Business Context and Reporting Period
Company: Liquidity Services, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: September 1, 2011
Event: Entry into a Material Definitive Agreement to acquire Jacobs Trading, LLC.
On September 1, 2011, Liquidity Services, Inc. (the "Company") and its wholly owned subsidiary, Profar Acquisition Partners, LLC, entered into an Asset Purchase Agreement to acquire the business of Jacobs Trading, LLC. The target business involves purchasing closeouts, excess merchandise, and customer returns for resale. The closing is expected to occur in the first quarter of the Company's fiscal year 2012.
Key Financial Metrics and Transaction Terms
This filing details the structure of the acquisition rather than the Company's historical financial performance. Key transaction metrics include:
- Cash Consideration: $80 million.
- Stock Consideration: 900,171 shares of Company common stock ("Closing Shares").
- Debt Instrument: A subordinated, unsecured promissory note with a principal amount of $40 million.
- Note Terms: 5.0% annual interest rate; matures three years post-closing; subordinated to current and future bank financing.
- Contingent Consideration (Earn-Out): Up to $20 million based on 2012 operating results and up to $10 million based on 2013 operating results. Seller may elect to receive up to 50% of earn-out payments in stock.
- Working Capital Adjustment: The total consideration is subject to a post-closing adjustment based on the working capital of the business.
Note: The filing text does not provide specific values for the Company's current revenue, profit, cash flow, or existing debt levels outside of the new transaction terms.
Material Changes and Agreements
The filing reports the following material changes and concurrent agreements:
- Asset Purchase: Acquisition of Jacobs Trading, LLC's business assets.
- Shareholders' Agreement: Restricted Parties (Seller and key individuals) are prohibited from transferring Closing Shares for six months post-closing. A five-year non-compete and non-solicitation covenant applies to the Restricted Parties.
- Management Retention: Management services agreement with founder Irwin L. Jacobs through 2013; employment agreements with five key executives for an initial two-year term.
- Financing Amendment: Amendment to the Financing and Security Agreement with Bank of America, N.A., to permit the acquisition and the issuance of the $40 million note.
Guidance, Risks, and Contingencies
Closing Conditions: The transaction is subject to customary conditions, including the expiration of the Hart-Scott-Rodino Antitrust waiting period, obtaining third-party consents, and the release of liens on assets.
Operational Structure: The acquired business will operate as a stand-alone entity through the end of calendar year 2013 under the management of Irwin L. Jacobs and Howard Grodnick.
Indemnification: The Company may offset indemnification payments owed by the Seller against the outstanding amount of the promissory note. Key individuals have agreed to pay their pro rata share of indemnification obligations if the Seller fails to pay.
Securities Exemption: The Closing Shares and potential Earn-Out Shares will be issued pursuant to the exemption from registration provided by Rule 506 of Regulation D, relying on the Seller's status as an "accredited investor."
Investor Verification Checklist
- Verify the final closing date and whether the Hart-Scott-Rodino waiting period has expired.
- Confirm the final purchase price after the post-closing working capital adjustment.
- Review the impact of the new $40 million subordinated note on the Company's leverage ratios and debt covenants with Bank of America.
- Monitor the integration of the acquired business and the retention of key management personnel (Irwin L. Jacobs and Howard Grodnick).
- Assess the potential dilution from the issuance of 900,171 Closing Shares and any future Earn-Out Shares.