Operating income. As a result of the above factors, our operating income increased 43.7% to $4.1 million for the year ended December 31, 2005, compared to $2.8 million for the previous year.
Interest expense, net. Interest expense, net decreased $87,000 to $381,000 for the year ended December 31, 2005, compared to $468,000 in 2004. The decrease was primarily due to the reduction of our outstanding debt. Our average debt balance for 2005 was approximately $3.1 million compared to $6.9 million in 2004.
Other income. For the year ended December 31, 2004, we received proceeds totaling $266,000 relating to notes receivable from former officers of one of our subsidiaries. These notes had previously been written off as uncollectible; therefore, their collection resulted in this gain.
Income tax provision. The income tax provision for 2005 was approximately $1.4 million as compared to $62,000 for the year ended December 31, 2004. During September 2004, we recorded a tax benefit of $972,000 relating to an income tax contingent liability for which the statute of limitations expired in September 2004. As a result, the effective tax rate for the year ended December 31, 2004 was 2.3%. We expect our effective tax rate to be approximately 39.0% in future periods.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Participation fees. Participation fees decreased $2.6 million, or 9.4%, to $25.3 million for the year ended December 31, 2004, compared to $27.9 million for the year ended December 31, 2003. The decrease was primarily due to a decrease in the total funding through our BusinessManager program. Total receivables funded through BusinessManager declined to $4.03 billion in 2004 compared to $4.44 billion in 2003. This decreased funding was primarily the result of fewer merchants funding through our BusinessManager program during 2004 as compared to 2003. The decline is a result of merchants leaving the program faster than they are being replenished through new sales. Merchant attrition rates are stable, however new merchant sales were sluggish, which is why we invested heavily in our sales force during 2004. As a percentage of total revenue, participation fees decreased to 63.8% for the year ended December 31, 2004, from 64.7% for the year earlier period.
Software license. Software license fees decreased 15.2% to $228,000 for the year ended December 31, 2004, compared to $269,000 for the year ended December 31, 2003. The decrease was primarily due to the slow pace of new licenses sold in the first quarter of 2004. Although total new licensed banks increased in 2004 compared to 2003, more of the new agreements were signed in the second half of 2004. Due to the revenue recognition deferral policies in place for new license agreements discussed elsewhere in this report, however, the fact that more of the licenses were signed in late 2004 resulted in the decrease in license fees for 2004. Software license fees accounted for 0.6% of total revenues for the two years ended December 31, 2004.
Retail planning services. Retail planning services revenue decreased to $9.0 million for 2004 as compared to $9.1 million in 2003. The decline of $121,000, or 1.3%, from 2003 is a result of a decline in point of sale customer support revenues from $933,000 in 2003 to $806,000 in 2004. This is due to the fact that the point of sale system support services offered relate to a point of sales system that is no longer being marketed, upgraded and sold. As a result, some existing point of sale support customers purchased new point of sale systems and moved their support services elsewhere. As a percentage of total revenues, retail planning services accounted for 22.7% during 2004 compared to 21.1% in 2003.
Insurance brokerage fees. Insurance brokerage fees decreased $244,000 to $2.6 million for the year ended December 31, 2004, compared to $2.8 million for the year ended December 31, 2003. This decrease is a result of the lower total receivables funding volume discussed above. Insurance brokerage fees accounted for 6.5% and 6.6% of total revenues for the years ended December 31, 2004 and 2003, respectively.
Maintenance and other. Maintenance and other revenues decreased approximately $469,000, or 15.6%, to $2.5 million for the year ended December 31, 2004, compared to $3.0 million for the year ended December 31, 2003. Other revenue in 2003 includes two unusual revenue items: a gain of $427,000 resulting from the sale of our bank insurance division in June 2003 and a $250,000 gain resulting from a favorable legal settlement. Excluding these two items, other revenue would have been approximately $2.3 million, resulting in an increase of $208,000 from December 31,2003 to December 31, 2004. Factoring commission revenue increased approximately $204,000 to $995,000 in 2004 from $791,000 in 2003. As a percentage of total revenues, maintenance and other revenue decreased to 6.4% for the year ended December 31, 2004, from 7.0% for the year ended December 31, 2003.
Total revenues. As a result of the foregoing revenue categories, total revenues decreased 8.1% to $39.6 million for the year ended December 31, 2004, compared to $43.2 million for the year ended December 31, 2003.
26
General and administrative. General and administrative expenses decreased 15.5% to $16.2 million for the year ended December 31, 2004, compared to $19.2 million for the year ended December 31, 2003. General and administrative expenses include the cost of our executive, finance, human resources, information services, support services, administrative functions and general operations. The decrease was due to a $1.0 million decrease in depreciation expense to $1.7 million in 2004 as compared to $2.7 million in 2003. This is due to lower capital spending over the last two years. Also contributing to the decrease was a decline in salary and benefits expense of $1.0 million, due to a decrease in the number of general and administrative personnel during 2004 as compared to 2003. As a percentage of total revenues, general and administrative expenses decreased to 40.9% for the year ended December 31, 2004 compared to 44.5% for the year ended December 31, 2003.
Selling and marketing. Selling and marketing expenses increased 3.6% to $17.6 million for the year ended December 31, 2004 compared to $17.0 million for the year ended December 31, 2003. Selling and marketing expenses include cost of wages and commissions paid to our dedicated business development, bank and retail planning sales force, travel costs of the dedicated sales force, recruiting for new sales and marketing personnel and marketing fees associated with direct and telemarketing programs. The increase was primarily due to an increase in sales staff, travel expenses and recruiting costs, partially offset by a decrease in commissions expense. As a percentage of total revenues, selling and marketing expenses increased to 44.5% for the year ended December 31, 2004 compared to 39.4% for the year ended December 31, 2003.
Research and development. Research and development expenses decreased 8.0% to $369,000 for the year ended December 31, 2004, compared to $401,000 for the previous year ended December 31, 2003. These costs include the non-capitalizable direct costs associated with developing new versions of the BusinessManager software, as well as, other software development projects that do not meet the capitalization rules. The decrease was primarily due to fewer personnel on staff devoted to research and development activities in 2004. As a percentage of total revenues, research and development expenses remained constant at 0.9% for the years ended December 31, 2004 and 2003.
Amortization. Amortization expenses decreased 37.1% to approximately $1.1 million for the year ended December 31, 2004, compared to approximately $1.8 million for the previous year. These expenses include the cost of amortizing intangible assets including trademarks, software development costs, and debt issuance costs related to our recapitalization in 1998 (2003 only) as well as identified intangibles recorded from the Towne Services merger. The decrease is primarily the result of decreased debt issuance cost amortization associated with our new credit facility, as well as lower software development amortization.
Other operating expenses. Other operating expenses increased significantly to $1.5 million for the year ended December 31, 2004 from approximately $280,000 for 2003. Other operating expenses include property tax and other miscellaneous costs associated with providing support and services to our client banks. The increase in 2004 is due to the Capital Event transaction discussed in Note 3 to the audited consolidated financial statements included in this report. The Capital Event transaction resulted in two significant unusual items: a $780,000 charge for the write-off of deferred financing costs associated with the 1998 Fleet credit facility, and a $896,000 charge related to the purchase of a tail directors and officers insurance policy that was required to be expensed immediately. Partially offsetting these two unusual Capital Event items is a reduction in expense of approximately $400,000 due to the favorable conclusion of several state sales tax contingency matters.
Operating income. As a result of the above factors, our operating income decreased 36.1% to $2.8 million for the year ended December 31, 2004, compared to $4.4 million for the previous year.
Interest expense, net. Interest expense, net decreased $1.0 million to $468,000 for the year ended December 31, 2004 compared to $1.5 million in 2003. The decrease was primarily due to the reduction of our outstanding debt resulting from the Capital Event transaction. Our average debt balance for 2004 was approximately $6.9 million compared to $26.8 million in 2003.
Other income. For the year ended December 31, 2004, we received proceeds totaling $266,000 relating to notes receivable from former officers of one our subsidiaries. These notes had previously been written off as uncollectible; therefore their collection resulted in this gain.
Income tax provision. The income tax provision for 2004 was approximately $62,000 as compared to $1.2 million for the year ended December 31, 2003. During September 2004, we recorded a tax benefit of $972,000 relating to an income tax contingent liability for which the statute of limitations expired in September 2004. As a result, the effective tax rate for the year ended December 31, 2004 was 2.3%. We expect our effective tax rate to be approximately 39.0% in future periods.
27
Liquidity and Capital Resources
Our primary sources of capital have historically been cash provided by operations, investment from shareholders, and amounts drawn on outstanding credit facilities. During 2005, our operating activities provided cash of $4.3 million. We used $8.3 million in our investing activities as a result of fixed asset and software development additions, as well as acquisition of KVI Capital and Captiva. Cash provided by financing activities totaled $4.2 million for 2005.
We entered into the Bank of America Credit Facility on January 19, 2004. The Bank of America Credit Facility was secured by a pledge of all of our assets and contains financial and non-financial covenants. The Bank of America Credit Facility included a term loan in the amount of $5.0 million and a revolving line of credit of up to $6.0 million for a total facility of up to $11.0 million. The revolving line of credit included a $1.0 million letter of credit sub-limit. As of December 31, 2005, no amount was outstanding under the Bank of America Credit Facility. On December 8, 2005, this facility was amended by converting the entire facility to a revolving line of credit and reducing the total size of the facility to $5.0 million. As of December 31, 2005, no amount was outstanding under the Bank of America Credit Facility. The Bank of America Credit Facility was slated to mature on March 8, 2006, but it was replaced by the amended and restated credit facility discussed below. We were in compliance with all restrictive financial and non-financial covenants contained in the Bank of America Credit Facility throughout 2005.
On December 9, 2005, we issued a $10.0 million senior subordinated note to Lightyear (“Lightyear Note”) as approved by our shareholders during a special shareholders meeting on that same date. As discussed below, the Lightyear Note was converted into shares of our Series C Preferred Stock on January 23, 2006.
On January 23, 2006, we entered into an Amended and Restated Credit Agreement with Bank of America (“Amended and Restated Credit Facility”). The Amended and Restated Credit Facility is for a total of $18.0 million, has a two year term and is secured by a pledge of all of the Company’s assets. The Amended and Restated Credit Facility total of $18.0 million consists of two-term loans totaling $16.0 million and a revolving credit line totaling $2.0 million. The $10.0 million Term A loan has a maturity date of January 23, 2008. The $6.0 million Term B loan has a maturity date of no later than July 23, 2006. The revolving credit line matures on January 23, 2008.
The Term A loan has scheduled repayment terms as follows:
March 31 and June 30, 2006 | $250,000/quarter |
September 30 and December 31, 2006 | $500,000/quarter |
Thereafter (until maturity) | $750,000/quarter |
The Amended and Restated Credit Facility includes certain restrictive financial covenants, measured quarterly, relating to net worth, maximum annual capital expenditures, funded debt to EBITDA ratio and fixed charge coverage ratio, as defined in the agreement. The facility also contains customary negative covenants, including but not limited to a prohibition on declaring and paying any cash dividends on any class of stock, including the Series A, Series B, and Series C preferred shares outstanding.
In conjunction with this Amended and Restated Credit Facility, The Lightyear Fund, L.P. guaranteed the Term B loan and exchanged its senior subordinated $10.0 million note due on December 9, 2010 for 10,000 shares of our Series C preferred stock. Therefore, the senior subordinated debt discussed above was converted to Series C preferred shares on January 23, 2006.
In the event that we are unable to repay the $6.0 million Term B loan by July 23, 2006 and Lightyear is required to repay the Term B loan on our behalf, we are obligated to issue new Series D preferred shares to Lightyear. The Series D preferred shares will carry a 10% per annum dividend rate, will have a mandatory redemption date nine months from the date of issuance, and will require the issuance of 66,045 common stock warrants with an exercise price of $0.01 per share. We will also be required to pay a closing fee equal to 3.75% of the amount repaid by The Lightyear Fund, L.P. to Bank of America.
The Series C preferred shares issued to Lightyear have a mandatory redemption date of December 9, 2010 at $10.0 million and have a 10% annual dividend rate that increases to 12% on June 9, 2007. The Series C preferred shares do not carry any voting rights. Due to the mandatory redemption requirement, the Series C preferred stock will be included in the liability section of our consolidated balance sheet.
As of December 31, 2005, we had working capital of approximately $2.2 million compared to a working capital deficit of approximately $158,000 as of December 31, 2004. The change in working capital resulted primarily from a decrease in the amount of the current portion of long-term debt by $1.7 million, as well as a decrease in accrued liabilities of $429,000 plus increases in cash of $180,000, accounts receivable and other of $189,000, deferred taxes of $300,000 and prepaid and other current assets of $287,000, partially offset by a $674,000 increase in accounts payable. The decrease in current portion of long-term debt is a result of the Lightyear Note issuance described above, as well as the use of available cash balances to pay down on our revolving line of credit. The decrease in accrued liabilities relates to a reduction in accrued severance expenses of $190,000.
28
We believe that the existing cash available, future operating cash flows and our Amended and Restated Credit Facility will be sufficient to meet our working capital, debt service and capital expenditure requirements for the next twelve months. Furthermore, we expect to be in compliance with the financial covenants of our new credit facility throughout 2006. There can be no assurance that we will have sufficient cash flows to meet our obligations or that we will remain in compliance with the new covenants. Non-compliance with these covenants could have a material adverse effect on our operating and financial results.
The following is a schedule of our obligations and commitments for future payments as of December 31, 2005:
(in thousands) | | | | | Payments Due by Period | |
| | | | |
| |
Contractual Obligations | | Total | | Less than 1 year | | 1-2 years | | 3-4 Years | | 5 years & after | |
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|
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|
| |
|
| |
|
| |
Revolving Line of Credit | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Operating Leases | | $ | 6,607 | | $ | 1,816 | | $ | 1,776 | | $ | 1,592 | | $ | 1,423 | |
Senior Subordinated Note Payable (subsequently converted to Series C Preferred Stock) | | $ | 10,000 | | $ | — | | $ | — | | $ | — | | $ | 10,000 | |
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Total Contractual Cash Obligations | | $ | 16,607 | | $ | 1,816 | | $ | 1,776 | | $ | 1,592 | | $ | 11,423 | |
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Standby Letters of Credit Commitment | | $ | 400 | | $ | 400 | | $ | — | | $ | — | | $ | — | |
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We may, in the future, acquire businesses or products complementary to our business, although we cannot be certain that we will make any such acquisitions will be made. The need for cash to finance additional working capital or to make acquisitions may cause us to seek additional equity or debt financing. We cannot be certain that such financing will be available on terms acceptable to us or at all, or that our need for higher levels of working capital will not have a material adverse effect on our business, financial condition or results of operations.
Off-Balance Sheet Arrangements
As of December 31, 2005, we do not have any off-balance sheet arrangements as defined by item 303(a) (4) of regulation S-K.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123R is effective as of the beginning of the first annual reporting period that begins after December 15, 2005 and therefore we have adopted SFAS 123R effective January 1, 2006. SFAS No. 123R requires the cost of employee services received in exchange for equity instruments awarded or liabilities incurred to be recognized in the financial statements. Compensation cost will be measured using a fair-value based method over the period that the employee provides service in exchange for the award. We anticipate using the Black-Scholes option-pricing model to determine the annual compensation cost related to share-based payments under SFAS No. 123R. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under the current rules. This requirement will reduce net operating cash flow and reduce net financing cash outflow by offsetting and equal amounts. As disclosed in Note 2 to of our audited consolidated financial statements included in this report, based on the current assumptions and calculations used, had we recognized compensation expense based on the fair value of awards of equity instruments, net income would have been increased by approximately $71,000 for the year ended December 31, 2005. This compensation expense is the after-tax net effect of the stock-based compensation expense determined using the fair-value based method for all awards and stock-based employee compensation included previously in reported net income under APB No. 25. SFAS No. 123R will apply to all awards granted after the effective date and to the unvested portion of existing option awards, as well as modifications, repurchases or cancellations of existing awards. The impact of the adoption of SFAS No. 123R for the year ending December 31, 2006, based upon the options outstanding as of February 28, 2006, is estimated to result in an increase in compensation expense of approximately $800,000. The actual impact of adopting SFAS No. 123R will change for the effect of potential future awards and actual option forfeitures which are not known at this time. The impact of those future awards will vary depending on the timing, amount and valuation methods used for such awards, and our past awards are not necessarily indicative of such potential future awards.
29
Seasonality
We have generally realized lower revenues and income in the first quarter and, to a lesser extent, in the second quarter of the year. We believe that this is primarily due to a general slowdown in economic activity following the fourth quarter’s holiday season and, more specifically, a decrease in purchased receivables by our client financial institutions. Therefore, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and that such comparison cannot be relied upon as indicators of our future performance. Due to the relatively fixed nature of costs such as personnel, facilities and equipment costs, a revenue decline in a quarter will typically result in lower profitability for that quarter.
Inflation
We do not believe that inflation has had a material effect on our results of operations. There can be no assurance, however, that our business will not be affected by inflation in the future.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are subject to market risk from exposure to changes in interest rates based on our financing and cash management activities. Currently, our exposure relates primarily to our long-term debt obligations pursuant to the Amended and Restated Bank of America Credit Facility.
As of December 31, 2005, we did not have any significant market risks because its outstanding debts on that date had fixed interest rates.
Item 8. Financial Statements and Supplementary Data.
Financial statements are contained on pages F-1 through F-27 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
In an effort to ensure that the information we must disclose in our filings with the Securities and Exchange Commission is recorded, processed, summarized, and reported on a timely basis, our management, with the participation of the principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of December 31, 2005. Based on such evaluation, such officers have concluded that, as of December 31, 2005, our disclosure controls and procedures were effective in timely alerting us to information relating to us required to be disclosed in our periodic reports filed with the SEC. There has been no change in the our internal control over financial reporting during the quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning our directors and executive officers is incorporated by reference to the proxy statement for our 2006 annual meeting of shareholders.
Item 11. Executive Compensation.
Executive compensation information is incorporated by reference to the proxy statement for our 2006 annual meeting of shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The equity compensation plan information and the security ownership of certain beneficial owners and management information are incorporated by reference to the proxy statement for our 2006 annual meeting of shareholders.
Item 13. Certain Relationships and Related Transactions.
Information concerning relationships and related transactions is incorporated by reference to the proxy statement for our 2006 annual meeting of shareholders.
Item 14. Principal Accountant Fees and Services.
Information concerning the fees and services provided by our principal accountant is incorporated by reference to the proxy statement for our 2006 annual meeting of shareholders.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
Financial statements and schedules of the Company and its subsidiaries required to be included in Part II, Item 8 are listed below.
Financial Statements
| Reports of Independent Registered Public Accounting Firms |
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| Consolidated Balance Sheets as of December 31, 2005 and 2004 |
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| Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003 |
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| Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2005, 2004 and 2003 |
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| Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 |
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| Notes to Consolidated Financial Statements |
Financial Statement Schedules
Schedule II — Valuation and Qualifying Accounts
No other schedules are required or are applicable.
Exhibits
The Exhibits filed as part of the Report on Form 10-K are listed in the Index to Exhibits immediately following the signature page.
32
INDEX TO FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Private Business, Inc.
We have audited the accompanying consolidated balance sheet of Private Business, Inc. and subsidiaries (the “Company”) as of December 31, 2005, and the related consolidated statement of income, stockholders’ equity (deficit), and cash flows for the year ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Private Business, Inc. and subsidiaries are not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Private Business, Inc. and subsidiaries at December 31, 2005, and the consolidated results of their operations and their cash flows for the year ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton, LLP
Raleigh, North Carolina
March 9, 2006
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Private Business, Inc.
We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated financial statements of Private Business, Inc. and subsidiaries referred to in our report dated March 9, 2006, which is included in the annual report to security holders and incorporated by reference in Part II of this form. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule titled “Schedule II-Valuation and Qualifying Accounts” is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken s a whole.
/s/ Grant Thornton, LLP
Raleigh, North Carolina
March 9, 2006
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Private Business, Inc.
We have audited the accompanying consolidated balance sheet of Private Business, Inc. and subsidiaries as of December 31, 2004, and the related consolidated statements of income, stockholders’ equity (deficit), and cash flows for each of the two years in the period then ended. Our audits also included the financial statement schedule listed in the Index at Item 15 for each of the two years in the period ended December 31, 2004. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Private Business, Inc. and subsidiaries at December 31, 2004, and the consolidated results of their operations and their cash flows for each of the two years in the period then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
February 18, 2005
F-4
PRIVATE BUSINESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
(dollars in thousands) | | 2005 | | 2004 | |
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ASSETS | | | | | | | |
CURRENT ASSETS: | | | | | | | |
Cash and cash equivalents | | $ | 187 | | $ | 7 | |
Accounts receivable — trade, net of allowance for doubtful accounts of $206 and $242, respectively | | | 4,773 | | | 4,506 | |
Accounts receivable — other | | | 26 | | | 104 | |
Deferred tax assets | | | 370 | | | 70 | |
Investment in direct financing leases | | | 2,235 | | | — | |
Prepaid and other current assets | | | 1,567 | | | 1,280 | |
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Total current assets | | | 9,158 | | | 5,967 | |
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PROPERTY AND EQUIPMENT, NET | | | 2,187 | | | 2,327 | |
OPERATING LEASE EQUIPMENT, NET | | | 187 | | | — | |
OTHER ASSETS: | | | | | | | |
Software development costs, net | | | 1,618 | | | 1,138 | |
Deferred tax assets | | | 1,456 | | | 2,704 | |
Investment in direct financing leases, net of current portion | | | 4,642 | | | — | |
Intangible and other assets, net | | | 4,931 | | | 2,074 | |
Goodwill | | | 12,378 | | | 7,161 | |
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Total other assets | | | 25,025 | | | 13,077 | |
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Total assets | | $ | 36,557 | | $ | 21,371 | |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
CURRENT LIABILITIES: | | | | | | | |
Accounts payable | | $ | 2,535 | | $ | 1,861 | |
Accrued liabilities | | | 1,582 | | | 2,011 | |
Deferred revenue | | | 456 | | | 586 | |
Current portion of non-recourse lease notes payable | | | 2,336 | | | — | |
Current portion of long-term debt | | | — | | | 1,667 | |
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Total current liabilities | | | 6,909 | | | 6,125 | |
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REVOLVING LINE OF CREDIT | | | — | | | 110 | |
NON-RECOURSE LEASE NOTES PAYABLE, net of current portion | | | 4,056 | | | — | |
OTHER NON-CURRENT LIABILITIES | | | 230 | | | 74 | |
LONG-TERM DEBT, net of current portion | | | — | | | 1,666 | |
SENIOR SUBORDINATED LONG-TERM DEBT, net of unamortized debt discount of $1,491 | | | 8,509 | | | —- | |
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Total liabilities | | | 19,704 | | | 7,975 | |
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COMMITMENTS AND CONTINGENCIES | | | | | | | |
STOCKHOLDERS’ EQUITY: | | | | | | | |
Common stock, no par value; 100,000,000 shares authorized and 15,489,454 and 14,388,744 shares issued and outstanding, respectively | | | — | | | — | |
Preferred Stock, 20,000,000 shares authorized: | | | | | | | |
Series A non-convertible, no par value; 20,000 shares issued and outstanding | | | 6,209 | | | 6,209 | |
Series B convertible, no par value; 40,031 shares issued and outstanding | | | 114 | | | 114 | |
Additional paid-in capital | | | 6,998 | | | 3,716 | |
Retained earnings | | | 3,532 | | | 3,357 | |
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Total stockholders’ equity | | | 16,853 | | | 13,396 | |
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Total liabilities and stockholders’ equity | | $ | 36,557 | | $ | 21,371 | |
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The accompanying notes are an integral part of these consolidated financial statements.
F-5
PRIVATE BUSINESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands, except per share data) | | 2005 | | 2004 | | 2003 | |
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| |
REVENUES: | | | | | | | | | | |
Participation fees | | $ | 23,063 | | $ | 25,287 | | $ | 27,920 | |
Software license | | | 343 | | | 228 | | | 269 | |
Retail planning services | | | 8,678 | | | 9,003 | | | 9,124 | |
Insurance brokerage fees | | | 2,444 | | | 2,593 | | | 2,837 | |
Maintenance and other | | | 3,823 | | | 2,538 | | | 3,007 | |
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|
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|
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|
| |
Total revenues | | | 38,351 | | | 39,649 | | | 43,157 | |
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|
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|
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OPERATING EXPENSES: | | | | | | | | | | |
General and administrative | | | 14,747 | | | 16,222 | | | 19,205 | |
Selling and marketing | | | 18,344 | | | 17,623 | | | 17,011 | |
Research and development | | | 221 | | | 369 | | | 401 | |
Amortization | | | 968 | | | 1,144 | | | 1,820 | |
Other operating (income) expenses, net | | | (4 | ) | | 1,457 | | | 280 | |
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|
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|
| |
Total operating expenses | | | 34,276 | | | 36,815 | | | 38,717 | |
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|
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|
| |
|
| |
OPERATING INCOME | | | 4,075 | | | 2,834 | | | 4,440 | |
INTEREST EXPENSE, NET | | | (381 | ) | | (468 | ) | | (1,492 | ) |
OTHER INCOME | | | — | | | 266 | | | — | |
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|
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|
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|
| |
INCOME BEFORE INCOME TAXES | | | 3,694 | | | 2,632 | | | 2,948 | |
Income tax provision | | | 1,359 | | | 62 | | | 1,150 | |
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|
| |
|
| |
|
| |
NET INCOME | | | 2,335 | | | 2,570 | | | 1,798 | |
Preferred stock dividends | | | (2,160 | ) | | (2,056 | ) | | (160 | ) |
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|
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| |
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS | | $ | 175 | | $ | 514 | | $ | 1,638 | |
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EARNINGS PER SHARE: | | | | | | | | | | |
Basic | | $ | 0.01 | | $ | 0.04 | | $ | 0.12 | |
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|
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Diluted | | $ | 0.01 | | $ | 0.04 | | $ | 0.12 | |
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The accompanying notes are an integral part of these consolidated financial statements.
F-6
PRIVATE BUSINESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands) | | Shares of
Common
Stock | | Preferred
Stock | | Additional
Paid-in
Capital | | Retained
Earnings
(Deficit) | | Total | |
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| |
| |
| |
| |
| |
Balance December 31, 2002 | | | 14,047 | | | 114 | | | (7,195 | ) | | 1,206 | | | (5,875 | ) |
Preferred stock dividends | | | — | | | — | | | | | | (160 | ) | | (160 | ) |
Exercise of stock options | | | 13 | | | — | | | 9 | | | — | | | 9 | |
Shares issued under employee stock purchase plan | | | 71 | | | — | | | 54 | | | — | | | 54 | |
Other | | | (68 | ) | | — | | | (194 | ) | | — | | | (194 | ) |
Comprehensive income: | | | | | | | | | | | | | | | | |
2003 net income | | | — | | | — | | | — | | | 1,798 | | | 1,798 | |
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|
| |
|
| |
|
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|
| |
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Balance December 31, 2003 | | | 14,063 | | $ | 114 | | $ | (7,326 | ) | $ | 2,844 | | $ | (4,368 | ) |
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|
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| |
Series A preferred stock issuance and common stock warrant issuance | | | — | | | 6,209 | | | 10,685 | | | — | | | 16,894 | |
Preferred stock dividends | | | — | | | — | | | — | | | (2,056 | ) | | (2,056 | ) |
Exercise of stock options | | | 299 | | | — | | | 325 | | | — | | | 325 | |
Shares issued under employee stock purchase plan | | | 27 | | | — | | | 32 | | | — | | | 32 | |
Other | | | — | | | — | | | — | | | (1 | ) | | (1 | ) |
Comprehensive income: | | | | | | | | | | | | | | | | |
2004 net income | | | — | | | — | | | — | | | 2,570 | | | 2,570 | |
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|
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|
| |
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|
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|
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Balance December 31, 2004 | | | 14,389 | | $ | 6,323 | | $ | 3,716 | | $ | 3,357 | | $ | 13,396 | |
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|
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Issuance of common stock for purchase of KVI Capital, LLC | | | 116 | | | — | | | 200 | | | — | | | 200 | |
Issuance of common stock for the merger with Captiva Solutions, LLC | | | 758 | | | — | | | 925 | | | — | | | 925 | |
Issuance of Private Business stock options for the merger with Captiva Solutions, LLC | | | — | | | — | | | 381 | | | — | | | 381 | |
Issuance of common stock warrants | | | — | | | — | | | 1,510 | | | — | | | 1,510 | |
Preferred stock dividends | | | — | | | — | | | — | | | (2,160 | ) | | (2,160 | ) |
Exercise of stock options | | | 299 | | | — | | | 381 | | | — | | | 381 | |
Shares issued under employee stock purchase plan | | | 25 | | | — | | | 35 | | | — | | | 35 | |
Repurchase of treasury stock | | | (98 | ) | | — | | | (150 | ) | | — | | | (150 | ) |
Comprehensive income: | | | | | | | | | | | | | | | | |
2005 net income | | | — | | | — | | | — | | | 2,335 | | | 2,335 | |
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Balance December 31, 2005 | | | 15,489 | | $ | 6,323 | | $ | 6,998 | | $ | 3,532 | | $ | 16,853 | |
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The accompanying notes are an integral part of these consolidated financial statements.
F-7
PRIVATE BUSINESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands) | | 2005 | | 2004 | | 2003 | |
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CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | |
Net income | | $ | 2,335 | | $ | 2,570 | | $ | 1,798 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
Write-off of debt issuance costs | | | — | | | 780 | | | — | |
Depreciation and amortization | | | 2,056 | | | 2,844 | | | 4,159 | |
Depreciation on fixed assets under operating leases | | | 48 | | | — | | | — | |
Deferred taxes | | | 973 | | | 1,065 | | | 1,033 | |
Amortization of debt issuance costs and discount | | | 126 | | | 90 | | | 359 | |
Amortization of lease income and initial direct costs | | | (376 | ) | | — | | | — | |
Loss on write-down or disposal of fixed assets and software development costs | | | 16 | | | 65 | | | 150 | |
Deferred gain on land sale | | | (16 | ) | | (16 | ) | | (16 | ) |
Gain on sale of leased equipment | | | (66 | ) | | — | | | — | |
Gain on sale of insurance division | | | — | | | — | | | (427 | ) |
Changes in assets and liabilities, net of acquisitions: | | | | | | | | | | |
Accounts receivable | | | 4 | | | 402 | | | 2,143 | |
Prepaid and other current assets | | | (203 | ) | | 289 | | | 890 | |
Other assets | | | — | | | — | | | 1 | |
Accounts payable | | | 433 | | | 120 | | | (298 | ) |
Accrued liabilities | | | (892 | ) | | (1,767 | ) | | (1,610 | ) |
Deferred revenue | | | (130 | ) | | 29 | | | 87 | |
Other non-current liabilities | | | 81 | | | — | | | (333 | ) |
| |
|
| |
|
| |
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| |
Net cash provided by operating activities | | | 4,389 | | | 6,471 | | | 7,936 | |
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|
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|
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|
| |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | |
Proceeds from lease terminations | | | 122 | | | — | | | — | |
Investment in capital leases | | | (719 | ) | | — | | | — | |
Lease receivables paid | | | 1,001 | | | — | | | — | |
Additions to property and equipment | | | (545 | ) | | (530 | ) | | (113 | ) |
Software development costs | | | (1,028 | ) | | (714 | ) | | (765 | ) |
Additions to intangible and other assets | | | (26 | ) | | — | | | — | |
Proceeds from sale of property and equipment | | | — | | | — | | | 25 | |
Proceeds from sale of financial institution insurance division | | | — | | | — | | | 325 | |
Proceeds from note receivable | | | 60 | | | 43 | | | 28 | |
Acquisition of KVI Capital, LLC, net of cash acquired | | | (575 | ) | | — | | | — | |
Acquisition of Captiva Solutions, LLC, net of cash acquired | | | (6,571 | ) | | — | | | — | |
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| |
Net cash used in investing activities | | | (8,281 | ) | | (1,201 | ) | | (500 | ) |
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CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | |
Repayments on long-term debt | | | (3,333 | ) | | (1,667 | ) | | (5,077 | ) |
Repayments on capitalized lease obligations | | | — | | | (201 | ) | | (303 | ) |
Extinguishment of long-term debt, facility with Fleet | | | — | | | (23,875 | ) | | (295 | ) |
Payments on other short term borrowings | | | — | | | (388 | ) | | (795 | ) |
Payment of debt issuance costs and amendment fees | | | (287 | ) | | (286 | ) | | (589 | ) |
Payment of preferred dividends declared | | | (2,160 | ) | | (2,793 | ) | | — | |
Net proceeds (payments) from revolving line of credit | | | (110 | ) | | (2,390 | ) | | — | |
Net proceeds from sale of Series A preferred shares and common stock warrant | | | — | | | 16,894 | | | — | |
Proceeds from new debt facility with Bank of America | | | — | | | 7,500 | | | — | |
Proceeds from issuance of senior subordinated long-term debt and common stock warrant | | | 10,000 | | | — | | | — | |
Net repayments of non-recourse lease financing notes payable | | | (304 | ) | | — | | | — | |
Repurchase of common stock | | | (150 | ) | | — | | | — | |
Proceeds from exercise of employee stock options | | | 381 | | | 325 | | | 9 | |
Stock issued through employee stock purchase plan | | | 35 | | | 32 | | | 54 | |
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|
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| |
Net cash provided by (used in) financing activities | | | 4,072 | | | (6,849 | ) | | (6,996 | ) |
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|
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| |
NET CHANGE IN CASH AND CASH EQUIVALENTS | | | 180 | | | (1,579 | ) | | 440 | |
CASH AND CASH EQUIVALENTS at beginning of year | | | 7 | | | 1,586 | | | 1,146 | |
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CASH AND CASH EQUIVALENTS at end of year | | $ | 187 | | $ | 7 | | $ | 1,586 | |
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SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | | | | | |
Cash payments for income taxes during period | | $ | 749 | | $ | 306 | | $ | 221 | |
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Cash payments of interest during period | | $ | 168 | | $ | 237 | | $ | 1,492 | |
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SUPPLEMENTAL NON-CASH DISCLOSURES: | | | | | | | | | | |
Dividends accrued on preferred stock | | $ | — | | $ | — | | $ | 160 | |
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| |
Notes payable issued for certain insurance and software contracts | | $ | — | | $ | — | | $ | 1,184 | |
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Common stock issued in connection with acquisitions | | $ | 1,125 | | $ | — | | $ | — | |
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The accompanying notes are an integral part of these consolidated financial statements.
F-8
PRIVATE BUSINESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Private Business, Inc. (the “Company”) was incorporated under the laws of the state of Tennessee on December 26, 1990 for the purpose of marketing a solution that helps financial institutions market and manage accounts receivable financing. The Company operates primarily in the United States and its customers consist of financial institutions of various sizes, primarily community financial institutions. The Company consists of two wholly owned subsidiaries, Towne Services, Inc. and Captiva Solutions, LLC (“Captiva”). Towne Services, Inc. (“Towne”) owns Forseon Corporation (d/b/a RMSA), Private Business Insurance, LLC (“Insurance”) and KVI Capital, LLC (“KVI”). Insurance brokers credit and fraud insurance, which is underwritten through a third party, to its customers. KVI Capital was acquired in August 2005 and is in the business of providing a “turn-key” leasing solution for financial institutions who want to offer a leasing option to their commercial customers. Captiva was acquired in December 2005 and is in the business of providing core data and image processing services to financial institutions.
The market for the Company’s services is concentrated in the financial institution industry. Further, the Company’s services are characterized by risk and uncertainty as a result of the Company’s reliance primarily on one product to generate a substantial amount of the Company’s revenues. There are an increasing number of competitors and alternative products available and rapid consolidations in the financial institution industry. Consequently, the Company is exposed to a high degree of concentration risk relative to the financial institution industry environment and its limited product offerings.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter company transactions and balances have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments that mature in three months or less to be cash equivalents. As of December 31, 2005, the Company reclassified $529,000 of uncleared checks to accounts payable.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated using an accelerated method over 5 to 10 years for furniture and equipment, 3 years for purchased software and the shorter of estimated useful life or the life of the lease for all leasehold improvements. Expenditures for maintenance and repairs are charged to expense as incurred, whereas expenditures for renewals and betterments are capitalized. The Company evaluates the carrying value of property and equipment whenever events or circumstances indicate that the carrying value may have been impaired in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Equipment under operating leases is carried at cost and is depreciated to the individual equipment’s net realizable value. Depreciation is calculated using the straight-line method over the shorter of the life of the lease or the estimated useful life of the equipment, typically 5 to 7 years.
Allowance for Doubtful Accounts
The Company estimates its allowance for doubtful accounts on a case-by-case basis, based on the facts and circumstances surrounding each potentially uncollectible receivable. An allowance is also maintained for expected billing adjustments and for accounts that are not specifically reviewed that may become uncollectible in the future. Uncollectible receivables are written-off in the period management believes it has exhausted every opportunity to collect payment from the customer. The Company considers customer balances in excess of sixty days past due to be delinquent and thus subject to consideration for the allowance for doubtful accounts.
F-9
Software Development Costs
Development costs incurred in the research and development of new software products and significant enhancements to existing software products are expensed as incurred until technological feasibility has been established. After such time, any additional costs are capitalized in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. Capitalized software development costs are amortized on a straight-line basis over the estimated life of the product or enhancement, typically 2 to 5 years.
Also, the Company capitalizes costs of internally used software when application development begins in accordance with American Institute of Certified Public Accounts’ Statement of Position (“AICPA SOP”) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This is generally defined as the point when research and development have been completed, the project feasibility is established, and management has approved a development plan. Many of the costs capitalized for internally used software are related to upgrades or enhancements of existing systems. These costs are only capitalized if the development costs will result in specific additional functionality of the existing system, and are capitalized at the point that application development begins. Typically these costs are amortized on a straight-line basis over a three to five year time period.
Amortization expense associated with capitalized software development costs was approximately $548,000, $788,000 and $954,000 during the years ended December 31, 2005, 2004, and 2003, respectively.
Intangible and Other Assets
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). SFAS No. 142 addresses how intangible assets and goodwill should be accounted for upon and after their acquisition. Specifically, goodwill and intangible assets with indefinite useful lives are not amortized, but are subject to impairment tests based on their estimated fair value.
Intangible and other assets consist primarily of the excess of purchase price over the fair value of the identifiable assets acquired for the minority share of Insurance purchased during 1998, Towne acquired in 2001, and KVI and Captiva acquired in 2005. Also included in intangible and other assets are debt issuance costs that are amortized using the effective interest method over the respective terms of the financial institution loans. In addition, intangible and other assets include non-competition agreements, customer lists and acquired technology.
Revenue Recognition
Software Licenses
The Company accounts for software revenues in accordance with the AICPA SOP No. 97-2, Software Revenue Recognition (“SOP 97-2”). Further, the Company has adopted the provisions of SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions, which supercedes and clarifies certain provisions of SOP 97-2.
The Company licenses its software under automatically renewing agreements, which allow the licensees use of the software for the term of the agreement and each renewal period. The fee charged for this license is typically stated in the contract and is not inclusive of any post contract customer support. The original license agreement also includes a fee for post contract customer support (“PCS”), which must be renewed annually. This fee covers all customer training costs, marketing assistance, phone support, and any and all software enhancements and upgrades. The Company defers the entire amount of this fee and recognizes it over the twelve-month period in which the PCS services are provided. The Company has established vendor specific objective evidence (“VSOE”) for its PCS services, therefore the portion of the up-front fee not attributable to PCS relates to the software license and to all other services provided during the initial year of the agreement, including installation, training and marketing services. The portion of the up-front fee related to these activities is recognized over the first four months of the contract, which is the average period of time over which these services are performed. The agreements typically do not allow for cancellation during the term of the agreement. However, for agreements that contain refund or cancellation provisions, the Company defers the entire fee until such refund or cancellation provisions lapse.
Participation Fees
The Company’s license agreements are structured in a manner that provides for a continuing participation fee to be paid for all receivables purchased by customers using the Company’s software product. These fees are recognized as earned based on the volume of receivables purchased by customers.
F-10
Retail Planning Services
Retail planning services revenue is recognized as earned as the inventory forecasting services are performed.
Insurance Brokerage Fees
The Company acts as a licensed insurance agent for the credit and fraud insurance products that can be purchased in conjunction with the Company’s accounts receivable financing services. The Company earns an insurance brokerage commission for all premiums paid by our financial institution customers. The brokerage fees are recorded on a net basis as opposed to reflecting the entire insurance premium as revenues because the Company does not take any credit risk with respect to these premiums.
Lease Accounting
As a result of the KVI acquisition (Note 2), the Company is an equipment lessor. As such, the Company accounts for its leasing business in accordance with SFAS No. 13, Accounting for Leases. SFAS No. 13 requires lessors to evaluate each lease transaction and determine whether it qualifies as a sales-type, direct financing, leveraged, or operating lease. KVI’s leases fall into two of those catagories: direct financing and operating leases.
For direct financing leases, the investment in direct financing leases caption consists of the sum of the minimum lease payments due during the remaining term of the lease and the unguaranteed residual value of the leased asset. The difference between the total above and the cost of the leased asset is then recorded as unearned income. Unearned income is amortized to income over the lease term as to produce a constant periodic rate of return on the net investment in the lease.
For leases classified as operating leases, lease payments are recorded as rent income during the period earned.
Amounts earned are included in Maintenance and other in the consolidated statements of income.
Core Data and Image Processing
Core data and image processing services are primarily offered on an outsourced basis through our service bureau but are also offered through licenses for use by the institution on an in-house basis. Support and services fees are generated from implementation services contracted with us by the customer, ongoing support services to assist the customer in operating the systems and to enhance and update the software, and from providing outsourced data processing services. Outsourcing services are performed through our data and item centers. Revenues from outsourced item and data processing are derived from monthly usage fees typically under multi-year contracts with our customers and are recorded as revenue in the month the services are performed.
For customers that install our core data system at their location, revenues from the installation and training for the system are recognized as the installation and training services are provided. In addition, there is an annual software maintenance fee, which is recognized ratably over the year to which it relates.
Amounts earned are included in Maintenance and other in the consolidated statements of income.
Maintenance and Other
Maintenance revenue is deferred and recognized over the period in which PCS services are provided. Other revenues are recognized as the services are performed.
F-11
Income Taxes
The Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. As of December 31, 2005 the Company believes that it is more likely than not that the Company will be able to generate sufficient taxable income in future years in order to realize the deferred tax assets that are recorded. As such, no valuation allowance has been provided against the Company’s deferred tax assets as of December 31, 2005.
Concentration of Revenues
Substantially all of the Company’s revenues are generated from financial institutions.
Earnings Per Share
The Company applies the provisions of SFAS No. 128, Earnings per Share, which establishes standards for both the computation and presentation of basic and diluted EPS on the face of the consolidated statement of operations. Basic earnings per share have been computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each year presented. Diluted earnings per common share have been computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding plus the dilutive effect of options and other common stock equivalents outstanding during the applicable periods.
Stock Based Compensation
The Company has elected to account for its stock-based compensation plans under the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and does not utilize the fair value method. However, the Company has adopted the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, and has adopted the additional disclosure requirements as specified in SFAS No. 148, Accounting For Stock-Based Compensation-Transition and Disclosure, for the three years ended December 31, 2005.
The following table illustrates the effect on net income available to common shareholders and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.
(in thousands, except per share data) | | 2005 | | 2004 | | 2003 | |
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| |
| |
| |
Net income available to common shareholders, as reported | | $ | 175 | | $ | 514 | | $ | 1,638 | |
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | | | — | | | — | | | — | |
Add (Deduct): Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | 71 | | | (219 | ) | | (509 | ) |
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Pro forma net income | | $ | 246 | | $ | 295 | | $ | 1,129 | |
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| | | | | | | | | | |
(in thousands, except per share data) | | 2005 | | 2004 | | 2003 | |
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| |
Earnings per share: | | | | | | | | | | |
Basic—as reported | | $ | 0.01 | | $ | 0.04 | | $ | 0.12 | |
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Basic—pro forma | | $ | 0.02 | | $ | 0.02 | | $ | 0.08 | |
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Diluted—as reported | | $ | 0.01 | | $ | 0.04 | | $ | 0.12 | |
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Diluted—pro forma | | $ | 0.02 | | $ | 0.02 | | $ | 0.08 | |
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Fair Value of Financial Instruments
To meet the reporting requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments, the Company estimates the fair value of financial instruments. At December 31, 2005 and 2004, there were no material differences in the book values of the Company’s financial instruments and their related fair values. Financial instruments primarily consists of cash, accounts receivable, accounts payable and debt instruments.
Comprehensive Income
The Company applies the provisions of SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires that the changes in the amounts of certain items, including gains and losses on certain securities, be shown in the financial statements as a component of comprehensive income. The Company reports comprehensive income as a part of the consolidated statements of stockholders’ equity (deficit).
F-12
Segment Disclosures
The Company applies the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the method that business enterprises report information about operating segments in annual and interim financial statements. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic area and major customers. The Company operates in two industry segments, financial institution services and retail inventory forecasting. Note 22 of these consolidated financial statements discloses the Company’s segment results.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year classifications.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123R is effective as of the beginning of the first annual reporting period that begins after December 15, 2005 and therefore the Company adopted SFAS 123R on January 1, 2006. SFAS No. 123R requires the cost of employee services received in exchange for equity instruments awarded or liabilities incurred to be recognized in the financial statements. Compensation cost will be measured using a fair-value based method over the period that the employee provides service in exchange for the award. The Company anticipates using the Black-Scholes option-pricing model to determine the annual compensation cost related to share-based payments under SFAS No. 123R. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under the current rules. This requirement will reduce net operating cash flow and reduce net financing cash outflow by offsetting and equal amounts. As disclosed above, based on the current assumptions and calculations used, had the Company recognized compensation expense based on the fair value of awards of equity instruments, net income would have been increased by approximately $71,000 for the year ended December 31, 2005. This compensation expense is the after-tax net effect of the stock-based compensation expense determined using the fair-value based method for all awards and stock-based employee compensation included previously in reported net income under APB No. 25. SFAS No. 123R will apply to all awards granted after the effective date and to the unvested portion of existing awards, as well as, to modifications, repurchases or cancellations of existing awards. The impact of the adoption of SFAS No. 123R for the year ending December 31, 2006, based upon the options outstanding as of February 28, 2006, is estimated to result in an increase in compensation expense of approximately $800,000. The actual impact of adopting SFAS No. 123R will change for the effect of potential future awards and actual option forfeitures which are not known at this time. The impact of those future awards will vary depending on the timing, amount and valuation methods used for such awards, and the Company’s past awards are not necessarily indicative of such potential future awards.
2. ACQUISITIONS
Leasing Business
Effective August 1, 2005, the Company acquired 100% of the outstanding membership units of KVI in exchange for cash consideration of $699,000 and common stock consideration of $200,000 (115,607 shares). In addition to the consideration at closing, the selling shareholder will be entitled to contingent consideration equal to 20% of the operating income (as defined in the stock purchase agreement) of KVI for each of the three years ending December 31, 2008. Any contingent consideration payments made will be treated as additional purchase price and therefore increase goodwill. Simultaneous to the execution of the stock purchase agreement, the Company entered into a three year employment agreement with the principal selling member of KVI. The operating results of KVI were included with those of the Company beginning August 1, 2005. The transaction was accounted for in accordance with SFAS No. 141, Business Combinations. The purchase price allocation is as follows:
F-13
(in thousands except share amounts) | | | | |
| | | | |
Purchase Price: | | | | |
Cash | | $ | 699 | |
Common shares (115,607 shares valued at $1.73 per share) | | | 200 | |
| |
|
| |
Total purchase price | | $ | 899 | |
| |
|
| |
Value assigned to assets and liabilities: | | | | |
Assets: | | | | |
Cash and cash equivalents | | $ | 124 | |
Accounts receivable | | | 200 | |
Property and equipment | | | 44 | |
Operating lease equipment | | | 209 | |
Investment in direct financing leases | | | 8,280 | |
Customer list (estimated life of seven years) | | | 116 | |
Vendor program (estimated life of seven years) | | | 119 | |
Non-compete (estimated life of two years) | | | 75 | |
Goodwill | | | 216 | |
Liabilities: | | | | |
Accounts payable | | | (196 | ) |
Accrued liabilities | | | (352 | ) |
Other non-current liabilities | | | (26 | ) |
Non-recourse lease notes payable | | | (7,910 | ) |
| |
|
| |
Total net assets | | $ | 899 | |
| |
|
| |
Core and Item Processing Business
On December 9, 2005, the Company acquired 100% of the membership units of Captiva Solutions, LLC in exchange for cash consideration of $6,000,000 and common stock consideration of $925,000 (757,576 shares). In addition to the consideration at closing, the selling shareholders will be entitled to up to an additional 1.2 million common shares, upon the achievement of certain annualized acquired revenue targets during 2006. Any contingent consideration payments made will be treated as additional purchase price and therefore increase goodwill. Simultaneous with the execution of the merger agreement, the Company entered into a two year employment agreement with the chief executive officer of Captiva to become the chief executive officer of the Company. The operating results of Captiva were included with those of the Company beginning December 9, 2005. The transaction was accounted for in accordance with SFAS No. 141, Business Combinations. The Company engaged an independent third party to assist in the identification and valuation of identifiable intangible assets. The purchase price allocation is as follows:
(in thousands except share amounts) | | | | |
| | | | |
Purchase Price: | | | | |
Cash | | $ | 6,000 | |
Common shares (757,576 shares valued at $1.22 per share) | | | 925 | |
Common stock options | | | 381 | |
Direct acquisition costs | | | 579 | |
| |
|
| |
Total purchase price | | $ | 7,885 | |
| |
|
| |
Value assigned to assets and liabilities: | | | | |
Assets: | | | | |
Cash | | $ | 8 | |
Accounts receivable | | | 181 | |
Other current assets | | | 78 | |
Property and equipment | | | 317 | |
Customer list (estimated life of ten years) | | | 1,450 | |
Acquired technology (estimated life of three years) | | | 760 | |
Non-compete (estimated life of three years) | | | 640 | |
Goodwill | | | 5,033 | |
Liabilities: | | | | |
Accounts payable | | | (45 | ) |
Accrued liabilities | | | (466 | ) |
Other non-current liabilities | | | (71 | ) |
| |
|
| |
Total net assets | | $ | 7,885 | |
| |
|
| |
We expect that the goodwill originating from both the KVI and Captiva transactions will be deductible for tax purposes over fifteen years.
F-14
3. PREFERRED STOCK ISSUANCE AND CREDIT FACILITY CLOSING
On January 20, 2004, the Company completed the sale of 20,000 shares of Series A non-convertible preferred stock and a warrant to purchase 16,000,000 shares of our common stock ($1.25 per share exercise price) for a total of $20 million to Lightyear Fund, L.P. (the “Lightyear Transaction”). The preferred shares carry a cash dividend rate of 10% of an amount equal to the liquidation preference, payable quarterly in arrears, when and as declared by the Board of Directors. The Series A preferred stock has a liquidation preference superior to the common stock and to the extent required by the terms of the Series B preferred stock, in parity with the currently outstanding Series B preferred stock. The liquidation preference is equal to the original $20 million purchase price, plus all accrued but unpaid dividends. In addition, the Security-holders agreement between the Company and Lightyear PBI Holdings, LLC (“Lightyear”), executed in conjunction with the sale of the preferred stock and warrant, entitles Lightyear to an additional equity purchase right. The equity purchase right allows Lightyear, so long as Lightyear continues to hold any shares of Series A Preferred Stock, all or any portion of its rights under the warrant or any shares of common stock issued pursuant to an exercise of the warrant, the right to purchase its pro rata portion of all or any part of any new securities which the Company may, from time to time, propose to sell or issue. However, in the case of new security issuances resulting from the exercise of employee stock options, which have an exercise price less than $1.25 per share, Lightyear must still pay $1.25 per share under this equity purchase right. To the extent that new security issuances resulting from the exercise of employee stock options occur which have an exercise price in excess of $1.25 per share, then Lightyear will be required, if they choose to exercise their equity purchase right, to pay the same price per share as the employee stock options being exercised.
The net proceeds from the Lightyear Transaction are shown below:
(in thousands) | | | | |
| | | | |
Cash Received from Lightyear | | $ | 20,000 | |
Less: | | | | |
Broker fees | | | 1,256 | |
Legal and accounting fees | | | 383 | |
Transaction structuring fees | | | 1,200 | |
Other | | | 267 | |
| |
|
| |
Net Proceeds Received | | $ | 16,894 | |
| |
|
| |
Simultaneous with the closing of the Lightyear Transaction, the Company entered into a credit facility with Bank of America. See Notes 11 and 12 for discussion of the Company’s credit facility.
The total net proceeds of both the Lightyear Transaction and the Bank of America credit facility were used to extinguish the Company’s 1998 credit facility.
On December 8, 2005, this facility was amended by converting the entire facility to a revolving line of credit and reducing the total amount of the facility to $5.0 million. The amended credit facility was slated to mature March 8, 2006. It was replaced by the Amended and Restated Credit Facility described below.
On December 9, 2005, the Company entered into a $10.0 million senior subordinated note payable instrument with Lightyear PBI Holdings (“Lightyear Note”) as approved by the shareholders of the Company during a special shareholders meeting on that same date. Prior to its conversion into Series C Preferred Stock discussed below, the Lightyear Note was due in total on December 9, 2010, carried an interest rate of 10% through June 8, 2007 and thereafter increased to 12% annum until maturity. The Lightyear Note was unsecured and could be redeemed by the Company, in whole or part, at anytime at 100% of the principal amount plus any accrued and unpaid interest. In conjunction with the Lightyear Note, the Company issued warrants to Lightyear PBI Holdings, LLC to acquire up to 3,787,879 common shares at $1.32 per share. As part of the warrant agreement, in the event that the Company repaid all or a portion of the Lightyear Note prior to June 9, 2007, then 50% of the warrants above are cancelable on a pro-rate basis. The warrant agreement and the warrants were amended in connection with the conversion of the Lightyear Note into shares of Series C Preferred Stock.
On January 23, 2006, the Company entered into an Amended and Restated Credit Agreement with Bank of America (“Amended and Restated Credit Facility”). The Amended and Restated Credit Facility is for a total of $18.0 million, has a two year term and is secured by a pledge of all of the Company’s assets. The Amended and Restated Credit Facility total of $18.0 million consists of two-term loans totaling $16.0 million and a revolving credit line totaling $2.0 million. The Term A loan is for $10.0 million and has a maturity date of January 23, 2008. The Term B loan is for $6.0 million and has a maturity date of no later than July 23, 2006. The revolving credit line matures on January 23, 2008.
F-15
The Term A loan has scheduled repayment terms as follows:
March 31 and June 30, 2006 | $250,000/quarter |
September 30 and December 31, 2006 | $500,000/quarter |
Thereafter (until maturity) | $750,000/quarter |
In conjunction with this Amended and Restated Credit Facility, The Lightyear Fund, L.P. guaranteed the Term B loan and exchanged its senior subordinated $10.0 million note due on December 9, 2010 for 10,000 shares of the Company’s Series C Preferred Stock. Therefore, the senior subordinated debt discussed above was converted to Series C Preferred Stock on January 23, 2006. In connection with the conversion of the Lightyear Note into Series C Preferred Stock, the warrants that were issued as part of the Lightyear Note were amended such that the exercise price of such warrants can now be paid, at the option of their holder; (i) in cash or by wire transfer, (ii) by the surrender of shares that would otherwise be issuable upon exercise of the warrant that have a market price equal to the aggregate exercise price, or (iii) through a redemption of shares of the Company’s Series C Preferred Stock having a liquidation value equal to the aggregate exercise price. Under the terms of the amended warrant agreement and amended warrants, in the event that the Company redeems any shares of Series C Preferred Stock on or before June 23, 2007, the number of shares issuable pursuant to the warrants will be reduced in accordance with a formula set forth in the warrant agreements.
In the event that we are unable to repay the $6.0 million Term B loan by July 23, 2006 and Lightyear is required to repay the Term B loan on our behalf, we are obligated to issue new Series D preferred shares to Lightyear. The Series D preferred shares will carry a 10% per annum dividend rate, will have a mandatory redemption date nine months from the date of issuance, and will require the issuance of 66,045 common stock warrants with an exercise price of $0.01 per share. We will also be required to pay a closing fee equal to 3.75% of the amount repaid by The Lightyear Fund, L.P. to Bank of America.
The Series C Preferred Shares issued to Lightyear have mandatory redemption date of December 9, 2010 and have a 10% annual dividend rate that increased to 12% on June 9, 2007. The Series C preferred shares do not carry any voting rights. Due to the mandatory redemption requirement, the Series C preferred stock will be included in the liability section of our consolidated balance sheet.
The Amended and Restated Credit Facility includes certain restrictive financial convenants, measured quarterly, relating to net worth, maximum annual capital expenditures, funded debt to EBITDA ratio and fixed charge coverage ratio, as defined in the agreement. The Amended and Restated Credit Facility also contains customary negative covenants, including but not limited to a prohibition on declaring and paying any cash dividends on any class of stock, including the Series A, Series B, and Series C preferred shares outstanding.
As a result of the 1998 debt facility extinguishment, the Company recorded a charge of $780,000 to write-off the unamortized portion of debt issuance costs as of January 20, 2004. Also, the Lightyear Transaction required that the Company obtain directors and officers tail insurance coverage for periods prior to January 20, 2004. The premium for the tail directors and officers’ liability insurance coverage totaled approximately $900,000. The Company expensed the entire premium in January 2004. Therefore, 2004 operating results include two non-recurring expense items totaling approximately $1.7 million, and are included in other operating expenses in the accompanying 2004 consolidated statements.
4. SALE OF BANK INSURANCE DIVISION
On June 30, 2003, the Company entered into an agreement to sell certain operating assets of its Bank Insurance business for cash of $325,000 and a note receivable for $175,000. The note is secured by all assets of the business sold, is due in equal quarterly installments of principal and interest through June 2006 and bears interest at 3%. The result of this transaction was a gain on sale of approximately $427,000, which is included in maintenance and other revenues in the accompanying 2003 consolidated statement of income.
5. PROPERTY AND EQUIPMENT
Property and equipment are classified as follows:
(in thousands) | | 2005 | | 2004 | |
| |
| |
| |
Purchased software | | $ | 3,765 | | $ | 4,876 | |
Leasehold improvements | | | 697 | | | 694 | |
Furniture and equipment | | | 8,031 | | | 8,277 | |
| |
|
| |
|
| |
| | | 12,493 | | | 13,847 | |
Less accumulated depreciation | | | (10,306 | ) | | (11,520 | ) |
| |
|
| |
|
| |
| | $ | 2,187 | | $ | 2,327 | |
| |
|
| |
|
| |
F-16
Depreciation expense was approximately $1,042,000, $1,642,000, and $2,698,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
During the fourth quarter of 2003, the Company completed an extensive review of its fixed assets and determined that certain fixed assets, primarily computer equipment, should be written off. As such, $160,000 of computer equipment was expensed in 2003, which is included in other operating expense in the accompanying 2003 consolidated statement of income. Also in 2003, the Company retired fully depreciated fixed assets with a cost of approximately $4,706,000.
6. OPERATING LEASE PROPERTY
The following schedule provides an analysis of the Company’s investment in property leased under operating leases by major classes as of December 31, 2005:
(in thousands) | | 2005 | |
| |
| |
Computer Equipment | | $ | 20 | |
Office Furniture | | | 38 | |
Manufacturing Equipment | | | 7 | |
Medical Equipment | | | 16 | |
Copiers | | | 134 | |
| |
|
| |
Total Equipment | | | 215 | |
Plus: Initial direct costs | | | 2 | |
Less: Accumulated depreciation | | | (30 | ) |
| |
|
| |
Net property on operating leases | | $ | 187 | |
| |
|
| |
The following is a schedule by years of minimum future rentals on noncancelable operating leases as of December 31, 2005:
2006 | | $ | 88 | |
2007 | | | 37 | |
2008 | | | 20 | |
2009 | | | 2 | |
| |
|
| |
| | $ | 147 | |
| |
|
| |
Depreciation expense on operating lease property was $39,000 for the year ended December 31, 2005.
7. NET INVESTMENT IN DIRECT FINANCING LEASES
The following lists the components of the net investment in direct financing leases as of December 31, 2005:
(in thousands) | | 2005 | |
| |
| |
Total minimum lease payment to be received | | $ | 7,291 | |
Less: Allowance for uncollectibles | | | — | |
| |
|
| |
Net minimum lease payments receivable | | | 7,291 | |
Unguaranteed estimated residual values of leased property | | | | |
| | | 862 | |
Initial direct costs | | | 102 | |
Less: Unearned income | | | (1,378 | ) |
| |
|
| |
Net investment in direct financing leases | | $ | 6,877 | |
| |
|
| |
At December 31, 2005, minimum lease payments for each of the next five years are as follows:
2006 | | $ | 2,868 | |
2007 | | | 1,929 | |
2008 | | | 1,351 | |
2009 | | | 861 | |
2010 | | | 229 | |
Thereafter | | | 53 | |
| |
|
| |
| | $ | 7,291 | |
| |
|
| |
F-17
8. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
(in thousands) | | 2005 | | 2004 | |
| |
| |
| |
Debt issuance costs, net of accumulated amortization of $199 and $90, respectively | | $ | 375 | | $ | 195 | |
Non-compete agreements, net of accumulated amortization of $389 and $359, respectively (remaining weighted average life of 26 months) | | | 1,626 | | | 961 | |
Customer lists, net of accumulated amortization of $1,126 and $841, respectively (remaining weighted average life of 88 months) | | | 1,740 | | | 459 | |
Acquired technology, net of accumulated amortization of $308 and $279, respectively (remaining weighted average life of 50 months) | | | 872 | | | 183 | |
Other, net | | | 318 | | | 276 | |
| |
|
| |
|
| |
| | $ | 4,931 | | $ | 2,074 | |
| |
|
| |
|
| |
Amortization expense of identified intangible assets during the years ended December 31, 2005, 2004 and 2003 was approximately $421,000, $356,000, and $342,000, respectively.
The estimated amortization expense of intangible assets during the next five years is as follows:
2006 | | $ | 1,159 | |
2007 | | | 840 | |
2008 | | | 744 | |
2009 | | | 283 | |
2010 | | | 228 | |
2011 and thereafter | | | 1,653 | |
| |
|
| |
| | $ | 4,907 | |
| |
|
| |
9. GOODWILL
The changes in the carrying amount of goodwill for 2005 and 2004 are as follows:
(in thousands) | | 2005 | | 2004 | |
| |
| |
| |
Balance as of January 1 | | $ | 7,161 | | $ | 7,161 | |
Goodwill acquired during year | | | 5,249 | | | — | |
Decrease resulting from change to deferred tax assets associated with Towne acquisition (Note 14) | | | (25 | ) | | — | |
Write off of goodwill | | | (7 | ) | | — | |
| |
|
| |
|
| |
Balance as of December 31 | | $ | 12,378 | | $ | 7,161 | |
| |
|
| |
|
| |
10. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
(in thousands) | | 2005 | | 2004 | |
| |
| |
| |
Commissions and other payroll costs | | $ | 704 | | $ | 843 | |
Accrued severance costs | | | 103 | | | 294 | |
Other | | | 775 | | | 874 | |
| |
|
| |
|
| |
| | $ | 1,582 | | $ | 2,011 | |
| |
|
| |
|
| |
F-18
11. REVOLVING LINE OF CREDIT
In January 2004, the Company entered into a new credit facility with Bank of America, which included a revolving line of credit. The revolving line of credit with Bank of America allowed for a $6.0 million line, including a $1.0 million letter of credit sublimit. The revolver availability reduced by $1.0 million on each of the first two anniversary dates of the credit facility.
On December 8, 2005, the Bank of America credit facility was amended such that the entire facility (both revolver and term loan) was converted into a revolving credit line with a total capacity of $5.0 million. As of December 31, 2005, there was $0 drawn against the facility and $400,000 was utilized for standby letters of credit. Weighted average borrowings drawn against the facility during 2005 were $3.1 million.
12. LONG-TERM DEBT
Long-term debt consists of the following:
(in thousands) | | 2005 | | 2004 | |
| |
|
| |
|
| |
Senior Subordinated Note Payable with Lightyear PBI Holdings, Inc., net of unamortized debt discount of $1,491 | | $ | 8,509 | | $ | — | |
Term Loan with Bank of America, principal and interest due quarterly At LIBOR plus the applicable margin | | | — | | | 3,333 | |
| |
|
| |
|
| |
Less current portion | | | — | | | (1,667 | ) |
| |
|
| |
|
| |
| | $ | 8,509 | | $ | 1,666 | |
| |
|
| |
|
| |
As stated in Note 11, the Bank of America facility was amended on December 8, 2005, which converted the term loan to a revolver with a maximum borrowing capacity of $5.0 million. The facility is secured by all assets of the Company. There were no amounts outstanding at December 31, 2005 and, as such, there were no scheduled term debt repayments at December 31, 2005. The facility had restrictive financial covenants including a minimum net worth requirement, a maximum debt to EBITDA ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all such restrictive covenants for all periods in which they were applicable. The amended facility had a stated maturity date of March 8, 2006.
On December 9, 2005, the Company issued a $10.0 million unsecured senior subordinated note to Lightyear PBI Holdings, Inc. (“Lightyear Note”) and warrants to acquire 3,787,879 common shares at $1.32 per share in exchange for $10.0 million in cash. On January 23, 2006, the Lightyear Note was converted into shares of the Company’s Series C Preferred Stock as described below. The Lightyear Note was unsecured and was subordinated to the then existing Bank of America facility. The Lightyear Note accrued interest monthly at a rate of 10%, increasing to 12% beginning June 9, 2007, and was payable semi-annually in arrears beginning July 1, 2006. The term of the Lightyear Note was five years, at which time the entire principal was to become due. In the event that the Company prepaid the Lightyear Note in full or any partial payments prior to June 9, 2007, up to 50% of the 3,787,879 of common stock warrants would be cancelled on a pro rata basis in proportion to the amount of debt prepaid. The $10.0 million in proceeds received was allocated to the two instruments in proportion to their relative fair values. As a result, the Lightyear Note has been recorded at a discount. The discount will be accrued over the term of the debt as interest expense. The proceeds of the Lightyear Note were used to acquire Captiva Solutions and repay the outstanding balance of the Bank of America facility. The warrant agreement and the warrants were amended in connection with the conversion of the Lightyear Note into shares of Series C Preferred Stock.
On January 23, 2006, the Bank of America Credit Agreement was amended and restated in its entirety (See Note 23) (“Amended and Restated Facility”).
13. NON-RECOURSE LEASE NOTES PAYABLE
As part of the leasing business, the Company borrows funds from its community bank partners on a non-recourse basis in order to acquire the equipment to be leased. In the event of a lease default, the Company is not obligated to continue to pay on the non-recourse note payable associated with that particular lease. As of December 31, 2005, the principal balance of all non-recourse lease notes payable, due to various financial institutions, totaled $6.4 million ($2.3 million of the total is classified as current). Interest and principal are primarily due monthly with interest rates ranging from 4% to 10.75%.
The following is the scheduled non-recourse notes payable principal payments over the next five years as of December 31, 2005:
2006 | | $ | 2,336 | |
2007 | | | 1,694 | |
2008 | | | 1,241 | |
2009 | | | 841 | |
2010 | | | 230 | |
Thereafter | | | 50 | |
| |
|
| |
| | $ | 6,392 | |
| |
|
| |
F-19
14. INCOME TAXES
Income tax provision (benefit) consisted of the following for the three years ended December 31, 2005:
(in thousands) | | 2005 | | 2004 | | 2003 | |
| |
|
| |
|
| |
|
| |
Current income tax expense (benefit) | | $ | 386 | | $ | (1,003 | ) | $ | 117 | |
Deferred tax expense | | | 973 | | | 1,065 | | | 1,033 | |
| |
|
| |
|
| |
|
| |
Income tax provision, net | | $ | 1,359 | | $ | 62 | | $ | 1,150 | |
| |
|
| |
|
| |
|
| |
A reconciliation of the tax provision from the U.S. federal statutory rate to the effective rate for the three years ended December 31, 2005 is as follows:
(in thousands) | | 2005 | | 2004 | | 2003 | |
| |
|
| |
|
| |
|
| |
Tax expense at U.S. federal statutory rate | | $ | 1,256 | | $ | 895 | | $ | 1,032 | |
State tax expense, net of reduction to federal taxes | | | 148 | | | 129 | | | 118 | |
Expenses not deductible | | | 58 | | | 56 | | | 80 | |
Other | | | (103 | ) | | (1,018 | ) | | (80 | ) |
| |
|
| |
|
| |
|
| |
Income tax provision, net | | $ | 1,359 | | $ | 62 | | $ | 1,150 | |
| |
|
| |
|
| |
|
| |
During September 2004, the Company recorded a $972,000 tax benefit relating to an income tax contingent liability for which the statue of limitations expired in September 2004. This resulted in the large other reconciling item above and the low effective tax rate for 2004.
Significant components of the Company’s deferred tax assets and liabilities, using an average tax rate of 37% at December 31, 2005 and 39% at December 31, 2004 are as follows:
(in thousands) | | 2005 | | 2004 | |
| |
|
| |
|
| |
Current assets (liabilities): | | | | | | | |
Deferred revenue | | $ | 87 | | $ | 138 | |
Allowances on assets | | | 57 | | | 97 | |
Net operating loss carryforwards | | | 400 | | | — | |
Prepaid and accrued expenses | | | (174 | ) | | (165 | ) |
| |
|
| |
|
| |
Deferred tax assets, current | | | 370 | | | 70 | |
| |
|
| |
|
| |
Non-current assets (liabilities): | | | | | | | |
Software development costs | | | (607 | ) | | (446 | ) |
Net operating loss carryforwards, net of current portion | | | 2,746 | | | 3,747 | |
Other | | | 38 | | | 42 | |
Depreciation and amortization | | | (721 | ) | | (639 | ) |
| |
|
| |
|
| |
Deferred tax assets, non-current | | | 1,456 | | | 2,704 | |
| |
|
| |
|
| |
Total net deferred tax assets | | $ | 1,826 | | $ | 2,774 | |
| |
|
| |
|
| |
As a result of the completion of the 2002 federal tax return, certain costs associated with the Towne merger were determined to be deductible for tax purposes, thereby creating additional deferred tax assets that had not been previously recognized. As such, goodwill, associated with the Towne merger, was reduced by approximately $1.6 million in 2003.
The Company has gross net operating loss carryforwards of approximately $40.8 million available as of December 31, 2005 for both federal and state tax purposes. Of this total, $37.6 million were acquired during the Towne merger. At the time of the merger, an analysis was performed to assess the realizability of these NOLs due to Section 382 of the US tax code. The results of this analysis concluded that the likelihood of ever being able to utilize the majority of those NOLs was remote; therefore, the Company recorded only the portion of the Towne NOLs estimated to be usable under Section 382. These carryforwards are limited in use to approximately $1.1 million per year in years 2005 through 2009 and $333,000 annually thereafter due to the Lightyear transaction and the Towne merger and expire at various times through 2021.
F-20
15. PREFERRED STOCK
On August 9, 2001, the Company issued 40,031 shares of Series B Convertible Preferred Stock valued at approximately $114,000 as a condition of the merger of Towne into Private Business. These preferred shares were issued in exchange for all the issued and outstanding Towne Series B preferred stock. The preferred stock is entitled to dividends, in preference to the holders of any and all other classes of capital stock of the Company, at a rate of $0.99 per share of preferred stock per quarter commencing on the date of issuance. Holders of the Series B preferred shares are entitled to one vote per share owned. Approximately $351,000 in accrued dividends payable was assumed by the Company as a part of the merger transaction and approximately $160,000, $160,000 and $63,000 of dividends payable were accrued during the years ended December 31, 2003, 2002 and the period from August 9, 2001 through December 31, 2001, respectively. Total accrued dividends were $735,000 as of December 31, 2003. Accrued dividends payable were paid in full during 2004 and 2005.
The Series B Convertible Preferred Stock is convertible to common stock on a one share for one share basis at the option of the preferred stockholders at any time after August 9, 2002 upon the written election of the stockholder. The Series B Convertible Preferred Stock is also redeemable at the option of the Company for cash at any time, in whole or in part, with proper notice. The stated redemption price is $50.04 per Series B Convertible Preferred share, plus any accrued but unpaid dividends as of the redemption date. The Series B Convertible Preferred Stock, in the event of liquidation, dissolution or winding up of the Company, contains a liquidation preference over all other capital stock of the Company equal to and not less than the stockholder’s invested amount plus any declared but unpaid dividends payable. As of December 31, 2005, in the event of liquidation, dissolution or winding up of the Company, the preferred stockholders would be entitled to receive a total of approximately $2.0 million.
The Series A Non-convertible Preferred Stock issued on January 20, 2004 in conjunction with the capital event is described in Note 3. Holders of the Series A preferred shares are entitled to 800 votes per share owned.
As stated in Note 23, subsequent to December 31, 2005, the Company issued 10,000 shares of Series C Preferred Stock to Lightyear in exchange for the outstanding senior subordinated note payable. The Series C preferred shares are non-voting and have a mandatory redemption date of December 9, 2010 at $10.0 million. The Series C preferred shares have a stated annual dividend rate of 10% per annum, increasing to 12% on June 9, 2007 thereafter until maturity and has a liquidation preference equal to the original $10.0 million purchase price, plus all accrued and unpaid dividends.
16. EMPLOYEE STOCK OPTION PLAN
The Company has four stock option plans: the 1994 Stock Option Plan, the 1999 Stock Option Plan, the 2004 Equity Incentive Plan and the 2005 Long-Term Equity Incentive Plan. Options under these plans include non-qualified and incentive stock options and are issued to officers, key employees and directors of the Company. The Company has reserved 8,203,547 shares of common stock for these plans under which the options are granted at a minimum of 100% of the fair market value of common stock on the date of the grant, expire 10 years from the date of the grant and are exercisable at various times determined by the Board of Directors. The Company also has approximately 848,484 shares of common stock reserved for the issuance of options replacing the Towne options outstanding at the time of the Towne merger. The Company applies APB No. 25 in accounting for its options and, accordingly, no compensation cost has been recognized.
A summary of the status of the Company’s stock options is as follows:
| | Number of
Shares | | Weighted
Average
Exercise
Price | |
| |
|
| |
|
| |
Balance at December 31, 2002 | | | 2,233,507 | | $ | 5.56 | |
Granted | | | 745,700 | | | 0.59 | |
Exercised | | | (15,268 | ) | | 0.64 | |
Canceled | | | (454,054 | ) | | 9.81 | |
| |
|
| |
|
| |
Balance at December 31, 2003 | | | 2,509,885 | | $ | 3.35 | |
| |
|
| |
|
| |
Granted | | | 160,000 | | | 1.59 | |
Exercised | | | (296,274 | ) | | 1.09 | |
Canceled | | | (131,531 | ) | | 4.73 | |
| |
|
| |
|
| |
Balance at December 31, 2004 | | | 2,242,080 | | $ | 3.44 | |
| |
|
| |
|
| |
Granted | | | 3,802,210 | | | 1.38 | |
Exercised | | | (299,739 | ) | | 1.27 | |
Canceled | | | (381,255 | ) | | 3.06 | |
| |
|
| |
|
| |
Balance at December 31, 2005 | | | 5,363,296 | | $ | 2.24 | |
| |
|
| |
|
| |
F-21
The following table summarizes information about stock options outstanding at December 31, 2005:
| | Options Outstanding | | Options Exercisable | |
| |
| |
| |
Exercise Price | | Number | | Weighted Average
Remaining
Contractual Life | | Weighted
Average Exercise
Price | | Number | | Weighted
Average Exercise
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
$ 0.00 to $ 4.99 | | | 5,135,330 | | | 8.5 years | | $ | 1.51 | | | 1,557,933 | | $ | 1.85 | |
$ 5.00 to $14.99 | | | 129,548 | | | 2.4 years | | | 7.33 | | | 129,548 | | | 6.88 | |
$15.00 to $34.99 | | | 59,949 | | | 3.2 years | | | 29.90 | | | 59,949 | | | 21.59 | |
$35.00 to $54.99 | | | 38,469 | | | 2.4 years | | | 39.72 | | | 38,469 | | | 39.72 | |
| |
|
| |
|
| |
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| |
|
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|
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Total | | | 5,363,296 | | | 8.3 years | | $ | 2.24 | | | 1,785,899 | | $ | 3.69 | |
| |
|
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|
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|
| |
At the end of 2005, 2004 and 2003, the number of options exercisable was approximately 1,785,899, 1,983,000, and 1,638,000, respectively, and the weighted average exercise price of these options was $3.69, $3.70, and $4.38, respectively.
SFAS No. 123 requires that compensation expense related to options granted be calculated based on the fair value of the options as of the date of grant. The fair value calculations take into account the exercise prices and expected lives of the options, the current price of the underlying stock, its expected volatility, the expected dividends on the stock, and the current risk-free interest rate for the expected life of the option. Under SFAS No. 123, the weighted average fair value of the 2005, 2004, and 2003 options at the date of grant was approximately $0.78, $1.20, and $1.17 per share, respectively. The fair value was calculated using a weighted average risk-free rate of 4.5%, 4.0%, and 4.0%, an expected dividend yield of 0% and expected stock volatility of 59%, 75%, and 75% for 2005, 2004, and 2003, respectively, and an expected life of the options of 6.5 years, 8 years, and 8 years for 2005, 2004, and 2003, respectively.
17. NET INCOME PER SHARE
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average number of dilutive common and common equivalent shares outstanding during the fiscal year, which includes the additional dilution related to conversion of preferred stock, common stock warrants and stock options as computed under the treasury stock method. Neither the Series B Convertible Preferred Stock nor the common stock warrant held by the Series A shareholder were included in the adjusted weighted average common shares outstanding for 2005, 2004 and 2003 as the effects of conversion are anti-dilutive.
The following table is a reconciliation of the Company’s basic and diluted earnings per share in accordance with SFAS No. 128:
(in thousands, except per share data) | | 2005 | | 2004 | | 2003 | |
| |
|
| |
|
| |
|
| |
Net income available to common stockholders | | $ | 175 | | $ | 514 | | $ | 1,638 | |
| |
|
| |
|
| |
|
| |
Basic earnings per Share: | | | | | | | | | | |
Weighted average common shares outstanding | | | 14,727 | | | 14,243 | | | 14,028 | |
| |
|
| |
|
| |
|
| |
Basic earnings per share | | $ | 0.01 | | $ | .04 | | $ | 0.12 | |
| |
|
| |
|
| |
|
| |
Diluted earnings per Share: | | | | | | | | | | |
Weighted average common shares outstanding | | | 14,727 | | | 14,243 | | | 14,028 | |
Dilutive common share equivalents | | | 291 | | | 463 | | | 88 | |
| |
|
| |
|
| |
|
| |
Total diluted shares outstanding | | | 15,018 | | | 14,706 | | | 14,116 | |
| |
|
| |
|
| |
|
| |
Diluted earnings per share | | $ | 0.01 | | $ | 0.04 | | $ | 0.12 | |
| |
|
| |
|
| |
|
| |
For the years ended December 31, 2005, 2004, and 2003, approximately 25.0 million, 17.1 million and 1.9 million employee stock options, warrants and the Series B preferred shares, respectively, were excluded from diluted earnings per share calculations as their effects were anti-dilutive.
F-22
18. COMMITMENTS AND CONTINGENCIES
The Company leases office space and office equipment under various operating lease agreements. Rent expense for the years ended December 31, 2005, 2004 and 2003 totaled approximately $1,535,000, $1,446,000, and $1,503,000, respectively, and is included in general and administrative expense in the consolidated statements of income.
As of December 31, 2005, the future minimum lease payments relating to operating lease obligations are as follows:
(in thousands) | | | | |
| | | | |
2006 | | $ | 1,816 | |
2007 | | | 1,776 | |
2008 | | | 1,592 | |
2009 | | | 1,140 | |
2010 | | | 283 | |
| |
|
| |
| | $ | 6,607 | |
| |
|
| |
Legal Proceedings
We are not currently a party to, and none of our material properties is currently subject to, any material litigation other than routine litigation incidental to our business.
Employment Agreements
The Company has entered into employment agreements with certain executive officers of the Company. The agreements provide for compensation to the officers in the form of annual base salaries and bonuses based on the earnings of the Company. The employment agreements also provide for severance benefits, ranging from 0 to 24 months, upon the occurrence of certain events, including a change in control, as defined. As of December 31, 2005, the total potential payouts under all employment agreements was approximately $2.7 million.
19. EMPLOYEE BENEFIT PLANS
The Company has an employee savings plan, the Private Business, Inc. 401(k) Profit Sharing Plan (the “Plan”), which permits participants to make contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Code. The Company matches contributions contributed by employees up to a maximum of $1,000 per employee per year and may, at its discretion, make additional contributions to the Plan. Employees are eligible for participation beginning with the quarter immediately following one year of service. Total contributions made by the Company to the Plan were $136,000, $153,000, and $192,000, in 2005, 2004 and 2003, respectively, and are included in general and administrative expense in the consolidated statements of income.
During 2000, the Company established an employee stock purchase plan whereby eligible employees may purchase Company stock at a discount through payroll deduction of up to 15% of base pay. The price paid for the stock is the lesser of 85% of the closing market price on the first or last day of the quarter in which payroll deductions occur. The Company has reserved 333,333 shares for issuance under this plan. The Company issued 25,000 shares during 2005, 30,000 shares during 2004, and 71,000 shares during 2003. Effective December 31, 2005, the Company terminated the employee stock purchase plan.
As a result of the Towne merger, the Company has an employee stock ownership plan (“ESOP”), the RMSA Employee Stock Ownership Plan (the “ESOP Plan”). The purpose of the ESOP is to provide stock ownership benefits for substantially all the employees of RMSA who have completed one year of service. The plan is subject to all the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended. The Company may make discretionary contributions to the ESOP Plan in the form of either cash or the Company’s common stock. The ESOP Plan does not provide for participant contributions. Participants vest in their accounts ratably over a seven-year schedule. The Company made no contribution to the ESOP Plan in 2005, 2004 or 2003. As of December 31, 2005, all of the Company’s common shares previously held by the ESOP Plan were distributed to participants as a result of the Plan’s termination.
20. RELATED PARTY TRANSACTIONS
During the years ended December 31, 2005, 2004 and 2003, the Company paid fees of approximately $0, $15,000, and $25,000, respectively, for legal services to a law firm in which a former director and shareholder of the Company is a partner. Additionally, this former director held a material membership interest in Captiva prior to the Company’s acquisition of Captiva. Because of this ownership interest, the acquisition of Captiva required a shareholder vote, which was held on December 9, 2005. The former director received approximately $1.1 million cash, 287,272 common shares of the Company’s common stock and 670,000 common stock options with a $1.32 exercise price as his portion of the total consideration paid for Captiva.
F-23
During the year ended December 31, 2004, the Company received proceeds of $266,000 for the repayment of notes receivable owed to the Company by two former officers of Towne Services. The Company had previously written these notes off as uncollectible, therefore collection of these notes resulted in a gain. This gain was recorded in 2004 as a non-operating gain in the accompanying consolidated statement of income.
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
| | Quarter Ended
(in thousands, except per share data) | |
| |
| |
| | March 31,
2004 | | June 30,
2004 | | Sept. 30,
2004 | | Dec. 31,
2004 | | March 31,
2005 | | June 30,
2005 | | Sept. 30,
2005 | | Dec. 31,
2005 | |
| |
|
| |
|
| |
|
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|
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|
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|
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|
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|
| |
Statement of income data: | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 9,843 | | $ | 10,156 | | $ | 9,998 | | $ | 9,652 | | $ | 9,199 | | $ | 9,501 | | $ | 9,554 | | $ | 10,097 | |
| |
|
| |
|
| |
|
| |
|
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|
| |
|
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|
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|
| |
Operating income (loss) | | $ | (982 | ) | $ | 1,174 | | $ | 1,216 | | $ | 1,426 | | $ | 693 | | $ | 1,158 | | $ | 1,189 | | $ | 1,035 | |
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|
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| |
Income (loss) from operations before income taxes | | $ | (1,172 | ) | $ | 1,341 | | $ | 1,123 | | $ | 1,340 | | $ | 623 | | $ | 1,088 | | $ | 1,110 | | $ | 873 | |
Income tax provision (benefit) | | | (457 | ) | | 526 | | | (531 | ) | | 524 | | | 244 | | | 423 | | | 433 | | | 259 | |
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|
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|
| |
Net income (loss) | | | (715 | ) | | 815 | | | 1,654 | | | 816 | | | 379 | | | 665 | | | 677 | | | 614 | |
Preferred stock dividends | | | 438 | | | 545 | | | 540 | | | 533 | | | 540 | | | 540 | | | 540 | | | 540 | |
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| |
Net income (loss) available to common Stockholders | | $ | (1,153 | ) | $ | 270 | | $ | 1,114 | | $ | 283 | | $ | (161 | ) | $ | 125 | | $ | 137 | | $ | 74 | |
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Earnings (loss) per diluted common share | | $ | (0.08 | ) | $ | 0.02 | | $ | 0.07 | | $ | 0.02 | | $ | (0.01 | ) | $ | 0.01 | | $ | 0.01 | | $ | 0.01 | |
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The quarter ended March 31, 2004 included unusual charges totaling $1.7 million in operating expenses related to the completion of the capital event described in Note 3.
The quarter ended September 30, 2004 included a $972,000 income tax benefit related to the favorable settlement of an income tax contingency as described in Note 14.
22. SEGMENT INFORMATION
The Company operates in two business segments: financial institution services and retail inventory management and forecasting. The Company accounts for segment reporting under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. Corporate overhead costs and interest have been allocated to income before income taxes of the retail inventory forecasting segment. Additionally, $1.5 million of the goodwill originating from the Towne acquisition has been allocated to the retail inventory forecasting segment and is therefore included in the segment’s total assets.
The following table summarizes the financial information concerning the Company’s reportable segments from continuing operations for the years ended December 31, 2005, 2004 and 2003.
| | (in thousands) | |
| |
| |
| | 2005 | | 2004 | | 2003 | |
| |
| |
| |
| |
(in thousands) | | Financial
Institution
Services | | Retail
Inventory
Forecasting | | Total | | Financial
Institution
Services | | Retail
Inventory
Forecasting | | Total | | Financial
Institution
Services | | Retail
Inventory
Forecasting | | Total | |
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|
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|
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|
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|
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| |
Revenues | | $ | 29,673 | | $ | 8,678 | | $ | 38,351 | | $ | 30,646 | | $ | 9,003 | | $ | 39,649 | | $ | 34,033 | | $ | 9,124 | | $ | 43,157 | |
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Income before taxes | | | 2,607 | | | 1,087 | | | 3,694 | | | 1,606 | | | 1,026 | | | 2,632 | | | 2,216 | | | 732 | | | 2,948 | |
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| |
Assets | | | 32,868 | | | 3,689 | | | 36,557 | | | 17,283 | | | 4,088 | | | 21,371 | | | 22,689 | | | 4,396 | | | 27,085 | |
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Total expenditures for additions to long-lived assets | | | 1,580 | | | 19 | | | 1,599 | | | 1,095 | | | 149 | | | 1,244 | | | 838 | | | 40 | | | 878 | |
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23. SUBSEQUENT EVENTS (UNAUDITED)
On January 18, 2006, the Company acquired certain operating assets of P.T.C. Banking Systems, Inc. for total consideration of approximately $1.0 million. The acquisition will be accounted for as a purchase in accordance with SFAS No 141. The operating results of this business will be included in the operating results of the Company beginning on the date of acquisition.
F-24
On January 23, 2006, the Bank of America Credit Agreement was amended and restated in its entirety (“Amended and Restated Credit Facility”). The Amended and Restated Credit Facility is for a total of $18.0 million, consisting of a $10.0 million term loan due January 23, 2008, a $6.0 million term loan due July 23, 2006 and a $2.0 million revolving credit facility due January 23, 2008. The $10.0 million Term A note has scheduled principal payments as follows:
March 31 and June 30, 2006 | $250,000/quarter |
September 30 and December 31, 2006 | $500,000/quarter |
Thereafter (until maturity) | $750,000/quarter |
Interest on the term notes and the revolving line of credit is due quarterly in arrears at LIBOR plus 3.0% or the lender base rate (as defined in the agreement) as selected by the Company.
The Amended and Restated Credit Facility prohibits the payment in cash of any dividends in all classes of stock for the entire term of the facility.
The $6.0 million Term B note is guaranteed by The Lightyear Fund L.P.. In the event that we are unable to repay the $6.0 million Term B loan by July 23, 2006 and Lightyear is required to repay the Term B loan on our behalf, we are obligated to issue new Series D preferred shares to Lightyear. The Series D preferred shares will carry a 10% per annum dividend rate, will have a mandatory redemption date nine months from the date of issuance, and will require the issuance of 66,045 common stock warrants with an exercise price of $0.01 per share. We will also be required to pay a closing fee equal to 3.75% of the amount repaid by The Lightyear Fund, L.P. to Bank of America.
Simultaneous with the execution of the Amended and Restated Credit Facility, the Company and Lightyear PBI Holdings, LLC. exchanged the Lightyear Note for 10,000 shares of Series C Preferred Stock of the Company. The Series C shares have a stated redemption date of December 9, 2010 at $10.0 million and carry a 10% annual dividend rate through June 8, 2007 and thereafter increasing to 12% annually. In accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, the Series C preferred shares will be included in the liability section of our consolidated balance sheet. Further, the originally recorded debt discount did not change as a result of the exchange and it will continue to be accrued to interest expense until the stated redemption date. In connection with the conversion of the Lightyear Note into Series C Preferred Stock, the warrants that were issued as part of the Lightyear Note were amended such that the exercise price of such warrants can now be paid, at the option of their holder: (i) in cash or by wire transfer, (ii) by the surrender of shares that would otherwise be issuable upon exercise of the warrant that have a market price equal to the aggregate exercise price, or (iii) through a redemption of shares of the Company’s Series C Preferred Stock having a liquidation value equal to the aggregate exercise price. Under the terms of the amended warrant agreement and amended warrants, in the event that the Company redeems any shares of Series C Preferred Stock on or before June 23, 2007, the number of shares issuable pursuant to the warrants will be reduced in accordance with a formula set forth in the warrant agreements.
On January 31, 2006, the Company acquired all of the outstanding capital stock of Goldleaf Technologies, Inc. (“Goldleaf”) for $17.2 million total consideration, consisting of $16.8 million in cash and $350,000 in common shares (272,342 shares). In conjunction with the Goldleaf acquisition, the Company entered into employment agreements with four of Goldleaf’s executives, which included signing bonuses totaling $1.8 million. Additionally, a total of 1.6 million common stock options with an exercise price of $1.33 were issued to certain employees of Goldleaf at closing. The acquisition will be accounted for as a purchase in accordance with SFAS No. 141 and the results of Goldleaf will be included with those of the Company beginning as of the date of acquisition.
24. SUPPLEMENTAL PRO FORMA DATA (UNAUDITED)
As described in Note 2, the Company acquired both KVI and Captiva during 2005. Below is a pro forma consolidated statement of operations data of the Company as if these businesses were acquired as of January 1, 2005 and January 1, 2004, respectively.
2005
(in thousands) | |
|
|
| |
| | Private
Business | | KVI | | Captiva | | | Pro Forma
Adjustments | | Total | |
| |
|
| |
|
| |
|
| | |
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| |
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| |
Revenues | | $ | 38,351 | | $ | 757 | | $ | 1,713 | | | $ | — | | $ | 40,821 | |
| | | | | | | | | | | | A | 517 | | | | |
Operating expenses | | | 34,276 | | | 935 | | | 2,289 | | | B | 393 | | | 38,410 | |
| |
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| |
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| | |
|
| |
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| |
Operating income (loss) | | | 4,075 | | | (178 | ) | | (576 | ) | | | (910 | ) | | 2,411 | |
Nonoperating expense (income) | | | 381 | | | 91 | | | 164 | | | C | 924 | | | 1,560 | |
Income tax provision (benefit) | | | 1,359 | | | — | | | — | | | D | (1,027 | ) | | 332 | |
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| | |
|
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|
| |
Net income (loss) | | | 2,335 | | | (269 | ) | | (740 | ) | | | (807 | ) | | 519 | |
Preferred dividends | | | 2,160 | | | — | | | — | | | | — | | | 2,160 | |
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|
| |
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| | |
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| |
Net income (loss) available to common shareholders | | $ | 175 | | $ | (269 | ) | $ | (740 | ) | | $ | (807 | ) | $ | (1,641 | ) |
| |
|
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|
| |
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| | |
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| |
Diluted earnings (loss) per share | | $ | 0.01 | | | | | | | | | | | | $ | (0.11 | ) |
| |
|
| | | | | | | | | | | |
|
| |
F-25
2004
(in thousands) | |
| |
| | Private
Business | | KVI | | Captiva | | | Pro Forma
Adjustments | |
Total
| |
| |
|
| |
|
| |
|
| | |
|
| |
|
| |
Revenues | | $ | 39,649 | | $ | 1,539 | | $ | 1,902 | | | $ | — | | $ | 43,090 | |
| | | | | | | | | | | | A | 693 | | | | |
Operating expenses | | | 36,815 | | | 1,160 | | | 1,746 | | | B | 669 | | | 41,083 | |
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|
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| | |
|
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| |
Operating income | | | 2,834 | | | 379 | | | 156 | | | | (1,362 | ) | | 2,007 | |
Nonoperating expense (income) | | | 202 | | | (44 | ) | | 84 | | | C | 1,003 | | | 1,245 | |
Income tax provision (benefit) | | | 62 | | | — | | | — | | | D | (736 | ) | | (674 | ) |
| |
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| | |
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|
| |
Net income | | | 2,570 | | | 423 | | | 72 | | | | (1,629 | ) | | 1,436 | |
Preferred dividends | | | 2,056 | | | — | | | — | | | | — | | | 2,056 | |
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| | |
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| |
Net income (loss) available to common shareholders | | $ | 514 | | $ | 423 | | $ | 72 | | | $ | (1,629 | ) | $ | (620 | ) |
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| | |
|
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| |
Diluted earnings (loss) per share | | $ | 0.04 | | | | | | | | | | | | $ | (0.04 | ) |
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| | | | | | | | | | | |
|
| |
The 2005 Private Business column above includes the results of KVI and Captiva from their dates of acquisition of August 1, 2005 and December 9, 2005, respectively.
| Proforma adjustments: |
| | |
| A | To increase amortization expense of new intangibles recorded as a result of the KVI and Captiva transactions. The pro forma amounts utilized the $3.2 million of identified intangibles recorded (See Note 2), consisting of acquired technology ($760,000), customer lists ($1,566,000), non-competes ($715,000), and vendor program ($119,000) and are amortized over estimated average useful lives of three, ten and three years, respectively. |
| | |
| B | To increase general and administrative costs for the increased salaries of the new Chief Executive Officer and Senior Vice President of Leasing based on the employment agreements executed as part of these transactions |
| | |
| C | To increase interest expense for additional debt acquired by the company as consideration paid for the membership units of Captiva and KVI. Interest expense has been estimated assuming that the Lightyear PBI Holdings financing discussed above is used for the acquisitions. Therefore, the pro forma interest expense was calculated using an interest rate of 10% and includes amortization of the debt discount using the effective interest method. |
| | |
| D | To record income tax effects (at an effective rate of 39%) of the pro forma adjustments of each period. |
The pro forma statement of operations data does not include stock compensation expense for the new stock options issued in conjunction with the Captiva acquisition described in Note 2 above. The stock option grants made on October 20, 2005 totaled 3.3 million and the fair value using the Black-Scholes model is $0.74 per share. The Company accounts for stock-based compensation plans under the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and does not utilize the fair value method. If the Company expensed options under SFAS No. 123, Accounting for Stock-Based Compensation, an estimated additional $398,000 of compensation expense would have been expensed during each of the years ended December 31, 2005 and 2004, respectively. Beginning January 1, 2006, the Company will be required to expense the remaining unvested fair value of all stock options, including those issued as part of this transaction. The estimated annual stock compensation expense for the stock options issued as part of the Captiva acquisition is $398,000.
Captiva organized and began operations on April 1, 2005. On June 1, 2005, Captiva acquired all operating assets of Total Bank Technology, LLC (“TBT”). The year ended December 31, 2005 consists of the full five months results of TBT (January 1 – May 31, 2005 presented separately) prior to the acquisition by Captiva along with the results of Captiva from April 1, 2005 through December 31, 2005, including the results of TBT for the months of June through December 2005. Had Captiva been in existence as of January 1, 2004, the 2004 and 2005 results would have reflected additional expenses for the management team and facilities expense of Captiva.
The pro forma financial data are presented for informational purposes. You should not rely on the pro forma amounts as being indicative of the financial position or the results of operations of the consolidated companies that would have actually occurred had the acquisitions been effective during the periods presented or of the future financial position or future results of operations of the consolidated companies. You should read this information in conjunction with the accompanying notes thereto and with the historical consolidated financial statements and accompanying notes of the company included elsewhere in this document.
F-26
SCHEDULE II
PRIVATE BUSINESS, INC.
VALUATION AND QUALIFYING ACCOUNTS
| | Balance at
Beginning of
Period | | Additions
Charged to
Costs and
Expenses (1) | | Deductions
(Charge
Offs)(1) | | Balance at
End of
Period | |
| |
|
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|
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|
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|
| |
Year ended December 31, 2005 | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 242,000 | | $ | 138,000 | | $ | 174,000 | | $ | 206,000 | |
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Year ended December 31, 2004 | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 358,000 | | $ | 31,000 | | $ | 147,000 | | $ | 242,000 | |
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|
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|
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Year ended December 31, 2003 | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 632,000 | | $ | 260,000 | | $ | 534,000 | | $ | 358,000 | |
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|
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|
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(1) | Additions to the allowance for doubtful accounts are included in general and administrative expense. All deductions or charge offs are charged against the allowance for doubtful accounts. |
F-27
SIGNATURES
Pursuant to the requirements of Schedule 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.
| | PRIVATE BUSINESS, INC |
| | |
| | |
| | /s/ G. Lynn Boggs |
| |
|
| | G. Lynn Boggs |
| | Chief Executive Officer |
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Date: March 22, 2006 | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | | Title | | Date |
| |
| |
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| | | | |
/s/ G. Lynn Boggs | | Chief Executive Officer and Director | | March 22, 2006 |
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G. Lynn Boggs | | | | |
| | | | |
/s/ J. Scott Craighead | | Chief Financial Officer (Principal Financial and Accounting Officer) | | March 22, 2006 |
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J. Scott Craighead | | | | |
| | | | |
/s/ John D. Schneider, Jr. | | Director | | March 22, 2006 |
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John D. Schneider, Jr. | | | | |
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/s/ David W. Glenn | | Director | | March 22, 2006 |
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David W. Glenn | | | | |
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/s/ Thierry F. Ho | | Director | | March 22, 2006 |
| | | | |
Thierry F. Ho | | | | |
| | | | |
/s/ David B. Ingram | | Director | | March 22, 2006 |
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David B. Ingram | | | | |
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/s/ Robert A. McCabe, Jr. | | Director | | March 22, 2006 |
| | | | |
Robert A. McCabe, Jr. | | | | |
| | | | |
/s/ Lawrence A. Hough | | Director | | March 22, 2006 |
| | | | |
Lawrence A. Hough | | | | |
INDEX TO EXHIBITS
Exhibit
Number | | Description of Exhibit |
| |
|
3.1 | | | Amended and Restated Charter of the Company (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on No. 333-75013 Form S-1). |
3.1.1 | | | Charter Amendment Dated August 9, 2001 (incorporated by reference to Exhibit 3.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). |
3.1.2 | | | Charter Amendment Dated January 16, 2004 (incorporated by reference to Exhibit B of the Company’s Definitive Proxy Statement on Schedule 14A filed on December 29, 2003). |
3.1.3 | | | Charter Amendment Dated January 23, 2006 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on January 26, 2006). |
3.1.4 | | | Charter Amendment Dated January 24, 2006 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K Dated January 26, 2006). |
3.2 | | | Amended and Restated Bylaws of Private Business (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement No. 333-75013 on Form S-1). |
3.2.1 | | | Bylaw Amendment Dated January 20, 2004 (incorporated by reference to Exhibit 3.2.1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003). |
10.1 | | | Stock Purchase Agreement dated as of July 24, 1998 (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement No. 333-75013 on Form S-1). |
10.2 | | | Stockholders Agreement dated as of August 7, 1998 (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement No. 333-75013 on Form S-1). |
10.3 | | | Registration Rights Agreement dated as of August 7, 1998 (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement No. 333-75013 on Form S-1). |
10.4 | | | Credit Agreement dated as of January 19, 2004 between the Company, certain guarantees, and Bank of America, N.A. (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004). |
10.5 | | | Form of Indemnification Agreement between Private Business and each of its Officers and Directors (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement No. 333-75013 on Form S-1). |
10.6 | | | Form of Non-qualified Stock Option Agreement without change of control provision (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement No. 333-75013 on Form S-1). |
10.7 | | | Form of Non-qualified Stock Option Agreement with change of control provision (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement No. 333-75013 on Form S-1). |
10.8 | | | Private Business, Inc. 1999 Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement No. 333-75013 on Form S-1). |
10.9 | | | Cendant Termination and Non-Competition Agreement (incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement No. 333-75013 on Form S-1). |
10.10 | | | Lease Between Triple Brentwood as Landlord and 21 Private Business, Inc. as Tenant (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999). |
10.11 | | | Employment Agreement between the Company and Henry M. Baroco (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004). |
10.12 | | | Incentive Stock Option Agreement between the Company and Henry M. Baroco (incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004). |
10.13 | | | Amendment to Employment Agreement dated October 21, 2005 between the Company and Henry M. Baroco (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 20, 2005). |
10.14 | | | Amended and Restated Securities Purchase Agreement dated December 24, 2003, between the Company and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit A of the Company’s Definitive Proxy Statement on Schedule 14A filed on December 29, 2003). |
10.15 | | | Warrant Agreement dated January 20, 2004, by and among the Company and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit C of the Company’s Definitive Proxy Statement on Schedule 14A filed on December 29, 2003). |
10.16 | | | Security-holders Agreement dated January 20, 2004, by and among the Company and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit D of the Company’s Definitive Proxy Statement on Schedule 14A filed on December 29, 2003). |
Exhibit
Number | | Description of Exhibit |
| |
|
10.17 | | | Private Business, Inc. 2004 Equity Incentive Plan (incorporated by reference to Appendix B to the Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 23, 2004). |
10.18 | | | Private Business, Inc. 2005 Long-Term Equity Incentive Plan (incorporated by reference to Annex E to the Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on November 17, 2005). |
10.19 | | | Amended and Restated Credit Agreement dated January 23, 2006 between Private Business, Inc. and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 26, 2006). |
10.20 | | | Guaranty Side Letter dated January 23, 2006 between Private Business, Inc., The Lightyear Fund, L.P. and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 26, 2006). |
10.21 | | | Exchange Agreement dated January 23, 2006 between Private Business, Inc. and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on January 26, 2006). |
10.22 | | | Amended and Restated Warrant Agreement dated January 23, 2006 between Private Business, Inc. and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on January 26, 2006). |
10.23 | | | Amended and Restated Warrant Certificate dated January 23, 2006 issued by Private Business, Inc. to Lightyear PBI Holdings, LLC. (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on January 26, 2006). |
10.24 | | | Amended and Restated Warrant Certificate dated January 23, 2006 issued by Private Business, Inc. to Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on January 26, 2006). |
10.25 | | | Stock Purchase Agreement dated January 23, 2006 among Private Business, Inc. and the Stockholders of Goldleaf Technologies, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on January 24, 2006). |
10.26 | | | Agreement and Plan of Merger dated October 20, 2005 among Private Business, Inc., CSL Acquisition Corporation, Captiva Solutions, LLC, and certain of the Captiva members (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on October 25, 2005). |
10.27 | | | Securities Purchase Agreement dated December 9, 2005 between Private Business, Inc. and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 12, 2005). |
10.28 | | | Senior Subordinated Note dated December 9, 2005 issued by Private Business, Inc. to Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 12, 2005). |
10.29 | | | Warrant Agreement dated December 9, 2005 between Private Business, Inc. and Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 12, 2005). |
10.30 | | | Warrant Certificate dated December 9, 2005 issued by Private Business, Inc. to Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on December 12, 2005). |
10.31 | | | Warrant Certificate dated December 9, 2005 issued by Private Business, Inc. to Lightyear PBI Holdings, LLC (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on December 12, 2005). |
10.32 | | | First Amendment to Credit Agreement dated December 8, 2005 between Private Business, Inc., the guarantors thereto, and Bank of America, N.A. (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on December 12, 2005). |
10.33 | | | First Amendment to Credit Agreement dated December 8, 2005 between Private Business, Inc., the guarantors thereto, and Bank of America, N.A. (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on December 12, 2005). |
10.34 | | | Revolving Note dated December 8, 2005 issued by Private Business, Inc. to Bank of America, N.A. (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on December 12, 2005). |
10.35 | | | Employment Agreement dated December 9, 2005 between Private Business, Inc. and G. Lynn Boggs (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on December 12, 2005). |
Exhibit
Number | | Description of Exhibit |
| |
|
21 | | | Subsidiaries of Private Business. |
23.1 | | | Consent of Grant Thornton LLP. |
23.2 | | | Consent of Ernst & Young LLP. |
31.1 | | | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Chief Executive Officer. |
31.2 | | | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer. |
32.1 | | | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Chief Executive Officer. |
32.2 | | | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Chief Financial Officer. |
The attachments referenced in these exhibits are not included in this filing but are available from Private Business upon request.
