-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ki2EeMA8VSgctHyyd+HhrazaBCaWd/l6Z3lfTE2Ql3tdtGEWtWux8CfDmp6ebYw2 gHHcB1Sp7/NJGfqFD4y9Ow== 0000930413-03-003313.txt : 20031113 0000930413-03-003313.hdr.sgml : 20031113 20031113171921 ACCESSION NUMBER: 0000930413-03-003313 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIND SVP INC CENTRAL INDEX KEY: 0000801338 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT [8700] IRS NUMBER: 132670985 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-75828 FILM NUMBER: 03999229 BUSINESS ADDRESS: STREET 1: 625 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10011 BUSINESS PHONE: 2126454500 10-Q 1 c29845_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD_____________ TO _____________ -------------------------------------- Commission file no.0-15152 ------- FIND/SVP, INC. ----------------------------------------------------------------- (Exact name of Registrant as specified in its charter) New York 13-2670985 -------------------------- --------------------- (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification no.) 625 Avenue of the Americas, New York, NY 10011 --------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (212) 645-4500 -------------- 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 whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES NO X ----------- ----------- Number of shares of Common Stock, $.0001 par value per share outstanding at November 5, 2003: 13,198,982 FIND/SVP, INC. AND SUBSIDIARIES Index Page PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets 3 September 30, 2003 and December 31, 2002 Condensed Consolidated Statements of Operations 4 Nine Months Ended September 30, 2003 and 2002 Condensed Consolidated Statements of Operations 5 Three Months Ended September 30, 2003 and 2002 Condensed Consolidated Statements of Cash Flows 6 Nine Months Ended September 30, 2003 and 2002 Notes to Condensed Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and 19 Results of Operations ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 28 ITEM 4. Controls and Procedures 28 PART II. OTHER INFORMATION ITEM 2. Changes in Securities and Use of Proceeds 29 ITEM 5. Other Information 29 ITEM 6. Exhibits and Reports on Form 8-K 29 SIGNATURES 31 INDEX TO EXHIBITS 32 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FIND/SVP, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (unaudited) (in thousands, except share and per share data)
September 30, December 31, 2003 2002 ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 1,368 $ 968 Accounts receivable, net 5,501 1,953 Deferred tax assets 312 272 Prepaid expenses and other current assets 977 948 -------- -------- Total current assets 8,158 4,141 Equipment and leasehold improvements, at cost, less accumulated depreciation and amortization of $9,295 in 2003 and $8,626 in 2002 2,355 2,334 Other assets: Goodwill, net 10,229 75 Deferred tax assets 1,143 1,324 Rental asset 428 575 Cash surrender value of life insurance 241 418 Non-marketable equity securities 185 185 Other assets 726 486 -------- -------- $ 23,465 $ 9,538 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of notes payable $ 827 $ 606 Trade accounts payable 2,549 353 Accrued expenses and other 3,203 1,749 Unearned retainer income 4,231 1,476 -------- -------- Total current liabilities 10,810 4,184 -------- -------- Notes payable 3,189 1,200 Deferred compensation and other liabilities 354 441 Commitments and contingencies Redeemable, convertible, Preferred stock, $.0001 par value Authorized 2,000,000 shares; issued and outstanding 333,333 at September 30, 2003 and zero at December 31, 2002 520 -- Redeemable common stock, $.0001 par value, issued and outstanding 571,237 at September 30, 2003 and zero at December 31, 2002 997 -- Shareholders' equity: Common stock, $.0001 par value. Authorized 100,000,000 shares; issued and outstanding 13,230,502 at September 30, 2003 and 10,214,102 at December 31, 2002 2 1 Capital in excess of par value 10,933 7,332 Accumulated deficit (3,340) (3,620) -------- -------- Total shareholders' equity 7,595 3,713 -------- -------- $ 23,465 $ 9,538 ======== ========
See accompanying notes to condensed consolidated financial statements 3 FIND/SVP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (unaudited) Nine months ended September 30 (in thousands, except share and per share data)
2003 2002 ---- ---- Revenues $ 21,333 $ 15,479 ------------- ------------- Operating expenses: Direct costs 11,358 7,698 Selling, general and administrative expenses 9,164 8,582 ------------- ------------- Operating income (loss) 811 (801) Other income 93 56 Interest expense (424) (118) ------------- ------------- Income (loss) before (provision) benefit for income taxes 480 (863) (Provision) benefit for income taxes (200) 258 ------------- ------------- Net income (loss) 280 (605) Less: Preferred dividends (20) -- Less: Accretion on redeemable common shares (270) -- ------------- ------------- Net loss attributable to common shareholders $ (10) $ (605) ============= ============= Loss per common share: Basic and diluted $ 0.00 $ (0.06) ============= ============= Weighted average number of common shares: Basic and diluted 11,324,055 10,132,731 ============= =============
See accompanying notes to condensed consolidated financial statements. 4 FIND/SVP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (unaudited) Three months ended September 30 (in thousands, except share and per share data)
2003 2002 ---- ---- Revenues $ 9,168 $ 5,209 ------------- ------------- Operating expenses: Direct costs 5,077 2,491 Selling, general and administrative expenses 3,320 2,605 ------------- ------------- Operating income 771 113 Other income 1 8 Interest expense (207) (42) ------------- ------------- Income before provision for income taxes 565 79 Provision for income taxes (226) (24) ------------- ------------- Net income 339 55 Less: Preferred dividends (20) -- Less: Accretion on redeemable common shares (123) -- ------------- ------------- Net income attributable to common shareholders $ 196 $ 55 ============= ============= Earnings per common share: Basic $ 0.02 $ 0.01 ============= ============= Diluted $ 0.01 $ 0.00 ============= ============= Weighted average number of common shares: Basic 12,934,120 10,200,680 ============= ============= Diluted 15,048,190 11,583,601 ============= =============
See accompanying notes to condensed consolidated financial statements. 5 FIND/SVP, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (unaudited) Nine months ended September 30 (in thousands)
2003 2002 ---- ---- Net cash provided by (used in) operating activities $ 1,488 $ (1,923) ----------- ----------- Cash flows from investing activities: Purchase of Guideline Research Corp., including transaction costs, and net of cash acquired (3,942) -- Purchase of Teltech, including transaction costs (3,071) Capital expenditures (316) (264) Repayment of note receivable -- 28 ----------- ----------- Net cash used in investing activities (7,329) (236) ----------- ----------- Cash flows from financing activities: Principal borrowings under notes payable, net of closing costs 2,536 3,030 Principal payments under notes payable (335) (2,075) Issuance of preferred stock 693 -- Issuance of warrant 838 -- Issuance of common stock 2,376 Proceeds from exercise of stock options 133 82 ----------- ----------- Net cash provided by financing activities 6,241 1,037 ----------- ----------- Net increase (decrease) in cash and cash equivalents 400 (1,122) Cash and cash equivalents at beginning of period 968 1,951 ----------- ----------- Cash and cash equivalents at end of period $ 1,368 $ 829 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 113 $ 105 =========== =========== Taxes paid $ -- $ 1 =========== ===========
See accompanying notes to condensed consolidated financial statements. 6 FIND/SVP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) A. MANAGEMENT'S STATEMENT In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position at September 30, 2003, the results of operations for the nine and three month periods ended September 30, 2003 and 2002, and cash flows for the nine months ended September 30, 2003 and 2002. All such adjustments are of a normal and recurring nature. Operating results for the nine and three month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. FIND/SVP, Inc. and its subsidiaries (the "Company") have reclassified certain prior year balances to conform with the current year presentation. References in this report to "we," "us," or "our" refer to FIND/SVP, Inc. and its subsidiaries. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2002 included in the Company's 2002 Annual Report on Form 10-K/A. B. REVENUE RECOGNITION Revenues from retainer arrangements that are based on a fixed fee are recognized ratably over the contractual period. Revenues from retainer arrangements that are based on a unit of service are recognized as units of service are performed. Revenues from projects are recognized in proportion to the level of service performed in relation to the project's estimated total level of service to be completed. Revenues from publications are recognized on a subscription basis as issues are delivered. Revenues include certain out-of-pocket and other expenses billed to clients. C. EARNINGS (LOSS) PER COMMON SHARE Basic earnings (loss) per common share is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per common share is computed by dividing net income (loss) attributable to common shareholders by a diluted weighted average number of common shares outstanding. Diluted earnings (loss) per common 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. 7 The table below sets forth the number of common shares used in computing basic and diluted earnings (loss) per share.
- --------------------------------------------------------------------------------------------------------------- Nine months ended Three months ended September 30, September 30, 2003 2002 2003 2002 ---------------------------------------------------------------- Basic number of common shares 11,324,055 10,132,731 12,934,120 10,200,680 ================================================================ Effect of dilutive securities: Warrants -- -- 986,681 138,685 Convertible preferred stock -- -- 13,892 -- Stock options -- -- 1,113,497 1,244,236 ---------------------------------------------------------------- Diluted number of common shares 11,324,055 10,132,731 15,048,190 11,583,601 ================================================================ - ---------------------------------------------------------------------------------------------------------------
Warrants to purchase 150,000 shares of common stock at $2.25 per share were outstanding during the three months ended September 30, 2003 and 2002, and options to purchase 149,000 shares of common stock at prices ranging from $2.22 to $3.69 per share, and options to purchase 222,250 shares of common stock at prices ranging from $1.22 to $3.69 per share were outstanding during the three months ended September 30, 2003 and 2002, respectively, but were not included in the computation of diluted EPS because the warrants' and options' exercise price was greater than the average market price of the common shares. Warrants, convertible preferred shares, and options to purchase 5,054,481 and 3,417,622 shares of common stock were outstanding during the nine months ended September 30, 2003 and 2002, respectively, but were not included in the computation of diluted EPS because the Company had a net loss attributable to common shareholders during these periods. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123." This statement amends SFAS No. 123 by providing alternative methods of adopting the fair-value method of accounting for stock-based compensation, if an entity elects to discontinue using the intrinsic-value method of accounting permitted in Accounting Principles Board (APB) Opinion No. 25. One of these adoption methods, under which a prospective adoption of the fair-value method would be permitted without the need for a cumulative restatement of prior periods, is only available to the Company if adopted in 2003. Management continues to study whether it will continue to account for stock-based compensation under APB No. 25 or whether it will adopt SFAS No. 123 as amended. 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, the Company's net loss would have been increased to the pro forma amounts indicated below: 8
- --------------------------------------------------------------------------------------------------------------------------------- THREE NINE MONTHS NINE MONTHS THREE MONTHS MONTHS ENDED ENDED ENDED ENDED SEPTEMBER SEPTEMBER SEPTEMBER 30, SEPTEMBER 30, 2003 30, 2002 2003 30, 2002 Net income (loss) attributable to common shareholders, as reported $ (10,000) $ (605,000) $ 196,000 $ 55,000 Add: Stock based employee compensation expense included in reported net loss, net of tax related effects 77,000 140,000 29,000 47,000 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (321,000) (367,000) (107,000) (122,000) -------------------------------------------------------------------------------- Pro forma net income (loss) attributable to common shareholders $ (254,000) $ (832,000) $ 118,000 $ (20,000) ================================================================================ Earnings (loss) per share: As reported Basic $ 0.00 $ (0.06) $ 0.02 $ 0.01 ============ ============ =========== ============ Diluted $ 0.00 $ (0.06) $ 0.01 $ 0.00 ============ ============ =========== ============ Pro forma Basic $ (0.02) $ (0.08) $ 0.01 $ 0.00 ============ ============ =========== ============ Diluted $ (0.02) $ (0.08) $ 0.01 $ 0.00 ============ ============ =========== ============ - ---------------------------------------------------------------------------------------------------------------------------------
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 109% 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. D. INVESTMENTS PARTNERSHIP INTEREST The Company has a 9.1% interest in a limited partnership, and in March 2003, received an $87,000 distribution. This is the first distribution that the Company has received from this partnership interest, and the distribution was recognized as other income during the nine months ended September 30, 2003. E. DEBT As of September 30, 2003, there was $1,300,000 outstanding on a term note with JP Morgan Chase Bank (the "Term Note"), of which $400,000 is classified as current. Interest expense related to the Term Note amounted to $62,000 for the nine months ended September 30, 2003. The Term Note contains 9 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"). As of September 30, 2003, $427,000 remains outstanding. The Line of Credit contains certain restrictions on the conduct of our business, including, among other things, restrictions, generally, on incurring debt, and creating or suffering liens. The Company's 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 Company's 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 $3,300,000 with a consolidated tangible net worth plus subordinated debt covenant of $2,300,000. Furthermore, on November 13, 2003, the covenant to compute the ratio of current assets to current liabilities under the Term Note and Line of Credit was waived as of September 30, 2003. 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 believes it is in compliance with all of its loan agreements, as amended, with JP Morgan Chase as of September 30, 2003. 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 30%. Related interest expense was $307,000 and $156,000 for 10 the nine and three month periods ended September 30, 2003, respectively, of which $106,000 and $55,000 related to the non-cash accretion of the carrying value of the Note for the nine and three month periods ended September 30, 2003, respectively. 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 the Company's 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 believes it was in compliance with this loan agreement as of September 30, 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 30%. Related interest expense was $26,000 for the nine and three-month periods ended September 30, 2003, of which $9,000 related to the non-cash accretion of the carrying value of the Second Note for the nine and three-month periods ended September 30, 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 the Company's business including financial covenants related to a defined fixed charge coverage and a defined funded indebtedness to EBITDA ratio. The Company believes it was in compliance with this loan agreement as of September 30, 2003. F. INCOME TAXES The $200,000 income tax provision for the nine months ended September 30, 2003 represents 42% of the income before provision for income taxes. The $226,000 income tax provision for the three months ended September 30, 2003 represents 40% of the income before provision for income taxes. The $258,000 income tax benefit for the nine months ended September 30, 2002 and $24,000 income tax provision for the three months ended September 30, 2002, represent 30% of the income/loss before provision/benefit for income taxes. The difference between these rates and the statutory rate primarily relates to expenses that are not deductible for income tax purposes. Of the net deferred tax asset, $312,000 and $272,000 are classified as current as of September 30, 2003 and December 31, 2002, respectively. G. 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 adoption of this Statement 11 is not expected to have a material impact on the Company's consolidated results of operations or financial position. H. STOCK OPTIONS During the nine month period ended September 30, 2003, options to purchase 621,000 shares of common stock were granted under the Company's Stock Option Plans, at prices ranging from $1.15 to $1.55, a substantial portion of which were one-time issuances to Guideline and Teltech employees in connection with the Company's acquisitions of Guideline and Teltech. During the nine month period ended September 30, 2002, options to purchase 321,750 shares of common stock were granted under the Company's Stock Option Plan, at prices ranging from $0.83 to $1.50. Stock options were granted in November 2001 for future services to be rendered to the Company by the Chief Executive Officer ("CEO"), the Chairman and a consultant. In 2003, the Company's Board approved the acceleration of the vesting of 117,000 and 105,000 options granted to the CEO and Chairman, respectively. This action was taken to generate additional funds at the time of the Company's acquisition of Teltech. Compensation expense related to such grants is amortized over the vesting period of the options and was $110,000 and $200,000 and $41,000 and $68,000 for the nine and three-month periods ended September 30, 2003 and 2002, respectively. At the Company's 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 the Company's other equity plans remain outstanding according to their terms. During the nine month period ended September 30, 2003, options to purchase 77,500 shares of common stock were granted under the 2003 Incentive Plan, at prices ranging from $1.47 to $1.55. I. SEGMENT REPORTING The Company manages its consulting and business advisory services in the following four business segments: Quick Consulting ("QCS"), Strategic Consulting ("SCRG"), Guideline Research ("Guideline") and Teltech. The Company operates primarily in the United States. Guideline was added as a segment as a result of its acquisition by the Company 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 N "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. Prior year segment amounts have been revised as a result of a realignment of certain activities, including the association of certain QCS expenses with Corporate and Other.
- ---------------------------------------------------------------------------------------------------- (in thousands) NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ---------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- REVENUES - -------- QCS $ 13,469 $ 13,271 $ 4,485 $ 4,658 SCRG 1,575 2,208 498 551 Guideline 4,372 -- 2,268 -- Teltech 1,917 -- 1,917 -- ----------------------------------------------------------------------- Revenues $ 21,333 $ 15,479 $ 9,168 $ 5,209 =======================================================================
12 INCOME (LOSS) BEFORE INCOME TAXES - --------------------------------- QCS $ 1,961 $ 3,005 $ 719 $ 1,152 SCRG (461) (183) (76) (11) Guideline 24 -- 83 -- Teltech 129 -- 129 -- ----------------------------------------------------------------------- Total segment income before income taxes 1,653 2,822 855 1,141 Corporate & other (1) (1,173) (3,685) (290) (1,062) ----------------------------------------------------------------------- Income (Loss) before benefit for income taxes $ 480 $ (863) $ 565 $ 79 =================================== ====================================
(1) Includes certain direct costs and selling, general, and administrative expenses not attributable to a single segment - -------------------------------------------------------------------------------- J. ACCRUED EXPENSES As of December 31, 2002, a balance of $212,000 remained accrued for restructuring charges under a severance plan approved by our Board of Directors. During the third quarter of 2003, the Company revised its estimate of these restructuring charges, and recorded an additional $7,000 accrual. Payments totaling $205,000 were made to 12 individuals during the nine months ended September 30, 2003. The remainder of the balance will be paid through October 2003. K. DEFERRED COMPENSATION The Company has a deferred compensation arrangement with Andrew Garvin, Founder and President. In November 2003, Mr. Garvin announced his early retirement as of December 31, 2003. As a result, the estimates that were previously applied to the calculation of his accrued deferred compensation have been revised to reflect his announced date of retirement. As a result, the Company adjusted accrued deferred compensation by reducing the liability by $146,000 in the quarter ended September 30, 2003. After this adjustment, the present value of the obligation is approximately $243,000, which will be paid over the contractual term of 10 years. L. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND 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. 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. During the nine months ended September 30, 2003, the Company recorded preferred dividends of $20,000. During the nine months ended September 30, 2003, the Company recorded accretion on redeemable common shares of $270,000. 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. 13 M. LEASE EXTENSION On July 1, 2003, the Company extended its lease for its space at 625 Avenue of the Americas, New York, New York through June 30, 2013. Minimum lease payments through the end of the lease extension are as follows: - -------------------------------------------------------------------------------- Minimum lease payments ---------------- Remainder of 2003 $ 100,000 2004 400,000 2005 616,000 2006 840,000 2007 857,000 2008 874,000 Thereafter 4,417,000 ---------------- $ 8,104,000 ================ - -------------------------------------------------------------------------------- N. ACQUISITIONS GUIDELINE On April 1, 2003, the Company purchased all of the issued and outstanding stock of Guideline. Guideline is a provider of custom market research. The consideration for this acquisition consisted of the following: o Approximately $4,058,000 to be paid in cash, less cash acquired (includes $595,000 of paid and accrued transaction costs as of September 30, 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. If One Year Adjusted EBITDA is less than $1.2 million, but greater than $841,000, the One Year Deferred Consideration shall be between $0 and $1.0 million based on a specific formula set forth in the purchase agreement. Each of the Sellers may separately elect to have up to fifty percent (50%) of the amount of any One Year Deferred Consideration payable to such Seller in an amount of duly authorized and non-assessable unregistered shares of Company common stock; o Within thirty days from the second anniversary date of the acquisition, a potential deferred consideration amount (the "Two Year Deferred Consideration") of $1.845 million contingent upon Guideline achieving adjusted EBITDA (as defined in the purchase agreement) for the 24-month period following the acquisition ("Two Year Adjusted EBITDA") of $2.65 million plus 25% of the amount by which Two Year Adjusted EBITDA exceeds $2.65 million. If Two Year Adjusted EBITDA is less than $2.65 million, but greater than $2.2 million, the 14 Two Year Deferred Consideration shall 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 decreted 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. 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, of which, $58,000 is accrued as of September 30, 2003) 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. 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 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. 15 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 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 is in the process of finalizing its valuation of the assets and liabilities it has acquired for its allocation of the purchase price of the transaction. The Company expects to finalize its valuation no later than the fourth quarter of 2003. The Company's preliminary allocation of the purchase price is subject to refinement based on the final determination of fair values. 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 Research and Development and Engineering Departments of larger corporations. The consideration for this acquisition consisted of the following: o Approximately $3,071,000 paid in cash (including transaction costs) o 32,700 unregistered shares of the Company's Common Stock. 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 if certain customer subscription renewal goals, as defined in the Purchase Agreement, are attained. o An adjustment to the cash purchase price based on a determination of the net assets on TelTech's balance sheet at the date of closing in comparison to the amounts on which the preliminary cash purchase price was based, as outlined in the purchase agreement. Sopheon has asserted that an additional $259,000 of purchase price is due under this provision. The Company is in discussions with Sopheon regarding this issue, and believes that the final resolution of this amount will be less than this amount. Any final settlement under this provision would result in an adjustment to goodwill. 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. 16 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 transaction. The Company expects to finalize its valuation no later than the first quarter of 2004. The Company's preliminary allocation of the purchase price 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 $491,000 of transaction costs) $ 3,942,000 $ 3,071,000 $ 7,013,000 Accrued transaction costs 116,000 121,000 237,000 Common stock issued to sellers 760,000 50,000 810,000 ---------------------------------------------------------- Total purchase consideration $ 4,818,000 $ 3,242,000 $ 8,060,000 ==========================================================
The following table provides the preliminary estimated fair value of the acquired assets and assumed liabilities:
GUIDELINE TELTECH TOTAL --------- ------- ----- Current assets $ 1,686,000 $ 1,247,000 $ 2,933,000 Property and equipment 102,000 287,000 389,000 Other assets 267,000 -- 267,000 Liabilities assumed, current (2,236,000) (3,447,000) (5,683,000) ---------------------------------------------------------- Fair value of net liabilities assumed (181,000) (1,913,000) (2,094,000) Preliminary goodwill and intangible assets 4,999,000 5,155,000 10,154,000 ---------------------------------------------------------- Total purchase consideration $ 4,818,000 $ 3,242,000 $ 8,060,000 ==========================================================
In accordance with the provisions of SFAS No. 142 "Goodwill and other Intangible Assets", the Company will not amortize goodwill with indefinite lives recorded in connection with the acquisition of Guideline. The Company will perform an annual impairment test of goodwill, once finalized, but has not yet determined what effect these tests will have on the results of operations or the financial position of the Company in future periods. The unaudited pro forma information below represents the Company's 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 (in thousands, except per share data) NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 ---- ---- Total pro forma revenue $ 26,964 $ 28,960 Pro forma net income $ 262 $ 405 Pro forma earnings per share attributable to common shareholders: Basic and diluted $ 0.00 $ 0.02 17 O. SUBSEQUENT EVENT On November 12, 2003, the Company's President and Founder, Andrew Garvin, announced he would be retiring at the end of 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 expects to take a charge of approximately $330,000 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. See Note K for more details. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nine months ended September 30, 2003 compared to nine months ended September 30, 2002. Three months ended September 30, 2003 compared to three months ended September 30, 2002. GENERAL FIND/SVP, Inc. and its wholly owned subsidiaries provide broad consulting, advisory and business intelligence services to executives and other decision-making employees of client companies, primarily in the United States. The Company manages its consulting and business advisory services in four business segments: Quick Consulting ("QCS"), which provides retainer clients with access to the expertise of the Company's staff and information resources; Strategic Consulting ("SCRG"), which provides more extensive, in-depth custom market research and competitive intelligence information, as well as customer satisfaction and loyalty programs; Guideline Research ("Guideline"), which also provides custom market research; and Teltech, which provides custom research and information services, focusing on research and development and engineering departments of larger corporations. 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, the Company acquired Guideline and Guideline's results of operations are included in the Company's results of operations as of such date. On July 1, 2003, the Company acquired Teltech, and Teltech's results of operations are included in the Company's results of operations as of such date. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2002 REVENUES Revenues for the nine-month period ended September 30, 2003 were $21,333,000 and revenues for the nine-month period ended September 30, 2002 were $15,479,000. QCS QCS revenues, which result from monthly, quarterly, semi-annual or annual retainer contracts, increased by $198,000, or 1.5%, from $13,271,000 for the nine months ended September 30, 2002 to $13,469,000 for the nine months ended September 30, 2003. The increase was primarily the result of a pricing program whereby the Company is reimbursed for certain operating expenses necessary to provide retainer services. SCRG SCRG revenues, which result from in-depth research projects addressing clients' business issues, decreased by $633,000, or 28.7%, from $2,208,000 for the nine months ended September 30, 2002 to $1,575,000 for the nine months ended September 30, 2003. The decrease was due to a continued decline in new projects booked. 19 GUIDELINE Guideline revenues, which result from custom market research consulting engagements, such as conducting surveys and focus groups, were $4,372,000 for the nine months ended September 30, 2003. Revenues increased by $163,000 or 7.7% from the second to the third quarter 2003 as a result of increased projects booked, and the level of projects completed. The Company acquired this line of business on April 1, 2003. TELTECH Teltech revenues, which result from custom research and information services, were $1,917,000 for the three months ended September 30, 2003 since its acquisition on July 1, 2003. COSTS OF PRODUCTS AND SERVICES SOLD Direct costs (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 $3,660,000, or 47.5%, from $7,698,000 for the nine months ended September 30, 2002 to $11,358,000 for the nine months ended September 30, 2003. Direct costs represented 53.3% and 49.7% of revenues, respectively, for the nine-month periods ended September 30, 2003 and 2002. 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. Exclusive of Guideline and Teltech, direct costs decreased as a result of decreased use of sub-contractors in SCRG, and more favorable pricing from the Company's use of outside electronic services. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased by $582,000, or 6.8%, from $8,582,000, or 55.4% of revenue, for the nine months ended September 30, 2002 to $9,164,000, or 43.0% of revenue, for the nine months ended September 30, 2003. The increase in selling, general and administrative was due primarily to the acquisition of Guideline during the quarter ended June 30, 2003 and the acquisition of Teltech during the quarter ended September 30, 2003, offset by various cost containment measures implemented during the nine months ended September 30, 2003 and by an adjustment made during the third quarter of 2003 to an accrual for deferred compensation (see Note K to the accompanying financial statements for more details regarding this adjustment). Exclusive of Guideline and Teltech, selling, general and administrative expenses decreased by $622,000, or 7.2%, as a result of various cost containment measures. Primarily, the Company experienced decreases in bad debt expense, as the level of uncollectible accounts decreased; travel and entertainment, as a result of reduced staff levels and the use of video and teleconferencing; telecommunications expense decreased as a result of more favorable rates with carriers. We experienced a decrease in labor costs as a result of reduced staff levels. Also, during 2002, restructuring costs of $209,000 were incurred, that were not incurred again in 2003. OPERATING INCOME (LOSS) The Company's operating income was $811,000 for the nine months ended September 30, 2003, compared to an operating loss of $801,000 for the nine months ended September 30, 2002, an improvement of $1,612,000. This is primarily the result of increased revenues offset by an increase in selling, general and administrative expenses and direct costs. 20 OTHER INCOME The Company has a 9.1% interest in a limited partnership, and in March 2003, received an $87,000 distribution. This is the first distribution that the Company has received from this partnership interest, and the distribution was recognized as other income during the nine months ended September 30, 2003. INTEREST EXPENSE Interest expense for the nine months ended September 30, 2003 was $424,000, which was an increase from $118,000 for the nine months ended September 30, 2002. The increase was a result of additional borrowings, related to the acquisitions of Guideline and Teltech, during the nine months ended September 30, 2003, partially offset by repayments on existing debt. INCOME TAXES The $200,000 income tax provision for the nine months ended September 30, 2003 and the $258,000 income tax benefit for the nine months ended September 30, 2002 represent approximately 42% and 30%, respectively of the income/loss before provision/benefit for income taxes. The difference between these rates and the statutory rate primarily relates to expenses that are not deductible for income tax purposes. THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2002 REVENUES Revenues for the three-month period ended September 30, 2003 were $9,168,000 and revenues for the three-month period ended September 30, 2002 were $5,209,000. QCS QCS revenues, which result from annual retainer contracts paid by clients on a monthly, quarterly, semi-annual or annual basis, decreased by $173,000, or 3.7%, from $4,658,000 for the three months ended September 30, 2002 to $4,485,000 for the three months ended September 30, 2003. The decrease was the result of client cancellations in excess of new retainer accounts additions. SCRG SCRG revenues, which result from project-based consulting engagements addressing general business issues, decreased by $53,000, or 9.6%, from $551,000 for the three months ended September 30, 2002 to $498,000 for the three months ended September 30, 2003. The decrease was due to the continued decline in new projects booked. GUIDELINE Guideline revenues, which result from custom market research consulting engagements, such as conducting surveys and focus groups, were $2,268,000 for the three months ended September 30, 2003. Revenues increased by $163,000 or 7.7% from the second to the third quarter 2003 as a result of increased projects booked, and the level of projects completed. The Company acquired this line of business on April 1, 2003. 21 TELTECH Teltech revenues, which result from custom research and information services, were $1,917,000 for the three months ended September 30, 2003. The Company acquired this line of business on July 1, 2003. COSTS OF PRODUCTS AND SERVICES SOLD Direct costs (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 $2,586,000, or 103.4%, from $2,491,000 for the three months ended September 30, 2002 to $5,077,000 for the three months ended September 30, 2003. Direct costs represented 55.4% and 47.8% of revenues, respectively, for the three-month periods ended September 30, 2003 and 2002. 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 direct labor and direct costs, such as subcontractors who perform fieldwork for many of their projects. Exclusive of Guideline and Teltech, direct costs decreased as a result of decreased use of sub-contractors in SCRG, and more favorable pricing from the Company's use of outside electronic services. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased by $715,000, or 27.5%, from $2,605,000, or 50.0% of revenue, for the three months ended September 30, 2002 to $3,320,000, or 36.2% of revenue, for the three months ended September 30, 2003. The increase in selling, general and administrative was primarily due to the acquisitions of Guideline and Teltech, offset by decreases in other selling, general and administrative expenses as a result of continued cost containment measures and by an adjustment made during the third quarter of 2003 to an accrual for deferred compensation (see Note K to the accompanying financial statements for more details regarding this adjustment). Exclusive of Guideline and Teltech, selling, general and administrative expenses increased slightly, by $26,000, or 2.1%. OPERATING INCOME (LOSS) The Company's operating income was $771,000 for the three months ended September 30, 2003, compared to operating income of $113,000 for the three months ended September 30, 2002, an improvement of $658,000. This is primarily the result of increased revenues, offset by increases in direct costs and selling, general and administrative expenses. INTEREST EXPENSE Interest expense for the three months ended September 30, 2003 was $207,000, which was an increase from $42,000 for the three months ended September 30, 2002. The increase was a result of additional borrowings related to the acquisitions of Guideline and Teltech during the nine months ended September 30, 2003, partially offset by repayments on existing debt. INCOME TAXES The $226,000 income tax provision for the three months ended September 30, 2003 and the $24,000 income tax provision for the three months ended September 30, 2002, represents 40% and 30%, respectively, of the income before provision for income taxes. The difference between these rates and the statutory rate primarily relates to expenses that are not deductible for income tax purposes. 22 OTHER ITEMS 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, the Company's Board approved the acceleration of the vesting of 105,000 and 117,000 options granted to the Chairman and CEO, respectively. This action was taken to generate additional funds at the time of the Company's acquisition of Teltech. Compensation expense related to such grants is amortized over the vesting period of the options and was $110,000 and $200,000 and $41,000 and $68,000 for the nine and three-month periods ended September 30, 2003 and 2002, respectively. CRITICAL ACCOUNTING POLICIES AND ESTIMATES 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 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. GOODWILL Goodwill represents the excess of purchase price over net assets acquired or net liabilities assumed. Goodwill is not being amortized in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. The recoverability of goodwill will be evaluated annually at the operating unit level by analyzing operating results and considering other significant events or changes in the business environment. If an operating unit had current operating losses, and based upon projections there was a likelihood that such operating losses would continue, the Company would determine whether impairment existed on the basis of undiscounted expected future cash flows from operations before interest for the remaining amortization period. If impairment existed, goodwill would be reduced by the estimated shortfall of discounted cash flows. 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. The Company has tax loss carryforwards that have been recognized as assets on its balance sheet. These assets are subject to expiration from 2012 to 2022. 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 the Company performed an analysis of its deferred tax assets and projected future taxable income, a valuation allowance was provided for certain state and local carryforward 23 tax operating loss assets, as the Company determined that it was no longer probable that these assets would 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. Although realization is not assured, management believes that it is more likely than not that the deferred tax assets will be realized. NON-MARKETABLE EQUITY SECURITIES The preferred share securities in idealab! are an investment in a start-up enterprise. As of September 30, 2003, the carrying value of these preferred share securities is $185,000, included as a component of other assets. It is reasonably possible in the near term that the Company's estimate of the net realizable value of the preferred shares will be less than the carrying value of the preferred shares. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company's 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 $1,368,000 and $968,000 at September 30, 2003 and December 31, 2002, respectively. The Company's working capital position (current assets, less current liabilities) at September 30, 2003 was $(2,652,000) as compared to $(43,000) at December 31, 2002. Working capital is reduced by $4,231,000 and $1,476,000 of unearned retainer income as of September 30, 2003 and December 31, 2002, respectively. Such amounts reflect amounts billed, but not yet earned. Cash of $1,488,000 was provided by, and $1,923,000 was used in operating activities in the nine months ended September 30, 2003 and 2002, respectively. Cash used in investing activities was $7,329,000 and $236,000 in the nine months ended September 30, 2003 and 2002, respectively. The primary use of cash was the acquisition of Guideline during the quarter ended June 30, 2003 for $3,942,000 and the acquisition of Teltech during the quarter ended September 30, 2003 for $3,071,000. Capital expenditures were made for computer hardware upgrades and leasehold improvements. During the year ending December 31, 2003, the Company expects 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 of $6,241,000 and $1,037,000 was provided by financing activities in the nine months ended September 30, 2003 and 2002, respectively. In 2003, the most significant items were the net proceeds obtained from the borrowings under notes payable of $2,536,000, related to the acquisitions of Guideline and Teltech, offset by repayments of $335,000, the issuance of preferred stock for $693,000, the issuance of warrants for $838,000, the proceeds from the issuance of common stock of $2,376,000 and the proceeds from exercise of stock options of $133,000. In February 2002, the Company entered into a financing arrangement with JP Morgan Chase Bank providing for a term note (the "Term Note") in the principal amount of $2,000,000 with interest at prime plus 1.25% (5.5% at September 30, 2003), as amended on April 1, 2003. As of September 30, 2003, there was $1,300,000 outstanding on this Term Note, of which $400,000 is classified as current. Interest expense related to this Term Note amounted to $62,000 and $72,000 for the nine months ended September 30, 2003 and 2002, respectively. 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 proceeds from the February 2002 Term Note were used to repay the $1,100,000 balance on its $1,400,000 Term Note, due June 30, 2005, and to repay the remaining balance of $475,000 on certain 24 outstanding senior subordinated notes. The Company maintains a $1,000,000 line of credit with JP Morgan Chase Bank (the "Line of Credit"). Interest on the unpaid balance of the Line of Credit is at JP Morgan Chase Bank's prime commercial lending rate plus one-quarter percent (4.5% at September 30, 2003). The Line of Credit is renewable annually. As of September 30, 2003, $476,000 is outstanding. The Line of Credit contains certain restrictions on the conduct of our business, including, among other things, restrictions, generally, on incurring debt, and creating or suffering liens. The Company's Term Note and Line of Credit are secured by a general security interest in substantially all of the Company's assets. In May 2002, JP Morgan Chase agreed to lower the minimum tangible net worth covenant in the Term Note agreement to $3,500,000, and waived the prior covenant at the March 31, 2002 report date. In March 2003, JP Morgan Chase agreed to waive the prior cash flow coverage covenant for the twelve-month period ended December 31, 2002. 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 Company's acquisition of Guideline and the related financing transactions with 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 $3,300,000 with a consolidated tangible net worth plus subordinated debt covenant of $2,300,000. Furthermore, on November 13, 2003, the covenant to compute the ratio of current assets to current liabilities under the Term Note and Line of Credit was waived as of September 30, 2003. 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 believes it is in compliance with all of its loan agreements, as amended, with JP Morgan Chase as of September 30, 2003. 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 25 value will be accreted as additional interest expense over the maturities of the Note, and the resulting effective interest rate is approximately 30%. Related interest expense was $307,000 and $156,000 for the nine and three month periods ended September 30, 2003, respectively, of which $106,000 and $55,000 related to the non-cash accretion of the carrying value of the Note for the nine and three month periods ended September 30, 2003, respectively. 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 the Company's business including financial covenants related to a defined fixed charge coverage and a defined funded indebtedness to EBITDA ratio. The Company believes it was in compliance with this loan agreement as of September 30, 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 30%. Related interest expense was $26,000 for the nine and three-month periods ended September 30, 2003, of which $9,000 related to the non-cash accretion of the carrying value of the Second Note for the nine and three-month periods ended September 30, 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 the Company's business including financial covenants related to a defined fixed charge coverage and a defined funded indebtedness to EBITDA ratio. The Company believes it was in compliance with this loan agreement as of September 30, 2003. The Company believes that cash generated from operations, the proceeds from its Term Note and Line of Credit with JP Morgan Chase and its cash and cash equivalents will be sufficient to fund our operations for the foreseeable future. MARKET FOR COMPANY'S COMMON EQUITY Trading of our shares of common stock is conducted on the Over-The-Counter Bulletin Board. INFLATION The Company has in the past been able to increase the price of its products and services sufficiently to offset the effects of inflation on direct costs, and anticipates that it will be able to do so in the future. FORWARD LOOKING INFORMATION: CERTAIN CAUTIONARY 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 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 risks and uncertainties 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 26 all such factors, the risks and uncertainties that may affect the operations, performance and results of our business include the risks and uncertainties set forth in the section headed "Factors That May Affect Our Future Results" of Part 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 and those risks and uncertainties described in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. SUBSEQUENT EVENT On November 12, 2003, the Company's President and Founder, Andrew Garvin, announced he would be retiring at the end of 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 expects to take a charge of approximately $330,000 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. See Note K to the accompanying financial statements for more details. 27 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change to our exposure to market risk since December 31, 2002. ITEM 4. CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective. During the quarter ended September 30, 2003, the Company integrated the internal controls of Teltech as a result of its acquisition by the Company on July 1, 2003. The Company's 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 the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation. 28 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS During the quarter ended September 30, 2003, options to purchase 621,000 shares of common stock were granted under the Company's Stock Option Plans, at a price range of $1.15 to $1.55, to various employees and non-employee directors. In addition, the following consists of all securities sold during the quarter ended September 30, 2003 that were not registered under the Securities Act of 1933: o On July 1, 2003, 32,700 shares of the Company's common stock was issued to Sopheon Corp. as partial consideration for the Teltech acquisition. o On July 2, 2003 1,616,685 shares of the Company's common stock was issued to certain investors pursuant to a private placement at a price of $1.47 per share together with warrants to purchase 808,293 shares of common stock at an exercise price of $1.47. o On July 2, 2003 warrants to purchase 70,000 shares of common stock were issued at an exercise price of $.01 to Petra in conjunction with the Company's acquisition and finance of the Teltech acquisition. See Part 1, Item 1, Footnote N to the accompanying financial statements for further details regarding these issuances. Each of these issuances 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. ITEM 5. OTHER INFORMATION On November 12, 2003, the Company's President and Founder, Andrew Garvin, announced he would be retiring at the end of 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 expects to take a charge of approximately $330,000 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. See Note K to the accompanying financial statements for more details. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. EXHIBIT DESCRIPTION - ------- ----------- 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* *Filed herewith (b) Reports on Form 8-K. The Company filed a Form 8-K on July 16, 2003 with respect to the acquisition of the Teltech business unit of Sopheon Corporation. The Company filed a Form 8-K on August 22, 2003 with respect to the Company's press release announcing its 2003 second quarter results. The Company filed a Form 8-K/A on September 15, 2003 which amended the Company's Form 8-K filed on July 16, 2003 with respect to the acquisition of the Teltech business unit of Sopheon Corporation. 29 SIGNATURES Pursuant to the requirements 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) Date: November 13, 2003 /s/ David Walke - ----------------------- --------------------------------- David Walke Chief Executive Officer Date: November 13, 2003 /s/ Peter M. Stone - ----------------------- --------------------------------- Peter M. Stone Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 30 EXHIBIT INDEX NUMBER EXHIBIT ------ ------- 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 31 EX-31.1 3 c29845_ex31-1.txt EXHIBIT 31.1 CERTIFICATIONS I, David Walke, certify that: 1. I have reviewed this quarterly report on Form 10-Q of FIND/SVP, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter n the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 13, 2003 /s/ David Walke --------------- David Walke Chief Executive Officer 32 EX-31.2 4 c29845_ex31-2.txt EXHIBIT 31.2 CERTIFICATIONS I, Peter Stone, certify that: 1. I have reviewed this quarterly report on Form 10-Q of FIND/SVP, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter n the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 13, 2003 /s/ Peter M. Stone ------------------ Peter M. Stone Chief Financial Officer 33 EX-32.1 5 c29845_ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of FIND/SVP, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David Walke, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ David Walke - --------------- David Walke Chief Executive Officer November 13, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. In connection with the Quarterly Report of FIND/SVP, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Peter Stone, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Peter M. Stone - ------------------ Peter M. Stone Chief Financial Officer November 13, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 34 -----END PRIVACY-ENHANCED MESSAGE-----