Exhibit 99.3
Compass Diversified Holdings
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
The following unaudited pro forma condensed combined balance sheets as of December 31, 2006 and September 30, 2007, give effect to the following transactions, as if the following transactions had been completed as of the respective balance sheet date:
• | The acquisition of approximately 76% of Fox Factory, Inc. (“Fox”) as further described on Form 8-K that we filed on January 8, 2008 for a total cash investment of approximately $87.4 million; | ||
• | The acquisition of Staffmark Investment LLC (“Staffmark”) by our subsidiary, CBS Personnel Holdings, Inc. as further described on Forms 8-K that we filed on December 20, 2007 and January 23, 2008 for a total cash investment of approximately $83.9 million; and | ||
• | The completion of the credit facility expansion used to finance these two acquisitions as further described on Form 8-K that we filed on December 11, 2007. |
The purchase price for each of these acquisitions is subject to adjustment and is further subjected to the finalization of the preliminary purchase price allocation. The actual amount of working capital adjustments, which we do not expect to be material, will depend upon the actual working capital of Fox as of January 4, 2008 and Staffmark as of January 21, 2008, the actual closing dates for these two businesses.
The following unaudited pro forma condensed combined statements of operations for the year ended December 31, 2006 and for the nine months ended September 30, 2007, give effect to the acquisition of Fox and Staffmark and the credit facility expansion as if they had occurred on January 1, 2006. The “as reported” financial information in the unaudited pro forma condensed combined balance sheet at December 31, 2006 and September 30, 2007, and for the year ended December 31, 2006 and nine months ended September 30, 2007, for Fox and Staffmark is derived from the audited financial statements for the year ended December 31, 2006 and the unaudited financial statements for the nine months ended September 30, 2007 of each of the businesses, which are included elsewhere in this form 8-K. The “as reported” financial information for Compass Diversified Holdings at December 31, 2006 and for the year ended December 31, 2006, is derived from the audited financial statements of Compass Diversified Holdings as of December 31, 2006 and for the year ended December 31, 2006 as filed on Form 10-K dated March 13, 2007. The “as reported” financial information for Compass Diversified Holdings at September 30, 2007 and for the nine months ended September 30, 2007, is derived from the unaudited financial statements of Compass Diversified Holdings as of September 30, 2007 and for the nine months ended September 30, 2007 as filed on Form 10-Q dated November 9, 2007.
The following unaudited pro forma condensed combined financial statements, or the pro forma financial statements, have been prepared assuming that our acquisition of the Fox and Staffmark businesses will be accounted for under the purchase method of accounting. Under the purchase method of accounting, the assets acquired and the liabilities assumed will be recorded at their respective fair value at the date of acquisition. The total purchase price has been allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values, which are subject to revision if the finalization of the respective fair values results in a material difference to the preliminary estimate used.
The unaudited pro forma condensed combined statement of operations includes the results of operations for Fox and Staffmark as if they were purchased on January 1, 2006 and the actual historical results of operations of our other businesses as of the date of acquisition, which was May 16, 2006 for our initial businesses, August 1, 2006 for Anodyne Medical Device, February 28, 2007 for Aeroglide Corporation and Halo Branded Solutions, Inc and August 31, 2007 for American Furniture Manufacturing, Inc. As such these pro forma financial statements are not necessarily indicative of operating results that would have been achieved had the transactions described above been completed at the beginning of the period presented and should not be construed as indicative of future operating results.
You should read these unaudited pro forma condensed financial statements in conjunction with the accompanying notes, the financial statements of Fox and Staffmark included in this Form 8-K and the consolidated financial statements for the Trust and the Company, including the notes thereto as previously filed.
Compass Diversified Holdings
Condensed Combined Pro Forma Balance Sheet
at September 30, 2007
(Unaudited)
at September 30, 2007
(Unaudited)
Pro Forma | ||||||||||||||||||||||||
Compass | Combined | |||||||||||||||||||||||
Diversified | Credit | Compass | ||||||||||||||||||||||
Holdings as | Facility | Fox | Staffmark | Pro Forma | Diversified | |||||||||||||||||||
Reported | Expansion* | (as reported) | (as reported) | Adjustments | Holdings | |||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 6,397 | $ | 145,300 | $ | $ | 10,947 | $ | (145,300 | ) | $ | 17,344 | ||||||||||||
Accounts receivable, net | 126,398 | 15,023 | 54,818 | 196,239 | ||||||||||||||||||||
Inventories | 33,238 | 13,971 | 47,209 | |||||||||||||||||||||
Prepaid expenses and other current assets | 17,123 | 298 | 13,764 | 31,185 | ||||||||||||||||||||
Total current assets | 183,156 | 145,300 | 29,292 | 79,529 | (145,300 | ) | 291,977 | |||||||||||||||||
Property and equipment, net | 27,017 | 4,333 | 3,247 | 987 | 35,584 | |||||||||||||||||||
Goodwill | 265,025 | 64,294 | 20,920 | 350,239 | ||||||||||||||||||||
Intangible assets, net | 209,017 | 25,540 | 83,446 | 318,003 | ||||||||||||||||||||
Deferred debt issuance costs | 5,249 | 4,700 | 9,949 | |||||||||||||||||||||
Other non-current assets | 18,753 | 285 | 939 | 19,977 | ||||||||||||||||||||
Total assets | $ | 708,217 | $ | 150,000 | $ | 33,910 | $ | 173,549 | $ | (39,947 | ) | $ | 1,025,729 | |||||||||||
Liabilities and stockholders’ equity | ||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||
Accounts payable and accrued expenses | $ | 97,972 | $ | $ | 11,350 | $ | 50,068 | $ | 5,000 | $ | 164,390 | |||||||||||||
Due to related party | 524 | 524 | ||||||||||||||||||||||
Current portion of debt | 26,864 | 2,387 | 14,500 | 9,113 | 52,864 | |||||||||||||||||||
Total current liabilities | 125,360 | 13,737 | 64,568 | 14,113 | 217,778 | |||||||||||||||||||
Long-term debt | 150,000 | 1,126 | 69,725 | (70,851 | ) | 150,000 | ||||||||||||||||||
Supplemental put obligation | 19,167 | 19,167 | ||||||||||||||||||||||
Long-term deferred income taxes | 67,339 | 67,339 | ||||||||||||||||||||||
Other non-current liabilities | 19,494 | 19,469 | 38,963 | |||||||||||||||||||||
Total liabilities | 231,360 | 150,000 | 14,863 | 153,762 | (56,738 | ) | 493,247 | |||||||||||||||||
Minority interest | 30,393 | 356 | 55,269 | 86,018 | ||||||||||||||||||||
Total stockholders’ equity | 446,464 | 19,047 | 19,431 | (38,478 | ) | 446,464 | ||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 708,217 | $ | 150,000 | $ | 33,910 | $ | 173,549 | $ | (39,947 | ) | $ | 1,025,729 | |||||||||||
* | Reflects the issuance of term loan notes and the net proceeds received from the issuance of such notes, after deducting related transaction fees and expenses of approximately $4.7 million that were used to partially finance the acquisitions of Fox and Staffmark. |
2
Compass Diversified Holdings
Condensed Combined Pro Forma Balance Sheet
at December 31, 2006
(Unaudited)
at December 31, 2006
(Unaudited)
Pro Forma | ||||||||||||||||||||||||
Compass | Combined | |||||||||||||||||||||||
Diversified | Credit | Compass | ||||||||||||||||||||||
Holdings as | Facility | Fox | Staffmark | Pro Forma | Diversified | |||||||||||||||||||
Reported | Expansion* | (as reported) | (as reported) | Adjustments | Holdings | |||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 7,006 | $ | 145,300 | $ | 540 | $ | 10,177 | $ | (145,300 | ) | $ | 17,723 | |||||||||||
Accounts receivable, net | 74,899 | 8,701 | 61,303 | 144,903 | ||||||||||||||||||||
Inventories | 4,756 | 10,491 | 15,247 | |||||||||||||||||||||
Prepaid expenses and other current assets | 7,059 | 410 | 9,925 | 17,394 | ||||||||||||||||||||
Current assets of discontinued operations | 46,636 | 46,636 | ||||||||||||||||||||||
Total current assets | 140,356 | 145,300 | 20,142 | 81,405 | (145,300 | ) | 241,903 | |||||||||||||||||
Property and equipment, net | 10,858 | 2,828 | 3,712 | 2,493 | 19,891 | |||||||||||||||||||
Goodwill | 159,151 | 64,295 | 20,131 | 243,577 | ||||||||||||||||||||
Intangible assets, net | 128,890 | 25,564 | 83,422 | 237,876 | ||||||||||||||||||||
Deferred debt issuance costs | 5,190 | 4,700 | 9,890 | |||||||||||||||||||||
Other non-current assets | 15,894 | 185 | 932 | 17,011 | ||||||||||||||||||||
Assets of discontinued operations | 65,258 | 65,258 | ||||||||||||||||||||||
Total assets | $ | 525,597 | $ | 150,000 | $ | 23,155 | $ | 175,908 | $ | (39,254 | ) | $ | 835,406 | |||||||||||
Liabilities and stockholders’ equity | ||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||
Accounts payable and accrued expenses | $ | 52,900 | $ | $ | 6,459 | $ | 47,492 | $ | 5,000 | $ | 111,851 | |||||||||||||
Due to related party | 469 | 469 | ||||||||||||||||||||||
Current portion of debt | 87,604 | 184 | 11,600 | 14,216 | 113,604 | |||||||||||||||||||
Current portion of supplemental put obligation | 7,880 | 7,880 | ||||||||||||||||||||||
Current liabilities of discontinued operations | 14,019 | 14,019 | ||||||||||||||||||||||
Total current liabilities | 162,872 | 6,643 | 59,092 | 19,216 | 247,823 | |||||||||||||||||||
Long-term debt | 150,000 | 590 | 83,572 | (84,162 | ) | 150,000 | ||||||||||||||||||
Supplemental put obligation | 14,576 | 14,576 | ||||||||||||||||||||||
Deferred income taxes | 41,337 | 41,337 | ||||||||||||||||||||||
Non-current liabilities of discontinued operations | 6,634 | 6,634 | ||||||||||||||||||||||
Other non-current liabilities | 17,336 | 19,233 | 36,569 | |||||||||||||||||||||
Total liabilities | 242,755 | 150,000 | 7,233 | 161,897 | (64,946 | ) | 496,939 | |||||||||||||||||
Minority interest | 27,131 | 357 | 55,268 | 82,756 | ||||||||||||||||||||
Total stockholders’ equity | 255,711 | 15,922 | 13,654 | (29,576 | ) | 255,711 | ||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 525,597 | $ | 150,000 | $ | 23,155 | $ | 175,908 | $ | (39,254 | ) | $ | 835,406 | |||||||||||
* | Reflects the issuance of term loan notes and the net proceeds received from the issuance of such notes, after deducting related transaction fees and expenses of approximately $4.7 million that were used to partially finance the acquisitions of Fox and Staffmark. |
3
Compass Diversified Holdings
Condensed Combined Pro Forma Statement of Operations
for the nine months ended September 30, 2007
(Unaudited)
for the nine months ended September 30, 2007
(Unaudited)
Pro Forma | ||||||||||||||||||||
Compass | Combined | |||||||||||||||||||
Diversified | Compass | |||||||||||||||||||
Holdings as | Fox | Staffmark | Pro Forma | Diversified | ||||||||||||||||
Reported | (as reported) | (as reported) | Adjustments | Holdings | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net Sales | $ | 629,820 | $ | 75,724 | $ | 434,772 | $ | $ | 1,140,316 | |||||||||||
Cost of Sales | 466,037 | 54,222 | 360,404 | 215 | 880,878 | |||||||||||||||
Gross profit | 163,783 | 21,502 | 74,368 | (215 | ) | 259,438 | ||||||||||||||
Operating expenses: | ||||||||||||||||||||
Staffing Expense | 41,922 | 41,535 | 83,457 | |||||||||||||||||
Selling, general and administrative expense | 76,994 | 14,526 | 21,648 | 113,168 | ||||||||||||||||
Supplemental put expense | 4,591 | 4,591 | ||||||||||||||||||
Fees to Manager | 7,477 | 3,404 | 10,881 | |||||||||||||||||
Research and development expense | 1,120 | 1,120 | ||||||||||||||||||
Amortization expense | 14,382 | 7,078 | 21,460 | |||||||||||||||||
Operating income (loss) | 17,297 | 6,976 | 11,185 | (10,697 | ) | 24,761 | ||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest income | 1,898 | 1,898 | ||||||||||||||||||
Interest expense | (4,271 | ) | (86 | ) | (4,952 | ) | (7,070 | ) | (16,379 | ) | ||||||||||
Amortization of debt issuance costs | (861 | ) | (587 | ) | (1,448 | ) | ||||||||||||||
Other income (expense), net | 275 | 34 | (24 | ) | 285 | |||||||||||||||
Income (loss) from continuing operations before provision for income taxes and minority interest | 14,338 | 6,924 | 6,209 | (18,354 | ) | 9,117 | ||||||||||||||
Provision for income taxes | 5,699 | 17 | 239 | 5,955 | ||||||||||||||||
Minority interest | 869 | 248 | 1,117 | |||||||||||||||||
Income (loss) from continuing operations | $ | 7,770 | $ | 6,907 | $ | 5,970 | $ | (18,602 | ) | $ | 2,045 | |||||||||
Income from continuing operations per share | $ | 0.30 | $ | 0.08 | ||||||||||||||||
Weighted average number of shares outstanding | 26,316 | 26,316 | ||||||||||||||||||
4
Compass Diversified Holdings
Condensed Combined Pro Forma Statement of Operations
for the year ended December 31, 2006
(Unaudited)
for the year ended December 31, 2006
(Unaudited)
Pro Forma | ||||||||||||||||||||
Compass | Combined | |||||||||||||||||||
Diversified | Compass | |||||||||||||||||||
Holdings as | Fox | Staffmark | Pro Forma | Diversified | ||||||||||||||||
Reported | (as reported) | (as reported) | Adjustments | Holdings | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net Sales | $ | 410,873 | $ | 87,846 | $ | 624,484 | $ | $ | 1,123,203 | |||||||||||
Cost of Sales | 311,641 | 61,792 | 520,409 | 436 | 894,278 | |||||||||||||||
Gross profit | 99,232 | 26,054 | 104,075 | (436 | ) | 228,925 | ||||||||||||||
Operating expenses: | ||||||||||||||||||||
Staffing Expense | 34,345 | 54,270 | 88,615 | |||||||||||||||||
Selling, general and administrative expense | 36,732 | 17,450 | 29,829 | 84,011 | ||||||||||||||||
Supplemental put expense | 22,456 | 22,456 | ||||||||||||||||||
Fees to Manager | 4,376 | 4,538 | 8,914 | |||||||||||||||||
Research and development expense | 1,806 | 1,806 | ||||||||||||||||||
Amortization expense | 6,774 | 9,437 | 16,211 | |||||||||||||||||
Operating income (loss) | (7,257 | ) | 8,604 | 19,976 | (14,411 | ) | 6,912 | |||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest income | 807 | 807 | ||||||||||||||||||
Interest expense | (6,130 | ) | (152 | ) | (6,373 | ) | (9,657 | ) | (22,312 | ) | ||||||||||
Amortization of debt issuance costs | (779 | ) | (783 | ) | (1,562 | ) | ||||||||||||||
Loss on debt extinguishment | (8,275 | ) | (8,275 | ) | ||||||||||||||||
Other income (expense), net | 541 | 58 | (2,089 | ) | (1,490 | ) | ||||||||||||||
Income (loss) from continuing operations before provision for income taxes and minority interest | (21,093 | ) | 8,510 | 11,514 | (24,851 | ) | (25,920 | ) | ||||||||||||
Provision (benefits) for income taxes | 5,298 | (29 | ) | 134 | 1,300 | 6,703 | ||||||||||||||
Minority interest | 1,245 | 332 | 1,577 | |||||||||||||||||
Income (loss) from continuing operations | $ | (27,636 | ) | $ | 8,539 | $ | 11,380 | $ | (26,483 | ) | $ | (34,200 | ) | |||||||
Income (loss) from continuing operations per share | $ | (2.18 | ) | $ | (2.70 | ) | ||||||||||||||
Weighted average number of shares outstanding | 12,686 | 12,686 | ||||||||||||||||||
5
Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited)
(Unaudited)
This information in Note 1 provides all of the pro forma adjustments from each line item in the pro forma Condensed Combined Financial Statements. Note 2 describes how the adjustments were derived or calculated. Unless otherwise noted, all amounts are in thousands of dollars ($000).
Note 1. Pro Forma Adjustments
At | At | |||||||||
December 31, 2006 | September 30, 2007 | |||||||||
Balance Sheet: | ||||||||||
1. | Cash and cash equivalents | |||||||||
Revolving credit borrowing to partially fund acquisition of Staffmark | $ | 26,000 | (a) | $ | 26,000 | (a) | ||||
Use of cash to fund acquisitions of Fox and Staffmark | (171,300 | )(b) | (171,300 | )(b) | ||||||
$ | (145,300 | ) | $ | (145,300 | ) | |||||
2. | Property and equipment, net | |||||||||
Fox | $ | 2,493 | (c) | $ | 987 | (c) | ||||
3. | Goodwill | |||||||||
Fox | $ | 18,636 | (c) | $ | 14,278 | (c) | ||||
Staffmark | 1,495 | (d) | 6,642 | (d) | ||||||
$ | 20,131 | $ | 20,920 | |||||||
4. | Intangible assets, net | |||||||||
Fox | $ | 57,300 | (c) | $ | 57,300 | (c) | ||||
Staffmark | 26,122 | (d) | 26,146 | (d) | ||||||
$ | 83,422 | $ | 83,446 | |||||||
5. | Accrued expenses | |||||||||
Staffmark | $ | 5,000 | (d) | $ | 5,000 | (d) | ||||
6. | Current portion of debt | |||||||||
Compass Diversified Holdings | $ | 26,000 | (a) | $ | 26,000 | (a) | ||||
Fox | (184 | )(c) | (2,387 | )(c) | ||||||
Staffmark | (11,600 | )(d) | (14,500 | )(d) | ||||||
$ | 14,216 | $ | 9,113 | |||||||
7. | Long-term debt | |||||||||
Fox | $ | (590 | )(c) | $ | (1,126 | )(c) | ||||
Staffmark | (83,572 | )(d) | (69,725 | )(d) | ||||||
$ | (84,162 | ) | $ | (70,851 | ) | |||||
8. | Minority interest | |||||||||
Fox | $ | 7,725 | (c) | $ | 7,725 | (c) | ||||
Staffmark | 47,543 | (d) | 47,544 | (d) | ||||||
$ | 55,268 | $ | 55,269 | |||||||
9. | Total stockholders’ equity | |||||||||
Fox | $ | (15,922 | ) (c) | $ | (19,047 | ) (c) | ||||
Staffmark | (13,654 | )(d) | (19,431 | )(d) | ||||||
$ | (29,576 | ) | $ | (38,478 | ) | |||||
6
Statement of Operations:
Year Ended | Nine Months | ||||||||||
Ended | |||||||||||
December 31, 2006 | September 30, 2007 | ||||||||||
1. | Amortization expense | ||||||||||
Fox | $ | 5,084 | A(1) | $ | 3,813 | A(1) | |||||
Staffmark | 4,353 | B (1) | 3,265 | B (1) | |||||||
$ | 9,437 | $ | 7,078 | ||||||||
2. | Depreciation expense | ||||||||||
Fox | $ | 436 | A(2) | $ | 215 | A(2) | |||||
3. | Interest expense | ||||||||||
Staffmark | $ | (6,373 | ) B(2) | $ | (4,952 | )B(2) | |||||
Compass Diversified Holdings | 16,030 | D | 12,022 | D | |||||||
$ | 9,657 | $ | 7,070 | ||||||||
4. | Fees to manager | ||||||||||
Compass Diversified Holdings | $ | 4,538 | C | $ | 3,404 | C | |||||
5. | Amortization of debt issuance cost | ||||||||||
Compass Diversified Holdings | $ | 783 | G | $ | 587 | G | |||||
6. | Income tax expense | ||||||||||
Staffmark | $ | 1,300 | E | $ | — | E | |||||
7 | Minority interest | ||||||||||
Compass Diversified Holdings | $ | 332 | F | $ | 248 | F | |||||
7
Note 2. Pro Forma Adjustments by Business
As a further illustration, we have grouped the pro forma adjustments detailed in Note 1 to the Pro Forma Condensed Financial Statements by each business to show the combine effect of the pro forma adjustments on each business.
Balance Sheet
At | At | |||||||
December 31, 2006 | September 30, 2007 | |||||||
a. Reflects borrowings from the revolving credit facility to partially fund the Staffmark acquisition: | ||||||||
Cash | $ | 26,000 | $ | 26,000 | ||||
Current portion of debt | (26,000 | ) | (26,000 | ) | ||||
$ | — | $ | — | |||||
b. Reflect the use of cash for the acquisitions of Fox and Staffmark: | ||||||||
Fox– see note c | $ | (87,400 | ) | $ | (87,400 | ) | ||
Staffmark – see note d | (83,900 | ) | (83,900 | ) | ||||
$ | (171,300 | ) | $ | (171,300 | ) | |||
c. Fox Acquisition
The following information represents the pro forma adjustments made by us in Note 1 to reflect our acquisition of a 76.0% equity interest in and loans to Fox for a total cash investment of approximately $87.4 million. This investment of $87.4 million at December 31, 2006 was assigned to assets of $101.5 million, current liabilities of $6.4 million consisting of the historical carrying values for accounts payable and accrued expenses and $7.7 million to minority interest. The asset allocation represents $20.2 million of current assets valued at their historical carrying values, property and equipment of $5.4 million valued through a preliminary asset appraisal, $57.3 million of intangible assets and $18.6 million of goodwill representing the excess of the purchase price over identifiable assets.
This investment of $87.4 million at September 30, 2007 was assigned to assets of $106.4 million, current liabilities of $11.3 million consisting of the historical carrying values for accounts payable and accrued expenses and $7.7 million to minority interest. The asset allocation represents $29.3 million of current assets valued at their historical carrying values, property and equipment of $5.4 million valued through a preliminary purchase asset appraisal, $57.3 million of intangible assets and $14.4 million of goodwill representing the excess of the purchase price over identifiable assets
The preliminary intangible asset values at both December 31, 2006 and September 30, 2007 consist principally of customer relationships valued at $11.5 million, trade names valued at $13.3 million and core technology valued at $32.5 million.
The customer relationships were valued at $11.5 million using an excess earnings methodology, in which an asset is valuable to the extent that the asset enables its owner to earn a return in excess of the required returns on and of the other assets utilized in the business. Customer relationships were analyzed separately for the OEM and after market segments of the business.
The trade names were valued at $13.3 million using a royalty savings methodology, in which an asset is valuable to the extent that ownership of the asset relieves the company from the obligation of paying royalties for the benefits generated by the asset. The key assumptions in this analysis were a royalty rate equal to 1.5% of sales, a royalty sales base equal to 100% of Fox’s total sales, a risk-adjusted discount rate of 13.5%, and an indefinite remaining useful life.
The core technology was valued at $32.5 million using a royalty savings methodology, in which an asset is valuable to the extent that ownership of the asset relieves the company from the obligation of paying royalties for the benefits generated by the asset. The key assumptions in this analysis were a royalty rate equal to 6.5% of sales, an initial royalty sales base equal to 100% of Fox’s total sales, an obsolescence factor (reflecting the rate at which the utility of the core technology degrades relative to time) of 6.7% per annum, a risk-adjusted discount rate of 13.5%, and a remaining useful life of 8 years.
8
The value assigned to minority interest was derived from the equity value contributed by the minority holders at the time of acquisition.
1. | Reflects (1) purchase accounting adjustments to reflect Fox’s assets acquired and liabilities assumed at their estimated fair values, (2) redemption of existing debt of Fox and (3) elimination of Fox’s historical shareholders’ equity: |
At | At | |||||||
December 31, 2006 | September 30, 2007 | |||||||
Property and equipment | $ | 2,493 | $ | 987 | ||||
Goodwill | 18,636 | 14,278 | ||||||
Intangible assets | 57,300 | 57,300 | ||||||
Current portion of long-term debt | 184 | 2,387 | ||||||
Long-term debt | 590 | 1,126 | ||||||
Establishment of minority interest | (7,725 | ) | (7,725 | ) | ||||
Elimination of historical shareholders’ equity | 15,922 | 19,047 | ||||||
Cash used to fund acquisition | $ | 87,400 | $ | 87,400 | ||||
d. Staffmark Acquisition
The following information represents the pro forma adjustments made by us in Note 1 to reflect the acquisition by our subsidiary CBS Personnel Holdings, Inc (“CBS”) to acquire Staffmark for a total cash investment of approximately $83.9 million. This investment of $83.9 million at December 31, 2006 was assigned to assets of $203.6 million, current liabilities of $52.5 million consisting largely of the historical carrying values for accounts payable and accrued expenses, $19.3 million of other non current liabilities consisting primarily of workers’ compensation reserves and $47.9 million to minority interest. The asset allocation represents $81.4 million of current assets valued at their historical carrying values, property and equipment of $3.7 million valued through a preliminary asset appraisal, $51.7 million of intangible assets, $0.9 million of other assets and $65.8 million of goodwill representing the excess of the purchase price over identifiable assets.
This investment of $83.9 million at September 30, 2007 was assigned to assets of $206.4 million, current liabilities of $55.1 million consisting of the historical carrying values for accounts payable and accrued expenses, $19.5 million of other non current liabilities consisting primarily of workers’ compensation reserves and $47.9 million to minority interest. The asset allocation represents $79.5 million of current assets valued at their historical carrying values, property and equipment of $3.2 million valued through a preliminary purchase asset appraisal, $51.7 million of intangible assets, $0.9 million of other assets and $71.0 million of goodwill representing the excess of the purchase price over identifiable assets.
The preliminary intangible asset values at both December 31, 2006 and September 30, 2007 consist principally of customer relationships valued at $25.0 million; trademarks valued at $25.6 million and non-compete covenants of $1.1 million.
The customer relationships were valued at $25.0 million using an excess earnings methodology, in which an asset is valuable to the extent that the asset enables its owner to earn a return in excess of the required returns on and of the other assets utilized in the business. Customer relationships were analyzed separately for the retail, transportation, output solutions and executive search segments of the business.
The trade names were valued at $25.0 million using a royalty savings methodology, in which an asset is valuable to the extent that ownership of the asset relieves the company from the obligation of paying royalties for the benefits generated by the asset. The key assumptions in this analysis were a royalty rate equal to 0.8% of sales, a royalty sales base equal to 100% of Staffmark’s total sales, a risk-adjusted discount rate of 15.2% and a remaining useful life of 15 years.
The non-compete agreements were valued in aggregate (for two Staffmark executives) at $1.1 million.
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The value assigned to minority interest was derived from the equity value of the shares of CBS issued to the minority holders at the time of acquisition.
1. | Reflects (1) purchase accounting adjustments to reflect Staffmark’s assets acquired and liabilities assumed at their estimated fair values, (2) redemption of existing debt of Staffmark and (3) elimination of Staffmark’s historical shareholders’ equity: |
At | At | |||||||
December 31, 2006 | September 30, 2007 | |||||||
Goodwill | $ | 1,495 | $ | 6,642 | ||||
Intangible assets | 26,122 | 26,146 | ||||||
Accrued expenses | (5,000 | ) | (5,000 | ) | ||||
Current portion of long-term debt | 11,600 | 14,500 | ||||||
Long-term debt | 83,572 | 69,725 | ||||||
Elimination of historical minority interest | 357 | 356 | ||||||
Establishment of minority interest | (47,900 | ) | (47,900 | ) | ||||
Elimination of historical shareholders’ equity | 13,654 | 19,431 | ||||||
Cash used to fund acquisition | $ | 83,900 | $ | 83,900 | ||||
Statement of Operations:
Nine Months | ||||||||||||
Year Ended | Ended | |||||||||||
December 31, | September 30, | |||||||||||
2006 | 2007 | |||||||||||
A. | The following entries represent the pro forma adjustments made by us in Note 1 to reflect the effect of our acquisition of Fox upon the results of their operations for the year ended December 31, 2006 and for nine months ended September 30, 2007 as if we had acquired Fox on January 1, 2006: | |||||||||||
1. | Additional amortization expense of intangible assets resulting from the acquisition of Fox: | |||||||||||
Customer relationship – OEM of $7,700 which will be amortized over 12 years | $ | 642 | $ | 482 | ||||||||
Customer relationship – after market of $3,800 which will be amortized over 10 years | 380 | 285 | ||||||||||
Core technology of $32,500 which will be amortized over 8 years | 4,062 | 3,046 | ||||||||||
Total | $ | 5,084 | $ | 3,813 | ||||||||
2. | Additional depreciation expense resulting from the acquisition of Fox | $ | 436 | $ | 215 | |||||||
B. | The following entries represent the pro forma adjustments made by us in Note 1 to reflect the effect of our acquisition of Staffmark upon the results of their operations for the year ended December 31, 2006 and for the nine months ended September 30, 2007 as if we had acquired Staffmark on January 1, 2006: | |||||||||||
1. | Additional amortization expense of intangible assets resulting from the acquisition of Staffmark: | |||||||||||
Customer relationships retail of $13,820 which will be amortized over 8 years | $ | 1,728 | $ | 1,296 | ||||||||
Customer relationships - - transportation of $4,920 which will be amortized over 20 years | 246 | 184 | ||||||||||
Customer relationships – output solutions of $5,860 which will be amortized over 20 years | 293 | 220 | ||||||||||
Customer relationship – executive search of $380 which will be amortized over 20 years | 19 | 14 | ||||||||||
Total | $ | 2,286 | $ | 1,174 | ||||||||
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Nine Months | ||||||||||||
Year Ended | Ended | |||||||||||
December 31, | September 30, | |||||||||||
2006 | 2007 | |||||||||||
Trademarks of $25,630 which will be amortized over 15 years | $ | 1,709 | $ | 1,282 | ||||||||
Non-compete agreement of $1,075 which will be amortized over 3 years | $ | 358 | $ | 269 | ||||||||
Total amortization | $ | 4,353 | $ | 3,265 | ||||||||
2. | Reduction of interest expense with respect to debt redeemed in connection with acquisition of Staffmark | $ | (6,373 | ) | $ | (4,952 | ) | |||||
C. | Adjustment to record the additional estimated management fee expense pursuant to the Management Services Agreement to be incurred in connection with the acquisition of Fox and Staffmark | |||||||||||
Net purchase price of Fox | $ | 87,400 | $ | 87,400 | ||||||||
Net purchase price of Staffmark | 83,900 | 83,900 | ||||||||||
Minority interest of Fox | 7,725 | 7,725 | ||||||||||
Minority Interest of Staffmark | 47,900 | 47,900 | ||||||||||
Additional net assets | 226,925 | 226,925 | ||||||||||
Management fee % | 2.0 | % | 1.5 | % | ||||||||
$ | 4,538 | $ | 3,404 | |||||||||
D. | Adjustment to record interest expense: | |||||||||||
Interest expense on $150 million term loan at an assumed 8.5% interest rate | $ | 12,750 | $ | 9,562 | ||||||||
Interest expense on $26 million of revolving borrowings at an assumed 8.0% interest rate | 2,080 | 1,560 | ||||||||||
Letter of credit fee and other | 1,200 | 900 | ||||||||||
$ | 16,030 | $ | 12,022 | |||||||||
E. | Adjustment to record tax expense: | |||||||||||
Tax expense on pro forma net income applicable to Staffmark due to change in structure from a limited liability company to a corporation | $ | 1,300 | $ | — | ||||||||
F. | Adjustment to record the minority interest in net income: | |||||||||||
The adjustment for minority interest was calculated by applying the minority ownership percentage for Fox and Staffmark to the net income applicable to the minority interest holders | $ | 332 | $ | 248 | ||||||||
G. | Adjustment to record amortization of debt issuance cost: | |||||||||||
$4.7 million of debt issuance cost to be amortized over 6 years | $ | 783 | $ | 587 | ||||||||
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