-30
Approximately $95,000 was recorded related to bonus and commission
arrangements in the quarter ended December 31, 2003.
F-31
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE
To the Board of Directors and Shareholders of FIND/SVP, Inc.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule listed in the
table of contents on page F-1 is presented for the purpose of additional
analysis and is not a required part of the basic financial statements. This
schedule is the responsibility of the Company's management. Such schedule has
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects when considered in relation to the basic financial statements taken as
a whole.
/s/ Deloitte & Touche LLP
New York, New York
March 25, 2004
F-32
SCHEDULE II
FIND/SVP, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 2003, 2002 and 2001
(in thousands of dollars)
Balance at Additions
Beginning Charged to Write offs Balance At
Classification of Year Earnings (recoveries) End of Year
------- -------- ------------ -----------
Year ended December 31, 2003:
Allowance for doubtful accounts $150 $110 $(11) $271
==== ==== ==== ====
Year ended December 31, 2002:
Allowance for doubtful accounts $126 $128 $104 $150
==== ==== ==== ====
Year ended December 31, 2001:
Allowance for doubtful accounts $101 $454 $429 $126
==== ==== ==== ====
F-33