1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from Not Applicable to
----------------------- -----------------------
Commission file number 0-25890
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International Alliance Services, Inc.
- - --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2769024
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
10055 Sweet Valley Drive, Valley View, Ohio 44125
- - --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code) 216-447-9000
---------------------------
NOT APPLICABLE
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Outstanding at
Class of Common Stock April 30, 1997
--------------------- --------------
Par value $.01 per share 35,968,419
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Exhibit Index is on page 13 of this report.
Page 1 of 14 Pages.
2
INTERNATIONAL ALLIANCE SERVICES, INC.
TABLE OF CONTENTS
Page No.
PART I. Financial Information:
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheets -
March 31, 1997 and December 31, 1996 3
Consolidated Condensed Statements of Income -
Three Months Ended March 31, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 5
Notes to the Consolidated Condensed Financial Statements 6 - 7
Item 2 - Management`s Discussion and Analysis of Financial Condition and
Results of Operations 8 - 10
PART II. OTHER INFORMATION:
Item 2 - Changes in Securities 11
Item 4 - Submissions of Matters to a Vote of Security Holders 11
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 12
Exhibit Index 13
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PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
MARCH 31, DECEMBER 31,
1997 1996
---------- -----------
(unaudited) (audited)
ASSETS
Investments:
Fixed maturities held to maturity, at amortized cost $ 15,151 $ 15,481
Securities available for sale, at fair value:
Fixed maturities 40,018 35,471
Equity securities 10,809 9,213
Mortgage loans 3,685 3,685
Short-term investments 1,921 4,799
-------- --------
Total investments 71,584 68,649
Cash and cash equivalents 33,296 39,874
Premiums receivable, less allowance for doubtful
accounts of $289 and $284, respectively 7,182 7,013
Accounts receivable, less allowance for doubtful accounts
of $30 and $0, respectively 9,140 3,339
Deferred policy acquisition costs 4,332 4,345
Reinsurance recoverables 10,267 11,185
Excess of cost over net assets of businesses acquired,
net of accumulated amortization of $215 and $33,
respectively 24,494 6,048
Net assets held for disposal 22,465 22,999
Other assets 12,915 3,878
-------- --------
TOTAL ASSETS $195,675 $167,330
======== ========
LIABILITIES
Losses and loss expenses payable $ 42,306 $ 41,099
Unearned premiums 18,938 18,637
Notes payable and capitalized leases 8,500 3,211
Income taxes 3,898 1,994
Accrued expenses 10,362 5,355
Other liabilities 11,723 5,712
-------- --------
TOTAL LIABILITIES 95,727 76,008
-------- --------
SHAREHOLDERS' EQUITY
Common stock 350 338
Additional paid-in capital 88,166 80,446
Retained earnings 8,406 6,842
Net unrealized appreciation of investments (net of tax) 3,026 3,696
-------- --------
TOTAL SHAREHOLDERS' EQUITY 99,948 91,322
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $195,675 $167,330
======== ========
See the accompanying notes to the Consolidated Condensed Financial Statements.
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4
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
-------- --------
(unaudited)
Revenues $ 16,296 $ 9,320
-------- --------
Expenses:
Operating expenses 6,175 2,010
Losses and loss adjustment expenses 4,829 4,570
Policy acquisition expenses 2,231 1,747
-------- --------
Total expenses 13,235 8,327
-------- --------
Income from continuing operations before income tax expense 3,061 993
Income tax expense 952 338
-------- --------
Income from continuing operations 2,109 655
Loss from discontinued operations
(net of income tax benefit of $256) (534) --
-------- --------
Net income $ 1,575 $ 655
======== ========
Earnings per common and common share equivalents:
Primary and fully diluted:
Income from continuing operations $ .05 $ .04
Loss from discontinued operations (.01) --
-------- --------
Net income per share $ .04 $ .04
======== ========
Weighted average common and common share
equivalents, primary and fully diluted: 49,926 16,956
======== ========
See the accompanying notes to the Consolidated Condensed Financial Statements.
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INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
-------- --------
(unaudited)
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES $ 4,950 $ (195)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities, held to maturity (209) --
Purchase of fixed maturities, available for sale (5,869) (3,619)
Purchase of equity securities (2,133) (248)
Redemption of fixed maturities, held to maturity 500 --
Sale of fixed maturities, available for sale 743 4,347
Sale of equity securities 229 167
Principal receipts on mortgage loans -- 781
Change in short-term investments 2,878 (1,242)
Change in other long-term investments -- (31)
Business acquisitions, net of cash acquired (7,403) --
Acquisition of property and equipment (236) (74)
-------- --------
Net cash (used in) provided by investing activities (11,500) 81
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 405 --
Repayment of debt (589) (28)
Proceeds from stock issuances 156 --
Pre-merger dividends paid to parent -- (437)
Pre-merger capital contribution -- 149
-------- --------
Net cash used in financing activities (28) (316)
-------- --------
Net decrease in cash and cash equivalents (6,578) (430)
Cash and cash equivalents at beginning of period 39,874 2,694
-------- --------
Cash and cash equivalents at the end of period:
Continuing operations 33,296 2,264
Discontinued operations 527 --
-------- --------
Total cash and cash equivalents at end of period $ 33,823 $ 2,264
======== ========
See the accompanying notes to the Consolidated Condensed Financial Statements.
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INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. GENERAL
In the opinion of management of International Alliance Services, Inc. (the
"Company"), the accompanying unaudited consolidated condensed interim
financial statements reflect all adjustments necessary to present
fairly the financial position of the Company as of March 31, 1997 and
the results of its operations and cash flows for the periods ended
March 31, 1997 and 1996. The results of operations for such interim
periods are not necessarily indicative of the results for the full
year. The 1996 consolidated condensed balance sheet was derived from
the Company's audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1996. Certain reclassifications have
been made to the 1996 financial statements to conform to the 1997
presentation.
2. CALCULATION OF EARNINGS PER COMMON AND COMMON SHARE EQUIVALENTS
Income from continuing operations for the three months ended March 31,
1997 was adjusted to reflect the effect of all interest savings and
benefits and the tax effects under the modified treasury stock method.
The computation of fully diluted earnings per share under the modified
treasury stock method was antidilutive for the period ended March 31,
1997, and therefore is the same as primary earnings per share.
Modifications to income were not required for the three months ended
March 31, 1996.
Primary
and Fully
Diluted
--------------
(in thousands)
Income from continuing operations $ 2,109
Interest expense reduction less 34% tax rate 47
Interest income less 34% tax rate 201
-------
Adjusted income from continuing operations 2,357
Loss from discontinued operations (534)
-------
Adjusted net income $ 1,823
=======
The Company computed earnings per common and common share equivalents
under the modified treasury stock method as follows (in thousands):
Primary
and Fully
Diluted
---------
Weighted common shares - March 31, 1997:
Weighted average common shares 34,507
Additional stock equivalents less 20% limitation
on assumed repurchase 15,419
------
49,926
======
Weighted common shares - March 31, 1996:
Weighted average common shares 16,956
======
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INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3. DISCONTINUED OPERATION
In accordance with the Company's intent to sell the environmental services
business, the related results of operations reflected as discontinued
operations for the period ended March 31, 1997 include the following
(in thousands):
Revenues $ 7,551
=======
Loss before taxes $ 790
Income tax benefit 256
-------
Net loss $ (534)
=======
Net assets of the discontinued operations at March 31, 1997 consist of (in
thousands):
Cash $ 527
Accounts receivable, net 6,404
Property, plant and equipment, net 20,567
Excess of cost over net assets of businesses
acquired, net 3,238
Other assets 1,418
Accounts payable (3,027)
Accrued environmental costs (2,985)
Accrued expenses and other liabilities (3,677)
--------
$ 22,465
========
4. ACQUISITIONS
During the first quarter 1997, the Company acquired 100% of the stock of
Midland Consultants, Inc., M&N Risk Management, Inc., M&N Enterprises,
Inc., MFC, Inc., The Benefits Group Agency, Inc., TBG South Agency,
Inc., and TBG Investment Advisors Agency, Inc. and certain assets of
Midwest Indemnity Corporation for an aggregate of 1,274,356 of its
common stock, warrants to purchase 1,420,000 shares of its common stock
for prices ranging from $11.625 to $13.00 and cash of $7,403,000. These
acquisitions have been accounted for by the purchase method of
accounting.
5. SUBSEQUENT EVENT
On April 21, 1997, the Company completed a private placement in which the
Company sold 616,611 units (the "Units") to qualified investors at an
aggregate purchase price of $9.00 per Unit. Each Unit consisted of one
share of common stock and one warrant to purchase one share of common
stock at an exercise price of $11.00 per share, exercisable through
April 21, 2000. The Company realized net proceeds of approximately $5.2
million.
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8
INTERNATIONAL ALLIANCE SERVICES, INC.
-------------------------------------
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
International Alliance Services, Inc. (the "Company") is a provider of
integrated business services through its IASI Business Services Group,
and of niche market insurance products through its IASI Insurance
Services Group. The Business Services Group, formed in December 1996,
provides a wide range of outsourced services to small and mid-sized
companies, including tax services, financial planning, benefits
administration, retirement planning and professional employment
placement. The Company markets its business and environmental services,
specialty insurance and bonding products throughout the United States
and in Canada.
Results of Operations
---------------------
For the three months ended March 31, 1997 and 1996, the Company reported
income from continuing operations of $2,109,000 ($.05 per common share)
and $655,000 ($.04 per common share), respectively. These results
exclude revenues and earnings from the Company's discontinued
environmental services business. The increase in income from continuing
operations for the three months ended March 31, 1997 over the same
period 1996 is attributable to increased earned premiums, lower loss
and loss adjustment expense development spread over higher premium
production, and the initial consolidation of the operations comprising
the Business Services Group.
Revenues
--------
The following table presents revenues from the Company's continuing
operations by business segment for the three months ended March 31,
1997 and 1996 (in thousands):
Revenues
Three Months Ended March 31,
----------------------------
1997 % 1996 %
--------------- ---------- -------------- --------
Insurance Services Group $ 11,384 70% $ 9,320 100%
Business Services Group 4,912 30% - -
--------------- ---------- -------------- ------
Total $ 16,296 100% $ 9,320 100%
=============== ========== ============== =======
Revenues from the Company's Insurance Services Group are comprised of the
following (in thousands):
Three Months Ended March 31,
----------------------------
1997 1996
------------ ------------
Premiums earned $ 8,066 $ 6,587
Net investment income 1,317 824
Net gain on investments 964 70
Other 1,037 1,839
------------ ------------
$ 11,384 $ 9,320
============ ============
For the three months ended March 31, 1997, the Insurance Services Group
reported an increase in premiums earned of $1,479,000 (22%) on an
increase in net written premiums of $2,339,000 (39%) to $8,336,000 over
the prior year period. The favorable impact on earned premiums, while
effected somewhat by current quarter premium volume, is more
significantly effected by net premium written in the second half of
1996. On a gross written basis, the Insurance Services Group reported
an increase of $2,671,000 (31%), to $11,349,000 for the three months
ended March 31, 1997, compared to the prior year period, and is mainly
attributed to general liability insurance coverages. This increase,
however, was offset by temporary fluctuations in the construction
market which directly affected contract bond coverages.
-8-
9
Investment income was $2,281,000 for the three months ended March 31,
1997, including approximately $900,000 of gains from the sale of equity
securities. In addition, investment income of approximately $1,085,000
was earned on invested assets of $71,584,000 for the three months ended
March 31, 1997 for an annualized return of approximately 6.1%.
Other income decreased by $802,000 due in large part to non-recurring
income of $1.1 million from the American Sentinel transaction recorded
in the three months ended March 31, 1996, offset by higher commission
income of $515,000 reported during the three months ended March 31,
1997.
For the three months ended March 31, 1997, the Business Services Group
reported revenues of $4,912,000 which consists primarily of
professional fees and commissions earned. A significant portion of the
revenues generated by the Business Services Group are attributable to
SMR & Co. Business Services which have been consolidated for the full
quarter 1997. Only one month of revenues for M&N Risk Management, M&N
Enterprises, Inc., MFC, Inc., (collectively the M&N Companies) The
Benefit Group Agency, Inc., TBG South Agency, Inc. and TBG Investment
Advisors Agency, Inc. (collectively TBG) and two months of revenue for
Midland Consultants, Inc. (which was merged into SMR & Co. Business
Services upon acquisition) are included in the Company's results of
operations for the three months ended March 31, 1997, which reflects
revenues from the date of acquisition of those companies. Additionally,
the increase in accounts receivable for three months ended March 31,
1997 compared to March 31, 1996, is a result of the initial
consolidation of the Business Services Group.
Expenses
--------
Total expenses increased $4,908,000 to $13,235,000 for the three months
ended March 31, 1997 from $8,327,000 for the three months ended March
31, 1996. Such increase is primarily attributable to the increase in
operating expenses which primarily reflects the impact from the initial
consolidation of the Company's Business Services Group.
The Company reported an increase in loss and loss adjustment expense of
$259,000 from $4,570,000 for the three months ended March 31, 1996 to
$4,829,000 at March 31, 1997. The increase is primarily attributed to
an increase in casualty coverages offset by decreases in property loss
development. Such expenses represent 60% and 69% of earned premiums for
the three months ended March 31, 1997 and 1996, respectively.
Policy acquisition expenses increased $484,000 from $1,747,000 for the
three months ended March 31, 1996 to $2,231,000 at March 31, 1997 and
correspond directly to the increase in premium volume. Such costs
represent approximately 20% of premium written for the periods March
31, 1997 and 1996.
Income Taxes
------------
The Company recorded an income tax provision of $952,000 and $338,000 for
the three months ended March 31, 1997 and 1996, respectively,
reflecting an estimated effective tax rate of approximately 31% and
34%, respectively.
Discontinued Operations
-----------------------
In February 1997, the Company signed a non-binding letter of intent and
confidentiality agreement to sell the Company's environmental services
operations. Consummation of the transaction remains subject to the
purchasers due diligence, the negotiation and execution of definitive
documentation and the receipt of necessary governmental and third party
approvals and consents. Accordingly, there can be no assurance that the
transaction will be consummated.
-9-
10
The Company reported a loss from operations related to its discontinued
environmental services business of $790,000 excluding a tax benefit of
$256,000, on revenues of $7,551,000 for the three months ended March
31, 1997. Such quarterly operating loss is typical for this business
due to seasonality.
Other
-----
The Company's 1997 consolidated condensed balance sheet includes an
increase in excess of cost over net assets of businesses acquired of
$18,446,000 which relates directly to the acquisitions made during the
three months ended March 31, 1997. As a result of the nature of the
assets and liabilities acquired there are no material identifiable
intangible assets or liabilities.
Liquidity and Capital Resources
-------------------------------
The Company generated $4,950,000 in cash through operating activities for
the three months ended March 31, 1997 compared to cash used by
operations of $195,000 for the same period in 1996. The increase in
cash flow is due to increased profits and loss reserves on an
increasing volume of liability coverages which have slower payout
patterns than property coverages. In addition, cash from operating
activities increased over the prior period due to profits recognized
from the initial consolidation of its Business Services Group. The
Company has made certain business acquisitions utilizing $7.4 million
in cash financed, in part, through internal cash flow from operations
and cash on hand. At March 31, 1997 and 1996, the Company had cash and
investments, excluding mortgage loans of $101.2 million and $56.4
million, respectively. Management believes the Company currently has
sufficient cash, investments, and lines of credit to fund current
operations and expansion thereof.
----------
Statements included in the Form 10-Q which are not historical in nature
are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The
amount of the charges to discontinued operations with respect to the
Company's environmental services business will depend on a number of
factors, including the outcome of any related negotiations and the
final determination of the net realizable values of assets to be sold
or transferred. In addition, the Company's Annual Report on Form 10-K
contain certain other detailed factors that could cause the Company's
actual results to materially differ from forward-looking statements
made by the Company.
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PART II - OTHER INFORMATION
---------------------------
ITEM 2 - CHANGES IN SECURITIES
------------------------------
(c) Sales of unregistered shares during the three months ended March 31, 1997:
All transactions listed below involve the issuance of shares of Common Stock by
the Company in reliance upon Section 4(2) of the Securities Act of 1933, as
amended.
On January 7, 1997, in connection with the acquisition of Midwest Indemnity
Corporation, the Company issued 407,256 shares of Common Stock in exchange for
certain of the business and assets of Midwest.
On February 10, 1997, in connection with the acquisition of Midland Consultants,
Inc., the Company issued 87,500 shares of Common Stock and warrants to purchase
an additional 20,000 shares of Common Stock at an exercise price of $11.625 per
share in exchange for all of the outstanding shares of capital stock of Midland.
On March 3, 1997, in connection with the acquisition of the M&N Companies, the
Company issued 384,600 shares of Common Stock and warrants to purchase an
additional 900,000 shares of Common Stock at an exercise price of $13.00 per
share in exchange for all of the outstanding shares of capital stock of the M&N
Companies.
On April 1, 1997, in connection with the acquisition of TBG, the Company issued
395,000 shares of Common Stock and warrants to purchase an additional 500,000
shares of Common Stock at an exercise price of $12.50 per share in exchange for
all of the outstanding shares of capital stock of TBG.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
On January 6, 1997, a total of six stockholders holding an aggregate of
25,217,022, or approximately 74.7% of the Company's outstanding shares of Common
Stock on such date, in lieu of a special meting of stockholders, consented in
writing to the sale and issuance of an aggregate of 616,611 units of the Company
at a price of $9.00 per unit to affiliates of Messrs. Michael G. DeGroote,
Chairman of the Board of the Company, and Harve A. Ferrill and Richard C.
Rochon, directors of the Company. Each unit consists of one share of Common
Stock and one warrant to purchase one share of Common Stock at an exercise price
of $11.00 per share exercisable for a three year period from the date of
issuance. In connection therewith, on March 27, 1997, the Company sent an
Information Statement on Schedule 14C to its stockholders.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(27) FINANCIAL DATA SCHEDULE
(b) Reports on Form 8-K
1) The Company's Current Report on Form 8-K dated January 7, 1997,
reporting the closing of the sale of an aggregate of 3,521,888 units
of the Company and agreements to sell an additional 616,611 units.
2) The Company's Current Report on Form 8-K dated February 19, 1997
reporting a change in auditors pursuant to Item 4, as well as the
Company's intention to acquire M & N Risk Management, Inc.,
M & N Enterprises, Inc., and MFC, Inc., the consummation of its
acquisition of Midland Consultants, Inc. and the agreement between
Alliance Holding Corporation ("Alliance") and Mr. DeGroote, whereby,
subject to the occurrence of certain events, Alliance agreed to grant
a proxy to Mr. DeGroote that covers the shares of Common Stock of the
Company held by Alliance.
3) The Company's Current Report on Form 8-K/A dated February 19, 1997
amending the previous disclosure regarding the change of auditors.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
International Alliance Services, Inc.
--------------------------------------
(Registrant)
Date: May 15, 1997 By: /s/ Gregory J. Skoda
---------------- -----------------------------
Gregory J. Skoda
Chief Financial Officer
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13
INTERNATIONAL ALLIANCE SERVICES, INC.
-------------------------------------
EXHIBIT INDEX
-------------
Exhibit Number: Page No.
- - ---------------
(27) Financial Data Schedule (SEC only)......................................... 14
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7
1000
U.S. DOLLARS
3-MOS
DEC-31-1997
JAN-01-1997
MAR-31-1997
1
40,018
15,151
14,908
10,809
3,685
0
71,584
33,296
10,267
4,332
195,675
42,306
18,938
0
0
8,500
350
0
0
99,598
195,675
8,066
1,317
964
5,949
4,829
2,231
2,045
3,061
952
2,109
(534)
0
0
1,575
.04
.04
0
0
0
0
0
0
0
