1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
------------------------
Date of Report (Date of earliest event reported) February 20, 1998
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CENTURY BUSINESS SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2769024
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
0-25890
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(Commission File Number)
10055 Sweet Valley Drive
Cleveland, Ohio 44125
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (216) 447-9000.
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ITEM 7. Financial Statement and Exhibits.
(a) Financial Statements of Businesses Acquired
-------------------------------------------
Century Business Services, Inc. (Century) acquired the following businesses on
the dates noted: Comprehensive Business Services, Inc. (10/2/97); Valuation
Counselors Group, Inc. and Subsidiary (09/30/97); Zelenkofske, Axelrod & Co.,
Ltd. (06/30/97); Health Administration Services, Inc. (12/18/97); Shenkin Kurtz
Baker & Co., P.C. and Subsidiary (12/08/97); Robert D. O'Byrne and Associates,
Inc. and The Grant Nelson Group, Inc. (12/31/97); Environmental Safety Systems,
Inc. and Subsidiaries (06/16/97); and Smith & Radigan, P.C. (12/04/97). The
related financial statements referenced under "Index to Financial Statements" on
pages 4-6 are filed as part of this report.
(b) Exhibits
--------
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of KPMG Peat Marwick LLP
23.4 Consent of KPMG Peat Marwick LLP
23.5 Consent of KPMG Peat Marwick LLP
23.6 Consent of KPMG Peat Marwick LLP
23.7 Consent of Altschuler, Melvoin and Glasser LLP
23.8 Consent of Gelford Hochstadt Pangburn & Co.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CENTURY BUSINESS SERVICES, INC.
Date: February 20, 1998 By: /s/ Gregory J. Skoda
--------------------------
Gregory J. Skoda
Executive Vice President
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CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
COMPREHENSIVE BUSINESS SERVICES, INC.
Independent Auditors' Report........................................................ 7
Balance Sheet as of December 31, 1996 .............................................. 8
Statement of Operations for the Year Ended December 31, 1996 ....................... 9
Statement of Stockholder's Equity for the Year Ended December 31, 1996 ............. 10
Statement of Cash Flows for the Year Ended December 31, 1996 ....................... 11
Notes to Financial Statements....................................................... 12-17
Statement of Operations for the Period January 1, 1997 to
September 30, 1997 (Unaudited) ................................................ 18
Statement of Cash Flows for the Period January 1, 1997 to
September 30, 1997 (Unaudited) .................................................. 19
VALUATION COUNSELORS GROUP, INC. AND SUBSIDIARY
Independent Auditors' Report........................................................ 20
Consolidated Balance Sheets as of December 31, 1996 and 1995 ....................... 21
Consolidated Statement of Operations for the Years Ended
December 31, 1996 and 1995 .................................................... 22
Consolidated Statements of Changes in Stockholder's Equity for
the Years Ended December 31, 1996 and 1995 .................................... 23
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995 .................................................... 24-25
Notes to the Financial Statements .................................................. 26-31
Consolidated Statement of Operations for the Period January 1, 1997 to
September 30, 1997 (Unaudited) ................................................ 32
Consolidated Statement of Cash Flows for the Period January 1, 1997 to
September 30, 1997 (Unaudited) ................................................... 33
ZELENKOFSKE, AXELROD & CO., LTD.
Independent Auditors' Report........................................................ 34
Balance Sheet as of June 30, 1997 .................................................. 35
4
5
Statement of Operations and Retained Earnings for the
Three Months Ended June 30, 1997 ................................................ 36
Statement of Cash Flows for the Three Month Ended June 30, 1997 .................... 37
Notes to Financial Statements ...................................................... 38-42
HEALTH ADMINISTRATION SERVICES, INC.
Independent Auditors' Report........................................................ 43
Balance Sheet as of December 18, 1997 .............................................. 44
Statement of Income for the Period from January 1, 1997 to
December 18, 1997 ............................................................. 45
Statement of Changes in Stockholder's Equity for the Period from
January 1, 1997 to December 18, 1997 .......................................... 46
Statement of Cash Flows for the Period from January 1, 1997 to
December 18, 1997............................................................ 47
Notes to Financial Statements....................................................... 48-52
SHENKIN KURTZ BAKER & CO,. P.C. AND SUBSIDIARY
Independent Auditors' Report........................................................ 53
Consolidated Balance Sheet as of December 7, 1997 .................................. 54
Consolidated Statement of Income for the Period from January 1, 1997
to December 7, 1997 ........................................................... 55
Consolidated Statement of Stockholder's Equity for the Period from
January 1, 1997 to December 7, 1997 ........................................... 56
Consolidated Statement of Cash Flows for the Period from January 1, 1997
To December 7, 1997 ........................................................... 57
Notes to Consolidated Financial Statements.......................................... 58-60
ROBERT D. O'BYRNE AND ASSOCIATES, INC. AND THE GRANT NELSON GROUP, INC.
Independent Auditors' Report........................................................ 61
Combined Balance Sheet as of December 31, 1997 ..................................... 62-63
Combined Statement of Operations for the Year Ended December 31, 1997 .............. 64
Combined Statement of Stockholder's Equity for the Year Ended
December 31, 1997 ................................................................. 65
Combined Statement of Cash Flows for the Year Ended December 31, 1997 .............. 66
Notes to Combined Financial Statements.............................................. 67-72
5
6
ENVIRONMENTAL SAFETY SYSTEMS, INC. AND SUBSIDIARIES
Independent Auditors' Report........................................................ 73
Consolidated Balance Sheets as of December 31, 1996, 1995 and 1994 ................. 74
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994............................................... 75
Consolidated Statements of Stockholder's Equity (Deficit) for the
Years Ended December 31, 1996, 1995 and 1994....................................... 76
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994............................................... 77-78
Notes to Consolidated Financial Statements ......................................... 79-85
Consolidated Statement of Operations for the Period January 1, 1997 to
June 16, 1997 (Unaudited) ..................................................... 86
Consolidated Statement of Cash Flows for the Period January 1, 1997 to
June 16, 1997 (Unaudited) ..................................................... 87
SMITH & RADIGAN, P.C.
Independent Auditors' Report........................................................ 88
Balance Sheet as of December 3, 1997 ............................................... 89
Statement of Operations and Retained Earnings for the Period January 1, 1997
through December 3, 1997 ...................................................... 90
Statement of Cash Flows for the Period January 1, 1997 through
December 3, 1997 .............................................................. 91
Notes to Financial Statements....................................................... 92-95
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
Comprehensive Business Services, Inc.:
We have audited the accompanying balance sheet of Comprehensive Business
Services, Inc. (a wholly owned subsidiary of Franchise Services, Inc.) as of
December 31, 1996 and the related statements of operations, stockholder's equity
and cash flows for the year then ended. 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 generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Comprehensive Business
Services, Inc. as of December 31, 1996 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
Costa Mesa, California
August 7, 1997, except as to note 8,
which is as of October 1, 1997.
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COMPREHENSIVE BUSINESS SERVICES, INC.
(A Wholly Owned Subsidiary of Franchise Services, Inc.)
Balance Sheet
December 31, 1996
ASSETS
Current assets:
Cash and cash equivalents $ 254,219
Current portion of notes and accounts receivable (notes 2 and 5) 292,806
Deferred income taxes (note 4) 33,040
Prepaid expenses and other assets 94,299
------------------
Total current assets 674,364
Noncurrent portion of notes and accounts receivable, less allowance for doubtful
accounts of $111,167 (notes 2 and 5) 736,137
Federal and state taxes due from Parent (note 1) 1,442,350
Furniture and equipment, net (note 3) 114,594
Deposits and other assets 123,512
------------------
$ 3,090,957
==================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 131,970
Due to affiliates (note 5) 178,538
Franchise and other deposits 70,161
------------------
Total current liabilities 380,669
Deferred income taxes (note 4) 50,574
------------------
Total liabilities 431,243
Stockholder's equity:
Common stock, no par value; 1,000 shares authorized, 100 shares issued and
outstanding 1,000
Additional paid-in capital 4,974,000
Accumulated deficit (2,315,286)
------------------
Total stockholder's equity 2,659,714
Commitments and contingencies (notes 5, 6 and 7)
Subsequent event (note 8)
------------------
$ 3,090,957
==================
See accompanying notes to financial statements.
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COMPREHENSIVE BUSINESS SERVICES, INC.
(A Wholly Owned Subsidiary of Franchise Services, Inc.)
Statement of Operations
Year ended December 31, 1996
Revenues:
Continuing fees $ 1,706,685
Franchise sales 756,974
Software and processing fees 564,706
Computer and software sales 46,460
Interest and other 116,005
------------------
3,190,830
------------------
Costs and expenses:
Cost of sales and services 370,718
Selling, general and administrative (note 5) 2,675,727
------------------
3,046,445
------------------
Income before income tax expense 144,385
Income tax expense (note 4) 93,623
------------------
Net income $ 50,762
==================
See accompanying notes to financial statements.
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COMPREHENSIVE BUSINESS SERVICES, INC.
(A Wholly Owned Subsidiary of Franchise Services, Inc.)
Statement of Stockholder's Equity
Year ended December 31, 1996
COMMON STOCK ADDITIONAL TOTAL
----------------------------------- PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT EQUITY
-------------- ------------------ ------------------ ------------------ -----------------
Balance at December 31, 1995 100 $ 1,000 4,974,000 (2,366,048) 2,608,952
Net income -- -- -- 50,762 50,762
-------------- ------------------ ------------------ ------------------ -----------------
Balance at December 31, 1996 100 $ 1,000 4,974,000 (2,315,286) 2,659,714
============== ================== ================== ================== =================
See accompanying notes to financial statements.
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COMPREHENSIVE BUSINESS SERVICES, INC.
(A Wholly Owned Subsidiary of Franchise Services, Inc.)
Statement of Cash Flows
Year ended December 31, 1996
Cash flows from operating activities:
Net income $ 50,762
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts 7,530
Depreciation 46,190
Noncash franchise revenues (87,500)
Changes in:
Notes and accounts receivable 149,052
Federal and state taxes due from Parent 98,670
Prepaid expenses and other assets (24,558)
Deposits and other assets 35,673
Accounts payable, accrued expenses and franchise and other deposits (325,094)
Due to affiliates 61,547
Deferred income taxes (12,254)
Deferred rent --
------------------
Net cash provided by operating activities 18
Cash flows from investing activities - purchase of furniture and equipment, net of disposals (55,388)
------------------
Net decrease in cash and cash equivalents (55,370)
Cash and cash equivalents at beginning of year 309,589
------------------
Cash and cash equivalents at end of year $ 254,219
==================
See accompanying notes to financial statements.
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COMPREHENSIVE BUSINESS SERVICES, INC.
(A Wholly Owned Subsidiary of Franchise Services, Inc.)
Notes to Financial Statements
December 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
Comprehensive Business Services, Inc. (the Company) is in the business of
selling and servicing franchised accounting practices. During 1996, Sir
Speedy, Inc., the Company's parent during fiscal year 1995, completed a
formal restructure of its legal entities. Through this restructure, a
California holding company was established, Franchise Services, Inc.,
through which Franchise Services, Inc. became the Company's new parent.
Franchise Services, Inc. is a wholly owned subsidiary of KOA Holdings,
Inc.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation has been
provided on the straight-line method over the estimated useful lives of
the related assets.
CAPITALIZED SOFTWARE COSTS
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
provides for the capitalization of certain software development costs
once technological feasibility is established. The cost so capitalized is
then amortized using the straight-line basis over the estimated product
life, or the ratio of current revenues to total projected product
revenues, whichever is greater. Included in prepaid expenses and other
assets as of December 31, 1996 is approximately $204,700 of software
developments costs. Amortization expense for the year ended December 31,
1996 was approximately $58,100.
FRANCHISE SALES
Franchise sales include franchise fees and all contractually related
start-up fees. The Company defers franchise fees and costs related
thereto until certain services have been performed and the franchise has
opened. In 1996, the Company financed a portion of the initial franchise
fee for those new franchises which met certain credit qualification
criteria.
CONTINUING FEES AND SOFTWARE AND PROCESSING FEES
The Company records continuing, software and processing fees as revenue
when received from franchisees. Such cash basis recognition does not
differ materially from accrual basis recognition.
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COMPREHENSIVE BUSINESS SERVICES, INC.
(A Wholly Owned Subsidiary of Franchise Services, Inc.)
Notes to Financial Statements, Continued
INCOME TAXES
The Company is included in the Federal income tax return filed by KOA
Holdings, Inc. Franchise Services, Inc.'s policy is to apportion to each
subsidiary a pro rata share of its consolidated provision for income
taxes based upon the subsidiary's earnings or loss before income taxes at
prevailing tax rates.
The Company accounts for income taxes under the asset and liability
method whereby 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. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. This
Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Adoption of this
Statement did not have a material impact on the Company's financial
position, results of operations or liquidity.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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 those
estimates.
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COMPREHENSIVE BUSINESS SERVICES, INC.
(A Wholly Owned Subsidiary of Franchise Services, Inc.)
Notes to Financial Statements, Continued
(2) NOTES AND ACCOUNTS RECEIVABLE
Notes and accounts receivable consist of the following at December 31,
1996:
Current portion:
Notes from franchisees $ 169,600
Due from officers and employees 73,391
Other 49,815
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292,806
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Noncurrent portion:
Notes from franchisees 847,304
Due from officer --
------------------
847,304
Less allowance for doubtful accounts 111,167
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736,137
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$ 1,028,943
==================
(3) FURNITURE AND EQUIPMENT
Furniture and equipment, net, consist of the following at December 31,
1996:
ESTIMATED
USEFUL LIFE
---------------
Furniture and fixtures 5 years $ 163,394
Computer equipment 5 years 222,189
Leasehold improvements 5 years 26,604
-----------------
412,187
Less accumulated depreciation and
amortization 297,593
-----------------
$ 114,594
=================
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COMPREHENSIVE BUSINESS SERVICES, INC.
(A Wholly Owned Subsidiary of Franchise Services, Inc.)
Notes to Financial Statements, Continued
(4) INCOME TAXES
Income tax expense (benefit) consists of the following at December 31,
1996:
Current:
U.S. Federal $ 90,645
State 15,232
-----------------
105,877
-----------------
Deferred:
U.S. Federal (7,459)
State (4,795)
-----------------
(12,254)
-----------------
$ 93,623
=================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996
are presented below:
Deferred tax assets:
Accounts receivable $ 45,363
Vacation 15,484
Depreciation 7,117
Other --
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Total gross deferred tax assets 67,964
Less valuation allowance --
-----------------
Net deferred tax assets 67,964
-----------------
Deferred tax liabilities:
Research and experimentation (83,536)
State taxes (1,962)
Organization costs --
Furniture and equipment --
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Total deferred tax liabilities (85,498)
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Net deferred tax liability $ (17,534)
=================
Based on the Company's parent's historical pretax earnings, management
believes it is more likely than not that the Company will realize the
benefits of the deferred tax assets existing at December 31, 1996.
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COMPREHENSIVE BUSINESS SERVICES, INC.
(A Wholly Owned Subsidiary of Franchise Services, Inc.)
Notes to Financial Statements, Continued
Total income tax expense (benefit) differed from amounts computed by
applying the U.S. Federal statutory tax rate of 34% to earnings (loss)
before income taxes primarily as a result of meals and entertainment
disallowances and state franchise taxes.
(5) TRANSACTIONS WITH RELATED PARTIES
Included in selling, general and administrative expenses for the year
ended December 31, 1996 is approximately $283,000 billed by affiliates
for various cost reimbursements and accounting services provided.
The Company has unsecured non-interest bearing demand notes receivable
from officers which are included in notes and accounts receivable in the
accompanying balance sheets (see note 2).
The Company has a five-year operating facility lease with Franchise
Services, Inc. Rent expense under this lease totaled $134,400 (see note
7).
Due to affiliates represents amounts billed by vendors which have been
paid by affiliates for Company expenses. Included in due to affiliates
are amounts owed by the Company for these costs in addition to services
rendered by affiliates to support the Company.
(6) EMPLOYEE BENEFIT PLAN
The Company has a defined contribution 401(k) plan covering a majority of
its employees. The Company matched employee contributions in the amount
of $36,420 in 1996.
(7) COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has an operating facility lease with Franchise Services, Inc.
for general office space (see note 5). Future minimum lease payments are
as follows:
Year ending December 31:
1997 $ 134,400
1998 134,400
1999 134,400
2000 129,547
-----------------
$ 532,747
=================
Rent expense for the year ended December 31, 1996 totaled approximately
$145,000.
CONTINGENCIES
The Company is involved as both plaintiff and defendant in various legal
actions which arose in the normal course of business. In the opinion of
management, the settlement of these matters will not have a material
adverse effect on the Company's financial position, results of operations
or liquidity.
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COMPREHENSIVE BUSINESS SERVICES, INC.
(A Wholly Owned Subsidiary of Franchise Services, Inc.)
Notes to Financial Statements, Continued
(8) SUBSEQUENT EVENT
On October 1, 1997 the Company was sold to International Alliance
Services, Inc. (IASI) for IASI stock and cash. IASI is a publicly traded
company.
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COMPREHENSIVE BUSINESS SERVICES, INC.
(A Wholly Owned Subsidiary of Franchise Services, Inc.)
Statement of Operations
For the Period January 1, 1997 through September 30, 1997
(unaudited)
Revenues:
Continuing fees $ 1,319,794
Franchise sales 400,000
Software and processing fees 437,957
Computer and software sales 5,000
Interest and other 77,003
-----------
2,239,754
-----------
Costs and expenses:
Cost of sales and services 142,945
Selling, general and administrative 2,148,472
-----------
2,291,417
-----------
Loss before income tax expense (51,663)
Income tax benefit (15,303)
-----------
Net loss $ (36,360)
===========
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COMPREHENSIVE BUSINESS SERVICE, INC.
(A Wholly Owned Subsidiary of Franchise Services, Inc.)
Statement of Cash Flows
For the Period January 1, 1997 through September 30, 1997
(unaudited)
Cash flows from operating activities:
Net loss $ (36,360)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 37,695
Noncash franchise revenues (26,892)
Changes in:
Notes and accounts receivable 151,281
Federal and state taxes due from parent (42,985)
Prepaid expenses and other assets (48,851)
Accounts payable, accrued expenses and
franchise and other deposits 41,257
Due to affiliates 6,216
Deferred income taxes 16,239
---------
Net cash provided by operating activities 97,600
Cash flows from investing activities-
purchase of furniture and equipment, net of disposals (41,442)
---------
Net increase in cash and cash equivalents 56,158
Cash and cash equivalents at beginning of year 254,219
---------
Cash and cash equivalents at end of year $ 310,377
=========
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Valuation Counselors Group, Inc.
We have audited the accompanying consolidated balance sheets of VALUATION
COUNSELORS GROUP, INC. AND ITS WHOLLY OWNED SUBSIDIARY (an Illinois corporation)
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our report dated February 16, 1996, we expressed a qualified opinion because
a provision for deferred income taxes had not been provided as required by
generally accepted accounting principles. As described in Note 1, the Company
changed its method of accounting for deferred taxes and restated its 1995
financial statements to conform with generally accepted accounting principles.
Accordingly, our present opinion on the 1995 financial statements, as presented
herein, is different from that expressed in our previous report.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Valuation Counselors Group,
Inc. and its wholly owned subsidiary, as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Altschuler, Melvoin and Glasser LLP
Chicago, Illinois
February 12, 1997
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Exhibit A
VALUATION COUNSELORS GROUP, INC.
AND ITS WHOLLY OWNED SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and 1995
1995
(Restated-
Assets 1996 Note 5)
----------- -----------
Current Assets:
Cash $ 41,480 $ 26,888
Accounts receivable less allowance for
doubtful accounts of $646,000 for 1996 and
$306,000 for 1995 2,565,777 2,841,002
Prepaid expenses and other current assets 148,830 304,121
----------- -----------
2,756,087 3,172,011
----------- -----------
Property and Equipment, at cost (net of
accumulated depreciation and amortization)
(Notes 1 and 2) 754,636 978,598
----------- -----------
Other Assets:
Goodwill and other intangibles (net of
amortization--Note 1) 923,813 1,115,113
Other assets 125,681 143,134
----------- -----------
1,049,494 1,258,247
----------- -----------
$ 4,560,217 $ 5,408,856
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 56,187 $ 88,095
Unearned revenue (Note 1) 686,814 561,995
Deferred income tax payable (Note 5) 496,000 374,000
Bank obligation (Note 3) 740,000 1,190,164
Accrued expenses and other current liabilities 685,071 1,343,711
Former shareholder obligation (Note 6) 303,000 0
----------- -----------
2,967,072 3,557,965
----------- -----------
Noncurrent Liabilities:
Bank obligation (Note 3) 766,667 561,870
Former shareholder obligation (Note 6) 303,000 0
----------- -----------
1,069,667 561,870
----------- -----------
Stockholders' Equity (Note 6) (Exhibit C) :
Common stock 461 461
Additional paid-in capital 460,380 460,380
Retained earnings 1,008,637 864,180
Less treasury stock, at cost (Note 6) (946,000) (36,000)
----------- -----------
523,478 1,289,021
----------- -----------
$ 4,560,217 $ 5,408,856
=========== ===========
The accompanying notes are an integral part of this statement.
21
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Exhibit B
VALUATION COUNSELORS GROUP, INC.
AND ITS WHOLLY OWNED SUBSIDIARY
Consolidated Statement of Operations
Years Ended December 31, 1996 and 1995
1995
(Restated-
1996 Note 5)
------------ ------------
Net Revenue $ 17,368,355 $ 17,380,638
Operating Expenses 14,476,249 14,722,413
------------ ------------
Gross Operating Income 2,892,106 2,658,225
Marketing and Sales Expenses 1,801,859 1,825,492
------------ ------------
Income from Operations 1,090,247 832,733
------------ ------------
Other Income (Expenses), (net)
Interest expense (88,103) (99,521)
Acquisition-related expenses (Note 8) (367,250) (399,777)
Other (76,336) (151,536)
Insurance claim (Note 8) (250,000) (150,000)
------------ ------------
(781,689) (800,834)
------------ ------------
Income before Provision for Income Taxes 308,558 31,899
Provision for Income Taxes (Note 5) (164,101) (12,380)
------------ ------------
Net Income $ 144,457 $ 19,519
============ ============
The accompanying notes are an integral part of this statement.
22
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Exhibit C
VALUATION COUNSELORS GROUP, INC.
AND ITS WHOLLY OWNED SUBSIDIARY
Consolidated Statement of Changes in Stockholders' Equity
Years Ended December 31, 1996 and 1995
Amount Additional Subscription
Common Stock (Par Value Paid-in Notes Retained Treasury
Outstanding $.01) Capital Receivable Earnings Stock Total
----------- ----- ------- ---------- -------- ----- -----
Year Ended December 31, 1995:
Balances, December 31, 1994,
as Previously Reported 46,088 $ 461 $ 460,380 ($ 16,600) $ 1,129,563 $ 1,573,804
Prior Period Adjustment to Record
Income Taxes (Notes 1 and 5) (284,902) (284,902)
------ -------- --------- --------- ----------- ----------- -----------
Balances, December 31, 1994, as
Restated 46,088 461 460,380 (16,600) 844,661 1,288,902
Reduction in Subscription Notes
Receivable 16,600 16,600
Purchase of Treasury Stock (3,300) ($ 148,500) (148,500)
Sale of Treasury Stock 2,500 112,500 112,500
Net Income for Year (Exhibit B) 19,519 19,519
------ -------- --------- --------- ----------- ----------- -----------
Balances, December 31, 1995 45,288 $ 461 $ 460,380 $ 0 $ 864,180 ($ 36,000) $ 1,289,021
====== ======== ========= ========= =========== =========== ===========
Year Ended December 31, 1996:
Balances, December 31, 1995,
as Previously Reported 45,288 $ 461 $ 460,380 $ 0 $ 1,101,180 ($ 36,000) $ 1,526,021
Prior Period Adjustment to
Record Income Taxes
(Notes 1 and 5) (237,000) (237,000)
------ -------- --------- --------- ----------- ----------- -----------
Balances, December 31, 1995, as
Restated 45,288 461 460,380 0 864,180 (36,000) 1,289,021
Purchase of Treasury Stock (Note 6) (19,518) (910,000) (910,000)
Net Income for Year (Exhibit B) 144,457 144,457
------ -------- --------- --------- ----------- ----------- -----------
Balances, December 31, 1996 25,770 $ 461 $ 460,380 $ 0 $ 1,008,637 ($ 946,000) $ 523,478
====== ======== ========= ========= =========== =========== ===========
The accompanying notes are an integral part of this statement.
23
24
Exhibit D
VALUATION COUNSELORS GROUP, INC.
AND ITS WHOLLY OWNED SUBSIDIARY
Consolidated Statement of Cash FLows
Years Ended December 31, 1996 and 1995
1996 1995
----------- -----------
Cash Flows from Operating Activities:
Net income (Exhibit B) $ 144,457 $ 19,519
Adjustments to reconciLe net income to
net cash provided by operating activities:
Depreciation and amortization 553,022 512,564
(Gain) Loss on disposaL of equipment 16,210 (8,948)
Changes in assets and Liabilities:
(Increase) Decrease in accounts
receivabLe 275,225 (523,110)
Decrease in prepaid expenses
and other assets 172,744 1,008
Decrease in accounts payabLe (31,908) (84,390)
(Decrease) Increase in unearned revenue 124,819 (34,944)
Increase (Decrease) in accrued expenses (655,109) 210,962
Increase (Decrease)in deferred tax
Liability 122,000 (47,902)
----------- -----------
Net cash provided by operating activities 721,460 44,759
----------- -----------
Cash Flows from Investing Activities:
Additions to property and equipment (201,999) (692,729)
Proceeds from equipment sale 44,498 3,405
----------- -----------
Net cash used in investing activities (157,501) (689,324)
----------- -----------
Cash Flows from Financing Activities:
Net proceeds from bank obligation 4,818,904 1,875,000
Repayment of bank obligation (5,064,271) (1,391,086)
Purchase of Treasury stock (304,000) (148,500)
Reissuance of Treasury stock 0 112,500
Decrease in subscription notes receivable 0 16,600
----------- -----------
Net cash provided by (used in) financing activities (549,367) 464,514
----------- -----------
Net Increase (Decrease) in Cash 14,592 (180,051)
Cash, Beginning of Year 26,888 206,939
----------- -----------
Cash, End of Year $ 41,480 $ 26,888
=========== ===========
24
25
Exhibit D, Continued
VALUATION COUNSELORS GROUP, INC.
AND ITS WHOLLY OWNED SUBSIDIARY
Consolidated Statement of Cash Flows
Years Ended December 31, 1996 and 1995
1996 1995
-------- --------
Noncash Financing Activity:
Repurchase of stock (Note 4)--
Obligation to former shareholder $606,000 $ 0
Cash paid for treasury stock (see above) 304,000 0
-------- --------
Total increase in treasury stock (Exhibit C) $910,000 $ 0
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for interest $ 94,798 $136,329
======== ========
Cash paid during the year for income taxes $ 43,849 $ 20,282
======== ========
The accompanying notes are an integral part of this statement.
25
26
VALUATION COUNSELORS GROUP, INC.
AND ITS WHOLLY OWNED SUBSIDIARY
Notes to the Financial Statements
December 31, 1996 and 1995
Note 1--Nature of Activities and Significant Accounting Policies:
- -----------------------------------------------------------------
Valuation Counselors Group, Inc. (the "Company") is engaged in the business of
providing financial and commercial valuation services throughout the United
States and abroad.
Pursuant to an agreement dated September 30, 1994, the Company acquired the
outstanding common stock of Lloyd-Thomas/Coats Burchard Co. ("Lloyd-Thomas").
The acquisition was accounted for under the purchase method of accounting.
Lloyd-Thomas is engaged in the business of providing valuation and annual
revision services CARS) similar to the Company.
A summary of significant accounting policies followed by the Company is as
follows:
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary,
Lloyd-Thomas. Significant intercompany transactions have been
eliminated in consolidation.
DEPRECIATION AND AMORTIZATION--Provisions for depreciation of property
and equipment are computed, for financial reporting purposes, under the
straight-line method, over periods which approximate the estimated
useful lives of the assets. For income tax reporting purposes,
provisions for depreciation and amortization are computed using
accelerated methods and statutory recovery periods, as prescribed by
the Internal Revenue Service.
ORGANIZATION COSTS--Organization costs incurred in connection with the
Company's formation and acquisition are amortized on a straight-Line
basis over a five-year period.
CLIENT LIST--The client list represents the estimated present value of
the benefits to be derived from clients acquired as part of the
acquisition. These costs are amortized over a five-year period.
GOODWILL--Goodwill represents the excess of the purchase price over the
fair value of the assets purchased and liabilities assumed of
Lloyd-Thomas. For financial statement purposes, the balance is
amortized on a straight-Line basis over a thirty-year period.
Amortization for 1996 and 1995 amounted to $32,250 and $23,086 respect
ively.
REVENUE RECOGNITION--Revenue is recognized as the work is performed.
Unbilled charges on engagements in process are reflected at standard
billing rates and a provision is made for all anticipated Losses,
26
27
VALUATION COUNSELORS GROUP, INC.
AND ITS WHOLLY OWNED SUBSIDIARY
Notes to the Financial Statements
December 31, 1996 and 1995
Note 1--Nature of Activities and Significant Accounting Policies, Continued:
- ----------------------------------------------------------------------------
UNEARNED REVENUE--Unearned revenue represents prebilling of ARS
services performed by Lloyd-Thomas. The revenue is billed in advance of
performance of the service and is recognized into revenue upon
completion of such services.
ACCRUED RENT--Rental expense is recognized over the term of the lease,
inclusive of the portion of the term for which a rental concession has
been granted, with the amount of the concession being reflected as
accrued expense on the accompanying balance sheet. Such amount will be
amortized over the term of the lease during which actual payments of
the rent are made.
BASIS OF ACCOUNTING, INCOME TAXES AND PRIOR PERIOD ADJUSTMENT -- The
financial statements are prepared on the accrual basis of accounting,
however, the cash basis is utilized for income tax reporting purposes.
Through December 31, 1993 deferred income taxes were provided for the
resulting temporary differences between financial and income tax
reporting purposes in accordance with Statement of Financial Accounting
Standards No. 109 (see Note 5). The Company ceased accounting for
deferred income taxes from January 1, 1994 through December 31, 1995.
Effective January 1, 1996, the Company commenced providing for deferred
income taxes resulting in a prior period adjustment which decreased
retained earnings and increased deferred income taxes payable by
approximately $285,000 as of January 1, 1995 and decreased deferred
income taxes payable and the previously recorded net loss by
approximately $48,000 for the year ended December 31, 1995.
ESTIMATES -- In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements, as well as the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Note 2 -- Property and Equipment:
- ---------------------------------
Property and equipment are stated at cost and consist of the following:
1996 1995
Leasehold improvements $ 309,407 $ 292,318
Furniture and fixtures 1,426,372 1,363,811
Computer software 216,880 214,510
---------- ----------
1,952,659 1,870,639
Less accumulated depreciation and
amortization 1,198,023 892,041
---------- ----------
$ 754,636 $ 978,598
========== ==========
The provision for depreciation amounted to $365,252 and $333,958 for 1996 and
1995, respectively.
27
28
VALUATION COUNSELORS GROUP, INC.
AND ITS WHOLLY OWNED SUBSIDIARY
Notes to the Financial Statements
December 31, 1996 and 1995
Note 3 -- Corporate Obligations:
- --------------------------------
On July 18, 1995, the Company executed a promissory note ("Term Loan") with
Cole Taylor Bank ("Cole") in the principal amount of $1,000,000.
Additionally, the Company obtained a line-of-credit from Cole providing for
maximum borrowings of $1,000,000, due July 18, 1996.
The term and credit line bore interest at 9% and at prime plus 1% (9.5% at
December 31, 1995), respectively. The term loan was payable in 36 monthly
installments of $31,870 consisting of principal and interest, with a final
payment due July 18, 1998.
On July 16, 1996, the Company refinanced its existing loans with Cole
Taylor with a new Lender, American National Bank and Trust Company of
Chicago ("ANB"), as evidenced by a promissory and installment note,
maturing on July 31, 1997 and November 30, 1999, respectively. Both loans
were made pursuant to a loan and security agreement, providing for a
continuing security interest in all of the Company's assets.
The promissory note provides for maximum borrowings of $1,000,000 and bears
interest at prime plus 1.0% (9.25% at December 31, 1996), payable monthly.
The installment note allows for maximum borrowings of $1,200,000 and is
payable in monthly installments of principal and interest amortized over
the life of the loan. The installment note bears interest at 8.25%
annually.
The outstanding balances on the promissory note and installment loan at
December 31, 1996 were $340,000 and $1,166,667, respectively. The
installment loan proceeds were primarily used to repay the Company's prior
obligations due to Cole Taylor Bank, which amounted to $722,489 at the time
of closing.
The aggregate future annual principal maturities at December 31, 1996 are
as follows:
1997 $ 740,000
1998 400,000
1999 366,667
---------------
$ 1,506,667
===============
28
29
VALUATION COUNSELORS GROUP, INC.
AND ITS WHOLLY OWNED SUBSIDIARY
Notes to the Financial Statements
December 31, 1996 and 1995
Note 4--Lease Obligations:
- --------------------------
The Company occupies several offices under various noncancellable operating
lease agreements, the longest of which expires in 2005. The Leases
generally provide for the payment of annual base rentals plus a
proportionate share of operating costs (as defined). In addition, the
Company is obligated under various equipment leases through 2001.
Future minimum rentals, net of sublease rentals, required under these
Leases at December 31 are as follows:
Year Ending Equipment Office
December 31, Leases Leases Total
---------- ---------- ----------
1997 $ 106,000 $ 845,000 $ 951,000
1998 83,000 725,000 808,000
1999 63,000 707,000 770,000
2000 58,000 707,000 765,000
2001 31,000 731,000 762,000
Thereafter 0 1,045,000 1,045,000
---------- ---------- ----------
341,000 4,760,000 5,101,000
Less sublease rentals 0 (295,000) (295,000)
---------- ---------- ----------
$ 341,000 $4,465,000 $4,806,000
========== ========== ==========
In conjunction with the acquisition of Lloyd-Thomas, the Company leased
office space through September 30, 1995 from two former shareholders of
Lloyd-Thomas (totaling approximately $62,000 in 1995).
Total rental expense charged to operations amounted to $1,067,000 and
$1,313,000 for 1996 and 1995, respectively (net of sublease income of
$76,000 in 1996 and 23,000 in 1995).
Note 5 -- Income Taxes:
- -----------------------
The company provided for deferred income taxes in accordance with STATEMENT
OF FINANCIAL ACCOUNTING STANDARD NO. 109 (SFAS NO.109), until December 31,
1993, and did not record deferred income taxes in accordance with SFAS No.
109 for the year ended December 31, 1994. Effective January 1, 1996, the
Company commenced providing for deferred income taxes, resulting in a prior
period adjustment of January 1, 1995, retained earnings and deferred income
taxes, and December 31, 1995 deferred income taxes and income tax benefit
as discussed in Note 1.
29
30
VALUATION COUNSELORS GROUP, INC.
AND ITS WHOLLY OWNED SUBSIDIARY
Notes to the Financial Statements
December 31, 1996 and 1995
Note 5 -- Income Taxes, Continued:
- ----------------------------------
The provision for income taxes for the years ended December 31, 1996 and
1995, consist of the following:
1996 1995
----------- ---------
Current--provision $ 42,101 $ 60,282
Deferred--provision (benefit) 122,000 ( 47,902)
----------- ---------
$ 164,101 $ 12,380
=========== =========
The Company had essentially no current federal tax provision in both years
due to utilization of federal net operating loss carryforwards to offset
taxable income for the years ended December 31, 1996 and 1995, the
difference between the statutory federal tax rate of 34% and the effective
tax rate is due to the effect of state income taxes and nondeductible meals
and entertainment costs and amortization of goodwill.
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the
deferred tax Liabilities and assets at December 31, 1996 and 1995 and their
approximate tax effects are as follows:
Tax Tax
Effect Effect
1996 1995
----------- ------------
Accounts receivable and progress billings ($1,187,000) ($1,095,000)
Allowances on receivables 250,000 119,000
Prepaids and other receivables (52,000) (81,000)
Deferred income 265,000 218,000
Accounts payable and accrued expenses 240,000 391,000
Depreciation (52,000) (40,000)
Net operating Loss carryforwards 27,000 184,000
Intangibles 13,000 (70,000)
----------- -----------
Net current deferred tax Liability ($ 496,000) ($ 374,000)
=========== ===========
The Company's net tax operating and capital loss carryforward which expires
in years through 2011 was approximately $70,000 and $460,000 in 1996 and
1995, respectively.
30
31
VALUATION COUNSELORS GROUP, INC.
AND ITS WHOLLY OWNED SUBSIDIARY
Notes to the Financial Statements
December 31, 1996 and 1995
Note 6--Stockholders' Agreement, Repurchase of Stock and Related Obligation:
- ----------------------------------------------------------------------------
Pursuant to a stockholders' agreement dated December, 1993 (as restated),
upon termination of any shareholder (as defined), the Company is required
(unless shareholders holding a majority of the outstanding stock agree
otherwise) to purchase all of their shares not acquired by the remaining
corporate shareholders, based upon a value per share, and payment terms, as
provided for in the agreement. In the event of death, the Company maintains
term insurance aggregating $6,200,000 on the lives of its stockholders to
fund the purchase of stockholders' shares. Furthermore, the Company has the
right of first refusal to acquire the outstanding shares of any selling
stockholders, not acquired by the remaining corporate shareholders,
pursuant to terms and conditions, as provided for in the stockholders'
agreement.
The company repurchased 19,518 shares of outstanding stock from a former
shareholder and officer under a settlement agreement dated December 30,
1996 for $910,000. The settlement agreement provides for the payment of
$910,000 to be made in three installments; a $304,000 payment on December
31, 1996 and two payments of $303,000 to be paid by December 15, 1997 and
1998.
Note 7--Contribution to Profit-sharing Plan:
- --------------------------------------------
The Company maintains a defined contribution plan (which qualifies as a
"401K" plan) for all eligible employees, as defined by the plan.
Participants may make contributions up to 18% of their compensation (as
defined) but not to exceed the maximum amount allowed by the Internal
Revenue Code. On October 7, 1994, the Company amended the plan, effective
January 1, 1996, to allow a Company matching of 50% of the employee
contribution, up to a maximum of 3% of an employee's salary. The Company
made contributions to the plan of $165,929 for 1996 and $114,486 for 1995.
Note 8--Contingencies and Commitments:
- --------------------------------------
In conjunction with the Lloyd-Thomas acquisition agreement, the Company has
employed certain individuals through January 31, 1998, with the right to
extend the employment for an additional two-year term. In addition, the
Company is required to make a payment of $335,000 on December 31, 1997,
plus a one-time payment of $100,000, based on an earnings threshold (as
defined) to December 31, 1997. Amounts charged to operations in 1996 and
1995 represent the aforementioned payments, plus amortization of goodwill.
During 1995, the Company was involved in litigation, which resulted in a
settlement during 1996 aggregating $400,000, of which $150,000
(representing the insurance deductible) was provided for in 1995, and the
remaining $250,000 was provided for in 1996 (of which $180,000 is
outstanding and included in accrued expenses as of December 31, 1996).
31
32
VALUATION COUNSELORS GROUP, INC.
AND ITS WHOLLY OWNED SUBSIDIARY
Consolidated Statement of Operations
For the Period January 1, 1997 through September 30, 1997
(unaudited)
Net Revenue $ 14,185,505
Operating Expenses 11,460,528
------------
Gross Operating Income 2,724,977
Marketing and Sales Expenses 1,440,282
------------
Income from Operations 1,284,695
------------
Other Expenses
Bonus provision 1,444,433
Acquisition-related expenses 381,237
------------
1,825,670
Loss before Provision for Income Taxes (540,975)
Provision for Income Taxes (7,792)
------------
Net Loss $ (533,185)
============
32
33
VALUATION COUNSELORS GROUP, INC.
AND ITS WHOLLY OWNED SUBSIDIARY
Consolidated Statement of Cash Flows
For the Period January 1, 1997 through September 30, 1997
(unaudited)
Cash flows from operating activities:
Net Loss $(533,184)
Adjustments to reconcile net loss to net cash
used in by operating activities:
Depreciation and amortization 326,842
Loss on sale of fixed assets 1,235
Changes in:
Accounts receivable (34,425)
Other receivables, deposits and prepayments (13,581)
Notes receivable 3,275
Accounts payable (44,103)
Accrued liabilities 170,634
Deferred income taxes (66,000)
---------
Net cash used in operating activities (189,307)
Cash flows from investing activities:
Capital expenditures (92,268)
---------
Net cash used in investing activities (92,268)
Cash flows from financing activities:
Repayment of debt (640,000)
Sale of treasury stock 436,250
Purchase of treasury stock (72,545)
Exercise of stock options 615,000
---------
Net cash provided by financing activities 338,705
Net increase in cash and cash equivalents 57,130
Cash and cash equivalents at beginning of year 41,480
---------
Cash and cash equivalents at end of year $ 98,610
=========
33
34
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Zelenkofske, Axelrod & Co., Ltd.:
We have audited the accompanying balance sheet of Zelenkofske, Axelrod & Co.,
Ltd. (the Company) as of June 30, 1997, and the related statements of operations
and retained earnings, and cash flows for the three months then ended. 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 generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Zelenkofske, Axelrod & Co.,
Ltd. as of June 30, 1997 and the results of its operations and its cash flows
for the three months then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
February 6, 1998
34
35
ZELENKOFSKE, AXELROD & CO., LTD.
BALANCE SHEET
JUNE 30, 1997
ASSETS
------
Current Assets
Cash $ 12,350
Accounts Receivable, Less Allowance for Doubtful Accounts of $436,162 3,378,664
Work-in-Process 159,432
Prepaid Expenses 99,849
-----------
Total Current Assets 3,650,295
-----------
Property and Equipment - at Cost, Less Accumulated Depreciation of
$ 1,359,606 406,975
-----------
Other Assets
Cash Value of Officers' Life Insurance 170,068
Other Assets 32,600
-----------
Total Other Assets 202,668
-----------
Total Assets $ 4,259,938
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
Current Liabilities
Accounts Payable $ 493,217
Accrued Liabilities 273,593
Notes Payable to Bank 1,116,670
Notes Payable to Stockholders 220,000
Notes Payable to Former Stockholders 161,086
-----------
Total Current Liabilities 2,264,566
-----------
Commitments and Contingencies -
Stockholders' Equity
Common Stock - $1 Par Value; 1,000 Shares
Authorized - 970 Issued and 949 Outstanding 949
Additional Paid-in Capital 344,589
Treasury Stock, at Cost (138,430)
Retained Earnings 1,788,264
-----------
Total Stockholders' Equity 1,995,372
-----------
Total Liabilities and Stockholders' Equity $ 4,259,938
===========
See accompanying notes to the financial statements.
35
36
ZELENKOFSKE, AXELROD & CO., LTD.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
THREE MONTHS ENDED JUNE 30, 1997
Revenues
Fee Income $ 2,723,769
-----------
Expenses
Payroll, Benefits and Taxes 2,367,057
Travel 93,536
Depreciation and Amortization 79,500
Interest 42,525
Computer 21,290
Other Employee Benefits 72,357
Postage and Miscellaneous Office Expense 111,564
Provision for Bad Debts 112,592
Marketing 25,900
Professional Fees 120,940
Dues and Subscriptions 29,337
Entertainment 16,020
Rent and Occupancy 180,081
Telephone 43,831
License, Insurance and Taxes 44,549
-----------
Total Expenses 3,361,079
-----------
Net Loss (637,310)
Retained Earnings - Beginning of Period 2,425,574
-----------
Retained Earnings - End of Period $ 1,788,264
===========
36
37
ZELENKOFSKE, AXELROD & CO., LTD.
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 1997
Cash Flows From Operating Activities
Net Loss $(637,310)
---------
Adjustments to Reconcile Net Loss to Net Cash Used in Operating
Activities:
Depreciation and Amortization 79,500
Provision for Bad Debts 112,592
(Increase) Decrease in Current Assets
Accounts Receivable, Net 909,864
Work-in-Process 43,046
Prepaid Expenses (74,990)
Other Assets (186,427)
Increase in Current Liabilities
Accounts Payable (280,302)
Accrued Expenses (297,031)
---------
Total Adjustments 306,252
---------
Net Cash Used in Operating Activities (331,058)
---------
Cash Flows From Financing Activities
Repayment of Notes Payable to Bank (87,502)
Increase in Notes Payable to Stockholders 220,000
Decrease in Notes Payable to Former Stockholders (13,405)
---------
Net Cash Used in Financing Activities 119,093
---------
Net Decrease in Cash (211,965)
Cash - Beginning of Period 224,315
---------
Cash - End of Period $ 12,350
=========
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for:
Interest $ 42,525
=========
See accompanying notes to the financial statements.
37
38
ZELENKOFSKE, AXELROD & CO., LTD.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Zelenkofske, Axelrod & Co., Ltd. (the "Company") was engaged in
providing accounting, attestation, and tax services, in addition to
general business consulting services to a wide range of commercial,
governmental and not-for-profit clients, most of which were located in
Pennsylvania.
A summary of accounting policies consistently applied in the
preparation of the accompanying financial statements is as follows:
A) Revenue Recognition
-------------------
Revenue is recognized as services are performed.
B) Allowance for Doubtful Accounts
--------------------------------
The Company provided an allowance for doubtful accounts equal to
the estimated losses to be incurred in the collection of all
receivables. The estimated losses were based on a review of the
current status of the existing receivables.
C) Cash Equivalents
----------------
For purposes of the statement of cash flows, the Company
considered all short-term securities purchased with a maturity of
three months or less to be cash equivalents.
D) Accounts Receivable
-------------------
Accounts receivable represent the total of all invoices
outstanding for completed or partially completed engagements.
E) Work-in-Process
---------------
Work-in-process represents the unbilled portion of uncompleted
audit, tax, and consulting engagements recognized at net
realizable value.
F) Property and Equipment
----------------------
The cost of property and equipment is depreciated over the
estimated useful lives of the related assets. Leasehold
improvements are amortized over their estimated useful lives.
Depreciation is computed on the straight-line and accelerated
methods for financial reporting and ACRS and MACRS for income tax
purposes.
Maintenance and repairs are charged to operations when incurred.
Significant betterments are capitalized. When property and
equipment are sold or otherwise disposed of, the asset accounts
and related accumulated depreciation accounts are relieved, and
any gain or loss is included in operations.
38
39
ZELENKOFSKE, AXELROD & CO., LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
F) Property and Equipment (Continued)
----------------------
The useful lives of property and equipment for
purposes of computing depreciation and amortization
are:
Furniture and Fixtures 7 - 12 Years
Office Equipment 5 - 12 Years
Computer Equipment 5 Years
Leasehold Improvements 31.5 Years
G) Income Taxes
------------
The Company elected to be taxed under the provisions
of Subchapter S of the applicable federal and state
revenue codes. Under those provisions, the Company
does not pay federal and state corporate income taxes
on its taxable income. Also, the Company does not
receive the benefit of net operating loss
carryforwards or carrybacks. Instead, the
stockholders are liable for individual income taxes
on their respective shares of the Company's taxable
income or loss in their individual income tax
returns.
H) Use of Estimates
----------------
The preparation of financial statements in conformity
with accounting and reporting practices prescribed by
generally accepted accounting principles, requires
management to make estimates and assumptions that
affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those
estimates.
NOTE 2: SUBSEQUENT EVENT
On July 1, 1997, the Company spun-off a portion of its assets
to a newly created Pennsylvania S corporation, Zelenkofske
Axelrod & Co., CPA's, Inc. This new company is owned by the
former stockholders of Zelenkofske, Axelrod & Co., Ltd. Also,
on July 1, 1997, the Company changed its name to ZA Business
Services, Inc. and, simultaneously, 100% of its ownership as
well as assets aggregating to $1.7 million were acquired by
International Alliance Services, Inc. (now Century Business
Services).
39
40
ZELENKOFSKE, AXELROD & CO., LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE 3: PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, at cost, less
accumulated depreciation:
Furniture and Fixtures $ 604,585
Leasehold Improvements 29,376
Office Equipment 476,424
Computer Equipment 656,196
-----------
1,766,581
Less: Accumulated Depreciation
and Amortization 1,359,606
----------
$ 406,975
==========
Depreciation and amortization expense for the three months ended June
30, 1997, was $79,500.
NOTE 4: ALLOWANCE FOR DOUBTFUL ACCOUNTS
The activity in the allowance for doubtful accounts, for the three
months ended June 30, 1997, was as follows:
Beginning Balance, April 1 $ 662,895
Provision for Bad Debts 112,592
Charge Offs, Net of Recoveries (339,325)
----------
Ending Balance, June 30 $ 436,162
==========
There were no receivables from clients outstanding at June 30, 1997
that were considered to be individually significant.
NOTE 5: NOTES PAYABLE TO BANK
The Company maintained a line of credit with PNC Bank with a maximum
amount of $2,000,000. Interest was based on prime plus 1/4%. The
amount outstanding at June 30, 1997, was $450,000. The interest rate
as of June 30, 1997 was 8.5%. The line was secured by all assets of
the Company.
The Company had five notes payable to PNC Bank totaling $666,670. On
July 1, 1997, the Company paid off these notes. Interest payable on
the notes was based on prime plus 1/4%.
40
41
ZELENKOFSKE, AXELROD & CO., LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE 6: EMPLOYEE RETIREMENT PLAN
The Company maintained a plan under which eligible employees
were able to defer a portion of their annual compensation, up
to a maximum of 15%, pursuant to Section 401(k) of the
Internal Revenue Code. Substantially all employees were
eligible to participate. The Company matched contributions on
a discretionary basis as determined by the board of directors.
Employees vested in their portion of the Company's
contributions, if any, at the rate of 20% for each year of
service. There were no Company contributions to the plan for
the three month period ended June 30, 1997.
NOTE 7: COMMITMENTS AND CONTINGENCIES
The former stockholders of Zelenkofske, Axelrod & Co., Ltd.
are guarantors of the accounts receivable and work-in-process
accounts that were retained by ZA Business Services, Inc. on
July 1, 1997, as a result of the change in ownership. If any
of these accounts are subsequently deemed to be uncollectible
by ZA Business Services, Inc., the former stockholders will
reimburse Century Business Services for these amounts.
On March 31, 1997, the health care consulting division of the
Company was sold to an independent entity, ZA Consulting, Inc.
(ZAC). As a result of this transaction, ZAC assumed a
liability to a former shareholder. At June 30, 1997, the
Company was a contingent guarantor on this liability up to a
maximum of $1,000,000. The guarantee decreases annually by
$200,000 until it expires on March 31, 2002. This guarantee
was assumed on July 1, 1997, by Zelenkofske Axelrod & Co.,
CPA's, Inc., a successor in interest.
This maximum guarantee decreases as follows:
March 31,
---------
1998 $800,000
1999 $600,000
2000 $400,000
2001 $200,000
The Company leased office space at the 101 West Avenue
building in Jenkintown, Pennsylvania, from APH Associates on a
lease, which will expire on May 31, 2000. Additionally, the
Company leased a second office space at the 101 West Avenue
building from Lincoln Investment Associates. The Company and
ZAC are jointly liable for this commitment which will expire
on May 31, 2000.
The future minimum lease payments under these operating
leases, as of June 30, 1997, were as follows:
Year Ending June 30,
--------------------
1998 $ 604,657
1999 604,657
2000 554,269
------------
$ 1,763,583
============
Office rental expense for the three months ended June 30,
1997, was $157,257.
41
42
ZELENKOFSKE, AXELROD & CO., LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE 8: RELATED PARTY TRANSACTIONS
As of June 30, 1997, the Company had a note payable to current
shareholders of $220,000 payable on December 31, 1997 with interest at
8.25%. This liability was assumed by Zelenkofske Axelrod & Co., CPA's,
Inc., a successor in interest, on July 1, 1997.
42
43
Independent Auditors' Report
----------------------------
The Board of Directors
Health Administration Services, Inc.:
We have audited the accompanying balance sheet of Health Administration
Services, Inc. as of December 18, 1997 and the related statements of income,
changes in stockholders' equity and cash flows for the period from January 1,
1997 to December 18, 1997. 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 generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements 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 financial position of Health Administration Services,
Inc. as of December 18, 1997, and the results of its operations and cash flows
for the period from January 1, 1997 to December 18, 1997 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Houston, Texas
January 28, 1998
43
44
HEALTH ADMINISTRATION SERVICES, INC.
BALANCE SHEET
December 18, 1997
Assets
------
Current assets:
Cash and cash equivalents $ --
Accounts receivable - trade, net of allowance for
doubtful accounts of $17,000 in 1997 751,848
Prepaid expenses 106,686
----------
Total current assets 858,534
Property and equipment, net of accumulated
depreciation and amortization 683,840
----------
Total assets 1,542,374
==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Book overdraft $ 173,353
Notes payable 38,000
Long-term debt, current portion (note 4) 84,252
Interest-bearing loans from stockholders, current portion (note 5) 53,305
Accounts payable and accrued expenses 831,095
Deferred state income tax 28,000
----------
Total current liabilities 1,208,005
Long-term debt, net of current portion (note 4) 29,871
Other liabilities 59,585
----------
Total liabilities 1,297,461
Commitments (notes 6 and 7)
Stockholders' equity:
Common stock, $1 par value, 1,000,000
shares authorized; 7,000 shares issued and
outstanding 7,000
Additional paid-in capital 120,000
Retained earnings 117,913
----------
Total stockholders' equity 244,913
----------
Total liabilities and stockholders' equity $1,542,374
==========
See accompanying notes to financial statements.
44
45
HEALTH ADMINISTRATION SERVICES, INC.
STATEMENT OF INCOME
For the period from January 1,1997 to December 18, 1997
Fee income $ 7,586,199
Costs and expenses:
Payroll and related payroll expenses 5,174,904
Advertising 3,508
Computer expenses 463,524
Depreciation and amortization 298,141
Rent 323,834
Postage and printing 380,512
Insurance expense 313,095
Professional fees 167,999
Other 788,050
-----------
Total costs and expenses 7,913,567
Loss from operations (327,368)
Other income (expense):
Gain (loss) on disposition of assets (601)
Interest income 485
Interest expense (50,329)
-----------
Total other expense, net (50,445)
-----------
Loss before provision for state income
tax (377,813)
Provision for state income tax --
-----------
Net loss $ (377,813)
===========
See accompanying notes to financial statements.
45
46
HEALTH ADMINISTRATION SERVICES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the period from January 1, 1997 to December 18, 1997
Total
Common Paid-in Retained stockholders'
stock capital earnings equity
----- ------- -------- ------
Balance at January 1, 1997 $ 7,000 -- 495,726 502,726
Additional paid-in capital -- 120,000 -- 120,000
Net loss -- -- (377,813) (422,726)
---------- -------------- ------------- -------------
Balance at December 18, 1997 $ 7,000 120,000 117,913 200,000
========== ============== ============= =============
See accompanying notes to financial statements.
46
47
HEALTH ADMINISTRATION SERVICES, INC.
STATEMENT OF CASH FLOWS
For the period from January 1, 1997 to December 18, 1997
Cash flows from operating activities:
Net loss $(377,813)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 298,141
Loss on disposition of assets 601
Effects of changes in operating assets and liabilities:
Accounts receivable - trade, net 55,807
Prepaid expenses (14,525)
Accounts payable and accrued expenses 434,481
Liability for deferred compensation (152,500)
Other liabilities 238
---------
Net cash provided by operating activities 244,430
---------
Cash flows from investing activities:
Capital expenditures for property and equipment (64,447)
Proceeds from disposition of assets 700
---------
Net cash used in investing activities (63,747)
---------
Cash flows from financing activities:
Net repayments under revolving line of
credit agreement and short-term notes payable (405,000)
Book overdraft 173,353
Borrowings on loans from stockholders 155,000
Borrowings on long-term debt 176,649
Principal payments on long-term debt (130,649)
Principal payments on loans from stockholders (463,467)
Additional paid-in capital 120,000
---------
Additional paid-in capital (374,114)
---------
Net decrease in cash and cash equivalents (193,431)
Cash and cash equivalents at beginning of year 193,431
---------
Cash and cash equivalents at end of year $ --
=========
Supplemental disclosure - cash paid for interest $ 50,329
=========
See accompanying notes to financial statements.
47
48
HEALTH ADMINISTRATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
December 18, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Health Administration Services, Inc. (the Company) provides health care
management services designed to control employer health care costs and
monitor patterns of treatment provided. The Company offers a broad range
of integrated services including group health claims administration,
utilization reviews and case management, psychiatric/chemical dependency
utilization review and case management, development of provider networks,
pre-determination and claims appeal review, data analysis and reporting.
The Company also assists employers to better manage the rising costs
associated with workers' compensation through claims administration
investigation, safety and the analysis of funding alternatives.
The Company's business strategy is to market a broad range of integrated
health care management services to new and existing clients and to develop
new services responsive to industry trends and the needs of its clients.
The Company has integrated its services so that it operates utilizing the
same on-line database system for claims histories, eligibility and benefit
coverage information, utilization review determinations and provider fee
arrangements.
As of December 18, 1997, the Company was merged into an Ohio Corporation
called IASI Acquisition D Co., which was a subsidiary of International
Alliance Services, Inc. Subsequently, IASI Acquisition D Co. changed its
name to Health Administration Services, Inc.
The following summarizes the other significant accounting and reporting
policies used in the preparation of the accompanying financial statements.
REVENUE RECOGNITION
Revenue is earned as services are provided based upon fee schedules for
each type of service.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization expense is computed on the
straight-line and accelerated methods over the estimated useful lives of
the related assets. Expenditures for additions, major renewals and
betterments are capitalized, and maintenance and repairs are charged to
expense as incurred.
The costs of assets retired or otherwise disposed of and the related
accumulated depreciation and amortization are eliminated from the accounts
in the year of disposal and the resulting gain or loss is credited or
charged to operations.
(Continued)
48
49
HEALTH ADMINISTRATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
INCOME TAXES
The Company has elected S corporation status for federal income tax
purposes for the period ended which provides that, in most cases, the
taxable earnings of the corporation flow through and are taxed to its
stockholders. Therefore, a provision for current federal income taxes is
not included in the accompanying financial statements. This election
terminates from the effective date of the merger into IASI Acquisition D
Company.
Deferred tax is accounted for in accordance with the liability method of
accounting for income taxes pursuant to Statement of Financial Accounting
Standards No. 109. Accordingly, a deferred income tax has been recorded to
reflect the tax consequences on future years of differences between the
tax basis of assets and liabilities and their financial amounts at year
end. Deferred state income tax results primarily from temporary
differences due to the use of cash basis accounting and accelerated
depreciation methods for tax purposes. The Company provides a valuation
allowance, if necessary, to reduce deferred tax assets to their estimated
net realizable value.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and in banks and other short-term highly liquid investments
with an original maturity of three months or less.
EMPLOYEE HEALTH PLAN
The Company is primarily self-insured for its employee major medical and
short-term disability coverage plan. Under the plan, the Company is liable
for claims, subject to stop-loss coverage provided by an independent
insurance carrier that limits the Company's liability to a specified
amount per plan participant and a specified aggregate amount in total. The
self-insurance claim liability is determined based on claims reported and
an estimate of claims incurred but not reported.
CONCENTRATION OF CREDIT RISK
The Company maintains deposits in demand accounts with a major bank which
exceed the federally insured limit of $100,000 from time to time. The
Company has not incurred losses related to these deposits.
The Company provides services and grants credit to customers located
primarily in the state of Texas and does not generally require collateral.
Approximately 65% of these customers are school districts. Customer credit
records are reviewed on a regular basis, and an allowance is provided for
accounts which are questionable as to collectibility. Credit losses have
historically been minimal and within management's expectations.
(Continued)
49
50
HEALTH ADMINISTRATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
The Company is not party to any financial instruments which would have
off-balance sheet credit or interest rate risk.
OVERALL EFFECT OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the 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 those
estimates.
(2) PROPERTY AND EQUIPMENT
A summary of property and equipment and related accumulated depreciation
and amortization follows:
Useful
Asset description years 1997
----------------- ------- ----
Office furniture and fixtures 5 - 10 years $ 210,077
Computer software 3 - 5 years 647,408
Automobiles 5 years 97,800
Office equipment 5 - 10 years 1,411,558
Leasehold improvements 3 - 5 years 44,835
--------------
Total property and equipment 2,411,678
Less accumulated depreciation and amortization 1,727,838
--------------
Net property and equipment $ 683,840
==============
(3) NOTES PAYABLE
Notes payable consisted of the following at December 18, 1997:
Revolving line of credit with a bank for $300,000, interest payable
monthly at the current prime rate (8.50% at December 18, 1997),
outstanding principal and accrued interest payable on July 31, 1998,
collateralized by accounts receivable and equipment, guaranteed by the
Company's stockholders $ 38,000
========
The line of credit agreement contains a covenant stating that the total
principal outstanding, at any time, shall not exceed the lesser of 80% of
accounts receivable no older than 60 days from invoice date or $300,000.
(Continued)
50
51
HEALTH ADMINISTRATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(4) LONG-TERM DEBT
The following is a schedule of long-term debt at December 31, 1997:
Note payable to a bank bearing interest at the prime rate, due in monthly
payments of $3,733 plus interest through August 1999, collateralized by
certain computer equipment and cross-collateralized with the $300,000
revolving line of credit $ 74,667
Note payable to a bank bearing interest at the prime rate,
due in monthly payments of $2,000 plus interest
through August 1998, collateralized by certain
equipment and cross-collateralized with the
$300,000 revolving line of credit 14,000
Note payable to a corporation bearing interest at 8.9%,
due in monthly installments of $911 including
interest through September 1998, collateralized by
certain equipment 8,749
Other 16,707
----------
114,123
Less current portion 84,252
----------
Long-term debt, net of current portion $ 29,871
==========
(5) INTEREST-BEARING LOANS FROM STOCKHOLDERS
The following is a schedule of the interest-bearing loans from
stockholders at December 18, 1997:
Uncollateralized notes payable to stockholders, bearing interest at 9. 5%
per year, due in monthly installments totaling $13,591, including
interest, through June 1998
$ 53,305
========
Interest expense incurred on loans from stockholders totaled $29,340 in
1997.
Future principal maturities of long-term debt and interest-bearing loans
from stockholders is as follows:
Year ending December 18,
1998 $ 137,557
1999 29,871
---------
$ 167,428
=========
(Continued)
51
52
HEALTH ADMINISTRATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(6) COMMITMENTS
The Company leases its office space under a noncancelable operating lease.
The lease agreement provides for accelerating payments over the term of
the lease, with a renewal option to extend the lease for an additional
five years. Rent expense is recorded on a prorated basis over the life of
the lease. A liability has been recorded for the rent expense charged to
operations in excess of rental payments actually made.
The following is a schedule of the future minimum rental payments required
under the office lease:
1998 $ 282,912
1999 292,992
2000 98,784
---------
$ 674,688
=========
The Company incurred rent expense of $276,192 in 1997.
The Company manages and markets a preferred provider organization (PPO)
service and has agreed to make distributions of 50% of the net profit in
excess of 15% of such PPO revenue to the founders of the PPO to reimburse
such founders up to the amount of their original investment. As of
December 18, 1997, the founders' unrecovered investment had been reduced
to $27,542.
The Company purchased software in 1994 under the terms of a software
license agreement that requires the payment of future license fees.
Included in other noncurrent liabilities and accounts payable at December
18, 1997 is $32,475 related to future license fees which is payable in
annual installments of $32,475 through 1998.
(7) EMPLOYEE RETIREMENT PLAN
During 1993, the Company established a qualified defined contribution
savings plan under Section 401(k) of the Internal Revenue Code which
covers all full-time employees once they have completed one full year of
service. Under the plan, eligible participating employees may elect to
contribute up to 15% of their salaries. The Company matches 50% of a
participant's voluntary contribution up to 1.5% of their salary.
Participants are at all times fully vested in their contributions and the
Company's contributions vest to the participants over a five year period
of continued employment. In addition, the Company may make annual
discretionary contributions. Contributions made by the Company and charged
to expense totaled $33,042 in 1997.
52
53
Independent Auditors' Report
----------------------------
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
SHENKIN KURTZ BAKER & CO., P.C.:
We have audited the accompanying consolidated balance sheet of Shenkin Kurtz
Baker & Co., P.C. and subsidiary as of December 7, 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for
the period from January 1, 1997 to December 7, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with Generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Shenkin
Kurtz Baker & Co., P.C. and subsidiary as of December 7, 1997, and the results
of their operations and their cash flows for the period from January 1, 1997
to December 7, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Denver, Colorado
January 26, 1998
53
54
SHENKIN KURTZ BAKER & CO., P.C.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 7, 1997
- -------------------------------------------------------------------------------
Assets
-------
Cash $ 25,452
Accounts receivable - trade, net of allowance
for doubtful accounts of $375,000 610,069
Work-in-progress 276,271
Prepaid expenses 47,255
-----------
Current assets 959,047
Fixed assets (including accumulated depreciation
of $441,774) 583,060
Other assets 198
------------
Total assets $ 1,542,305
------------
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Accounts payable $ 46,331
Notes payable - shareholders 100,000
Financial retainers 74,881
Accrued payroll 77,284
Accrued expenses and other 56,865
------------
Current liabilities 355,361
------------
Total liabilities 355,361
------------
Stockholders' equity:
Common stock, no par value, 25,000,000 shares authorized; 538,000
shares issued and 526,500 shares outstanding -
Additional paid-in capital 277,304
Treasury stock (41,100)
Retained earnings 950,740
------------
Total stockholders' equity l,186,944
------------
Total liabilities and stockholders' equity $ 1,542,305
============
See accompanying notes to consolidated financial statements.
54
55
SHENKIN KURTZ BAKER & CO., P.C.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
PERIOD FROM JANUARY 1, 1997 TO DECEMBER 7, 1997
- -------------------------------------------------------------------------------
Fee income $ 4,497,665
Direct expenses 2,467,784
------------
Gross profit 2,029,881
Indirect expenses 2,370,096
Loss from operations (340,215)
Other income, net 27,744
------------
Net loss $ (312,471)
===========
See accompanying notes to consolidated financial statements.
55
56
SHENKIN KURTZ BAKER & CO., P.C.
AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Period From January 1, 1997 to December 7, 1997
Common Stock Additional Treasury stock
-------------------- Paid-In Retained ---------------------
Shares Amount Capital Earnings Shares Amount Total
------ ------ ------- -------- ------ ------ -----
Balance as of January 1, 1997 523,000 - 63,830 1,263,211 - - 1,327,041
Net loss - - - (312,471) - - (312,471)
Sale of stock 15,000 - 213,474 - - - 213,474
Purchase of treasury stock - - - - (11,500) (41,100) (41,100)
------- --- ------- ------- ------- ------- -----------
Balance as of December 7, 1997 538,000 $ - 277,304 950,740 $ (11,500) (41,100) $ 1,186,944
======= === ======= ======= ======= ======= ===========
See accompanying notes to consolidated financial statements.
56
57
SHENKIN KURTZ BAKER & CO., P.C.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1997 TO DECEMBER 7, 1997
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(312,471)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 74,012
Allowance for doubtful accounts 232,000
Changes in the following items:
Accounts receivable (63,895)
Work-in-progress (18,059)
Prepaid expenses (20,966)
Accounts payable 46,331
Accrued expenses 133,865
---------
Net cash provided by operating activities 70,817
---------
Cash flows from investing activities -
Purchase of property and equipment (150,436)
---------
Cash flows from financing activities:
Proceeds from shareholders' notes payable 100,000
Repayment of notes payable (243,348)
Sale of stock 213,474
Purchase of treasury stock (41,100)
---------
Net cash provided by financing activities 29,026
---------
Net decrease in cash (50,593)
Cash at beginning of year 76,045
---------
Cash at end of year $ 25,452
=========
See accompanying notes to consolidated financial statements.
57
58
SHENKIN KURTZ BAKER & CO., P.C.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 7, 1997
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Shenkin Kurtz Baker & Co., P.C., (SKB or the Company) is a certified public
accounting firm. Formed in 1975, the firm offers services in areas of tax
planning and compliance, investment banking, outsourcing, dispute
resolution, accounting services, mergers and acquisitions, business
valuation and family office, primarily in Denver, Colorado.
BASIS OF CONSOLIDATION
The Company's consolidated financial statements include the accounts of its
wholly-owned subsidiary, SKB Corboy, Inc. (SKB Corboy). SKB Corboy is a
registered securities broker/dealer. All significant intercompany accounts
and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting and
reporting practices prescribed by generally accepted accounting
principles, requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
short-term securities purchased with a maturity of three months or less to
be cash equivalents.
REVENUE RECOGNITION
Revenues are recognized as services are performed. The allowance for
doubtful accounts generally includes accounts which are in excess of 120
days old.
WORK-IN-PROGRESS
Work-in-progress represents the unbilled portion of uncompleted services
recognized at net realizable value.
PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment are provided by
the use of the straight line and accelerated methods over the estimated
useful lives of the assets. Adjustments of the assets and the related
depreciation accounts are made for retirements and disposals with the
resulting gain or loss included in operations. Leasehold improvements are
depreciated over a 39-year period. All other assets are depreciated over
3 to 7 years.
58
59
SHENKIN KURTZ BAKER & CO., P.C.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
SKB is a C Corporation for tax purposes. The Company had no current
taxable income for the period from January 1, 1997 to December 7, 1997.
The Company holds a 100% valuation allowance on deferred tax assets of
approximately $143,000 at December 7, 1997. Such assets primarily
represent the allowance for doubtful accounts. The provision for income
taxes during the period from January 1, 1997 to December 7, 1997 differs
from amounts expected by applying the statutory income tax rate of 34%
primarily due to an increase in the valuation allowance of approximately
$90,000.
(2) CONCENTRATION OF CREDIT RISK
During the period from January 1, 1997 to December 7, 1997, revenue from
12 major clients amounted to approximately 22% of revenues. Accounts
receivable related to these major clients was approximately $73,000 at
December 7, 1997.
(3) NOTES PAYABLE
At December 31, 1996, the firm had a tenant improvement loan from
Norwest Bank of approximately $243,000. Terms of the loan were 9% fixed
interest for a term of sixty months, monthly payments of $5,190 due at
the last day of each month. The loan was to mature October 31, 2001. The
loan was paid in full on August 7, 1997.
On December 7, 1997, the two largest SKB shareholders made loans to the
firm in the amounts of $75,000 from Stephen S. Kurtz and $25,000 from
Thomas R. Hoffman. The funds were for operating capital. The two
shareholders received notes payable on demand, bearing interest at the
rate of 9%. The notes payable are unsecured.
(4) COMMITMENTS
The firm leases its office space from a related party, SKB Building
Company, LLC. SKB Building Company, LLC, is owned by the same
shareholders as SKB. For the period from January 1, 1997 through
December 7, 1997, SKB paid SKB Building Company, LLC, approximately
$268,000 in rent. Gross annual rental payments under this lease are as
follows:
1998 $ 326,466
1999 326,466
2000 326,466
2001 163,233
59
60
SHENKIN KURTZ BAKER & CO., P.C.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(5) STOCKHOLDERS' EQUITY
During October 1997, SKB's board of directors approved a
five-hundred-for-one stock split. The shares disclosed reflect this
change.
(6) EMPLOYEE RETIREMENT PLAN
The Company maintained a plan under which eligible employees were able
to defer a portion of their annual compensation up to a maximum of 15%
of their salary or the maximum amount permitted pursuant to Section
401(k) of the Internal Revenue Code. The Company has the ability to
make contributions on a discretionary basis as determined by the board
of directors. There were no Company contributions to the plan for the
period from January 1, 1997 to December 7, 1997.
(7) SUBSEQUENT EVENT
On December 8, 1997, 100% of the outstanding common stock of SKB was
acquired by International Alliance Services Inc. (now known as Century
Business Services). In connection with this transaction, and as required
by the Purchase and Sale Agreement, SKB spun-off certain operations to a
new Colorado limited liability company, Shenkin Kurtz Baker & Co., LLC
(the LLC). The members of the LLC include the former shareholders of
SKB prior to SKB's purchase by Century Business Services.
60
61
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Robert D. O'Byrne and Associates, Inc. and
The Grant Nelson Group, Inc.:
We have audited the accompanying combined balance sheet of Robert D. O'Byrne
and Associates, Inc. and The Grant Nelson Group, Inc. (the Company) as of
December 31, 1997 and the related combined statements of operations,
stockholders' equity and cash flows for the year then ended. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Robert
D. O'Byrne and Associates, Inc. and The Grant Nelson Group, Inc. as of
December 31, 1997 and the results of their combined operations and cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
February 13, 1998
Kansas City, Missouri
61
62
ROBERT D. O'BYRNE AND ASSOCIATES, INC. AND
THE GRANT NELSON GROUP, INC.
Combined Balance Sheet
December 31, 1997
- ----------------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------
Current assets:
Cash $ 472,404
Commissions receivable (net of allowance of approximately $133,000) 1,641,970
Accounts receivable 21,119
Current portion of note receivable (note 8) 80,866
Receivable from stockholder (note 9) 325,000
Other assets 208,348
- ----------------------------------------------------------------------------------------------
Total current assets 2,749,707
- ----------------------------------------------------------------------------------------------
Furniture, fixtures and equipment 1,206,976
Less accumulated depreciation 926,781
- ----------------------------------------------------------------------------------------------
Net property and equipment 280,195
- ----------------------------------------------------------------------------------------------
Noncurrent assets:
Excess cost over fair value of net assets acquired (net of amortization
of approximately $313,000) (note 2) 1,185,833
Deferred income taxes (note 10) 409,662
Note receivable, less current portion (note 8) 80,325
Other assets 48,591
- ----------------------------------------------------------------------------------------------
Total noncurrent assets 1,724,411
- ----------------------------------------------------------------------------------------------
Total assets $ 4,754,313
- ----------------------------------------------------------------------------------------------
See accompanying notes to combined financial statements.
62
63
ROBERT D. O'BYRNE AND ASSOCIATES, INC. AND
THE GRANT NELSON GROUP, INC.
Combined Balance Sheet
December 31, 1997
- ----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------
Current liabilities:
Accrued commissions payable $ 452,334
Accounts payable and other liabilities 1,726,538
Income taxes payable 170,849
Current portion of note payable to former stockholder (note 3) 25,694
Current portion of other notes payable (note 4) 116,942
Current portion of amount due under deferred compensation agreement (note 11) 80,000
- ----------------------------------------------------------------------------------------------
Total current liabilities 2,572,357
- ----------------------------------------------------------------------------------------------
Long-term obligations, less current portion:
Note payable to former stockholder (note 3) 889,204
Other notes payable (note 4) 452,849
Amounts due under deferred compensation arrangement (note 11) 334,360
- ----------------------------------------------------------------------------------------------
Total noncurrent liabilities 1,676,413
- ----------------------------------------------------------------------------------------------
Total liabilities 4,248,770
- ----------------------------------------------------------------------------------------------
Stockholders' equity (note 5):
Capital stock 2,006,650
Additional paid-in capital 7,859,402
Retained earnings (8,428,753)
Treasury stock (931,756)
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 505,543
Commitments and contingencies (note 7)
- ----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 4,754,313
- ----------------------------------------------------------------------------------------------
63
64
ROBERT D. O'BYRNE AND ASSOCIATES, INC. AND
THE GRANT NELSON GROUP, INC.
Combined Statement of Operations
Year ended December 31, 1997
- -----------------------------------------------------------------------------------------------
Revenues $ 17,052,730
- -----------------------------------------------------------------------------------------------
Operating expenses:
Compensation and benefits 13,136,353
Office operations 2,692,442
Other 1,593,232
- -----------------------------------------------------------------------------------------------
Total operating expenses 17,422,027
- -----------------------------------------------------------------------------------------------
Operating loss (369,297)
Interest expense 171,958
- -----------------------------------------------------------------------------------------------
Loss before income taxes and extraordinary item (541,255)
Income tax benefit 218,781
- -----------------------------------------------------------------------------------------------
Loss before extraordinary item (322,474)
Extraordinary item - gain on extinguishment of notes payable (notes 5, 10) 106,100
- -----------------------------------------------------------------------------------------------
Net loss $ (216,374)
- -----------------------------------------------------------------------------------------------
See accompanying notes to combined financial statements.
64
65
ROBERT D. O'BYRNE AND ASSOCIATES, INC. AND
THE GRANT NELSON GROUP, INC.
Combined Statement of Stockholders' Equity
Year ended December 31, 1997
- ---------------------------------------------------------------------------------------------------------
Additional
Common paid-in Retained Treasury
stock capital earnings stock Total
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 2,004,000 7,862,052 (8,212,379) (931,656) 722,017
Purchase of treasury stock - - - (100) (100)
Issuance of common stock 2,650 (2,650) - - -
Net loss - - (216,374) - (216,374)
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 2,006,650 7,859,402 (8,428,753) (931,756) 505,543
- ---------------------------------------------------------------------------------------------------------
See accompanying notes to combined financial statements.
65
66
ROBERT D. O'BYRNE AND ASSOCIATES, INC. AND
THE GRANT NELSON GROUP, INC.
Combined Statement of Cash Flows
Year ended December 31, 1997
- ----------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (216,374)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 187,467
Gain on extinguishment of notes payable to former stockholder (106,100)
Changes in assets and liabilities:
Commissions receivable (187,359)
Accounts receivable 65,403
Deferred income tax asset (297,024)
Other assets 127,462
Accrued commissions payable (134,476)
Accounts payable and other liabilities 940,445
Deferred compensation (40,696)
Payable to stockholders 23,584
Income taxes payable 30,849
Other liabilities 50,188
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 443,369
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net purchase of furniture, fixtures and equipment (88,392)
Purchase of treasury stock (100)
Other investing activities, net (166,334)
- ----------------------------------------------------------------------------------------------
Net cash used in investing activities (254,826)
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds advanced on note receivable from stockholder (325,000)
Proceeds from principal payments on note receivable 20,000
Principal payments on notes payable to former stockholders (752,658)
Proceeds from other notes payable 311,791
- ----------------------------------------------------------------------------------------------
Net cash used in financing activities (745,867)
- ----------------------------------------------------------------------------------------------
Decrease in cash (557,324)
Cash at beginning of year 1,029,728
- ----------------------------------------------------------------------------------------------
Cash at end of year $ 472,404
- ----------------------------------------------------------------------------------------------
Cash paid for interest $ 175,395
- ----------------------------------------------------------------------------------------------
See accompanying notes to combined financial statements.
66
67
ROBERT D. O'BYRNE AND ASSOCIATES, INC. AND
THE GRANT NELSON GROUP, INC.
Notes to Combined Financial Statements
December 31, 1997
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Robert D. O'Byrne and Associates, Inc. (RDOB) and The Grant Nelson
Group, Inc. (GNG) (collectively, the Company) provide insurance
brokerage and consulting services to a wide variety of commercial,
industrial, institutional and governmental organizations. Commission
revenue is principally generated through the negotiation and placement
of insurance for its clients.
On December 31, 1997, Century Business Services, Inc. (CBS) acquired all
the outstanding shares of the Company in exchange for 872,400 shares of
CBS common stock and cash and notes aggregating $6,355,102. In addition,
CBS paid the remaining balance due under the note payable to stockholder
discussed in note 3. The effect of these transactions have not been
reflected in the combined financial statements.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
RDOB and GNG are controlled by substantially the same group of
stockholders and, accordingly, the Company has presented their financial
position and results of operations on a combined basis. Intercompany
transactions and balances have been eliminated in the consolidation.
The preparation of combined financial statements in conformity with
generally accepted accounting principles 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 combined financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(b) REVENUES
Revenues include insurance commissions and fees for services rendered.
Insurance commissions are recorded as revenue when earned.
(c) EXCESS COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
GNG has acquired certain other companies in previous years. Those
companies provided similar services to their customers as GNG and RDOB
provide to their customers. The companies were generally acquired for
cash in transactions accounted for as purchases. The excess of the
purchase price over the net assets acquired has been recorded by GNG as
goodwill. Such goodwill is being amortized over periods ranging from
twenty to twenty-five years.
(d) FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost, less accumulated
depreciation. Such assets are depreciated using the straight-line and
declining methods over five to seven years. Major replacements and
betterments are capitalized while normal maintenance and repairs are
charged to expense when incurred.
(Continued)
67
68
ROBERT D. O'BYRNE AND ASSOCIATES, INC. AND
THE GRANT NELSON GROUP, INC.
Notes to Combined Financial Statements
- --------------------------------------------------------------------------------
(e) INCOME TAXES
RDOB and GNG file separate federal and state income tax returns and,
accordingly, the accompanying combined financial statements reflect the
income tax of both entities. Deferred taxes have been provided for the
effect of temporary differences between pre-tax income for financial
reporting and income tax purposes.
(3) NOTE PAYABLE TO FORMER STOCKHOLDER
RDOB is obligated under a note payable to a former stockholder, dated
January 1997, with an original amount of $931,656 which represented the
purchase price for the former stockholder's interest in RDOB. Under the
terms of the agreement, the note is paid in quarterly installments of
principal and interest of 15% aggregating approximately $40,000 through
2011. In connection with the CBS transaction referred to in note 1, this
note was repaid by CBS in January 1998.
(4) OTHER NOTES PAYABLE
The Company's other notes payable at December 31, 1997 are as follows:
- --------------------------------------------------------------------------------------------
Unsecured notes payable to stockholders of GNG, bearing interest
at 6%, due 2001 $ 258,000
Note payable to bank, bearing interest at 9%, due in monthly payments
of $7,816 through 2000, secured by commissions receivable 245,333
Amount due to former employee under the provisions of a termination
agreement, payable in equal monthly installments of $1,928,
including interest of 9%, through April 2001 66,458
- --------------------------------------------------------------------------------------------
569,791
Less current portion 116,942
- --------------------------------------------------------------------------------------------
$ 452,849
- --------------------------------------------------------------------------------------------
Additionally, the Company has a line of credit agreement with a bank in
the amount of $755,000 under which there were no advances as of December
31, 1997.
(continued)
68
69
ROBERT D. O'BYRNE AND ASSOCIATES, INC. AND
THE GRANT NELSON GROUP, INC.
Notes to Combined Financial Statements
- --------------------------------------------------------------------------------
(5) STOCKHOLDERS' EQUITY
The stockholders' equity accounts of RDOB and GNG at December 31, 1997
are as follows:
- -----------------------------------------------------------------------------------------------
RDOB:
Common stock, $1 par value, 500,000
shares authorized, 6,650 shares issued $ 6,650
Additional paid-in capital 44,889
Retained earnings 414,798
Treasury stock, 1,000 shares at cost (931,656)
- -----------------------------------------------------------------------------------------------
Total $ (465,319)
- -----------------------------------------------------------------------------------------------
GNG:
Common stock, $1 par value, 3,000,000 shares
authorized, 2,000,000 shares issued $ 2,000,000
Additional paid-in capital 7,814,513
Retained earnings (8,843,551)
Treasury stock, 1,140,000 shares at cost (100)
- -----------------------------------------------------------------------------------------------
Total $ 970,862
- -----------------------------------------------------------------------------------------------
During 1996, RDOB purchased 1,000 shares of stock for the treasury from
a former stockholder in exchange for a note payable of $931,656 (see
note 3).
During 1997, GNG purchased 1,140,000 shares of common stock for the
treasury for $100. In connection with that transaction, GNG also settled
notes payable to that former stockholder aggregating $842,000 in
exchange for a cash payment by GNG of $735,900. The resulting gain on
extinguishment of that debt of $106,100 has been reflected as an
extraordinary item in the accompanying combined financial statements.
(6) LEASES
The Company is obligated under noncancelable operating leases for office
facilities, furniture and equipment. Included in the expense of office
operations is rent expense of approximately $1,206,000 for 1997. Future
minimum lease payments under operating leases are as follows:
- ----------------------------------------------------------------------------------------------
Year Amount
- ----------------------------------------------------------------------------------------------
1998 $ 1,192,000
1999 1,134,000
2000 601,000
2001 565,000
2002 366,000
- ----------------------------------------------------------------------------------------------
$ 3,858,000
- ----------------------------------------------------------------------------------------------
(continued)
69
70
ROBERT D. O'BYRNE AND ASSOCIATES, INC. AND
THE GRANT NELSON GROUP, INC.
Notes to Combined Financial Statements
- --------------------------------------------------------------------------------
It is expected that the Company will renew or replace such leases for
office facilities as they expire and, accordingly, future rent expense
will approximate the 1997 amount.
(7) CONTINGENT LIABILITIES
The Company is a party to certain claims and legal actions arising
during the ordinary course of business. In the opinion of management,
after consultation with legal counsel, resolution of these matters will
not have a material adverse effect on the combined financial statements
of the Company.
(8) NOTE RECEIVABLE
The Company has a noninterest bearing note receivable, dated October
1995, from an individual originally amounting to $230,651 which
represented an amount due under the terms of a sublease agreement. Under
the terms of the note, the remaining payments, aggregating $161,191, are
due in equal installments on September 1997 and September 1998. Although
the payment due September 1997 has not yet been received, management
believes such amount is collectible.
(9) RECEIVABLE FROM STOCKHOLDER
During 1997, the Company advanced $325,000 under a short-term note
receivable, bearing interest at 9.5%, to a stockholder.
(10) INCOME TAXES
The components of total income tax benefit, including a state tax
benefit of $38,000, for the year ended December 31, 1997 are as follows:
- ---------------------------------------------------------------------------------------------
Current $ 62,000
Deferred (281,000)
- ---------------------------------------------------------------------------------------------
Income tax benefit $ (219,000)
- ---------------------------------------------------------------------------------------------
Income taxes for 1997 as presented differ from amounts computed by
applying the statutory federal income tax rate of 34% to the combined
loss before extraordinary item as a result of the following:
- ---------------------------------------------------------------------------------------------
Expected income tax benefit $ (184,000)
State income tax benefit, net (15,000)
Nondeductible professional fees 41,000
Amortization of goodwill 15,000
Meals and entertainment 13,000
Utilization of net operating loss carryforward (93,000)
Other 4,000
- ---------------------------------------------------------------------------------------------
$ (219,000)
- ---------------------------------------------------------------------------------------------
(Continued)
70
71
ROBERT D. O'BYRNE AND ASSOCIATES, INC. AND
THE GRANT NELSON GROUP, INC.
Notes to Combined Financial Statements
- --------------------------------------------------------------------------------
At December 31, 1996, GNG had a federal net operating loss carryforward
of approximately $3,137,000. Approximately $500,000 of this carryforward
was used in 1997. As a result of the transaction referred to in note 5,
the Company lost substantially all of the remaining unused carryforward.
No deferred tax asset has been recorded for the remaining carryforward.
The use of the carryforward reduced taxes that would have otherwise have
been accrued on GNG's operating profit, as well as eliminated the tax
that would have been payable on the gain resulting from the
extinguishment of debt.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 are as follows:
- ---------------------------------------------------------------------------------------------
Deferred tax assets:
Deferred compensation $ 422,000
Accrued expenses 105,000
Other 21,000
- ---------------------------------------------------------------------------------------------
Total deferred tax assets 548,000
- ---------------------------------------------------------------------------------------------
Deferred tax liabilities:
Furniture, fixtures and equipment,
due to differences in depreciation 69,000
Other 69,000
- ---------------------------------------------------------------------------------------------
Total deferred tax liabilities 138,000
- ---------------------------------------------------------------------------------------------
Net deferred tax asset $ 410,000
- ---------------------------------------------------------------------------------------------
A valuation allowance relating to the deferred tax assets set forth
above was not considered necessary because, in management's opinion, it
is more likely than not that such amounts will be realized in the
future.
(11) DEFERRED COMPENSATION, BONUSES AND EMPLOYER BENEFIT AGREEMENTS
The deferred compensation obligation recorded in the accompanying
combined financial statements is payable to a former officer and
stockholder of GNG under an employment agreement dated October 1, 1995.
Under the provisions of that agreement, GNG is making annual payments of
$80,000 through 2003. GNG recorded the present value of such payments
using an interest rate of 9%. The Company is also obligated under
several other deferred compensation agreements under which the former
employee receives payments based upon future commission revenues earned
by the Company from certain customers previously served by the former
employees. Because the amounts of such payments are based upon future
revenues, no accrual for future payments has been made in the
accompanying combined financial statements. Total payments charged to
1997 compensation and benefits expense aggregated $350,708.
(Continued)
71
72
ROBERT D. O'BYRNE AND ASSOCIATES, INC. AND
THE GRANT NELSON GROUP, INC.
Notes to Combined Financial Statements
- --------------------------------------------------------------------------------
Included in compensation and benefits expense and other liabilities is
approximately $701,000 of bonuses payable to employees. Of such amount,
approximately $146,000 is payable to stockholders of RDOB and GNG.
The Company has a defined contribution employee 401(k) and profit
sharing plan covering substantially all employees. Employees electing to
participate in the 401(k) plan may contribute a maximum of 15% of their
salary, subject to limitations under the Internal Revenue Code, and the
Company will match 50% of each participant's contribution up to 5% of
the participant's compensation. The profit sharing plan provides for
discretionary employer contributions. Employer contributions for 1997 on
the 401(k) plan were $179,354 and are included as a component of
compensation expense. There were no discretionary contributions on the
profit sharing plan for 1997.
72
73
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Environmental Safety Systems, Inc.
Englewood, Colorado
We have audited the accompanying consolidated balance sheets of Environmental
Safety Systems, Inc. and subsidiaries, as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years in the three year period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Environmental Safety
Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Gelfond Hochstadt Pangburn & Co.
Denver, Colorado
May 20, 1997
73
74
ENVIRONMENTAL SAFETY SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
December 31,
1996 1995
Current assets:
Cash and cash equivalents $ 773 $ 178
Cash and cash equivalents, restricted 100 477
Accounts receivable, net 1,279 1,073
Prepaid expenses and other 74 118
------- -------
Total current assets 2,226 1,846
Related party receivables 1,230 534
Property and equipment, net 18 41
------- -------
$ 3,474 $ 2,421
======= =======
LAIBILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 415 $ 279
Premiums payable 2,066 1,848
Agents' credit balances 107 182
Debentures payable 833 833
------- -------
Total current liabilities 3,421 3,142
------- -------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.01 par; 15,000,000 shares
authorized; 3,072,386 shares issued and
outstanding 31 31
Additional paid-in-capital 4,227 4,227
Deficit (4,205) (4,979)
------- -------
Total stockholders' equity (deficit) 53 (721)
------- -------
$ 3,474 $ 2,421
======= =======
74
75
ENVIRONMENTAL SAFETY SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except per share data)
Years ended December 31,
1996 1995 1994
---- ---- ----
Revenues:
Agency commission $ 2,803 $ 2,721 $ 5,093
Profit sharing commission and
other income 290 508 66
Net investment income (loss) (8) (7) (43)
----------- ----------- -----------
Total revenues 3,085 3,222 3,905
----------- ----------- -----------
Expenses:
Selling, general and administration 2,205 2,799 3,905
Interest expense 100 100 101
----------- ----------- -----------
Total expenses 2,305 2,899 4,006
----------- ----------- -----------
Income before income taxes 780 323 1,110
Income tax expense 6
----------- ----------- -----------
Net income $ 774 $ 323 $ 1,110
=========== =========== ===========
Net income per common share $ 0.25 $ 0.11 $ 0.36
=========== =========== ===========
Weighted average shares outstanding 3,072,386 3,072,386 3,072,386
=========== =========== ===========
75
76
ENVIRONMENTAL SAFETY SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands except per share data)
Balances, January 1, 1994 3,072,386 $ 31 $ 4,227 $ (6,412) $ (2,154)
Net Income 1,110 1,110
--------- --------- --------- --------- ---------
Balance, December 31, 1994 3,072,386 31 4,227 (5,302) (1,044)
Net Income 323 323
--------- --------- --------- --------- ---------
Balance, December 31, 1995 3,072,386 31 4,227 (4,979) (721)
Net Income 774 774
--------- --------- --------- --------- ---------
Balances, December 31, 1996 3,072,386 $ 31 $ 4,227 $ (4,205) $ 53
========= ========= ========= ========= =========
See notes to consolidated financial statements
76
77
ENVIRONMENTAL SAEFTY SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Years ended December 31,
1996 1995 1994
Cash flows from operating activities:
Net income $ 774 $ 323 $ 1,110
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Change in accounting estimate (1,239)
Management fees 450 412 754
Depreciation and amortization 24 35 78
Loss on disposal of assets 4 29
Profit sharing receivable valuation
allowance 56
Unrealized loss on investments 49
(Gain) loss on disposition of subsidiary 9 (76)
Changes in assets and liabilities:
Cash and cash equivalents, restricted 377 309 (786)
Accounts receivable (206) (409) 1,081
Prepaid expenses and other 44 17 (62)
Related party receivables (96) 18 (1,718)
Accounts payable and accrued expenses 136 (74) (383)
Premiums payable 380 (441) (809)
Agents' credit balances (75) 24 (116)
Policyholders deposits (348) (1,461)
------- ------- -------
Net cash provided by (used in)
operating activities 582 (125) (2,263)
------- ------- -------
Cash flows from investing activities:
Equipment purchases (41)
Proceeds from sales of assets 13 30
Investment purchases (49)
------- ------- -------
Net cash provided by (used in)
investing activities 13 (60)
------- ------- -------
(Continued)
77
78
ENVIRONMENTAL SAEFTY SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(CONTINUED)
(In thousands)
Years ended December 31,
1996 1995 1994
---- ---- ----
Cash flows from financing activities:
Debt repayments (81)
------- ------- -------
Adjustments to reconcile net income
to net cash provided by (used in) (81)
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 595 (125) (2,404)
Cash and cash equivalents:
Beginning of year 178 303 2,707
------- ------- -------
End of year $ 773 $ 178 $ 303
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 5 $ 30 $ 54
======= ======= =======
Cash paid for income taxes $ 2
=======
Supplemental disclosure of non-cash transactions:
Transfer of equipment from a
related party $ 18
=======
Debt reduction resulting from
disposal of equipment and
other assets $ 69
=======
See notes to consolidated financial statements
78
79
ENVIRONMENTAL SAFETY SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION, GENERAL, AND PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements of Environmental Safety Systems,
Inc. ("the Company" or "ESS"), majority-owned by Paul Freeman and ERIC
Group, Inc. ("EGI"), included the accounts of the Company and its
wholly owned subsidiaries including ERIC Underwriters Agency, Inc.
("ERIC Agency"), a distributor of environmental insurance products;
American Underwriters Agency, Inc. ("ERIC Surety"), a distributor of
environmental bonding products; and Environmental Safety Products, Inc.
("EssTek"), formerly a provider of scientific and engineering services
to the environmental industry. All intercompany balances and
transactions have been eliminated in consolidation. Substantially all
of the consolidated operating activity results from ERIC Agency.
In November 1993, EssTek ceased operations. EssTek's Idaho division was
sold to a third party in January 1994. At December 31, 1993, a
provision of $414,000 ($.13 per common share) was made for the
estimated disposal costs and losses expected to arise from closing
EssTek. At December 31, 1995, the remaining provision of $76,000 was
reversed, as there are no additional expenses estimated to be incurred
on behalf of EssTek. In 1996, all remaining assets and liabilities of
EssTek were written off resulting in a loss of $9,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and cash equivalents:
The Company considers all highly liquid, short-term investments
purchased with an original maturity of three months or less to be
equivalent to cash. The Company's cash and cash equivalent financial
instruments at times exceeded FDIC insurance. The Company has not
incurred any losses due to the excess funds held in financial
institutions.
Cash and cash equivalents, restricted:
Cash and cash equivalents, restricted, at December 31, 1996 is
comprised of $100,000 in a short-term certificate of deposit, and is
comprised of $370,000 cash
79
80
ENVIRONMENTAL SAFETY SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Cash and cash equivalents, restricted (continued):
in trust and $107,000 in a short-term certificate of deposit at
December 31, 1995. The cash held in trust represents premiums collected
from insureds which are to be remitted to the insurance carriers
issuing the related policies. The certificate of deposit is held as a
requirement for insurance licensing.
Property and equipment:
Property and equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets which range from five to seven years.
Intangible assets:
Intangible assets were amortized using the straight-line method over
five years and were fully amortized during 1995.
Income taxes:
The Company has adopted SFAS No. 109 which requires recognition of
deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to
reverse.
Income per common share:
Income per share is based on the weighted average number of common
share outstanding during each period. The effect of common equivalent
shares is antidilutive.
Use of estimates in the preparation of financial statements:
80
81
ENVIRONMENTAL SAFETY SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Management makes these estimates using the
best information available at the time the estimates are made; however,
actual results could differ from these estimates.
Reclassifications:
Certain amounts reported in the 1995 financial statements have been
reclassified to conform to the 1996 presentation
3. CHANGE IN ACCOUNTING ESTIMATE:
During the year ended December 31, 1996 the Company recorded $1,239,000
($0.40 per common share) of agency commissions resulting from a change in
an accounting estimate. From 1991 through 1995, agency commissions earned
under the Company's three main agency agreements were calculated using
estimated rates. Total agency commissions earned under the agency
agreements for those years as previously estimated totaled $11,207,000.
During the year ended December 31, 1996, these rates were clarified, and
agency commissions earned under the agency agreement based on actual rates
were $12,446,000.
4. ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK:
December 31,
1996 1995
---- ----
(in thousands)
Insurance and bond premiums $ 705 $ 562
Profit sharing commission 625 564
Other 5 3
------- -------
1,335 1,129
Valuation allowance for profit sharing
Commission receivable (56) (56)
------- -------
$ 1,279 $ 1,073
======= =======
81
82
ENVIRONMENTAL SAFETY SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
4. ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK (CONT.):
The Company grants credit, usually without collateral, to its agent, which
at December 31, 1996 and 1995 are not concentrated in any specific
geographic region. At December 31, 1996 and 1995, the Company's three
largest agents accounted for approximately 39% and 50%, respectively, of
the insurance and bond premiums receivable balances.
5. PROPERTY AND EQUIPMENT:
December 31,
1996 1995
---- ----
(in thousands)
Office furniture and equipment $ 18 $ 166
Accumulated deprecation (125)
----- -----
$ 18 $ 41
===== =====
During the year ended December 31, 1996, assets with a cost of $166,000
were disposed of resulting in a $4,000 loss on disposition.
6. DEBENTURES PAYABLE:
In 1996 and 1995, ESS was in default on the terms of the 12% subordinated
debentures of $833,000 (originally $1,500,000) which were issued in 1987.
As a result, the debenture balance has been classified as a current
liability as of December 31, 1996 and 1995. Interest is payable quarterly,
with principal due in equal, quarterly installments through 1996. Accrued
interest at December 31, 1996 and 1995 was $240,000 and 145,000,
respectively.
7. INCOME TAXES:
The components of the deferred tax assert is as follows:
December 31,
1996 1995
---- ----
(in thousands)
Deferred Tax assets:
Net operating loss carryforwards $ 1,164 $ 1,427
Profit sharing receivable valuation allowance 19 19
Valuation allowance (1,183) (1,446)
------- -------
Net deferred tax asset $ $
======= =======
82
83
ENVIRONMENTAL SAFETY SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
7. INCOME TAXES (CONTINUED):
The difference between taxes computed at the statutory federal tax rate
(34%) and the effective tax rate is reconciled below:
Years ended December 31,
1996 1995 1994
Income tax expense computed
at statutory federal tax rate $ 263 $ 110 $ 379
Utilization of operating loss
carryforward (263) (110) (388)
Other 6 9
----- ----- -----
Income tax expense computed
At effective tax rate $ 6 $ $
===== ===== =====
Income tax expense for the year ended December 1996 represents alternative
minimum tax. As of December 31, 1996, the Company has net operating loss
carryforwards of approximately $3,417,000 which may be utilized to offset
taxable income through the year 2008.
8. COMMITMENTS AND CONTINGENCIES:
Premiums payable:
As discussed in Note 11, in 1993 the Company entered into an agreement with
North American Reinsurance ("NARe") whereby $11,214,000 owed to NARe was
transferred to EGI in reduction of amounts owed by EGI to the Company.
Subsequent to year end 1994, NARe informed the Company that it may still be
looking to the Company as a source of repayment of this amount. The
ultimate liability of the Company to repay the NARe indebtedness cannot be
presently determined; however, EGI, NARe and the Company are presently in
negotiations concerning the indebtedness and Company management believes
that the final negotiated amount which the Company owes to NARe pursuant to
this agreement will not be materially different from the amount recorded in
the financial statements.
83
84
ENVIRONMENTAL SAFETY SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
8. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Profit sharing agreement:
The Company has entered into a profit sharing agreement with its sole
underwriter whereby a percentage of defined net profits earned by them on
the Company's products will be paid to the Company. The continuation of the
agreement is contingent upon the Company's president continuing as chief
executive officer.
Letter of credit:
The Company has an unused letter of credit of $100,000 as of December 31,
1996.
9. INCENTIVE PERFORMANCE PLAN AND EMPLOYEE BENEFIT PLAN:
Effective December 31, 1990, ESS and affiliated companies (the "ERIC
Group", or the "Group") adopted the ERIC Group Incentive Performance Plan
(the "Plan") to provide additional incentive to members of senior
management for achieving certain predetermined increases in Group fair
market value. Under the Plan, participants are awarded performance units,
and if the predetermined levels of increased fair market value of ERIC
Group companies are attained payments in cash or securities of one or more
Group companies will be made beginning in July of 1996. At December 31,
1996, 1995, and 1994, no amounts had been earned under the Plan.
In addition to the incentive performance plan, effective January 1, 1992,
EGI and subsidiary companies began sponsoring an employee long-term savings
and retirement (401k) plan. The Company matches a specified percentage of
eligible employees' contributions, which is revised annually based on
financial results. In 1996, 1995, and 1994, the matching percentage was 15%
of the first 5% of gross earnings contributed by employees. The Company
contributions were approximately $4,600, $3,700, and $5,000, respectively,
for the years ended December 31, 1996, 1995 and 1994. Participation in this
plan is available to all eligible employees.
84
85
ENVIRONMENTAL SAFETY SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
10. STOCK OPTIONS:
The Company has reserved 350,000 shares of common stock for issuance under
the Company's non-qualified, incentive stock option plan. Regulations set
by the Toronto Stock exchange limit the number of shares available for
incentive stock option plans to 10% of the outstanding issue, or 307,239
shares. At December 31, 1996, options for 136,000 shares had been granted
and are outstanding. The options, granted at prices not less than fair
market value as of the grant date, expire through 1998 and are exercisable
each year in cumulative annual installments of 25% starting one year from
the date of grant. At December 31, 1996, options for the 136,000 shares are
exercisable at prices ranging from approximately $3.50 to $6.00 per share,
in Canadian currency. No options have been exercised as of December 31,
1996.
11. RELATED PARTY TRANSACTIONS:
Pursuant to a general Agent Agreement, ERIC Agency retains the exclusive
distribution rights fro ERIC Syndicate, Inc. ("ERIC Syndicate", a
subsidiary of EGI) products for which ERIC Agency earns commission
revenues. There was no commission income from ERIC Syndicate for the years
ended December 31, 1996, 1995, and 1994. At December 31, 1996 and 1995, the
Company had receivables of $112,000 and $106,000 due from ERIC Syndicate
and Environmental Risk Holdings, Inc., an affiliated company, respectively.
Effective December 31, 1993, the Company transferred approximately
$11,214,000 of premiums payable to NARe to EGI in exchange for assignment
of related party receivables of $10,173,000 and a capital contribution from
EGI of $1,041,000.
As of December 31, 1996 and 1995, the Company had $1,118,000 and $428,000,
respectively, receivable from EGI, resulting primarily from advances
provided to EGI during 1994 and the adjustment for revisions to agency
commission rates in 1996.
ESS and its subsidiaries have entered into management agreements for
executive, financial and administrative services to be provided by EGI. The
management fees are 15% of gross revenues, as defined; are for a one-year
term; and are renewable automatically on an annual basis. Management fees
were $450,000, $412,000 and $754,000 for the years ended December 31, 1996,
1995, and 1994, respectively, and have been applied against amounts
receivable from EGI.
In 1996, EGI transferred certain property and equipment to ESS at its net
book value of $18,000.
85
86
ENVIRONMENTAL SAFETY SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Period January 1, 1997 to June 16, 1997
(In thousands)
(unaudited)
Revenues:
Agency commissions $ 758
Profit sharing commissions and other income 143
Net investment income 4,255
------
Total revenue 5,157
Expenses:
Selling, general and administrative 1,425
Interest expense 46
------
Total expenses 1,471
------
Income before income taxes 3,686
Income tax expense -
------
Net income $3,686
======
86
87
ENVIRONMENTAL SAFETY SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period January 1, 1997 to June 16, 1997
(In thousands)
(unaudited)
Cash flows from operating activities:
Net income $ 3,686
Adjustments to reconcile net income to net
Cash used in operating activities:
Depreciation and amortization 3
Gain on disposal of assets (4,253)
Changes in assets and liabilities:
Accounts receivable (76)
Prepaid expenses and other 47
Related party receivables (30)
Accounts payable and accrued expenses (82)
Premiums payable (636)
Agents' credit balances (86)
-------
Net cash used in operating activities (1,426)
Cash flows from investing activities:
Proceeds from sales of assets 697
Investment sales 92
-------
Net cash provided by investing activities 789
Net decrease in cash and cash equivalents (638)
Cash and cash equivalents at beginning of year 773
-------
Cash and cash equivalents at end of year $ 135
=======
87
88
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Smith & Radigan, P.C.:
We have audited the accompanying balance sheet of Smith & Radigan, P.C. as of
December 3, 1997, and the related statements of operations and retained
earnings, and cash flows for the period January 1, 1997 through December 3,
1997. 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 generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Smith & Radigan, P.C. as of
December 3, 1997, and the results of its operations and its cash flows for the
period January 1, 1997 through December 3, 1997 in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Atlanta, Georgia
February 6, 1998
88
89
SMITH & RADIGAN, P.C.
Balance Sheet
December 3, 1997
Assets
------
Current assets:
Cash and cash equivalents $ 32,156
Accounts receivable, less allowance for doubtful
accounts of $172,746 1,019,591
Work in progress, less allowance for realization
of $20,753 53,107
Prepaid expenses 11,113
----------
Total current assets 1,115,967
----------
Property and equipment:
Leasehold improvements 27,008
Furniture and fixtures 112,141
Office equipment 10,507
Computer equipment 155,831
----------
305,487
Less accumulated depreciation and amortization 112,867
----------
192,620
----------
$1,308,587
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 19,878
Accounts payable 47,846
Accrued expenses 95,023
Accrued income taxes 17,241
Deferred income taxes 194,197
Deferred compensation 437,963
----------
Total current liabilities 812,148
----------
Deferred income taxes 15,953
Long-term debt 65,636
Stockholders' equity:
Common stock, no par value. Authorized - 1,000 shares,
issued and outstanding - 100 shares 3,757
----------
Retained earnings 411,093
----------
414,850
$1,308,587
==========
See accompanying notes to financial statements.
89
90
SMITH & RADIGAN, P.C.
Statement of Operations and Retained Earnings
For the Period January 1, 1997 through December 3, 1997
Revenues - fees $ 4,237,479
Operating expenses:
Salaries and benefits 3,557,245
Facilities 375,778
Administrative 339,076
-----------
4,272,099
-----------
Loss from operations (34,620)
Other income (expense):
Interest income 21,574
Interest expense (10,507)
Loss on sale of property and equipment (7,463)
-----------
3,604
-----------
Loss before income taxes (31,016)
Income tax provision:
Current 17,241
Deferred benefit (32,065)
-----------
(14,824)
-----------
Net loss (16,192)
Retained earnings, beginning of period 427,285
-----------
Retained earnings, end of period $ 411,093
===========
See accompanying notes to financial statements.
90
91
SMITH & RADIGAN, P.C.
Statement of Cash Flows
For the Period January 1, 1997 through December 3, 1997
Cash flows from operating activities:
Net loss $ (16,192)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation 49,534
Deferred income taxes (32,065)
Loss on sale of property and equipment 7,463
Decrease (increase) in:
Receivables (432,674)
Work in progress (5,363)
Prepaid expenses 5,616
Other assets 15,000
Increase (decrease) in:
Accounts payable and accrued expenses (160,962)
---------
Total adjustments (553,451)
---------
Net cash used in operating activities (569,643)
Cash flows from investing activities:
Proceeds from sale of property and equipment 2,061
Capital expenditures (138,876)
---------
Net cash used in investing activities (136,815)
---------
Cash flows from financing activities:
Proceeds from long-term borrowing 100,000
Principal repayments on notes payable (18,429)
Borrowings under line of credit agreement 390,000
Repayments under line of credit agreement (390,000)
---------
Net cash provided by financing activities 81,571
---------
Net decrease in cash (624,887)
Cash at beginning of year 657,043
---------
Cash at end of year $ 32,156
=========
Supplemental disclosure of cash flow
information - interest paid $ 10,507
=========
See accompanying notes to financial statements.
91
92
SMITH & RADIGAN, P.C.
Notes to Financial Statements
December 3, 1997
(1) Summary Of Significant Accounting Policies
------------------------------------------
(a) ORGANIZATION
Smith & Radigan, P.C. (the "Company") is a professional corporation
that was incorporated December 7, 1977 in the State of Georgia. The
Company engages in the practice of public accounting.
(b) REVENUE RECOGNITION
The Company recognizes revenue at the time services are performed for
clients based upon the expected realization of such services.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and include expenditures
for new facilities and replacements or betterments of existing
facilities. Expenditures for normal maintenance and repairs are
charged to expense as incurred. Depreciation is computed using the
straight-line method over the useful lives of the assets, which range
from three to ten years for furniture and fixtures, computer
equipment, office equipment, and leasehold improvements.
Depreciation expense was $49,534 for the period January 1, 1997
through December 3, 1997.
(d) BASIS OF ACCOUNTING AND USE OF ESTIMATES
The accompanying financial statements were prepared on the accrual
basis of accounting.
The preparation of financial statements in conformity with generally
accepted accounting principles 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 those estimates.
(e) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid
investments with maturities of three months or less from the date of
purchase. These amounts are stated at cost, which approximates fair
value, and are considered cash equivalents for purposes of reporting
cash flows.
(Continued)
92
93
SMITH & RADIGAN, P.C.
Notes to Financial Statements
(f) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the fair value of financial instruments at
December 3, 1997 does not differ materially from the carrying value
of its financial instruments recorded in the accompanying balance
sheet.
(2) LINE OF CREDIT
The Company has a $500,000 line of credit with Wachovia Bank, N.A. The
line of credit is secured by accounts receivable, inventory, and all
practice assets. The line of credit is personally guaranteed by the
stockholders of the Company. At December 3, 1997, no draws were
outstanding against the line of credit.
The line of credit provides that interest will accrue on the outstanding
balance at the prime rate. The prime rate was eight and one half percent
at December 3, 1997. The line of credit expires October 1, 1998 at which
time all principal and accrued interest are due and payable.
(3) LONG-TERM DEBT
Long-term debt consists of a loan payable to SunTrust Bank secured by the
assets of the Company. The loan requires monthly payments of $2,016
through December 6, 2001. The loan accrues interest at seven and
three-quarters percent. The loan is personally guaranteed by the
stockholders of the Company. The current portion of long-term debt at
December 3, 1997 is $19,878.
Future maturities of long-term debt are as follows:
Year ending
December 31, Amount
------------ ------
1998 $ 19,878
1999 19,886
2000 21,483
2001 24,267
-----------
$ 85,514
===========
(4) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
(continued)
93
94
SMITH & RADIGAN, P.C.
Notes to Financial Statements
The Company's deferred income tax assets and liabilities as of December
3, 1997 result from the Company using the cash basis of accounting for
tax purposes, and the excess of tax over book depreciation.
The tax effects of temporary differences that give rise to the deferred
tax assets and liabilities at December 3, 1997 are as follows:
Deferred tax assets:
Accounts payable $ 18,492
Deferred compensation 169,273
Compensated absences 9,031
Other 23,608
--------------
Total gross deferred tax assets 220,404
--------------
Deferred tax liabilities:
Accounts receivable (414,601)
Property and equipment, principally due
to differences in depreciation (15,953)
---------------
Total gross deferred liabilities (430,554)
--------------
Net deferred tax liability $ (210,150)
==============
No valuation allowance for deferred tax assets was considered necessary
at December 3, 1997.
Significant components of the provision for income taxes are as follows:
Current Deferred Total
------- -------- -----
Federal $ 14,582 (27,255) (12,673)
State 2,659 (4,810) (2,151)
----------- ------- -------
$ 17,241 (32,065) (14,824)
=========== ======= =======
The difference between the Company's effective income tax rate and the
federal statutory income tax rate for the period January 1, 1997 through
December 3, 1997 result from state income taxes, a carryforward deduction
from the expensing of equipment purchases, and certain expenses that are
not tax deductible.
(continued)
94
95
SMITH & RADIGAN, P.C.
Notes to Financial Statements
(5) LEASE COMMITMENTS
The Company occupies premises in Atlanta, Georgia under an operating
lease agreement with a limited liability company owned by the
stockholders of the Company. The lease expires December 2006. In
addition, the Company leases various equipment under operating leases.
Rental expenses under these agreements amounted to approximately $237,468
and $21,524 for the period January 1, 1997 to December 3, 1997. A summary
of the future minimum lease commitments is as follows:
Year ending Related party
December 31, Facilities Equipment
------------ -------------- ---------
1998 $ 253,488 17,711
1999 262,944 12,324
2000 275,472 12,324
2001 288,228 12,324
2002 296,196 1,522
Thereafter 1,324,164 -
--------------- -------
$ 2,700,492 56,205
=============== ======
(6) PROFIT SHARING 401(K) PLAN
The Company has a defined contribution profit sharing plan that includes
a 401(k) element. The Plan covers all qualified employees as defined
under the agreement. The Company makes discretionary contributions under
the Plan. Contributions were $207,670 for the period January 1, 1997
through December 3, 1997. The Company terminated the profit sharing plan
effective December 3, 1997.
(7) SUBSEQUENT EVENT AND DEFERRED COMPENSATION
On December 4, 1997, the Company merged into S.R. Business Services,
Inc., a subsidiary of International Alliance Services, Inc.
International Alliance Services, Inc. subsequently changed its name to
Century Business Services, Inc. Under the terms of the merger
agreement, the former stockholders of Smith & Radigan, P.C. will be
paid deferred compensation in the amount of $437,963.
95
1
Exhibit 23.1
The Board of Directors
Comprehensive Business Services, Inc.:
We consent to the incorporation by reference in the registration statements
Nos. 333-27825 and 333-15413 on Forms S-3; No. 333-40331 on Form S-3 as
amended; and No. 333-40313 on Form S-4 as amended of our report dated August 7,
1997, with respect to the balance sheet of Comprehensive Business Services,
Inc. (a wholly owned subsidiary of Franchise Services, Inc.) as of December 31,
1996, and the related statements of operations and cash flows for the year then
ended, which report appears in the Form 8-K of Century Business Services, Inc.
dated February 20, 1998.
/s/ KPMG Peat Marwick LLP
Costa Mesa, California
February 20, 1998
96
1
Exhibit 23.2
The Board of Directors
Health Administrative Services, Inc.:
We consent to the incorporation by reference in the registration statements Nos.
333-27825 and 333-15413 on Forms S-3; No. 333-40331 on Form S-3 as amended; and
No. 333-40313 on Form S-4 as amended of our report dated January 28, 1998, with
respect to the balance sheet of Health Administration Services, Inc. as of
December 18, 1997, and the related statements of income, changes in
stockholders' equity and cash flows for the period from January 1, 1997 to
December 18, 1997, which report appears in the Form 8-K of Century Business
Services, Inc. dated February 20, 1998.
/s/ KPMG Peat Marwick LLP
Houston, Texas
February 20, 1998
97
1
Exhibit 23.3
The Board of Directors and Stockholders of
Shenkin Kurtz Baker & Co., P.C.
We consent to the incorporation by reference in the registration statements Nos.
333-27825 and 333-15413 on Forms S-3; No. 333-40331 on Form S-3 as amended; and
No. 333-40313 on Form S-4 as amended of our report dated January 26, 1998, with
respect to the consolidated balance sheet of Shenkin Kurtz Baker & Co., P.C. and
subsidiary as of December 7, 1997, and the related consolidated statements of
income, stockholders' equity, and cash flows for the period from January 1, 1997
to December 7, 1997, which report appears in the Form 8-K of Century Business
Services, Inc. dated February 20, 1998.
/s/ KPMG Peat Marwick LLP
Denver, Colorado
February 20, 1998
98
1
Exhibit 23.4
The Board of Directors
Zelenkofske, Axelrod & Co., Ltd.:
We consent to the incorporation by reference in the registration statements Nos.
333-27825 and 333-15413 on Forms S-3; No. 333-40331 on Form S-3 as amended; and
No. 333-40313 on Form S-4 as amended of our report dated February 6, 1998, with
respect to the balance sheet of Zelenkofske, Axelrod & Co., Ltd. as of June 30,
1997, and the related statements of operations and retained earnings, and cash
flows for the three months then ended, which report appears in the Form 8-K of
Century Business Services, Inc. dated February 20, 1998.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
February 20, 1998
99
1
Exhibit 23.5
To the Stockholders
Smith & Radigan, P.C.:
We consent to the incorporation by reference in the registration statements Nos.
333-27825 and 333-15413 on Forms S-3; No. 333-40331 on Form S-3 as amended; and
No. 333-40313 on Form S-4 as amended of our report dated February 6, 1998, with
respect to the balance sheet of Smith & Radigan, P.C. as of December 3, 1997,
and the related statements of operations and retained earnings and cash flows
for the period January 1, 1997 through December 3, 1997, which report appears in
the Form 8-K of Century Business Services, Inc. dated February 20, 1998.
/s/ KPMG Peat Marwick LLP
Atlanta, Georgia
February 20, 1998
100
1
Exhibit 23.6
The Board of Directors
Robert D. O'Byrne and Associates, Inc. and
The Grant Nelson Group, Inc.
We consent to the incorporation by reference in the registration statements Nos.
333-27825 and 333-15413 on Forms S-3; No. 333-40331 on Form S-3 as amended; and
No. 333-40313 on Form S-4 as amended of our report dated February 13, 1998, with
respect to the combined balance sheet of Robert D. O'Byrne and Associates, Inc.
and The Grant Nelson Group as of December 31, 1997, and the related combined
statements of operations, stockholders' equity, and cash flows for the year then
ended, which report appears in the Form 8-K of Century Business Services, Inc.
dated February 20, 1998.
/s/ KPMG Peat Marwick LLP
Kansas City, Missouri
February 20, 1998
101
1
Exhibit 23.7
The Board of Directors
Valuation Counselors Group, Inc.
We consent to the incorporation by reference in the registration statements Nos.
333-27825 and 333-15413 on Forms S-3; No. 333-40331 on Form S-3 as amended; and
No. 333-40313 on Form S-4 as amended of our report dated February 12, 1997, with
respect to the consolidated balance sheets of Valuation Counselors Group, Inc.
and its wholly owned subsidiary as of December 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended, which report appears in Form 8-K of Century Business
Services Inc. dated February 20, 1998.
/s/ ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
February 20, 1998
102
1
Exhibit 23.8
The Board of Directors
Environmental Safety Systems, Inc.
We consent to the incorporation by reference in the registration statements Nos.
333-27825 and 333-15413 on Forms S-3; No. 333-40331 on Form S-3 as amended; and
No. 333-40313 on Form S-4 as amended of our report dated May 20, 1997, with
respect to the consolidated balance sheets of Environmental Safety Systems, Inc.
and Subsidiaries as of December 31, 1996 and 1995, and the related statements of
operations, stockholders' equity and cash flows for the years then ended, which
report appears in Form 8-K of Century Business Services, Inc. dated February 20,
1998.
/s/ Gelfond Hochstadt Pangburn & Co.
Denver, Colorado
February 20, 1998
103
