<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 1997
REGISTRATION NO. 333-36575
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
U.S. LEGAL SUPPORT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
TEXAS 7338 76-0523238
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NO.)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
RICHARD O. LOONEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
1001 FANNIN ST., SUITE 650 1001 FANNIN ST., SUITE 650
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 653-7100 (713) 653-7100
(ADDRESS , INCLUDING ZIP CODE, AND (NAME, ADDRESS, INCLDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING AREA CODE, TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OF AGENT FOR SERVICE)
OFFICES)
----------------
Copies to:
W. CLELAND DADE DAN BUSBEE
BRACEWELL & PATTERSON, L.L.P. LOCKE PURNELL RAIN HARRELL (A PROFESSIONAL
711 LOUISIANA STREET, SUITE 2900 CORPORATION)
HOUSTON, TEXAS 77002-2781 2200 ROSS AVENUE, SUITE 2200
(713) 221-1314 DALLAS, TEXAS 75201
(214) 740-8000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIMES THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1998
3,500,000 SHARES
LOGO
[LOGO OF U.S. LEGAL SUPPORT, INC. APPEARS HERE]
COMMON STOCK
All of the 3,500,000 shares of Common Stock offered hereby are being offered
by U.S. Legal Support, Inc. (the "Company"). The Company and a shareholder have
granted to the Underwriters a 30-day option to purchase up to 525,000
additional shares of Common Stock solely to cover over-allotments, if any. If
the over-allotment option is exercised, up to 100,000 shares of Common Stock
will be offered by a shareholder.
Prior to this offering (the "Offering"), there has been no public market for
the Common Stock of the Company. It is currently estimated that the initial
public offering price of the Common Stock will be between $11.00 and $13.00 per
share. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Company has applied for
quotation of the Common Stock on the Nasdaq National Market under the symbol
"LEGL," subject to official notice of issuance.
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
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<S> <C> <C> <C>
Per Share......................................... $ $ $
Total (3)......................................... $ $ $
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</TABLE>
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $2,350,000.
(3) The Company and a shareholder, Mr. Richard O. Looney, President and Chief
Executive Officer of the Company, have granted to the Underwriters a 30-day
option to purchase up to 525,000 additional shares of Common Stock solely
to cover over-allotments, if any. If the Underwriters exercise this option
in full, the Price to Public will total $ , the Underwriting Discount
will total $ , the Proceeds to Company will total $ and the Proceeds
to Shareholder will total $ . See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of NationsBanc Montgomery Securities, Inc. on or about , 1998.
-----------
NATIONSBANC MONTGOMERY SECURITIES, INC.
HAMBRECHT & QUIST
J.C. BRADFORD & CO.
, 1998
<PAGE>
LOGO OF U.S. LEGAL SUPPORT, INC. APPEARS HERE
[COLOR MAP OF UNITED STATES WITH COMPANY OFFICE AND NETWORK AFFILIATE
LOCATIONS IDENTIFIED.]
A LEADING PROVIDER OF LEGAL SUPPORT AND STAFFING SERVICES
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by independent certified public
accountants and with quarterly reports containing unaudited summary financial
information for each of the first three quarters of each fiscal year.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
financial statements, including the related notes thereto, appearing elsewhere
in this Prospectus. Concurrently with the closing of the Offering made by this
Prospectus, the Company will acquire three legal support businesses and one
staffing business (collectively, the "Pending Acquisitions") in separate
transactions in exchange for shares of Common Stock and cash. Unless the
context otherwise requires, the "Company" refers to U.S. Legal Support, Inc.,
its subsidiaries and the Pending Acquisitions. See "The Company--Pending
Acquisitions." Disclosures herein relating to the number of shares of Common
Stock to be outstanding after the Offering are estimated, based upon an assumed
initial public offering price of $12.00 per share (the mid-point of the
estimated initial public offering price range) and give effect to the
conversion of all outstanding securities that are convertible into Common Stock
as described herein. See "--The Offering." Unless otherwise indicated, the
information in this Prospectus: (i) gives effect to the Pending Acquisitions;
(ii) assumes no exercise of the Underwriters' over-allotment option; and (iii)
gives effect to the 100-for-one stock split effected on December 16, 1996.
THE COMPANY
The Company is one of the largest providers of legal support and staffing
services in the United States, providing court reporting, certified record
retrieval, legal placement and staffing and related services to law firms and
corporations, including insurance companies, through 40 offices in seven states
and the District of Columbia. The Company seeks to become the leading national,
full-service provider of legal support and staffing services through a
combination of selective acquisitions and internal growth. After succeeding to
the operations of Looney in January 1997, the Company has acquired 13
businesses and will acquire four additional businesses concurrently with the
Offering. In 1997, the Company has provided court reporting and certified
record retrieval services to The Boeing Company, Ford Motor Company, ITT
Hartford, CNA and Kemper Insurance, among others. For the year ended December
31, 1996, the Company had pro forma revenues of $43.4 million and pro forma
operating income of $5.2 million. For the nine months ended September 30, 1997,
the Company had pro forma revenues of $37.3 million and pro forma operating
income of $5.3 million compared with pro forma revenues of $32.0 million and
pro forma operating income of $3.7 million for the nine months ended September
30, 1996.
Based on available industry data, the Company estimates that the market for
legal support and staffing services in the United States exceeds $5.0 billion
annually. The industry is highly fragmented, with more than 1,000 court
reporting and record retrieval firms and over 400 legal placement and staffing
firms. The Company believes that the legal support and staffing services market
is growing due to several trends, including an increase in the: (i) outsourcing
of legal support services by law firms, corporations and insurance providers,
to companies that specialize in providing such services at a lower cost; (ii)
use of attorneys on a temporary basis by law firms and corporations; (iii)
volume and complexity of litigation; and (iv) national scope of litigation,
particularly in class action and product liability lawsuits.
Legal support and staffing services traditionally have been marketed to law
firms. Increasingly, corporations, especially insurance providers, who
ultimately pay the costs of legal support and staffing services, are seeking to
control and reduce the costs associated with lawsuits, centralize their
purchasing decisions and ensure consistent service quality. As a result, the
Company believes that these companies are more frequently selecting the
providers of legal support services, rather than delegating that selection to
the law firms engaged to represent them. Currently the industry is highly
fragmented and consists primarily of local and regional firms that typically
provide a single or limited number of legal support and staffing services. The
Company believes that many legal
3
<PAGE>
support businesses lack: (i) a full range of legal support services; (ii)
regional or national coverage; and (iii) access to capital and effective
marketing programs. As a result, the Company believes that many legal support
and staffing companies are unable to effectively service large, geographically
dispersed clients.
The Company is implementing a focused business strategy that includes
establishing full service operations in multiple metropolitan areas; adopting
best practices, policies and procedures; achieving operating efficiencies; and
managing its business on a decentralized basis, with local management retaining
primary responsibility for day-to-day operations and local marketing. The
Company believes that allowing local management to retain appropriate autonomy
will preserve existing client relationships, provide opportunities for internal
growth and enhance the Company's competitiveness in attracting acquisition
candidates.
The Company has implemented a strategy designed to continue its growth in
existing and new markets based on the following key elements: (i) actively
pursue strategic acquisitions; (ii) establish an effective national marketing
program; (iii) capitalize on cross-selling opportunities; and (iv) develop and
expand new and existing client relationships. The Company's acquisition
strategy is to identify, acquire and integrate independent companies with
strong management, profitable operating results and recognized local or
regional market presence. The Company typically pursues acquisitions that will
allow it to accomplish one or more of the following: (i) expand the geographic
markets served by the Company; (ii) increase the Company's penetration of
existing markets; (iii) establish or enhance customer relationships; and (iv)
offer services complementary to those offered by the Company. The Company
believes there are numerous attractive acquisition candidates due to the large
size and fragmentation of the legal support and staffing services industry,
including participants in the Company's referral network of over 130 court
reporting affiliates, through which the Company supplies court reporting
services to its clients in locations not served directly by the Company.
The Company is a Texas corporation. Its principal executive offices are
located at 1001 Fannin Street, Suite 650, Houston, Texas 77002, and its
telephone number at that location is (713) 653-7100.
THE OFFERING
Common Stock offered by the
Company............................. 3,500,000 shares
Common Stock to be outstanding
after the Offering................. 7,813,115 shares (1) (2)
Use of proceeds..................... To repay indebtedness, to pay a portion
of the purchase price associated with
the Pending Acquisitions and to redeem
shares of the Company's Series C
Preferred Stock. See "Use of Proceeds."
Proposed Nasdaq National Market
symbol.............................. LEGL
- --------
(1) Includes 609,268 shares to be issued in connection with the Pending
Acquisitions and gives effect to the conversion of: (i) 1,000,000 shares of
Series A Convertible Preferred Stock into 1,560,000 shares of Common Stock;
(ii) 2,046,667 shares of Series B Convertible Preferred Stock into 183,393
shares of Common Stock; and (iii) $1.8 million principal amount of
Convertible Subordinated Promissory Notes into 225,890 shares of Common
Stock, in each case to be effected concurrently with the Offering. See
"Capitalization" and Notes 7 and 8 of Notes to Consolidated Financial
Statements of U.S. Legal Support, Inc.
(2) Excludes (i) 900,000 shares of Common Stock reserved for issuance under the
Company's 1997 Stock Incentive Plan and the Company's Stock Option Plan for
Non-Employee Directors and (ii) 131,856 shares of Common Stock issuable
upon exercise of options granted in connection with completed acquisitions.
See "Management," "Capitalization" and "Principal Shareholders."
4
<PAGE>
SUMMARY FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
------------------------------------
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
--------------------- --------------- ------------ -----------------------
1994 1995 1996 1996 1997 (2) 1996 (3)(4) 1996 (3)(4) 1997 (3)(4)
------ ------ ------ ------ -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues................ $8,363 $9,104 $7,667 $5,886 $14,549 $43,405 $32,024 $37,277
Cost of services........ 5,589 5,763 4,839 3,726 9,287 25,474 18,575 21,261
------ ------ ------ ------ ------- ------- ------- -------
Gross profit............ 2,774 3,341 2,828 2,160 5,262 17,931 13,449 16,016
Selling, general and
administrative
expenses (5)........... 3,043 1,970 2,352 1,310 3,855 10,968 8,420 9,365
Depreciation and
amortization (4)....... 224 231 212 159 332 1,754 1,332 1,337
------ ------ ------ ------ ------- ------- ------- -------
Operating income
(loss)................. (493) 1,140 264 691 1,075 5,209 3,697 5,314
Interest expense........ 185 230 238 178 1,147 880 668 707
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) before
taxes.................. (678) 910 26 513 (72) 4,329 3,029 4,607
Provisions (benefit) for
income taxes........... (183) 327 10 174 11 1,847 1,298 1,928
------ ------ ------ ------ ------- ------- ------- -------
Net income (loss)....... (495) 583 16 339 (83) 2,482 1,731 2,679
Accretion of preferred
stock.................. -- -- -- -- (479) -- -- --
------ ------ ------ ------ ------- ------- ------- -------
Net income (loss)
attributable to common
shareholders........... $ (495) $ 583 $ 16 $ 339 $ (562) $ 2,482 $ 1,731 $ 2,679
====== ====== ====== ====== ======= ======= ======= =======
Net income (loss) per
common share (6)....... $ (.13) $ .31 $ .22 $ .33
======= ======= ======= =======
Weighted average shares
outstanding (7)(8)..... 4,226 8,002 8,002 8,002
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
ACTUAL PRO FORMA (3) (7)
------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash................................................. $ 559 $ 1,238
Total assets......................................... 38,720 62,652
Short-term debt...................................... 3,936 75
Long-term debt (net of current maturities)........... 26,339 11,083
Redeemable preferred stock........................... 3,757 --
Total shareholders' equity (deficit)................. $(2,321) $43,940
</TABLE>
- --------
(1) Prior to January 17, 1997, the Company had no business operations.
Therefore, the business of Looney & Company, for financial statement
purposes, represents the predecessor business.
(2) The Company's Completed Acquisitions (as hereafter defined) have been, and
the Pending Acquisitions will be, accounted for as purchases, and
therefore, the operations of the acquired businesses are included in the
statement of income data from the respective dates of acquisition. See the
Consolidated Financial Statements of U.S. Legal Support, Inc. included
herein.
(3) Pro forma information gives effect to: (i) the completed acquisitions and
completion of the Pending Acquisitions; (ii) an adjustment to compensation
expense for the difference between actual compensation paid to certain
officers of businesses acquired or to be acquired and employment contract
compensation negotiated in connection with the completed acquisitions and
the Pending Acquisitions; (iii) amortization expense relating to intangible
assets recorded in conjunction with the completed acquisitions and to be
recorded in the Pending Acquisitions; and (iv) the sale of the shares
offered hereby and the application of the net proceeds thereof, as if such
events had occurred on January 1, 1996 (for statement of income data) and
as of September 30, 1997 (for balance sheet data). The Pending Acquisitions
and the conversion of certain outstanding preferred stock and Convertible
Subordinated Promissory Notes described in Note 6 below are contingent
upon, and will close concurrently with, completion of the Offering. The pro
forma results of operations are not necessarily indicative of the results
that would have occurred had these transactions been completed as of such
date or the results that may be attained in the future.
(4) Pro forma depreciation and amortization amounts consist primarily of
amortization of goodwill totaling $1,313,000 and $985,000 for the periods
ended December 31, 1996 and September 30, 1997, respectively, recorded or
to be recorded as a result of the completed acquisitions and the Pending
Acquisitions. Goodwill is amortized over periods ranging from ten to 40
years and computed on the basis described in Note 2 of Notes to
Consolidated Financial Statements of U.S. Legal Support, Inc.
(5) Includes a non-recurring charge of $360,000 in the fourth quarter of 1996
representing the estimated fair value of ownership interests granted to
certain employees by Looney's shareholder.
(6) Supplementary historical earnings per common share for the nine months
ended September 30, 1997, would be $.09 per share, giving effect to: (i)
the 3,893,000 weighted average shares outstanding for the period; (ii) the
issuance of 2,908,000 of shares in the Offering, the proceeds from which
would be necessary to (a) repay $16,000,000 of bank indebtedness under the
Company's credit facility, (b) redeem $9,000,000 of Senior Subordinated
Notes, (c) repay $4,979,000 of Subordinated Promissory Notes, (d) redeem
231,250 shares of Series C Preferred Stock, and (e) pay the applicable
Offering expenses; and (iii) the reduction of interest expense and
dividends.
(7) Gives effect to: (i) 1,734,564 shares outstanding prior to the Offering;
(ii) 3,500,000 shares issued in the Offering; (iii) 609,268 shares to be
issued in the Pending Acquisitions; (iv) 1,969,283 shares issuable upon
conversion of preferred stock and Convertible Subordinated Promissory
Notes; and (v) 188,187 shares issuable upon exercise of outstanding stock
options in accordance with SEC Staff Accounting Bulletin Topic 4D. See
"Capitalization."
(8) Shares used in calculating net loss per share for the nine months ended
September 30, 1997, include the number of shares, the proceeds from the
sale of which would be necessary to repay the portion of the Company's debt
that funded the distribution to Richard O. Looney in connection with the
reorganization of the Company and Looney & Company.
5
<PAGE>
SUMMARY OF INDIVIDUAL COMPANY REVENUES (1)
(IN THOUSANDS)
After succeeding to the operations of Looney in January 1997, the Company has
acquired 13 businesses and will acquire four others in the Pending
Acquisitions. The following table sets forth a summary of the revenues
attributable to Looney, the principal businesses acquired and the businesses to
be acquired in the Pending Acquisitions for the fiscal years ended December 31,
1995 and 1996 and for the nine-month periods ended September 30, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------- -----------------
1995 1996 1996 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Looney (2).................................... $ 9,104 $ 7,667 $ 5,886 $ 5,641
Klein Bury (3)................................ 7,302 8,526 6,524 6,460
Elaine Dine (4)............................... 3,503 4,658 2,808 5,821
Legal Enterprise.............................. 2,756 3,707 2,711 3,464
Reporting Service (5)......................... 1,906 3,012 2,171 3,067
Jilio (5)..................................... 3,366 4,022 2,772 3,085
Johnson Group (6)............................. 1,714 2,155 1,616 1,702
Ziskind Greene................................ 1,442 1,841 1,593 1,653
Amicus One.................................... 1,642 1,883 1,394 1,544
Kirby Kennedy (5)............................. 1,629 1,866 1,455 1,427
G&G........................................... 1,544 1,517 1,152 1,371
San Francisco Reporting....................... 1,105 1,140 911 946
Block......................................... 1,025 1,317 947 760
Commander Wilson (5).......................... 578 94 84 336
------- ------- -------- --------
Total....................................... $38,616 $43,405 $32,024 $37,277
======= ======= ======== ========
</TABLE>
- --------
(1) See "The Company" for the full names and additional information concerning
the completed acquisitions and the Pending Acquisitions.
(2) The revenues of Looney include from their respective dates of acquisition,
the revenues of: (i) Cindi Rogers & Associates (acquired April 3, 1997);
(ii) Preferred Records, Inc. (acquired July 31, 1997); (iii) Rocca
Reporting Service (acquired August 15, 1997); and (iv) Encore Reporting
(acquired August 28, 1997). The table does not include revenues for these
entities prior to their acquisition because these amounts are immaterial.
See "The Company--Completed Acquisitions."
(3) Revenues for 1995 are for the year ended September 30, 1995.
(4) The revenues for the nine months ended September 30, 1997 include the
revenues of Elaine Dine Temporary Attorneys, L.L.C. Revenues for 1995 and
1996 represent results for the years ended March 31, 1996 and 1997,
respectively.
(5) To be acquired in a Pending Acquisition concurrently with the completion of
the Offering.
(6) The revenues of Johnson Group include the combined revenues of Goren of
Newport, Inc., Medtext, Inc. and Rapidtext, Inc.
6
<PAGE>
RISK FACTORS
The factors set forth below should be considered carefully in evaluating an
investment in the shares of Common Stock offered by this Prospectus. Further,
this Prospectus contains certain forward-looking statements. These forward-
looking statements are subject to certain assumptions, risks and uncertainties
which may cause actual results to be materially different from those expressed
in or implied by such statements.
ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATING ACQUIRED COMPANIES
Since the combination of Looney and the Company in January 1997, the Company
has acquired 13 businesses. The Company also has entered into agreements to
acquire four additional businesses in the Pending Acquisitions. While the
Company intends to continue to emphasize decentralized management of
operations and marketing in the acquired businesses, its success will depend,
to a large extent, upon its ability to integrate effectively the operations of
the acquired businesses. There can be no assurance that the recently assembled
management group will be able to implement successfully the Company's business
and growth strategies or manage successfully the combined operations of the
Company and the businesses acquired. Most of the businesses acquired or to be
acquired in the Pending Acquisitions historically have operated with limited
financial and other reporting systems. Although the Company believes that its
existing financial reporting and accounting control systems are satisfactory
for the operation of the combined businesses for the near term, these systems
may not be capable of efficiently addressing the rapidly changing needs of the
Company as it implements its acquisition strategy. The Company is currently
evaluating alternatives designed to address these needs, including the
possibility of enhancing existing systems or acquiring new systems. Any
changes in the systems currently used by the Company could require the Company
to provide additional training to existing personnel or hire additional
personnel. If the Company cannot upgrade or replace these systems in a timely
manner, or with respect to acquired businesses, if it must rely on the
financial reporting and accounting control systems of the businesses acquired,
the Company's ability to integrate successfully and manage effectively the
combined enterprise could be adversely affected. The pro forma combined
historical financial results included herein cover periods during which the
businesses acquired were not under common control and may not be indicative of
the Company's future financial or operating results. See "Business--
Acquisition and Integration Strategy" and "Management."
RISKS ASSOCIATED WITH ACQUISITIONS
The Company's growth strategy is dependent upon a program of continuing
acquisitions. However, there can be no assurance the Company will be able to
identify attractive acquisition candidates or to negotiate acquisition terms
acceptable to the Company, and the failure to do so would have a material
adverse effect on the Company's results of operations and its ability to
sustain growth. The Company's acquisition strategy involves a number of risks,
each of which could affect adversely the Company's reported operating results,
including the diversion of management attention from operation of the
business, loss of key personnel from acquired businesses and the failure of an
acquired business to achieve targeted financial results. In addition, the
Company could encounter unanticipated business risks or unanticipated
liabilities with respect to the acquired businesses, and significant
amortization of acquired intangible assets is likely to be required in most
acquisitions. Further, there can be no assurance that the Company's strategy
to become a national, full service provider of legal support services will be
successful, or that the Company's clients will accept the Company as a
provider of such services. The legal support and staffing industry is
undergoing consolidation, and the resulting increase in the competition for
acquisition candidates could limit the Company's acquisition opportunities or
increase the cost of acquisitions. See "Business--Growth Strategy."
The Company will require additional financing for future acquisitions, which
may not be available on terms favorable to the Company, if available at all.
The Company currently intends to finance future acquisitions using shares of
its Common Stock for a significant portion of the purchase price. In the event
the Company's Common Stock does not maintain sufficient value or potential
acquisition candidates are unwilling to accept Common Stock as consideration
for the sale of their businesses, the Company may be required to utilize more
of its cash
7
<PAGE>
resources, if available, in order to continue its acquisition program. The net
proceeds of the Offering will be used primarily to repay existing indebtedness
and to partially fund the cash portion of the purchase price of the Pending
Acquisitions, and none of such proceeds will be available for future
acquisitions. If the Company does not have sufficient cash resources, is
unable to borrow the funds required to make acquisitions or is not able to use
its Common Stock as consideration for acquisitions, its growth through
acquisitions would be limited. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
RISKS ASSOCIATED WITH RAPID GROWTH
The Company has experienced rapid growth through acquisitions since it
commenced operations in January 1997, which has placed demands on its
management, operational capacity and financial resources. The Company's growth
strategy provides for a continuing acquisition program, which will place
further demands on its management, operational capacity and financial
resources and systems. The increased management requirements will necessitate
the recruitment and retention of additional qualified management personnel and
the purchase and implementation of new management information systems. There
can be no assurance that the Company will be able to recruit and retain
qualified personnel or expand and manage its operations effectively and
profitably. The failure to manage growth effectively could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business."
REGULATORY INITIATIVES
The Company derives most of its revenues from operations in California,
Florida, New York, Pennsylvania and Texas. Legislation or regulations enacted
in any of these states, states into which the Company expands or at the
federal level relating to lawsuits or other dispute resolution proceedings, or
to the provision of court reporting or other legal support and staffing
services provided by the Company, could have a material adverse effect on the
Company's business and results of operations. A key component of the Company's
business strategy is the pursuit of arrangements with insurance providers and
major corporations under which the Company is designated as the exclusive or
preferred provider of court reporting and certified record retrieval services.
Legislation recently was proposed in the State of Texas that could have
prohibited such arrangements by making illegal the provision of services by a
court reporter under any agreement other than on a case-by-case basis. The
proposed legislation also would have prohibited a court reporter from being
employed by, or serving as an independent contractor for, a court reporting
firm unless a majority of the firm is owned by certified shorthand reporters.
While the foregoing provisions were not included in the Texas legislation as
enacted, the Company expects that there will continue to be efforts to sponsor
the adoption of similar prohibitions in legislative or regulatory action or
through the ethics codes governing the conduct of court reporters or
attorneys. If enacted, these prohibitions would represent a significant
impediment to the implementation of the Company's current business strategy
and could have a material adverse effect on the Company's business and results
of operations. Other states have enacted or considered such legislation and
may do so in the future. West Virginia recently enacted legislation that
prohibits a court reporter from entering into a contract for the provision of
court reporting services directly with a party to a lawsuit. In addition,
recent federal and certain state legislative proposals have included
limitations on the number and length of depositions or proposed the
substitution of videotaped reporting for stenographic transcription of certain
legal proceedings.
State and national bar associations and committees on legal ethics and
professional responsibility have from time to time issued opinions regarding
the ethical implications of arrangements involving temporary attorneys. These
opinions have suggested that the payment of fees to agencies that place
temporary attorneys may constitute, in certain circumstances, the improper
splitting of legal fees with a non-lawyer. The applicability of these opinions
to the Company's business is uncertain, and there can be no assurance that a
state will not determine that the business as conducted by the Company
violates ethical or professional responsibility regulations for attorneys. In
addition, the practice of placing temporary lawyers with a number of firms may
raise conflict of interest issues under applicable ethics codes, particularly
when attorneys from a placement firm are placed with opposing parties, or law
firms representing such parties, in a lawsuit or business transaction.
8
<PAGE>
The Company cannot determine whether legislative or regulatory proposals
affecting the Company's operations will be initiated, reproposed or enacted;
however, if adopted, certain of such proposals could require the Company to
alter the manner in which it conducts its business, and could materially and
adversely affect its business and results of operations. See "Business--
Regulation."
ALTERNATIVE DISPUTE RESOLUTION
The high cost of litigation in the United States has resulted in the more
frequent use of alternative dispute resolution practices, such as arbitration
and mediation. The increasing use of such alternative dispute resolution
practices could affect the demand for the Company's legal support and staffing
services; however, the Company is unable to assess the ultimate effect, if
any, that such practices may have on its services.
COMPETITION
The legal support and staffing services industry is highly competitive and
fragmented, and limited barriers to entry exist with respect to each component
of the Company's business. Although the industry is undergoing consolidation,
the principal competition for the Company's court reporting and certified
record retrieval businesses currently consists of numerous local and regional
firms. In its legal staffing business, the Company competes with national,
regional and local firms, some of which have substantially greater resources,
offer more diversified services and operate in broader geographic areas than
the Company. As the Company seeks to expand into new geographic markets, its
growth in those markets will depend upon its ability to gain market share from
competitors, and there can be no assurance that additional market share will
be obtained. Prices for legal support services generally have remained stable
or have declined in many markets over the past several years as law firms,
insurance providers and corporations have increased their efforts to reduce
expenses by centralizing their purchasing decisions and negotiating lower
rates with vendors. As this trend and the related consolidation among legal
support service companies continue, the Company anticipates that it will
encounter more intense price-based competition which could adversely affect
the Company's profitability. See "Business--Competition."
STATUS OF INDEPENDENT CONTRACTORS
The Company typically provides court reporting services through independent
contractors and, therefore, does not pay federal or state employment taxes or
withhold income taxes for such persons. Further, the Company does not include
these independent contractors in its employee benefit plans. From time to time
persons engaged as independent contractors are determined to be employees as a
result of challenges by the federal Internal Revenue Service ("IRS") and state
authorities asserted in administrative proceedings or court action. In certain
instances, persons engaged to be independent contractors also could initiate
court proceedings asserting that they are employees under state law and should
be included in employee benefit plans. Such determinations of employee status
under these challenges are made on a case-by-case basis and are based upon the
particular facts of each case. In the event persons engaged by the Company as
independent contractors are determined to be employees by the IRS or any state
taxation department, the Company would be required to pay applicable federal
and state employment taxes and withhold income taxes with respect to such
persons and could become liable for amounts required to be paid or withheld in
prior periods. In addition, the Company could be required to include such
persons in its employee benefit plans on a retroactive as well as a current
basis. Approximately 500 court reporters are engaged by the Company as
independent contractors, and any challenge by the IRS, state authorities or
private litigants resulting in a determination that such persons are employees
would have a material adverse effect on the Company's business, results of
operations and financial condition. In October 1997, a bill was introduced in
the U.S. House of Representatives that would amend the Internal Revenue Code
to establish more stringent requirements for the engagement of independent
contractors. The Company is unable to assess the likelihood that this bill or
similar legislation will be enacted. See "Business--Legal Support and Staffing
Services" and "--Independent Contractors."
DEPENDENCE UPON KEY PERSONNEL
The Company is dependent on the continuing services of Richard O. Looney,
other executive officers and the senior management of the acquired businesses,
and the Company likely will depend on the senior management of any significant
business it acquires in the future. The business or prospects of the Company
could
9
<PAGE>
be affected adversely if any of these persons do not continue in their
management roles and the Company is unable to attract and retain qualified
replacements. The Company does not currently maintain key-man life insurance
on any executive officer. See "Management."
ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL
The Company is dependent on the availability of a sufficient number of
licensed court reporters. From time to time, there are shortages of qualified
court reporters, and there can be no assurance that the Company will be able
to maintain an adequate force of licensed court reporters or that the
Company's expenses will not increase as a result of such a shortage. The
Company competes with other legal staffing companies, as well as its clients,
for qualified attorneys. The Company expects that a substantial number of the
Company's temporary legal staffing personnel will terminate their temporary
assignments to accept full-time employment with Company clients. The Company
also may encounter difficulty in recruiting a sufficient number of qualified
attorneys. In addition, during periods of high demand for the Company's
services, the Company may incur increased expense associated with recruiting
qualified temporary attorneys. The Company's inability to attract and retain a
sufficient number of qualified temporary attorneys, or the loss of a
significant number of qualified temporary attorneys to clients, could
adversely affect the Company's operating results and business strategy. See
"Business--Business Strategy."
POTENTIAL LIABILITY TO CLIENTS
The provision of personnel in the legal support and staffing business
entails an inherent risk of professional malpractice and similar claims, and
the Company could be named as a defendant in litigation in connection with
services rendered. Although the Company maintains errors and omissions
insurance for court reporting, record retrieval and temporary and permanent
legal staffing businesses, there can be no assurance that, if named, the
Company would be able to defend such claims within policy limits. The
Company's business also involves the handling of clients' documents containing
confidential and other sensitive information. There can be no assurance that
unauthorized disclosures will not occur, or that clients' documents will not
be mishandled or lost, which could have a material adverse effect on the
Company's business reputation or results of operations. The Company also may
be subject to discrimination and harassment claims for the acts of legal
staffing personnel who are placed with the Company's clients. See "Business--
Regulation."
TECHNOLOGICAL ADVANCES
The Company's business is subject to changes in technology, which may result
in the introduction of new products or services that are competitive with,
superior to, or render obsolete the services provided by the Company. For
example, voice recognition technology is designed to eliminate the need for
manual transcription of oral testimony and has been under development for
several years. There can be no assurance that substantial advances will not be
made in the area of voice recognition technology or that other technology will
not be developed that renders the Company's services obsolete or impractical.
These changes in technology could also include conducting certified document
retrieval electronically, with deposition notices and subpoenas being
transmitted electronically to document custodians and witnesses who similarly
would return responses electronically. The Company's ability to compete
effectively will depend upon its ability to adapt to such changes and to
develop services to satisfy evolving client requirements. There can be no
assurance that current technologies, or technologies developed in the future,
will not compete with or replace services provided by the Company, or that any
technological advances made by the Company will be responsive to client
requirements or represent the best available technology to meet client needs.
See "Business--Legal Support and Staffing Services."
CONTROL BY OFFICERS, DIRECTORS AND SHAREHOLDERS
Upon completion of the Offering, the Company's officers, directors and
current principal shareholders will beneficially own approximately 42.0% of
the outstanding Common Stock. These persons, if acting together, will have
substantial control over matters requiring approval of the shareholders of the
Company, including the election of directors. See "--Anti-Takeover Effect of
Certain Charter Provisions," "Management" and "Principal Shareholders."
10
<PAGE>
DILUTION
Purchasers of Common Stock in the Offering will experience immediate
dilution in net tangible book value per share of Common Stock of $12.93 from
the assumed initial public offering price per share of $12.00 and may
experience further dilution in that value from issuances of Common Stock in
connection with future acquisitions. See "Dilution."
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
There can be no assurance that an active trading market for the Common Stock
will develop or be sustained after the Offering or that purchasers of the
Common Stock will be able to resell their shares at prices equal to or greater
than the initial public offering price. The initial public offering price will
be determined through negotiations between the Company and the Underwriters
and may not be indicative of the prices that will prevail in the public market
after the Offering. Numerous factors, including fluctuations in the operating
results of the Company or its competitors, fluctuations in the demand for the
Company's services or business services in general, and the timing and
announcement of acquisitions by the Company or its competitors, could have a
significant impact on the price of the Common Stock. In addition, the stock
markets have experienced significant price and volume fluctuations in recent
years that often have been unrelated or disproportionate to the operating
performance of companies. These fluctuations may adversely affect the market
price of the Common Stock. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 7,813,115 shares of
Common Stock outstanding. Of these shares, all of the shares sold in the
Offering will be freely transferable without restriction or limitation under
the Securities Act of 1933, as amended (the "Securities Act"), except for any
shares purchased by "affiliates" of the Company, as such term is defined in
Rule 144 under the Securities Act. The remaining 4,313,115 shares constitute
"restricted securities" within the meaning of Rule 144 and the resale of such
shares is restricted for one year from the date they were acquired. The
holders of such shares have certain rights to have shares registered in the
future under the Securities Act pursuant to the terms of agreements between
such holders and the Company. The Company, its executive officers, directors
and principal shareholders have agreed not to offer or sell any shares of
Common Stock for a period of 180 days following the date of this Prospectus
without the prior written consent of Montgomery Securities, except that the
Company may issue shares of Common Stock in connection with acquisitions and
pursuant to the exercise of stock options described in this Prospectus. On the
date of this Prospectus, the Company had outstanding options to purchase
609,024 shares of Common Stock granted pursuant to the 1997 Stock Incentive
Plan. In addition, the Company intends to grant options to purchase 100,000
shares of Common Stock pursuant to the Company's Stock Option Plan for Non-
Employee Directors upon completion of the Offering. The Company intends to
register all of the 900,000 shares of Common Stock reserved for issuance
pursuant to the Company's 1997 Stock Incentive Plan and pursuant to the
Company's Stock Option Plan for Non-Employee Directors under the Securities
Act for public resale. On the date of this Prospectus, the Company had
outstanding options to purchase 131,856 shares of Common Stock granted in
connection with the Completed Acquisitions. Sales of substantial amounts of
shares of Common Stock in the public market after this Offering or the
perception that such sales could occur may adversely affect the market price
of the Common Stock. See "Shares Eligible for Future Sale."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors of the Company is empowered to issue preferred stock
in one or more series without shareholder action, which could render more
difficult or discourage an attempt to obtain control of the Company by means
of a tender offer, business combination, proxy contest or otherwise. In
addition, certain provisions of the Texas Business Corporation Act also may
discourage takeover attempts that have not been approved by the Board of
Directors. See "Description of Capital Stock."
11
<PAGE>
THE COMPANY
The Company was founded in October 1996 as the successor to Looney & Company
("Looney") and to create a leading provider of legal support and staffing
services to law firms, insurance providers and major corporations. Since
combining with Looney in January 1997, the Company has acquired 13 businesses
(together with Looney, the "Completed Acquisitions") and will acquire four
additional businesses concurrently with the Offering in the Pending
Acquisitions. Prior to the combination with Looney in January 1997, the
Company did not conduct any operations. Looney now conducts its operations as
a subsidiary of the Company and provides court reporting and certified record
retrieval services through operations in Houston, Dallas, San Antonio, Austin,
Corpus Christi and Harlingen, Texas. In July 1997, Looney acquired Preferred
Records, Inc., a Dallas court reporting and certified record retrieval company
and in August 1997, acquired Encore Reporting, a Harlingen-based court
reporting and record retrieval company. Looney had 1996 revenues of $7.7
million. Mr. Richard O. Looney, the founder of Looney, serves as Chairman,
President and Chief Executive Officer of the Company.
The Company also provides court reporting services to customers in locations
not directly served by the Company through U.S. Court Reporters, Inc., a
referral network with over 130 affiliated court reporting firms located
throughout the United States. In addition, in April 1997, the Company acquired
Cindi Rogers & Associates, a Houston-based court reporting company. In August
1997, the Company acquired Rocca Reporting Service ("Rocca"), a Chicago
Illinois court reporting company.
The following is a brief description of each of the Completed Acquisitions
and the Pending Acquisitions.
COMPLETED ACQUISITIONS
Klein, Bury & Associates. Klein, Bury & Associates ("Klein Bury") provides
court reporting services through operations in Miami, Fort Lauderdale, West
Palm Beach, Orlando, Jacksonville and Tampa, Florida and was previously a U.S.
Court Reporters network affiliate. Michael Klein, President of Klein Bury,
serves on the Board of Directors of the Company. Headquartered in Miami,
Florida, Klein Bury had 1996 revenues of $8.5 million.
G&G Court Reporters. G&G Court Reporters ("G&G") provides court reporting
services in southern California. Headquartered in Los Angeles, G&G had 1996
revenues of $1.5 million.
San Francisco Reporting Service. San Francisco Reporting Service ("San
Francisco Reporting") provides court reporting services in the San Francisco
and northern California markets and was previously a U.S. Court Reporters
network affiliate. Headquartered in San Francisco, California, San Francisco
Reporting had 1996 revenues of $1.1 million.
Johnson Court Reporting Group. The Johnson Court Reporting Group ("Johnson
Group"), through Johnson Court Reporting, Rapidtext, Inc. and Medtext, Inc.,
provides court reporting services, closed-captioning services for the hearing
impaired, remote classroom captioning services, medical transcription
services, and scanning and imaging services primarily in southern California.
Headquartered in Los Angeles, California, Johnson Group had 1996 revenues of
$2.2 million.
Legal Enterprise, Inc. Legal Enterprise, Inc. ("Legal Enterprise") provides
certified record retrieval services as well as digital scanning, reproduction
services and automated subpoena preparation services through seven offices in
California. Tony Maddocks, President of Legal Enterprise, serves as Vice
President of Sales and Marketing for the Company. Headquartered in Los
Angeles, California, Legal Enterprise had 1996 revenues of $3.7 million.
Amicus One Legal Support Services, Inc. Amicus One Legal Support Services,
Inc. ("Amicus One") provides court reporting, computer and still board
animation exhibit preparation and image scanning services with operations in
Manhattan, White Plains and Brooklyn, New York. Headquartered in New York, New
York, Amicus One had 1996 revenues of $1.9 million.
12
<PAGE>
Block Court Reporting, Inc. Block Court Reporting, Inc. and its subsidiary
("Block") provide court reporting services to the Washington, D.C. and
northern Virginia markets. Block was previously a U.S. Court Reporters network
affiliate. Headquartered in Washington, D.C., Block had 1996 revenues of $1.3
million.
Ziskind Greene Watanabe & Nason. Ziskind Greene Watanabe & Nason ("Ziskind
Greene") provides permanent legal search services to national and California
law firms and legal departments of major corporations through offices in Los
Angeles, Orange County, San Diego and San Francisco, California. Headquartered
in Los Angeles, California, Ziskind Greene had 1996 revenues of $1.8 million.
Elaine P. Dine, Inc. Elaine P. Dine, Inc. ("Elaine Dine") provides permanent
legal search services to national and New York law firms and legal departments
of major corporations nationwide. In addition, Elaine Dine, through Elaine
Dine Temporary Attorneys, L.L.C., provides temporary lawyer services to its
clients. Headquartered in New York, New York, Elaine Dine had revenues of $4.7
million for the twelve months ended March 31, 1997.
The consideration paid by the Company in the Completed Acquisitions after
giving effect to post-closing adjustments to date consisted of: (i) $21.4
million in cash; (ii) 2,046,667 shares of Series B Preferred Stock; (iii)
231,250 shares of Series C Preferred Stock; (iv) $5.1 million aggregate
principal amount of Subordinated Promissory Notes; (v) $1.8 million aggregate
principal amount of Convertible Subordinated Promissory Notes; and (vi)
703,244 shares of Common Stock. In addition, with respect to certain of the
businesses acquired, the Company may be obligated to pay contingent
consideration based on improvements in the financial performance of the
businesses during specified periods after their acquisition. The Company also
granted options to purchase a total of 144,336 shares of Common Stock to the
owners or employees of the businesses acquired. These options expire five
years after their respective dates of grant and may be exercised for nominal
consideration. See "Use of Proceeds" and Notes 7 and 8 of Notes to
Consolidated Financial Statements of U.S. Legal Support, Inc.
PENDING ACQUISITIONS
Jilio & Associates. Jilio & Associates ("Jilio") provides court reporting
services in the Southern California market. Headquartered in Los Angeles,
California, Jilio had 1996 revenues of $4.0 million.
Kirby A. Kennedy & Associates. Kirby A. Kennedy & Associates ("Kirby
Kennedy") provides court reporting services in the Minneapolis and St. Paul,
Minnesota markets and is a U.S. Court Reporters network affiliate.
Headquartered in Minneapolis, Minnesota, Kirby Kennedy had 1996 revenues of
$1.9 million.
Reporting Service Associates, Inc. Reporting Service Associates, Inc.
("Reporting Service") provides court reporting services in the mid-Atlantic
markets. Headquartered in Philadelphia, Pennsylvania, Reporting Service had
1996 revenues of $3.0 million.
Commander Wilson, Inc. Commander Wilson, Inc. ("Commander Wilson") provides
permanent legal search services to national and Texas law firms and legal
departments of major corporations. James Wilson, the owner of Commander
Wilson, became Vice President, Legal Staffing of the Company on September 25,
1997. Headquartered in Houston, Texas, Commander Wilson had 1996 revenues of
$94,000. See Note 6 of Notes to Financial Statements of Commander Wilson for a
discussion of bankruptcy proceedings involving Commander Wilson. See
"Management" and "Certain Transactions."
The aggregate purchase price to be paid by the Company in connection with
the Pending Acquisitions, subject to post-closing adjustments, if any, is
approximately $16.9 million in cash and 609,268 shares of Common Stock.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common Stock
offered hereby are estimated to be approximately $36.6 million ($41.3 million
if the Underwriters' over-allotment option is exercised in full), assuming an
initial offering price of $12.00 per share and after deducting estimated
underwriting discounts and estimated expenses payable by the Company.
The net proceeds of the Offering will be utilized by the Company as follows:
(i) approximately $17.1 million will be used to repay the outstanding
principal and interest under the Company's existing credit agreement with a
commercial bank, which was used to finance the Completed Acquisitions and for
working capital purposes (the "Bank Credit Agreement"); (ii) approximately
$9.5 million will be used to repay the outstanding principal of, and accrued
interest on, the Company's 12% Senior Subordinated Notes due 2005 (the "Senior
Subordinated Notes"), which were issued in January 1997 to obtain funds to
finance the Completed Acquisitions; (iii) $231,250 will be used to redeem
231,250 shares of Series C Preferred Stock issued in connection with the
acquisition of San Francisco Reporting; (iv) approximately $5.0 million will
be used to repay the outstanding principal balance of, and interest on, the
Company's Subordinated Promissory Notes issued in connection with certain of
the Completed Acquisitions; and (v) the remaining net proceeds of
approximately $4.8 million will be applied to the $16.9 million required to
pay the cash portion of the purchase price in the Pending Acquisitions. The
additional $12.1 million required for the cash portion of the Pending
Acquisitions is expected to be financed through borrowings under a new credit
facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Indebtedness under the Bank Credit Agreement currently bears interest at the
rate of 8.50% per annum and is required to be accelerated upon completion of
the Offering. The Subordinated Promissory Notes become due and payable upon
completion of the Offering and bear interest at rates ranging from 6.0% to
10.0% per annum. Approximately $1.6 million of the principal amount of the
Subordinated Promissory Notes is held by two executive officers of the
Company. See "Capitalization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Certain Transactions" and Notes 3 and 7 of Notes to Consolidated
Financial Statements of U.S. Legal Support, Inc.
DIVIDEND POLICY
The Company has not paid a cash dividend on the Common Stock since its
incorporation and does not anticipate paying any dividends on Common Stock in
the foreseeable future. The Company intends to retain future earnings, if any,
to finance its operations and to fund the growth of its business, to repay
indebtedness and for general corporate purposes. Any payment of dividends will
be at the discretion of the Board of Directors and will depend upon, among
other things, the Company's earnings, financial condition, capital
requirements, level of indebtedness, contractual restrictions with respect to
the payment of dividends and other relevant factors. The Bank Credit Agreement
prohibits the payment of dividends. The Company has entered into a new credit
facility with a commercial bank, which will be effective concurrently with
completion of the Offering, and such agreement contains provisions restricting
the payment of dividends. See "Description of Capital Stock."
14
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1997: (i) the historical
consolidated capitalization of the Company and (ii) the historical consolidated
capitalization of the Company, as adjusted to reflect the sale of the Common
Stock in the Offering, the application of the estimated net proceeds therefrom
and the Pending Acquisitions. See "Use of Proceeds." This presentation should
be read in conjunction with the historical and pro forma consolidated financial
statements and related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1997
------------------
ACTUAL PRO FORMA
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt (including current portion of long-term
debt)...................................................... $3,936 $75
======= =======
Long-term debt, excluding current portion:
Bank indebtedness (1)..................................... $12,424 $11,000
Senior Subordinated Notes................................. 9,000 --
Subordinated Promissory Notes............................. 4,694 --
Subordinated Convertible Promissory Notes (2)............. 1,845 --
Debt discount (3)......................................... (1,707) --
Capital leases and other obligations...................... 83 83
------- -------
Total long-term debt.................................... 26,339 11,083
------- -------
Redeemable Preferred Stock:
Series A Convertible Preferred Stock, 1,000,000 shares
outstanding (4).......................................... 1,479 --
Series B Convertible Preferred Stock, 2,046,667 shares
outstanding (4).......................................... 2,047 --
Series C Convertible Preferred Stock, 231,250 shares
outstanding (5).......................................... 231 --
Shareholders' equity (deficit):
Preferred Stock, $1.00 par value, 10,000,000 shares
authorized............................................... -- --
Common Stock, $.01 par value, 100,000,000 shares
authorized: 1,734,564 shares outstanding, actual; and
7,813,115 shares, pro forma (6).......................... 17 78
Additional paid-in capital................................ 3,840 51,725
Accumulated deficit....................................... (6,178) (7,863)
------- -------
Total shareholders' equity (deficit).................... (2,321) 43,940
------- -------
Total capitalization........................................ $27,775 $55,023
======= =======
</TABLE>
- --------
(1) Actual long-term bank indebtedness does not include borrowings of
approximately $1.1 million incurred after September 30, 1997. Therefore,
pro forma long-term bank indebtedness, which represents borrowings to be
made under the Company's new credit facility to fund a part of the cash
portion of the purchase price of the Pending Acquisitions, are estimated to
be approximately $12.1 million.
(2) The Convertible Subordinated Promissory Notes were issued in connection
with certain of the Completed Acquisitions, and will be converted into an
aggregate of 225,890 shares of Common Stock.
(3) Includes $1,142,000 attributable to the Subordinated Promissory Notes and
$565,000 attributable to the Subordinated Convertible Promissory Notes. See
Note 7 of Notes to Consolidated Financial Statements of U.S. Legal Support,
Inc.
(4) The Series A Convertible Preferred Stock will be converted into 1,560,000
shares of Common Stock and the Series B Convertible Preferred Stock will be
converted into an aggregate of 183,393 shares of Common Stock, in each
case, upon completion of the Offering.
(5) The Series C Convertible Preferred Stock will be redeemed for $231,250 out
of the net proceeds of the Offering.
(6) Excludes: (i) 900,000 shares of Common Stock reserved for issuance under
the Company's 1997 Stock Incentive Plan and the Company's Stock Option Plan
for Non-Employee Directors and (ii) 131,856 shares of Common Stock issuable
upon exercise of options granted in connection with Completed Acquisitions.
See "Management," "Certain Transactions" and "Principal Shareholders."
15
<PAGE>
DILUTION
The net tangible book deficit of the Company at September 30, 1997 was
approximately $30.3 million, or $(17.47) per share of Common Stock. Net
tangible book deficit per share represents the Company's total tangible assets
less its total liabilities, divided by 1,734,564 shares of Common Stock
outstanding as of September 30, 1997. After giving effect to the sale of the
3,500,000 shares of Common Stock offered hereby (after deducting the
underwriting discount and estimated Offering expenses) and consummation of the
Pending Acquisitions, the pro forma net tangible book deficit of the Company at
September 30, 1997 would have been approximately $7.3 million, or $(0.93) per
share. This represents an immediate increase in such net tangible book value of
$16.54 per share to existing shareholders at September 30, 1997, consisting of
$10.54 per share attributable to the conversion of convertible subordinated
debt and preferred stock, $8.11 per share attributable to the Offering, offset
by a decrease of $3.22 per share attributable to the Pending Acquisitions. This
results in immediate dilution of $12.93 per share to investors purchasing
shares in the Offering. The following table illustrates pro forma dilution to
new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......... $12.00
Net tangible book deficit as of September 30, 1997
[$30.3 million]....................................... $(17.47)
Increase in pro forma net tangible book value attribut-
able to the conversion of convertible subordinated
debt and preferred stock [$4.8 million]............... 10.59
Increase in pro forma net tangible book value attribut-
able to the Offering, net of the extraordinary loss on
debt [$35.1 million].................................. 9.26
Decrease in pro forma net tangible book value per share
attributable to the Pending Acquisitions [$16.7 mil-
lion]................................................. (3.31)
-------
Pro forma net tangible book value per share after the Of-
fering [$7.3 million]................................... (0.93)
-------
Dilution per share to new investors...................... $(12.93)
=======
</TABLE>
The following table presents, after giving effect to the Offering and the
Pending Acquisitions, the difference among existing shareholders, sellers
receiving shares in the Pending Acquisitions and new investors with respect to
the number of shares purchased from the Company and the total consideration and
average price per share paid to the Company, before deducting the underwriting
discounts and estimated Offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION PURCHASE
----------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing common shareholders.. 1,734,564 22% $4,246,000 7% $2.45
Common shareholders upon
conversion of:
Series A Preferred Stock.... 1,560,000 20 1,000,000 2 0.64
Series B Preferred Stock.... 183,393 2 2,046,667 4 11.16
Convertible Subordinated
Promissory Notes........... 225,890 3 1,844,955 3 8.17
Sellers receiving shares in
the Pending Acquisitions..... 609,268 8 6,580,000 11 10.80
New investors................. 3,500,000 45 42,000,000 73 12.00
--------- ----- ----------- -----
Total....................... 7,813,115 100.0% $57,717,622 100.0%
========= ===== =========== =====
</TABLE>
The foregoing tables assume no exercise of outstanding options. As of the
date of this Prospectus, there are 795,880 shares of Common Stock issuable upon
the exercise of stock options at a weighted average exercise price of $9.16 per
share. See "Management."
16
<PAGE>
SELECTED FINANCIAL DATA
The financial data set forth below as of and for each of the years in the
three year period ended December 31, 1996 were derived from audited financial
statements of Looney. The financial data for the years ended December 31, 1992
and 1993 and as of and for the nine months ended September 30, 1996 and 1997
were derived from the unaudited financial statements of Looney and the
Company, respectively, which include all adjustments (consisting only of
normal recurring adjustments) that, in the opinion of management, are
necessary to present fairly the information set forth therein.
The pro forma financial data as of and for the nine months ended September
30, 1996 and 1997 and the year ended December 31, 1996, were derived from the
pro forma combined financial statements of the Company appearing elsewhere in
this Prospectus. Such pro forma combined financial statements give effect to
the completed acquisitions and the Pending Acquisitions, the Offering and the
application of the proceeds therefrom, and the related conversion of
outstanding securities as if each of these events had occurred on January 1,
1996. The pro forma financial information of the Company does not purport to
represent what the Company's results of operations or financial position
actually would have been had the completed acquisitions and the Pending
Acquisitions occurred on the dates specified, nor is it a projection of the
Company's results of operations or financial position for any future period or
date. The data presented below should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company, the financial statements and pro forma combined
financial statements and the notes thereto included elsewhere herein.
17
<PAGE>
SELECTED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
------------------------------------
NINE MONTHS NINE MONTHS
ENDED YEAR ENDED ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
------------------------------------ --------------- ------------ -----------------------
1992 1993 1994 1995 1996 1996 1997 (2) 1996 (3)(4) 1996 (3)(4) 1997 (3)(4)
------ ------ ------ ------ ------ ------ -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues................ $6,706 $7,722 $8,363 $9,104 $7,667 $5,886 $14,549 $43,405 $32,024 $37,277
Cost of services........ 3,802 4,595 5,589 5,763 4,839 3,726 9,287 25,474 18,575 21,261
------ ------ ------ ------ ------ ------ ------- ------- ------- -------
Gross profit............ 2,904 3,127 2,774 3,341 2,828 2,160 5,262 17,931 13,449 16,016
Selling, general and
administrative
expenses (5)........... 2,612 2,824 3,043 1,970 2,352 1,310 3,855 10,968 8,420 9,365
Depreciation and
amortization (4)....... 95 110 224 231 212 159 332 1,754 1,332 1,337
------ ------ ------ ------ ------ ------ ------- ------- ------- -------
Operating income
(loss)................. 197 193 (493) 1,140 264 691 1,075 5,209 3,697 5,314
Interest expense........ 101 181 185 230 238 178 1,147 880 668 707
------ ------ ------ ------ ------ ------ ------- ------- ------- -------
Income (loss) before
taxes.................. 96 12 (678) 910 26 513 (72) 4,329 3,029 4,607
Provisions (benefit) for
income taxes........... -- 35 (183) 327 10 174 11 1,847 1,298 1,928
------ ------ ------ ------ ------ ------ ------- ------- ------- -------
Net income (loss)....... $96 $(23) $(495) $583 $16 $339 (83) $2,482 $1,731 $2,679
====== ====== ====== ====== ====== ====== ======= ======= =======
Accretion of preferred
stock.................. (479)
-------
Net income (loss)
attributable to common
shareholders........... $(562)
=======
Net income (loss) per
common share (6)....... $(.13) $0.31 $0.22 $0.33
======= ======= ======= =======
Weighted average shares
outstanding (7) (8).... 4,226 8,002 8,002 8,002
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
ACTUAL PRO FORMA (3) (7)
------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash................................................. $ 559 $ 1,238
Total assets......................................... 38,720 62,652
Short-term debt...................................... 3,936 75
Long-term debt (net of current portion).............. 26,339 11,083
Redeemable preferred stock........................... 3,757 --
Total shareholders' equity (deficit)................. $(2,321) $43,940
</TABLE>
- -------
(1) Prior to January 17, 1997, the Company had no business operations.
Therefore, the business of Looney & Company, for financial statement
purposes, represents the predecessor business.
(2) The Completed Acquisitions have been, and the Pending Acquisitions will
be, accounted for as purchases and therefore, the operations of the
acquired businesses are included in the statement of income data from the
respective dates of acquisition. See the Consolidated Financial Statements
of U.S. Legal Support, Inc. included herein.
(3) Pro forma information gives effect to: (i) the Completed Acquisitions and
completion of Pending Acquisitions; (ii) an adjustment to compensation
expense for the difference between actual compensation paid to certain
officers of businesses acquired or to be acquired and employment contract
compensation negotiated in connection with the completed acquisitions and
the Pending Acquisitions; (iii) amortization expense relating to
intangible assets recorded in conjunction with the Completed Acquisitions
and to be recorded in the Pending Acquisitions; and (iv) the sale of the
shares offered hereby and the application of the net proceeds thereof, as
if such events had occurred on January 1, 1996 (for statement of income
data) and as of September 30, 1997 (for balance sheet data). The Pending
Acquisitions and the conversion of certain outstanding preferred stock and
Convertible Subordinated Promissory Notes described in Note 6 below, are
contingent upon and will close concurrently with completion of the
Offering. The pro forma results of operations are not necessarily
indicative of the results that would have occurred had these transactions
been completed as of such date or the results that may be attained in the
future.
(4) Pro forma depreciation and amortization amounts consist primarily of
amortization of goodwill totaling $1,313,000 and $985,000 for the periods
ended December 31, 1996 and September 30, 1997, respectively, recorded or
to be recorded as a result of the Completed Acquisitions and the Pending
Acquisitions. Goodwill is amortized over periods ranging from ten to 40
years and computed on the basis described in Note 2 of Notes to
Consolidated Financial Statements of U.S. Legal Support, Inc.
(5) Includes a non-recurring charge of $360,000 in the fourth quarter of 1996
representing the estimated fair value of ownership interests granted to
certain employees by Looney's shareholder.
(6) Supplementary historical earnings per common share for the nine months
ended September 30, 1997, would be $.09 per share, giving effect to: (i)
the 3,893,000 weighted average shares outstanding for the period; (ii) the
issuance of 2,908,000 of shares in the Offering, the proceeds from which
would be necessary to (a) repay $16,000,000 of bank indebtedness under the
Company's credit facility, (b) redeem $9,000,000 of Senior Subordinated
Notes, (c) repay $4,979,000 of Subordinated Promissory Notes, (d) redeem
231,250 shares of Series C Preferred Stock, and (e) pay the applicable
Offering expenses; and (iii) the reduction of interest expense and
dividends.
(7) Gives effect to: (i) 1,734,564 shares outstanding prior to the Offering;
(ii) 3,500,000 shares to be issued in the Offering; (iii) 609,268 shares
to be issued in the Pending Acquisitions; (iv) 1,969,283 shares issued
upon conversion of preferred stock and Convertible Subordinated Promissory
Notes; and (v) 188,187 shares issuable upon exercise of outstanding stock
options in accordance with SEC Staff Accounting Bulletin Topic 4D. See
"Capitalization."
(8) Shares used in calculating net loss per share for the nine months ended
September 30, 1997, include the number of shares, the proceeds from the
sale of which would be necessary to repay the portion of the Company's
debt that funded the distribution to Richard O. Looney in connection with
the reorganization of the Company and Looney & Company.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the historical
financial statements and related notes and the pro forma financial statements
and related notes included elsewhere in this Prospectus.
OVERVIEW
The Company is one of the largest providers of legal support and staffing
services in the United States providing court reporting, certified record
retrieval, legal placement and staffing, and other related services to law
firms and corporations, including insurance companies, through 40 offices in
seven states and the District of Columbia. The Company seeks to become the
leading national, full-service provider of legal support and staffing services
in the United States through a combination of selective acquisitions and
internal growth. After succeeding to the operations of Looney in January 1997,
the Company has acquired 13 businesses and will acquire four additional
businesses concurrently with the Offering. For the year ended December 31,
1996, the Company had pro forma revenues of $43.4 million and pro forma
operating income of $5.2 million. For the nine months ended September 30,
1997, the Company had pro forma revenues of $37.3 million and pro forma
operating income of $5.3 million, compared with pro forma revenues of $32.0
million and pro forma operating income of $3.7 million for the nine months
ended September 30, 1996.
In 1996, the Company derived approximately 64.0% of its pro forma revenues
from court reporting services, 18.0% from certified record retrieval services,
15.0% from permanent placement and temporary legal staffing and 3.0% from
other services. For the nine months ended September 30, 1997, the Company
derived 60.0% of its pro forma revenues from court reporting, 17.0% from
certified record retrieval, 21.0% from permanent placement and temporary legal
staffing and 2.0% from other services. The Company believes that over the past
several years prices for court reporting and certified record retrieval
services have remained stable or have declined in many markets, while rates
for permanent placement and temporary legal staffing have remained relatively
constant. The Company also believes that law firms and corporations have
increased their efforts to reduce legal expenses by centralizing their
purchasing decisions and negotiating lower rates with vendors. As these trends
and the consolidation among legal support companies continue, the Company
believes that the industry will experience more price-based competition. The
Company's strategy, however, is to capitalize on the centralization of
purchasing decisions by increasing its share of the market represented by
larger accounts and expanding the geographic markets in which it operates.
Charges for court reporting services typically are based upon the number of
pages transcribed, with a significant portion of revenues being derived from
the production of additional copies. Substantially all of the Company's court
reporting services are performed by independent contractors. Under its
standard arrangements with independent court reporters, the Company retains a
portion, typically averaging 40.0%, of the total court reporting fee and the
independent court reporter receives the balance. The Company also derives
court reporting revenues from its network of over 130 affiliated court
reporting firms in locations not directly served by the Company. Under these
arrangements, the Company refers court reporting assignments to network
participants and, upon completion of the assignment, bills the client directly
and retains a referral fee ranging from 5.0% to 10.0% of the total court
reporting fees. The Company anticipates that its reliance on the network of
court reporting affiliates will diminish as the Company acquires additional
court reporting businesses, including certain of the network affiliates
located in market areas not currently served by the Company.
Charges for certified record retrieval services are based upon the number of
subpoenas or other notices initiated and the volume of documents generated in
response to these subpoenas and notices. Certified record retrieval services
generally are used in personal injury and medical malpractice litigation.
Because the number of transcript copies requested by the parties and the
volume of certified records retrieved generally increase as the number of
parties in a lawsuit increases, revenues derived from court reporting and
certified record retrieval services are significantly higher in litigation
involving more than two parties.
19
<PAGE>
The Company's legal staffing recruiters are compensated on a commission
basis. Fees for successful placement of an attorney typically are based upon a
percentage, approximately 25.0% to 30.0% of the attorney's compensation earned
during the year following the placement, of which 40.0% to 50.0% is
customarily paid to the individual recruiter. This fee is subject to a partial
refund if the new employment arrangement is terminated prior to the expiration
of a negotiated period, usually three to six months. The Company charges its
clients an hourly fee for the number of hours worked by attorneys placed with
clients on a temporary basis.
Cost of services consists primarily of amounts due to the Company's
independent contractors, payroll for field agents, commissions for recruiters,
production equipment rental and costs associated with delivery of documents.
Selling, general and administrative expenses include payroll for management
and administrative employees, office occupancy costs, sales and marketing
expenses and other general and administrative costs. Depreciation and
amortization relates primarily to depreciation of office furniture and
equipment and amortization of intangible assets. The Company pays fees to its
independent contractors based on a percentage of the fees billed to clients.
Similarly, the Company compensates its temporary staffing attorneys only for
the hours actually worked. Consequently, the compensation for such personnel
is a variable cost that fluctuates in proportion to revenues.
The Completed Acquisitions have been, and the Pending Acquisitions will be,
accounted for under the purchase method of accounting, with the results of
operations of businesses acquired being included in the Company's results of
operations beginning on the date of acquisition. Upon completion of the
Offering, the Company will have recorded approximately $51.0 million as
goodwill, representing the excess of the fair value of the consideration paid
over the fair value of the assets to be acquired. Approximately 77.0% of the
goodwill is deductible for federal income tax purposes over 15 years. For
financial reporting purposes, goodwill is amortized over periods ranging from
ten to 40 years. The pro forma effect of this amortization expense is expected
to be approximately $1.3 million annually. Certain owners and employees of the
businesses acquired and to be acquired in the Pending Acquisitions have agreed
to reductions totaling $1.3 million from the levels of their 1996
compensation. These reductions have been reflected in the pro forma financial
statements included herein.
COMBINED AND PRO FORMA OPERATING DATA
The combined operating data of the Company for the periods presented do not
represent combined results of operations prepared in accordance with generally
accepted accounting principles, but are only a summation of the revenues, cost
of services and gross profit of the individual businesses on a historical
basis. The combined results of operations assume that each of the businesses
was combined from January 1, 1995.
The pro forma operating data for the year ended December 31, 1996 and the
nine months ended September 30, 1997 assumes that the Completed Acquisitions
as well as the Pending Acquisitions, were consummated as of January 1, 1996.
Pro forma adjustments include a reduction in compensation expense to reflect
amounts to be paid under the terms of employment agreements entered into in
connection with certain of the acquisitions. Pro forma adjustments also have
been made to reflect the amortization of the goodwill recorded in connection
with each acquisition.
20
<PAGE>
The following table sets forth certain combined and pro forma operating data
for the indicated periods:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
---------------------------- ----------------------------
1995 1996 1996 1997
------------- ------------- ------------- -------------
COMBINED PRO FORMA PRO FORMA
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................ $38,616 100.0% $43,405 100.0% $32,024 100.0% $37,277 100.0%
Cost of services....... 23,200 60.1 25,474 58.7 18,575 58.0 21,261 57.0
------- ----- ------- ----- ------- ----- ------- -----
Gross profit........... $15,416 39.9% $17,931 41.3 $13,449 42.0 $16,016 43.0
======= =====
Selling, general and
administrative
expenses.............. 10,968 25.3 8,420 26.3 9,365 25.1
Depreciation and
amortization.......... 1,754 4.0 1,332 4.2 1,337 3.6
------- ----- ------- ----- ------- -----
Operating income....... $5,209 12.0% $3,697 11.5% $5,314 14.3%
======= ===== ======= ===== ======= =====
</TABLE>
RESULTS OF OPERATIONS--PRO FORMA 1996 AND COMBINED 1995
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Revenue. Revenue increased $5.3 million, or 16.4%, to $37.3 million for the
nine months ended September 30, 1997 from $32.0 million for the nine months
ended September 30, 1996. The increase in revenue was a result of the
following: (i) revenue from court reporting services increased by
approximately $1.6 million, primarily due to higher demand in Pennsylvania,
California and New York; (ii) the Company's permanent legal search services
revenue increased by approximately $2.3 million as the result of several
significant retained searches; and (iii) revenue from certified record
retrieval services in California increased by $754,000 as the result of
several new insurance clients. In addition the start-up of temporary attorney
staffing services contributed approximately $1.0 million to the revenue
increase. These increases were partially offset by lower revenue from
certified record retrieval services in Texas.
Gross Profit. Gross profit increased $2.6 million, or 19.1%, to $16.0
million for the nine months ended September 30, 1997 from $13.4 million for
the nine months ended September 30, 1996. The gross profit on court reporting
services increased by approximately $800,000, while the gross profit on
permanent legal placement and temporary staffing services increased by
approximately $1.7 million. The gross margin percentage improved to 43.0%
during the nine months ended September 30, 1997 from 42.0% during the nine
months ended September 30, 1996. The improvement in the gross margin
percentage was primarily the result of an increase in the gross margin
percentage on court reporting services resulting from a reduction in the
percentage of court reporting fees paid to court reporters at one of the
Company's locations, offset by a slight decrease in the gross margin
percentage on permanent legal search and temporary staffing services as the
result of the start-up of temporary attorney staffing services.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue increased $4.8 million, or 12.4%, to $43.4 million in 1996
from a combined $38.6 million in 1995. The increase in revenue was a result of
the following: (i) revenue from court reporting services increased by
approximately $3.2 million primarily as the result of higher demand in
Florida, Pennsylvania and California; (ii) the Company's permanent legal
search services revenue increased by approximately $1.1 million as the result
of several significant retained searches; and (iii) revenue from certified
record retrieval services in California increased by $950,000 as the result of
several new insurance clients. The increase in revenue was partially offset by
lower court reporting and certified record retrieval revenue in Texas
resulting from the settlement of a number of large lawsuits in which the
Company had been providing services.
Gross Profit. Gross profit increased $2.5 million, or 16.3%, to $17.9
million in 1996 from $15.4 million in 1995. The gross profit on court
reporting services increased by approximately $2.0 million while gross profit
on permanent legal placement services increased by approximately $400,000 due
to the higher level of revenue and improved gross margin percentages. The
gross margin percentage improved to 41.3% in 1996 from 39.9%
21
<PAGE>
in 1995. The improvement in the gross margin percentage was primarily the
result of an increase in the gross margin percentage from court reporting
services resulting from a reduction in the percentage of court reporting fees
paid to court reporters at one of the Company's locations. Also, the gross
margin percentage on certified record retrieval services in California
improved as the result of increased volume from new insurance clients.
RESULTS OF OPERATIONS--THE COMPANY AND LOONEY
The Company provides court reporting, certified record retrieval, legal
placement and staffing and related services and derives its revenues from fees
associated with these services. Looney provides court reporting and certified
records retrieval services. The Company acquired Looney in January 1997.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
The Company acquired Klein Bury and eight other businesses during the nine
months ended September 30, 1997. Consequently, certain aspects of the
Company's results of operations in that period are not comparable to the
results of Looney for the nine months ended September 30, 1996.
Revenue. Revenue increased $8.7 million, or 147.2%, to $14.5 million for the
nine months ended September 30, 1997 from $5.9 million for the nine months
ended September 30, 1996. The increase in revenue was primarily the result of
the acquisitions made by the Company during the nine months ended September
30, 1997 which contributed $8.9 million of additional revenue.
Gross Profit. Gross profit increased $3.1 million, or 143.6%, to $5.3
million for the nine months ended September 30, 1997 from $2.2 million for the
nine months ended September 30, 1996. The gross margin percentage decreased by
0.5% to 36.2% for the nine months ended September 30, 1997 from 36.7% for the
nine months ended September 30, 1996. The slight decrease in the gross margin
percentage was primarily the result of higher fees paid to court reporters at
the Company's Florida subsidiary as compared to fees paid by Looney.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.5 million, or 194.3%, to $3.9 million for
the nine months ended September 30, 1997 from $1.3 million for the nine months
ended September 30, 1996. Approximately $1.8 million was attributable to
acquisitions and $746,000 was the result of higher expenses related to the
addition of corporate personnel to facilitate anticipated future growth.
Selling, general and administrative expenses as a percentage of revenue was
26.5% for the nine months ended September 30, 1997 as compared to 22.3% for
the nine months ended September 30, 1996 as the result of the additional
corporate office personnel.
Depreciation and Amortization. Depreciation and amortization increased by
$173,000, or 108.8%, to $332,000 for the nine months ended September 30, 1997
from $159,000 for the nine months ended September 30, 1996. The increase was
due to the amortization of goodwill incurred in connection with the 14
acquisitions made during the nine months ended September 30, 1997.
Operating Income. As the result of the foregoing, operating income increased
by $384,000, or 55.5%, to $1.1 million for the nine months ended September 30,
1997 from $691,000 for the comparable period in 1996. The operating margin
percentage decreased 4.3% to 7.4% for the nine months ended September 30, 1997
from 11.7% for the nine months ended September 30, 1996.
Year Ended December 31, 1996 Compared To Year Ended December 31, 1995
Revenue. Revenue decreased $1.4 million, or 15.8%, to $7.7 million in 1996
from $9.1 million in 1995. The decrease in revenue was primarily a result of
the bankruptcy of a major client and the settlement of a number of significant
lawsuits in late 1995 and early 1996.
Gross Profit. Gross profit decreased $512,000, or 15.3%, to $2.8 million in
1996 from $3.3 million in 1995. The gross margin percentage remained
relatively constant at 36.9% in 1996 compared with 36.7% in 1995.
22
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $381,000, or 19.4%, to $2.4 million in 1996
from $2.0 million in 1995. The increase was due to a non-recurring charge of
$360,000 related to equity interests in the Company that was granted to
certain employees. Excluding this non-recurring charge, selling, general and
administrative costs remained relatively constant from 1995 to 1996. Selling,
general and administrative expenses as a percentage of revenue increased 9.1%
to 30.7% at December 31, 1996 from 21.6% for December 31, 1995.
Depreciation and Amortization. Depreciation and amortization decreased
$18,000, or 7.8%, to $212,000 in 1996 from $231,000 in 1995 due to certain
assets becoming fully depreciated.
Operating Income. As a result of the foregoing, operating income decreased
by $875,000, or 76.8%, to $264,000 in 1996 from $1.1 million in 1995. The
operating margin percentage decreased 9.0% to 3.5% in 1996 as compared to
12.5% in 1995.
Year Ended December 31, 1995 Compared To Year Ended December 31, 1994
Revenue. Revenue increased by $741,000, or 8.9%, to $9.1 million in 1995
from $8.4 million in 1994 as the result of higher business activity
attributable to two major lawsuits for which the Company was providing both
court reporting and certified record retrieval services.
Gross Profit. Gross profit increased $567,000, or 20.5%, to $3.3 million in
1995 from $2.8 million in 1994. The gross margin percentage increased 3.5% to
36.7% in 1995 from 33.2% in 1994 as a result of improved margins related to
major multi-party lawsuits.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $1.1 million, or 35.3%, to $2.0 million
in 1995 from $3.0 million in 1994. The decrease was the result of reduced
expenses resulting from cost containment actions in 1995. In addition, in 1994
the Company recorded non-recurring charges totalling $611,000 related to the
settlement of certain employee-related litigation and elimination of certain
document copying services. Selling, general and administrative expenses as a
percentage of revenue decreased 14.8% to 21.6% in 1995 from 36.4% in 1994 due
to the factors discussed above.
Depreciation and Amortization. Depreciation and amortization increased
$7,000, or 3.0%, to $231,000 in 1995 from $224,000 in 1994.
Operating Income. As a result of the foregoing, operating income increased
$1.6 million to $1.1 million in 1995 from an operating loss of $493,000 in
1994.
RESULTS OF OPERATIONS--KLEIN BURY
Klein Bury provides court reporting services and derives its revenue from
court reporting fees. The Company acquired Klein Bury in January 1997.
Twelve Month Period ended December 31, 1996 Compared To the Twelve Month
Period Ended September 30, 1995
Revenue. Revenue increased $1.2 million, or 16.7%, to $8.5 million in 1996
from $7.3 million, for the fiscal year ended September 30, 1995. The increase
in revenue was a result of higher demand for Klein Bury's court reporting
services attributable to Klein Bury obtaining additional clients in the
insurance and health care industry, the expansion of services statewide for
certain existing clients and the addition of court reporting services for
municipal courts in Dade County, Florida which were previously performed by
municipal employees. In addition, Klein Bury derived additional revenue from a
new office which opened in 1995.
23
<PAGE>
Gross Profit. Gross profit increased $475,000, or 19.3%, to $2.9 million in
1996 from $2.5 million in 1995. The gross margin percentage increased slightly
to 34.5% in 1996 from 33.7% at September 30, 1995. The improvement in gross
margin percentage was the result of slightly lower independent contractor
costs in 1996.
Operating Expenses. Operating expenses increased $515,000, or 22.6%, to $2.8
million in 1996 from $2.3 million for the fiscal year ended September 30,
1995. The increase in operating expenses was the result of increased revenue
and increased compensation to executive officers. Operating expenses as a
percentage of revenue increased to 32.7% in 1996 from 31.2% in fiscal year
ended September 30, 1995.
Operating Income. As a result of the foregoing, operating income decreased
$41,000, or 22.1%, to $144,000 in 1996 from $185,000 for the fiscal year ended
September 30, 1995. Operating margin percentage decreased to 1.7% in 1996 from
2.5% in 1995.
RESULTS OF OPERATIONS--REPORTING SERVICE
Reporting Service provides court reporting services and derives its revenue
from court reporting fees. Reporting Service will be acquired concurrently
with the Offering.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Revenue. Revenue for the nine months ended September 30 1997 increased
$896,000, or 41.3%, to $3.1 million from $2.2 million for the nine months
ended September 30, 1996. The increase in revenue was the result of: (i)
increased demand from existing clients; (ii) more multi-party lawsuits which
result in higher demand for services as well as an increased number of court
reporting transcripts; and (iii) improved pricing of Reporting Service's court
reporting services.
Gross Profit. Gross profit for the nine months ended September 30, 1997
increased $718,000, or 72.4%, to $1.7 million from $992,000 for the nine
months ended September 30, 1996. The gross margin percentage improved by 10.1%
to 55.8% for the nine months ended September 30, 1997 compared with 45.7% at
September 30, 1996. The improvement in gross margin percentage primarily
resulted from (i) increased volume of copies required by parties in multi-
party lawsuits and (ii) cost containment actions taken by Reporting Service
and improved pricing of its services.
Operating Expenses. Operating expenses for the nine months ended September
30, 1997 increased $114,000, or 29.1%, to $505,000 from $391,000 for the nine
months ended September 30, 1996. The increase in operating expenses resulted
from costs attributable to additional administrative personnel and other
expenses attributable to the increased demand for Reporting Service's court
reporting services. Operating expenses as a percentage of sales decreased 1.5%
to 16.5% at September 30, 1997 from 18.0% at September 30, 1996, due to the
impact of higher volume without a corresponding increase in fixed overhead
costs.
Operating Income. As the result of the foregoing, operating income for the
nine months ended September 30, 1997 increased $603,000 or 101.4%, to $1.2
million from $595,000 for the nine months ended September 30, 1996. The
operating margin percentage improved 11.7% to 39.1% for the nine months ended
September 30, 1997 from 27.4% for the nine months ended September 30, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue increased $1.1 million, or 58.0%, to $3.0 million in 1996
from $1.9 million in 1995. The increase was due to increased demand from
existing clients, more multi-party lawsuits and improved pricing.
Gross Profit. Gross profit increased $581,000, or 77.5%, to $1.3 million in
1996 from $749,000 million in 1995. The gross margin percentage increased 4.9%
to 44.2% in 1996 from 39.3% in 1995. The improvement in the gross margin
percentage was due to cost containment actions and improved pricing.
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Operating Expenses. Operating expenses increased $162,000, or 38.2%, to
$586,000 in 1996 from $424,000 in 1995 as a result of additional
administrative personnel and increased demand for Reporting Service's court
reporting services. Operating expenses as a percentage of revenue decreased
2.7% to 19.5% at December 31, 1996 from 22.2% at December 31, 1995.
Operating Income. As a result of the foregoing, operating income increased
$419,000, or 128.8%, in 1996, to $744,000 from $325,000 in 1995. Operating
margin percentage improved 7.6% to 24.7% in 1996 from 17.1% in 1995.
RESULTS OF OPERATIONS--JILIO
Jilio provides court reporting services and derives its revenue from court
reporting fees. Jilio will be acquired concurrently with the Offering.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Revenue. Revenue for the nine months ended September 30 1997 increased
$313,000, or 11.3%, to $3.1 million from $2.8 million for the nine months
ended September 30, 1996. The increase in revenue was due to an expansion of
Jilio's client base as a result of marketing efforts, the impact of large
multi-party litigation and the offering of new services, including document
depository services, to its clients.
Gross Profit. Gross profit for the nine months ended September 30, 1997
increased $108,000, or 7.7%, to $1.5 million from $1.4 million for the nine
months ended September 30, 1996. The gross margin percentage declined 1.6% to
49.1% for the nine months ended September 30, 1997 from 50.7% for the nine
months ended September 30, 1996. The decrease in the gross margin percentage
was primarily the result of volume pricing discounts related to multi-party
lawsuits and start-up costs related to new document depository services.
Operating Expenses. Operating expenses increased $101,000, or 13.4%, to
$857,000 for the nine months ended September 30, 1997 from $756,000 for the
nine months ended September 30, 1996. Operating expenses as a percentage of
revenue increased 0.5% to 27.8% at September 30, 1997 from 27.3% for the nine
months ended September 30, 1996. The increase in operating expenses and
operating expenses as a percentage of revenue were the result of additional
personnel and increased costs related to the initiation of new document
depository services and complimentary services related to large multi-party
lawsuits.
Operating Income. As the result of the foregoing, operating income for the
nine months ended September 30, 1997 increased $7,000, or 1.0%, to $656,000
from $649,000 for the nine months ended September 30, 1996. Operating margin
percentage declined 2.1% to 21.3% for the nine months ended September 30, 1997
from 23.4% at September 30, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue increased $657,000, or 19.5%, to $4.0 million in 1996 from
$3.4 million in 1995. The increase in revenue was the result of an increase in
the number of clients, additional services from existing clients and the
number of multi-party lawsuits.
Gross Profit. Gross profit increased $384,000, or 23.0%, to $2.1 million in
1996 from $1.7 million in 1996. Gross margin percentage increased slightly to
51.0% in 1996 from 49.6% in 1995. The improvement in the gross margin
percentage was the result of cost containment actions.
Operating Expenses. Operating expenses increased $188,000, or 21.1%, to $1.1
million in 1996 from $891,000 in 1995 as the result of the higher level of
business activity. Operating expenses as a percentage of revenue increased
slightly from 26.8% in 1996 from 26.5% in 1995.
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Operating Income. As a result of the foregoing, operating income increased
$196,000, or 25.2%, to $973,000 in 1996 from $777,000 in 1995. Operating
margin percentage increased to 24.2% in 1996 from 23.1% in 1995.
RESULTS OF OPERATIONS--ELAINE DINE
Elaine Dine provides permanent placement and temporary legal staffing and
derives its revenue from legal placement and staffing fees which are based
upon a percentage of the attorney's compensation earned during the year
following the placement.
Historically, the operations of Elaine Dine have been focused on the
permanent placement of attorneys. In April 1996, Elaine Dine created Elaine
Dine Temporaries LLC which provides temporary legal staffing services. Revenue
from temporary staffing services are derived from hourly fees charged to
clients for the number of hours worked by temporary staffing attorneys.
The Company acquired Elaine Dine in September 1997.
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Revenue. Revenue for the three months ended June 30, 1997 increased
$488,000, or 70.2%, to $1.2 million from $695,000 for the three months ended
June 30, 1996. The increase was the result of the addition of several new
corporate clients and a higher number of searches for corporate in-house
attorneys.
Gross Profit. Gross profit for the three months ended June 30, 1997
increased $210,000, or 62.3%, to $546,000 from $337,000 for the three months
ended June 30, 1996. During the three months ended June 30, 1997, the gross
margin percentage declined 2.3% to 46.2% at June 30, 1997 from 48.5% at June
30, 1996. The decrease in gross margin percentage was the result of an
increase in the commission percentages paid to staff recruiters.
Operating Expenses. Operating expenses increased $58,000, or 35.2%, to
$222,000 for the three months ended June 30, 1997 from $164,000 for the three
months ended June 30, 1996. Operating expenses as a percentage of revenue
decreased 4.8% to 18.8% for the three months ended June 30, 1997 from 23.6%
for the three months ended June 30, 1996.
Operating Income. As a result of the foregoing, operating income increased
$152,000, or 88.0%, to $325,000 for the three months ended June 30, 1997 from
$173,000 for the three months ended June 30, 1996. During the three months
ended June 30, 1997, the operating margin percentage improved 2.6% to 27.5%
for the three months ended June 30, 1997 from 24.9% for the three months ended
June 30, 1996.
Year Ended March 31, 1997 Compared to Year Ended March 31, 1996
Revenue. Revenue increased $1.2 million, or 32.9%, to $4.7 million for the
year ended March 31, 1997 from $3.5 million for the year ended March 31, 1996.
The increase in revenue was due to favorable economic conditions in the
financial services industry which created a need for additional attorneys for
both law firms and large corporations. In 1996, Elaine Dine added new clients
and was awarded several large retained searches, including searches for in-
house attorneys.
Gross Profit. Gross profit increased $544,000, or 36.9%, to $2.0 million in
1997 from $1.5 million in 1996. Gross margin percentage increased slightly to
43.3% in 1997 from 42.1% in 1996.
Operating Expenses. Operating expenses decreased $116,000, or 9.2%, to $1.1
million in 1997 from $1.3 million in 1996. The reduction in operating expenses
in 1997 was primarily due to lower health insurance costs and outside
professional fees as compared with 1996. Operating expenses as a percentage of
revenue decreased 11.4% to 24.6% in 1997 from 36.0% in 1996.
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Operating Income. As a result of the foregoing, operating income increased
$660,000, or 313.1%, to $870,000 in 1997 from $211,000 in 1996. Operating
margin percentage improved 12.7% to 18.7% in 1997 from 6.0% in 1996.
RESULTS OF OPERATIONS--LEGAL ENTERPRISE, INC.
Legal Enterprise provides certified record retrieval services and derives
its revenue from fees generated from such services, which typically are based
upon the number of subpoenas or other notices initiated and the volume of
documents generated in response to these subpoenas. The Company acquired Legal
Enterprise in August 1997.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenue. Revenue increased $512,000, or 29.8%, to $2.2 million for the six
months ended June 30, 1997 from $1.7 million for the six months ended June 30,
1996. The increase in revenue was attributable to several new clients during
1996 and early 1997, including several large insurance companies. In addition,
Legal Enterprise opened a new office in northern California.
Gross Profit. Gross profit increased $80,000, or 12.5%, to $722,000 for the
six months ended June 30, 1997 from $642,000 for the six months ended June 30,
1996. Gross margin percentage declined 5.0% to 32.4% from 37.4% for the six
months ended June 30, 1996. The decline in gross margin percentage was the
result of increased costs attributable to hiring additional personnel and
training costs incurred in connection with the initiation of record retrieval
services to be provided to new clients. In addition, Legal Enterprise was
negatively impacted by servicing clients outside its core geographic area in
the six months ended June 30, 1997.
Operating Expenses. Operating expenses increased $13,000, or 2.4%, to
$584,000 for the six months ended June 30, 1997 from $571,000 for the six
months ended June 30, 1996. Operating expenses as a percentage of revenue
decreased 7.0% to 26.2% for the six months ended June 30, 1997 from 33.2% for
the six months ended June 30, 1996 as a result of achieving operating
leverage.
Operating Income. As a result of the foregoing, operating income increased
$67,000, or 93.5%, to $138,000 for the six months ended June 30, 1997 from
$71,000 for the six months ended June 30, 1996. Operating margin percentage
improved 2.1% to 6.2% for the six months ended June 30, 1997 from 4.1% for the
six months ended June 30, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue increased $950,000, or 34.5%, to $3.7 million in 1996 from
$2.8 million in 1995. During 1996, Legal Enterprise obtained several new
insurance company clients and expanded its business into northern California.
Gross Profit. Gross profit increased $444,000, or 45.8%, to $1.4 million in
1996 from $971,000 in 1995. Gross margin percentage increased 3.0% to 38.2% in
1996 from 35.2% in 1995. The increase in the gross margin percentage was the
result of the impact of greater revenue on the fixed component of cost of
services.
Operating Expenses. Operating expenses increased $377,000, or 43.3%, to $1.2
million in 1996 from $870,000 in 1995. Operating expenses as a percentage of
revenue increased 2.0% to 33.6% in 1996 from 31.6% in 1995, primarily as the
result of costs associated with relocating the headquarters and the opening of
additional locations in 1996.
Operating Income. As a result of the foregoing, operating income increased
$67,000, or 66.7%, to $167,000 in 1996 from $100,000 in 1995. Operating margin
percentage improved 0.9% to 4.5% in 1996 from 3.6% in 1995.
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FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
Revenues from the Company's services historically have shown no significant
seasonal variations. Revenues can vary from period to period due to the
effects of the timing of acquisitions and the timing and magnitude of costs
related to such acquisitions, as well as the timing of the commencement,
settlement or completion of major lawsuits. The increase in corporate overhead
associated with the Completed Acquisitions and the Pending Acquisitions will
be reflected in the Company's results of operations in the periods immediately
following the Offering, while the realization of benefits, if any, from such
acquisitions may not be reflected until future periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements have been primarily to fund the cash portion
of the purchase price of the acquisitions. The Company has obtained these
funds principally through borrowings under the Bank Credit Agreement, the
proceeds from the placement of $10.0 million of Senior Subordinated Notes and
Preferred Stock, and cash provided by operations. For the nine months ended
September 30, 1997, cash provided by operating activities was $615,000. The
aggregate cash consideration paid to sellers for acquisitions completed
through September 30, 1997 was approximately $21.4 million, prior to giving
effect to any associated working capital adjustments. The cash portion of the
purchase price for the Pending Acquisitions will be approximately $16.9
million, which will be provided from approximately $4.8 million of the net
proceeds of the Offering and borrowings of approximately $12.1 million under
the new credit facility described below.
The Company's existing Bank Credit Agreement provides for a $4.3 million
revolving line of credit of which approximately $3.2 million has been utilized
and a $14.0 million acquisition line of credit which has been fully utilized.
Borrowings under the Bank Credit Agreement bear interest at a base rate plus
0.75%, or LIBOR plus 2.5%, at the Company's option. As of December 15, 1997,
the average annual interest rate on borrowings under the credit facilities was
8.50% and such borrowings are secured by substantially all of the assets of
the Company, including the capital stock of subsidiaries. The Bank Credit
Agreement contains various covenants that, among other matters, restrict or
limit the Company's ability to pay dividends, incur indebtedness, make capital
expenditures and repurchase capital stock. The Company must also maintain
minimum fixed charge coverage and other ratios. All borrowings under the Bank
Credit Agreement are required to be repaid concurrently with the completion of
the Offering. See "Use of Proceeds."
The Company anticipates that it will require significant amounts of cash to
support its acquisition strategy after the Offering. The Company expects to
fulfill these requirements for cash primarily through bank borrowings, cash
from operations, and from the sale of debt or equity securities of the
Company. The Company has entered into a credit agreement (the "New Credit
Agreement") with NationsBank of Texas, N.A. ("NationsBank") to provide a new
$40.0 million revolving credit facility upon completion of the Offering. The
amount the Company may borrow under the revolving credit facility will be
subject to limitations based upon the EBITDA of the Company for the preceding
twelve months, adjusted to give effect to all acquisitions completed during
such period or pending as of the date of borrowing. The Company expects that,
immediately upon completion of the Offering, approximately $12.1 million will
be borrowed and approximately $10.0 million will be available for borrowing
under the New Credit Agreement. From time to time, additional borrowing
capacity will be available to the Company under the New Credit Agreement
provided that the Company achieves certain levels of financial performance
through operations or through acquisitions. Loans under the New Credit
Agreement will bear interest at rates based, at the Company's option, on
either LIBOR or NationsBank's base rate plus, in each case, an applicable
margin. The applicable margin will be contingent upon the ratio of the
Company's consolidated funded debt to its consolidated EBITDA (the "Debt
Coverage Ratio") and will vary from 1.75% to 2.25% in the case of LIBOR loans
and 0% to .50% in the case of base rate loans. In addition, the Company will
be required to pay to the lenders a quarterly fee with respect to the unused
portion of the credit facility. The unused fee varies depending on the Debt
Coverage Ratio and ranges from .30% to .50%. The New Credit Agreement will
also permit $2.5 million of the amount available for borrowings to be used for
the issuance of letters of credit. A per annum fee based on the applicable
margin for LIBOR loans is payable each quarter with respect to the face amount
of letters of credit outstanding during the applicable quarter. See Note 7 of
Notes to Financial Statements of U.S. Legal Support, Inc.
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Borrowings under the New Credit Agreement will be secured by substantially
all of the assets of the Company and its subsidiaries and by a pledge of the
stock of the subsidiaries. In addition, subsidiaries of the Company will be
required to guarantee the Company's obligations under the New Credit
Agreement. The New Credit Agreement also will require the Company and its
subsidiaries to comply with various affirmative and negative covenants related
to, among other matters: (i) the maintenance of certain financial ratios; (ii)
limitations on the incurrence of indebtedness; (iii) restrictions on liens,
guarantees, dividends and stock redemptions; and (iv) limitations on mergers
and sales of assets. The new revolving credit facility will terminate, and all
borrowings will be required to be repaid on December 31, 2000. The Company
anticipates that bank borrowings and cash from operations will be sufficient
to meet the Company's capital requirements through the end of 1998.
The Company's business has not typically required substantial capital
expenditures, and during the nine months ended September 30, 1997, capital
expenditures were approximately $111,000. However, the Company anticipates
that capital expenditures will increase to approximately $150,000 for the
remainder of 1997 and will be approximately $750,000 in 1998. These amounts
include approximately $500,000 expected to be incurred to acquire and
implement a centralized management information system designed to standardize
financial reporting and accounting controls.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"). SFAS 128 changes the computation of earnings per share and requires
dual presentation of basic and diluted earnings per share. SFAS 128 is
effective for financial statements issued for periods ending after December
15, 1997, including interim periods. The Company will adopt SFAS 128 in the
fourth quarter of 1997 as required.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131").
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. It requires: (i) classification of
the components other comprehensive income by their nature in a financial
statement and (ii) the display of the accumulated balance of the components
other comprehensive income separate from retained earnings and additional
paid-in-capital in the equity section of a statement of financial position.
SFAS 130 is effective for years beginning after December 15, 1997 and is not
expected to have a material impact on financial position or results of
operations.
SFAS 131 establishes standards for reporting information about operating
segments in annual financial statements and requires selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company has not determined
the impact of SFAS 131 on its financial reporting practices.
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BUSINESS
GENERAL
The Company is one of the largest providers of legal support and staffing
services in the United States, providing court reporting, certified record
retrieval, legal placement and staffing, and other related services to law
firms and corporations, including insurance companies, through 40 offices in
seven states and the District of Columbia. The Company seeks to become the
leading national, full-service provider of legal support and staffing services
through a combination of selective acquisitions and internal growth. Since
commencing operations in January 1997, the Company has acquired 14 businesses,
and will acquire four additional businesses concurrently with the Offering. In
1997, the Company has provided court reporting and certified record retrieval
services to clients such as The Boeing Company, Ford Motor Company, ITT
Hartford, CNA and Kemper Insurance Company. For the year ended December 31,
1996, the Company had pro forma revenues of $43.4 million and pro forma
operating income of $5.2 million. For the nine months ended September 30, 1997,
the Company had pro forma revenues of $37.3 million and pro forma operating
income of $5.3 million, compared with pro forma revenues of $32.0 million and
pro forma operating income of $3.7 million for the nine months ended
September 30, 1996.
Legal support and staffing services are frequently used by the participants
in civil litigation, particularly in cases involving personal injury, products
liability, workers' compensation and property casualty claims. While most civil
proceedings are resolved by settlement or are otherwise terminated prior to
trial, most legal support services are required in the pre-trial period. The
following presents the general progression of a civil lawsuit or other
proceeding and the opportunities for the Company to provide services to the
parties:
LOGO
[Flowchart of basic steps in the progression of a lawsuit or other legal
proceeding identifying Company's services at each step as follows:] [Claimant
Retains Counsel--Legal Staffing and Placement]--[File Lawsuit]--[Defendant
Retains Counsel--Legal Staffing and Placement]--[Gather & Prepare Documents--
Certified Record Retrieval]--[Examine Witnesses by Deposition--Court
Reporting]--[Trial or Other Proceeding Occurs].
Legal Placement and Staffing. During the course of litigation, particularly
in the pre-trial phase of complex, multi-party cases, law firms and corporate
legal departments may hire additional attorneys on a permanent or temporary
basis to assist in the preparation of the case for trial. In addition, law
firms and corporations increasingly are utilizing temporary lawyers in other
areas of practice to more effectively manage fluctuating work loads.
Certified Record Retrieval. After the initiation of a lawsuit or other legal
proceeding, the parties typically seek medical, employment, financial or other
records to assist in the evaluation, furtherance or defense of the claims
asserted. These records must be obtained through the issuance of subpoenas or
other notices directed to hospitals, physicians, employers, banks or others in
accordance with applicable federal and state rules of procedure to ensure the
admissibility of the records in the lawsuit. The Company prepares and delivers
subpoenas and other document request notices, monitors the recipient's response
and coordinates the retrieval and dissemination of documents for litigation.
Court Reporting. Prior to commencement of a trial or other proceeding,
attorneys for the parties to the dispute and their insurance providers often
seek sworn oral testimony of witnesses. Oral testimony is generally obtained
through a deposition transcribed by a court reporter. The persons deposed may
include the parties to
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the proceeding as well as expert witnesses and others, and the depositions may
include testimony concerning the content of documents previously obtained
through certified record retrieval. Licensed court reporters typically
transcribe the testimony given in deposition and written copies are made
available to the parties. Testimony given during a deposition often leads to
further depositions and to additional certified document retrieval
assignments.
INDUSTRY OVERVIEW
Based on available industry data, the Company estimates that the market for
legal support and staffing services in the United States exceeds $5.0 billion
annually. The industry is highly fragmented, with more than 1,000 court
reporting and record retrieval firms and over 400 legal placement and staffing
firms. The Company believes that the legal support and staffing services
market is growing due to several trends, including an increase in the: (i)
efforts by law firms and corporations, especially insurance providers, to
reduce legal expenses; (ii) outsourcing of legal support services to companies
that specialize in providing such services at a lower cost; (iii) use of
lawyers on a temporary basis by law firms and corporations; (iv) volume and
complexity of litigation; and (v) national scope of litigation, particularly
in class action and product liability lawsuits.
Legal support services, such as court reporting and certified record
retrieval, traditionally have been marketed to law firms. Increasingly,
insurance providers and major corporations, who ultimately pay the costs of
legal support and staffing services, are seeking to: (i) control and reduce
the costs associated with lawsuits; (ii) centralize their purchasing
decisions; and (iii) ensure consistent service quality. As a result, these
companies are more frequently selecting the providers of legal support
services themselves, rather than delegating that decision to the law firms
engaged to represent them.
Currently the legal support and staffing services industry is highly
fragmented and consists primarily of local and regional firms that typically
provide a single or limited number of legal support and staffing services. The
Company believes that many legal support and staffing businesses lack: (i) a
full range of legal support services; (ii) regional or national coverage;
(iii) access to capital; or (iv) effective marketing programs, and are
therefore unable to meet the needs of large, geographically dispersed clients.
In addition, there are limited opportunities for owners of local legal support
and staffing firms to obtain liquidity or to sell their businesses. The
Company consequently believes that many owners of such businesses will be
receptive to consolidation.
BUSINESS STRATEGY
The Company seeks to become the leading national, full-service provider of
legal support and staffing services in the United States. To achieve this
goal, the Company is implementing a focused business strategy that includes
the following key elements:
Establish Full Service Operations in Multiple Metropolitan Areas. The
Company seeks to capitalize on the trend toward vendor consolidation in the
legal support and staffing services industry. The Company believes that
national and regional accounts are increasingly contracting with vendors such
as the Company that are capable of delivering a full range of high-quality
legal support and staffing services on a broad geographic basis. The Company
offers an array of complementary services that includes court reporting,
certified record retrieval, legal placement and staffing, and related services
through 40 offices located in or near major metropolitan markets in the United
States. The Company expects to continue to increase the variety and geographic
scope of its services in targeted metropolitan areas throughout the United
States through selected acquisitions and expansion of its existing businesses.
Adopt Best Practices, Policies and Procedures. The Company evaluates its
operating policies and procedures in order to identify and implement practices
that best serve the objectives of the Company and its clients ("best
practices"). The Company intends to integrate these best practices, including
marketing, sales, field operations, human resources policies and recruiting
and training programs into the operations of acquired businesses. The Company
also intends to evaluate the practices of each acquired company and to
implement selected practices of the acquired companies on a Company-wide
basis.
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Achieve Operating Efficiencies. The Company seeks to be a low-cost provider
of legal support services through operating efficiencies and cost savings,
which the Company believes can be achieved by combining a number of general
and administrative functions at the corporate level and by reducing or
replacing redundant functions and facilities of acquired companies. In
addition, the Company believes that it will be able to reduce costs in the
purchase of insurance, management information systems, advertising and other
services.
Maintain Decentralized Management. Many of the businesses the Company will
seek to acquire operate on a local or regional basis. To take advantage of
existing relationships between the acquired companies and their clients, the
Company intends to manage its business on a decentralized basis, with
acquired-company management retaining primary responsibility for day-to-day
operations and local marketing. The Company believes that allowing local
management to retain appropriate autonomy will provide opportunities for
internal growth, enhance competitiveness in attracting acquisition candidates
and assist in preserving the entrepreneurial spirit of the acquired-company
management.
GROWTH STRATEGY
The Company has implemented a strategy designed to continue its growth in
existing and new markets based on the following key elements:
Actively Pursue Strategic Acquisitions. The Company intends to pursue an
aggressive strategy of acquiring companies in the fragmented legal support and
staffing services industry. Through strategic acquisitions, the Company will
seek to serve new geographic markets, expand its presence in existing markets
and add complementary services. One source of acquisition candidates has been
the court reporting firms that have been affiliated with the Company's
national court reporting network, through which the Company provides court
reporting services to customers in locations not directly served by the
Company. Since inception, the Company has acquired four network affiliates.
Establish Effective National Marketing Program. Insurance providers and
major corporations, which ultimately pay the cost of legal support and
staffing services, are increasingly seeking to centralize their purchasing
decisions on a national and regional level and to control or reduce the costs
associated with lawsuits. The Company seeks to capitalize on these initiatives
by marketing its services directly to these companies and has established a
national sales force to pursue these opportunities. The Company seeks to be
designated as the exclusive or preferred provider of legal support services on
a regional or national basis, which may result in assignments substantially
larger than those obtained through local accounts.
Capitalize on Cross-Selling Opportunities. The Company believes that
significant cross-selling opportunities exist which could enhance the
Company's revenue growth. Many legal support and staffing companies are local
or regional and specialize in one segment of the legal support services
market. The Company believes that its acquisition of such companies will
enable it to become a full-service provider of legal support services
nationwide and to leverage its existing client relationships by selling such
clients a full range of legal support and staffing services. For example, as a
result of the Company's acquisition of a certified record retrieval business
in California, the Company recently obtained the California certified record
retrieval business from a national insurance provider, who previously had
utilized only the Company's court reporting services. In addition, the Company
works closely with its clients to identify cost-savings opportunities and to
develop solutions to their legal support needs.
Develop New and Expand Existing Client Relationships. The Company intends to
develop new client relationships and expand existing relationships with law
firms, insurance providers and major corporations through aggressive sales and
marketing of its services. Sales and marketing efforts are conducted on both a
local and national level and are designed to focus potential clients on the
Company's: (i) ability to provide a broad range of complementary legal support
and staffing services; (ii) national geographic coverage through 40 offices
and its network of more than 130 affiliated court reporting firms; and (iii)
high-quality services and programs.
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ACQUISITION AND INTEGRATION STRATEGY
The Company's acquisition strategy is to identify, acquire and integrate
companies with strong management, profitable operating results and recognized
local or regional market presence. The Company typically pursues acquisitions
that will allow it to accomplish one or more of the following: (i) expand the
geographic markets served by the Company; (ii) increase the Company's
penetration of existing markets; (iii) establish or enhance customer
relationships; and (iv) offer services complementary to those offered by the
Company.
The Company believes that there are numerous attractive acquisition
candidates due to the large size and fragmentation of the legal support and
staffing services industry. These candidates include but are not limited to
participants in the Company's referral network of over 130 affiliated court
reporting firms, through whom the Company supplies court reporting services to
its clients in locations not served directly by the Company. The Company has
acquired four businesses that were previously part of its affiliated network
and the Company believes that others in the affiliated network may be likely
acquisition candidates. The Company also pursues smaller "tuck-in" businesses
that can be easily assimilated into the Company's existing operations. Such
tuck-in acquisitions are intended to enable the Company to benefit from the
operating leverage of its existing business by adding market share while
eliminating or reducing certain general administrative and operating costs.
The Company has made three such acquisitions of court reporting businesses in
Texas.
The Company's corporate officers are responsible for identifying acquisition
prospects, conducting due diligence, negotiating the terms of acquisitions and
integrating acquired companies. The Company expects that the management of
acquired companies will actively assist the Company in identifying additional
acquisition candidates. The Company also utilizes the services of The GulfStar
Group, Inc. ("GulfStar"), an investment banking firm and an affiliate of one
of the founding shareholders of the Company, in evaluating acquisition
candidates and negotiating acquisition terms. The Company's policy is to
include Common Stock as part of the consideration for acquisitions to more
closely align the interests of the shareholders and managers of acquired
companies with those of the Company. See "Certain Transactions."
The Company has relied on the existing accounting, financial and computer
systems of certain of the acquired companies for a transition period following
completion of their acquisition. Although the Company believes that its
existing financial reporting and accounting control systems are satisfactory
for the operation of the combined businesses for the near term, the Company is
currently evaluating alternatives in order to address the future needs of the
combined businesses and to standardize and centralize accounting and financial
procedures of acquired companies and establish a uniform system of accounts
and standardized budgeting and reporting processes. The marketing, sales,
field operations and personnel programs of the acquired companies also will be
evaluated and integrated with those of the Company under its best practices
program. Further, the Company seeks to identify any practices of an acquired
company that could be beneficial if implemented on a Company-wide basis.
Management of each of the acquired companies meet regularly to discuss the
assimilation of acquired companies, as well as cross-selling and other
opportunities to improve operating efficiency and increase revenue and
profitability. The Company has entered into employment agreements with certain
of the principal executives of each acquired business and intends to continue
to seek to enter into such arrangements with key executives of companies
acquired in the future.
33
<PAGE>
After succeeding to the operations of Looney in January 1997, the Company
has acquired 13 businesses and will acquire four additional businesses in the
Pending Acquisitions. Certain information relating to the Company's Completed
Acquisitions and Pending Acquisitions is summarized in the following table:
<TABLE>
<CAPTION>
NUMBER OF
SERVICES ACQUIRED COMPANY HEADQUARTERS LOCATIONS
- --------------------------- ----------------------- ---------------- ---------
<S> <C> <C> <C>
Court Reporting............ Amicus One New York 3
Block Washington, D.C. 3
G&G Los Angeles 1
Jilio (1) Los Angeles 1
Johnson Group Los Angeles 1
Kirby Kennedy (1) Minneapolis 1
Klein Bury Miami 6
Looney (2) Houston 8
Reporting Service (1) Philadelphia 1
Rocca Chicago 1
San Francisco Reporting San Francisco 1
---
27
Certified Record
Retrieval.................. Legal Enterprise Los Angeles 7
Legal Placement and
Staffing................... Elaine Dine New York 1
Ziskind Greene Los Angeles 4
Commander Wilson (1) Houston 1
---
6
Total: 40
===
</TABLE>
- --------
(1) Pending Acquisition to be completed concurrently with the Offering.
(2) Looney also provides certified record retrieval services. Excludes the
operations of Cindi Rogers & Associates, Encore Reporting and Preferred
Records, Inc., which were acquired in 1997.
LEGAL SUPPORT AND STAFFING SERVICES
The Company provides court reporting, certified record retrieval, legal
placement and staffing and other services, as described below.
Court Reporting. Court reporting is the verbatim transcription of sworn oral
testimony, generally for use in legal proceedings. While the transcription of
legal proceedings held in a courtroom generally is performed by personnel
employed by the federal court system or by state agencies, counties or
municipalities, court reporting performed outside a courtroom is generally
conducted by private court reporters who transcribe depositions and certain
other proceedings. Most states require court reporters to be licensed under
regulations that require each candidate to attend a certified court reporting
school, pass a written examination and demonstrate transcription proficiency
using machine shorthand equipment. Court reporters are officers of the court
and subject to ethical codes governing their professional conduct.
The Company believes that its court reporters utilize state-of-the-art
technology, including computer-aided transcription ("CAT") systems. CAT
systems allow the testimony transcribed by a court reporter to be
simultaneously recorded on computer disk. In addition to CAT systems, the
Company utilizes the following technologies to provide high-quality court
reporting services:
. Transcription on a Real-Time Basis. The Company's court reporters provide
instant transcripts of testimony on computer monitors, which may be
located where the testimony is taking place, as well as at remote
locations. This system also allows attorneys to receive a transcript of
the testimony on diskette at the conclusion of the proceeding.
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<PAGE>
. Search and Retrieval Programs. Through the use of computers, court
reporters can search, store, index and manage transcripts and other
documents. In particular, a search through a transcript for a particular
reference in the text can be accomplished quickly.
. Compressed Transcripts. Compressed transcripts contain an index listing
all words in the transcript as well as the frequency and location of the
words, thereby simplifying the summarizing of transcripts. This technique
also reduces transcript bulk by organizing the text in block and columns.
. Video Services. Video services include the taping of depositions and
other testimony on videotape while the court reporter simultaneously
transcribes the testimony on a CAT system. Videotaped testimony is
sometimes used in legal proceedings when a witness is unable to appear in
person at trial or when capturing the demeanor of a witness is important.
The Company believes that voice recognition technologies currently do not
represent a practicable alternative to the Company's court reporting services
because of the extremely high accuracy required in the transcription of legal
proceedings, the difficulties associated with the electronic recognition of
multiple voices, variances in dialect and regional accents and the higher cost
of the application of voice recognition technology.
Certified Record Retrieval. The parties to legal proceedings frequently use
certified record retrieval services. Certified record retrieval services are
labor-intensive and involve the preparation, handling, tracking and delivery
of large numbers of written documents. A significant portion of the record
retrieval business involves medical records acquired on behalf of insurance
companies and their counsel. The Company's record retrieval services include
the preparation and delivery of written deposition notices and subpoenas, the
monitoring of the recipient's response and the coordination of document
retrieval and production for litigation or other legal proceedings.
The Company has developed customized computer software to link record
retrieval directly to law firms. This software permits instant communication
and promotes efficient litigation management. The Company anticipates that
certified document retrieval will increasingly be conducted electronically,
with deposition notices and subpoenas being transmitted electronically to
document custodians and witnesses, and responses similarly returned
electronically.
Legal Placement and Staffing. The Company provides clients with qualified
permanent and temporary attorneys through a team of 11 recruiters located in
six metropolitan markets. The Company believes it is able to attract clients
based on the reputation and relationships of its recruiting personnel, its
emphasis on client service and its extensive legal staffing databases, which
allow it to match qualified personnel with its clients' needs. The Company's
databases include more than 50,000 attorneys and include individuals with
practices encompassing a broad range of legal specialties. The Company's
permanent search activities consist primarily of the recruitment and placement
of attorneys on a permanent basis with law firms and corporate legal
departments. The Company also has been engaged from time to time on
assignments to establish entire departments or offices. The Company is engaged
and paid by the hiring firm or corporation on either an exclusive or non-
exclusive basis pursuant to arrangements that may include a non-refundable
retainer paid to the Company or entitle the Company to a fee only upon the
successful placement of a candidate with the client.
Law firms and corporate legal departments are increasingly using temporary
legal personnel to enable them to respond more effectively to fluctuations in
work load. In response to this trend, the Company recently has begun to expand
its services beyond permanent placement services and supplies attorneys to
clients on a temporary basis. Temporary attorney assignments may range from
one day to more than a year and may involve one attorney or a team composed of
numerous lawyers. The Company does not maintain malpractice insurance to cover
the performance of services by its temporary attorneys. Instead, the Company
requests that clients agree to include temporary attorneys under their
policies and to indemnify the Company from losses associated with the
provision of legal services by temporary attorneys. In addition, the Company
believes that malpractice insurance coverage maintained by its clients
typically includes coverage for temporary attorneys who are supervised by
employees of clients.
35
<PAGE>
Other Ancillary Services. The Company also offers its clients transcription,
closed captioning, translation and document management services, either
directly or through relationships or alliances with other companies. Document
management services include the electronic recording, storage, coding,
indexing and automated retrieval of documents, as well as database management
services. The Company markets these services to legal support applications.
CLIENT RELATIONSHIPS
The Company's client base is composed primarily of over 9,000 law firms,
insurance providers and corporations. The Company has a broad customer base,
and no customer of the Company accounted for more than 5% of the Company's pro
forma revenues for 1996 or for the nine months ended September 30, 1997.
Clients typically engage the Company on a case-by-case basis, although the
Company intends to market its services increasingly to general counsels,
regional or national litigation managers, or other corporate officers in an
effort to persuade such persons to retain the Company on an exclusive or
"preferred provider" basis. The Company also works closely with its clients to
identify cost-saving opportunities and to develop solutions to the client's
legal support needs.
SALES AND MARKETING
The Company markets its services through management and sales personnel
located in 40 offices. Because the Company derives a majority of its revenues
from local or regional accounts, the managers of the Company's individual
offices are primarily responsible for sales and marketing in their respective
markets. These managers seek to identify leads, qualify prospects and close
sales. The Company obtains new clients in local markets primarily through
direct sales, client referrals and a variety of local media, including direct
mail, Yellow Pages and trade publications. In response to the trend among
insurance providers and major corporations to centralize their purchasing
decisions and to engage legal support and staffing services on a regional or
national basis, the Company also has established a national sales force
consisting of six salespersons. These national sales personnel focus on
national accounts and seek to have the Company designated as the exclusive or
preferred provider of legal support and staffing services. Company operating
personnel also participate in marketing efforts by providing advice regarding
the Company's operational capabilities. Because the Company offers a variety
of services and is seeking to establish national market coverage, sales and
operating personnel also seek to capitalize on cross-selling opportunities.
The Company is developing a marketing and advertising program to establish a
national brand identification, while preserving the value of the established
trade names and customer relationships of the acquired companies. The
Company's logo and identifying marks will be featured in promotional materials
of the Company, in a manner designed not to detract from the local recognition
of an acquired business.
COMPETITION
The market for legal support and staffing services is highly competitive.
The Company competes with a large number of local and regional court reporting
and certified record retrieval companies, as well as with permanent and
temporary legal staffing companies, including national temporary staffing
firms. A significant source of competition is also the in-house provision of
legal support and staffing services by law firms, insurance providers and
major corporations. There can be no assurance that these businesses will
continue to increase their outsourcing of legal support and staffing services
needs or that such businesses will not bring in-house services that they
currently outsource. Certain of the Company's competitors have substantially
greater resources and operate in broader geographic areas than the Company.
Many larger clients retain multiple legal support and placement and staffing
service providers, which exposes the Company to continuous competition. The
Company competes primarily on the basis of the quality, breadth and timeliness
of service, geographic coverage and price.
The Company believes that further consolidation among legal support and
staffing services providers will continue during the next few years and that
there will be significant competition for attractive acquisition
36
<PAGE>
candidates. This competition could lead to higher prices being paid for
businesses. The Company believes that it will have certain advantages in
completing acquisitions, including: (i) management's personal relationships
with existing legal support and staffing companies; (ii) its decentralized,
entrepreneurial management strategy; (iii) its greater size and scope of
services; and (iv) its visibility and resources as a public company. However,
there can be no assurance that the Company's acquisition program will be
successful or that the Company will be able to compete effectively for
acquisitions.
INDEPENDENT CONTRACTORS
The Company provides court reporting services through the use of independent
contractors who are not employees of the Company. The Company does not pay
federal or state employment taxes or withhold income taxes with respect to
these independent contractors or include such persons in the Company's
employee benefit plans. Independent court reporters are responsible for owning
and operating their court reporting equipment. The use of independent
contractors as court reporters is widespread industry practice and allows the
Company to control costs. In the event the Company were required to treat
these court reporters as its employees, the Company could become responsible
for the taxes required to be paid or withheld and could incur additional costs
associated with employee benefits and other employee costs on both a current
and a retroactive basis.
EMPLOYEES
The Company currently employs approximately 280 persons and believes that
its relationships with employees are good.
FACILITIES
The Company maintains 40 leased office locations in seven states and the
District of Columbia. The initial terms of most of the Company's leases range
from one to five years and do not contain renewal terms. The Company's leases
generally specify a fixed annual rent with fixed increases, or increases based
on changes in the Consumer Price Index, at various intervals during the lease
term. Generally, the leases are net leases which require the Company to pay
all or a portion of the cost of insurance, maintenance and utilities. The
Company believes that these facilities are adequate to serve its current level
of operations. If additional facilities are required, the Company believes
that suitable additional or alternative space will be available as needed on
commercially reasonable terms. Substantially all of the leasehold interests
and personal property of the Company are subject to a lien under its Bank
Credit Agreement. See "Certain Transactions."
REGULATION
Court reporters are subject to significant regulation under state licensing
programs. The conduct of court reporters is also subject to ethical and other
restrictions imposed by state laws and regulations. While these regulations
are not directly applicable to the Company, they affect the Company's court
reporting business. In addition, attorneys are subject to significant
regulation by committees on legal ethics and professional responsibility of
the various state and national bar associations, who from time to time,
examine and issue opinions regarding attorney services, including the use of
temporary attorneys through a placement agency. Changes in these laws and
regulations, particularly in California, New York, Florida, Pennsylvania or
Texas, the states from which the Company derives most of its revenues, could
have a material effect on the Company, its business, operations and
profitability.
LEGAL PROCEEDINGS
The Company is involved in legal proceedings from time to time in the
ordinary course of its business. Management believes that no pending legal
proceeding will have a material adverse effect on the financial condition or
results of operations of the Company.
37
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the executive
officers and directors of the Company and certain persons who will become
directors or executive officers upon completion of the Offering:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- ------------------------------------------------
<S> <C> <C>
Richard O. Looney.............. 40 Chairman of the Board, President and Chief
Executive Officer
David P. Tusa.................. 37 Executive Vice President and Chief Financial
Officer
Tony L. Maddocks............... 40 Vice President, Sales and Marketing
James M. Wilson................ 48 Vice President, Legal Staffing
Scott R. Creasman.............. 32 Vice President and Corporate Controller
Michael A. Klein............... 52 Director; President--Klein Bury
Fentress Bracewell............. 76 Director
Robert J. Cresci............... 53 Director
G. Kent Kahle.................. 46 Director
Ronald C. Lassiter............. 65 Director
</TABLE>
Richard O. Looney has served as Chairman of the Board, President and Chief
Executive Officer of the Company since January 1997. Mr. Looney founded Looney
& Company in 1988 and served as its President until October 1997. Mr. Looney
is an active member of the National Court Reporters Association and the Texas
Court Reporters Association.
David P. Tusa joined the Company in November 1997 as Executive Vice
President and Chief Financial Officer. From August 1994 until August 1997, Mr.
Tusa served as Senior Vice President of Finance and Administration of Serv-
Tech, Inc., a publicly held specialty provider of technology driven industrial
maintenance services. From 1990 until 1994, Mr. Tusa was with CRSS, Inc., a
publicly held diversified engineering and construction services firm, most
recently as Corporate Controller.
Tony L. Maddocks joined the Company in August 1997 as Vice President, Sales
and Marketing. From June 1993 until August 1997, Mr. Maddocks served as
President and Chief Executive Officer of Legal Enterprise, a certified record
retrieval company. The Company purchased substantially all of the assets of
Legal Enterprise in August 1997. From 1981 until June 1993, Mr. Maddocks
served as Vice President of Sales and Marketing of Compex, Inc., a document
management and record retrieval firm.
James M. Wilson joined the Company in September 1997 as Vice President,
Legal Staffing. Mr. Wilson has been directly involved in the attorney search
and consulting industry since 1986. In 1996, Mr. Wilson formed Commander
Wilson, Inc. Mr. Wilson has served on the Board of Directors of the National
Association of Legal Search Consultants, as well as serving as the
organization's Ethics Committee Chairman. In May 1996, Mr. Wilson filed a
voluntary petition for Chapter XIII bankruptcy relief following the initiation
of a lawsuit filed by a former independent contractor engaged by Commander
Wilson. Mr. Wilson has submitted a Chapter XIII plan which has not yet been
confirmed by the presiding bankruptcy court. Commander Wilson will sell all of
its assets to the Company concurrently with the closing of the Offering, and
such sale has been approved by the bankruptcy court.
Scott R. Creasman joined the Company in November 1997 as Vice President and
Corporate Controller. From October 1996 until August 1997, Mr. Creasman served
as Controller of Brink's Home Security, Inc., a national provider of
residential security services. From 1990 until 1996, Mr. Creasman was with
Texas Eastern Products Pipeline Company, the operator of a publicly held
petroleum products pipeline company, most recently as Controller.
Michael A. Klein has been a director of the Company since January 1997. Mr.
Klein is the founder and President of Klein Bury, the Company's Florida-based
subsidiary, and has been directly involved in the court reporting industry for
over twenty-nine years. The Company purchased all of the capital stock of
Klein Bury in January 1997.
38
<PAGE>
Fentress Bracewell has agreed to serve as a director of the Company
effective upon the closing of the Offering. Mr. Bracewell is a founder of and
Senior Counsel to the law firm of Bracewell & Patterson, L.L.P. He also serves
as the Chairman of the Board of Directors of First Investors Financial
Services, Inc., an automobile finance company and is a member of the Board of
Trustees of the Institute of International Education. Mr. Bracewell served as
the Chairman of the Port of Houston Authority from 1970 to 1985.
Robert J. Cresci has served as a director of the Company since January 1997.
Since September 1990, Mr. Cresci has been a Managing Partner of Pecks
Management Partners Ltd., an investment firm. Mr. Cresci currently serves on
the boards of Bridgeport Machines, Inc., EIS International, Inc., Sepracor,
Inc., Garnet Resources Corporation, HarCor Energy, Inc., Meris Laboratories,
Inc., Westbrae Natural, Inc. Arcadia Financial, Ltd., Hitox, Inc. Film Roman,
Inc., Educational Medical, Inc., Source Media, Inc. and NetPower, Inc.
G. Kent Kahle has served as a director of the Company since its formation.
Mr. Kahle has been a Managing Director of GulfStar since 1990. Prior to
joining GulfStar he was a Senior Vice President and Director of Rotan Mosle,
Inc., a subsidiary of PaineWebber Inc. Mr. Kahle currently serves on the board
of Castle Dental Centers, Inc.
Mr. Ronald C. Lassiter has agreed to serve as a director of the Company
effective upon the closing of the Offering. Since January 1997, Mr. Lassiter
has served as the Chairman and Chief Executive Officer of Daniel Industries, a
manufacturer of fluid measurement and flow control products and services for
the oil and gas industry. From October 1992 until June 1997, Mr. Lassiter
served as Chairman and Chief Executive Officer of Zapata Protein, Inc. Before
joining Zapata Protein, Inc., Mr. Lassiter served as Chairman and Chief
Executive Officer of Zapata Corporation. Mr. Lassiter also serves on the Board
of Directors of Zapata Corporation.
See "Certain Transactions" for a description of the terms of transactions or
other relationships between the Company and certain of its officers and
directors.
BOARD OF DIRECTORS
Directors serve for one-year terms and are elected annually by the Company's
shareholders. Pursuant to the terms of an agreement entered into in connection
with the Company's acquisition of all of the capital stock of Klein Bury, as
long as the Company is indebted to Mr. Klein under the $1.4 million
Subordinated Promissory Note issued in connection with such acquisition, Mr.
Klein is entitled to serve as a director of the Company. Mr. Cresci serves as
a director of the Company pursuant to the terms of the Securities Purchase
Agreement between the Company and the purchasers of the Senior Subordinated
Notes and the Series A Preferred Stock. The Securities Purchase Agreement will
terminate immediately prior to the completion of the Offering.
The Board of Directors has established two standing committees, the Audit
Committee and the Compensation Committee. Pursuant to resolutions of the
Board, these committees have the following responsibilities and authority.
Audit Committee. The Audit Committee has the responsibility, among other
things, to: (i) recommend the selection of the Company's independent public
accountants; (ii) review and approve the scope of the independent public
accountants' audit activity and extent of non-audit services; (iii) review
with management and the Company's independent public accountants the adequacy
of the Company's basic accounting system and the effectiveness of the
Company's internal audit plan and activities; (iv) review with management and
the independent public accountants the Company's financial statements and
exercise general oversight of the Company's financial reporting process; and
(v) review litigation and other legal matters that may affect the Company's
financial condition. The Audit Committee is composed of Messrs. Kahle (Chair)
and Cresci.
Compensation Committee. The Compensation Committee has the responsibility,
among other things, to: (i) recommend to the Board the salary rates of
officers of the Company and its subsidiaries; (ii) examine periodically the
compensation structure of the Company; and (iii) supervise the welfare and
pension plans and compensation
39
<PAGE>
plans of the Company. The Compensation Committee is composed of all of the
non-employee directors, currently Messrs. Kahle (Chair) and Cresci.
The Company's Board also may establish other committees.
DIRECTOR COMPENSATION
Prior to the date of this Prospectus, directors of the Company did not
receive compensation for their services as directors or for attending board
meetings. Upon completion of the Offering, non-employee directors of the
Company will receive options to purchase 25,000 shares of Common Stock at the
initial public offering price. In addition, each non-employee director will
receive an annual fee of $6,000, a fee of $1,000 for each meeting of the Board
attended and $500 for each meeting of a Board committee attended. Each
director also will be reimbursed for travel expenses incurred for each non-
telephonic meeting of the Board or any committee thereof attended.
EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS
Prior to January 1997, the Company did not conduct any operations, other
than activities related to the acquisition of Looney and Klein Bury, and did
not pay any compensation. The Company anticipates that during 1997 its most
highly compensated executive officers (the "Named Executive Officers") and
their annualized base salaries will be: Richard O. Looney, $250,000; David P.
Tusa, $170,000; Tony L. Maddocks, $162,500; James M. Wilson, $150,000; Michael
A. Klein, $175,000; and Scott R. Creasman, $100,000.
The Company and Mr. Looney have entered into an employment agreement that
provides for an annual base salary of $250,000 and a semi-annual cash bonus
based on a percentage of the annual pre-tax profits of the Company, subject to
an annual maximum of $100,000. Mr. Looney's employment agreement expires on
January 17, 2000. In the event his employment is terminated without cause, Mr.
Looney's annual salary and bonus opportunity will continue until the earlier
to occur of one year from the date of such termination or January 17, 2000.
Mr. Looney has also agreed not to compete with the Company in a court
reporting or litigation support service business within 50 miles of an office
served by the Company until the later to occur of January 17, 2002, or three
years after his employment terminates.
The Company and Mr. Maddocks have entered into an employment agreement which
provides for an annual base salary of $162,500 and an annual cash bonus not
exceeding $60,000, based on annual new national account sales of the Company.
Mr. Maddocks' employment agreement expires on August 29, 2000. In the event
his employment is terminated without cause, Mr. Maddocks' annual salary and
bonus opportunity will continue until the earlier to occur of one year from
the date of termination or August 29, 2000 or Mr. Maddocks' death. Mr.
Maddocks has agreed not to compete with the Company until the last to occur of
August 29, 2002, or three years after his employment under the agreement
terminates.
Mr. Wilson has entered into an employment agreement with the Company which
provides for an annual base salary of $150,000 and, commencing in 1998, an
annual cash bonus equal to 10% of the amount by which the annual adjusted net
profit (as defined in the agreement) derived from legal placement and staffing
services exceeds the adjusted net profit in the preceding year. In addition,
Mr. Wilson is entitled to receive: (i) commissions based upon the revenues
generated from national account sales by Mr. Wilson, not to exceed 3% of such
sales and (ii) 10% of any finder's fees or commissions payable by the Company
to a third party in connection with any acquisition in which Mr. Wilson
provides assistance. The agreement expires September 25, 2000. In the event
his employment is terminated without cause, Mr. Wilson's annual salary and
bonus opportunity will continue until the earlier to occur of one year from
the date of termination or the expiration of the term of the agreement. In
addition, Mr. Wilson has agreed not to compete with the Company until the
later of March 25, 2002, three years after termination of his employment or
three years after expiration of the agreement.
Mr. Michael Klein has entered into an employment agreement with the Company
which provides for an annual base salary of $175,000 and entitles Mr. Klein to
a percentage of certain revenues derived from specified
40
<PAGE>
clients, a percentage of court reporting fees billed by Mr. Klein and a cash
bonus based on the increase in the annual net profits of Klein Bury. Under
such bonus, Mr. Klein will receive 10% of the amount, if any, by which the
annual net profits of Klein Bury exceed the prior year's net profits. In
addition, Mr. Klein is entitled to receive (i) 85% of the amount billed on any
eight depositions per month transcribed by him individually in his capacity as
a court reporter and (ii) a percentage of any non Florida-based revenue
primarily attributable to Mr. Klein's promotional efforts. The agreement
expires on January 17, 2000. In the event his employment is terminated without
cause, Mr. Klein's annual salary, commissions and bonus opportunity will
continue until the earlier to occur of the year from the date of termination
or January 17, 2000. In addition, Mr. Klein has agreed not to compete with the
Company within 50 miles of any office location operated by the Company until
the last to occur of January 17, 2002, or three years after his employment
under the agreement terminates.
STOCK OPTION PLANS
1997 Stock Incentive Plan
The Company's 1997 Stock Incentive Plan provides for the granting to
eligible employees or directors of the Company and its subsidiaries of options
to purchase shares of Common Stock, which may be incentive stock options
within the meaning of Section 422(b) of the Internal Revenue Code or non-
qualified options. The 1997 Stock Incentive Plan is administered by the
Compensation Committee of the Board of Directors, which designates option
recipients, the number and type of options granted and their terms and
conditions, including the exercise price and vesting schedule. A total of
750,000 shares of Common Stock have been reserved for issuance pursuant to
options granted under the 1997 Stock Incentive Plan. Options to purchase
158,915 shares of Common Stock had been granted as of September 30, 1997, with
exercise prices ranging from $6.41 to $10.20, and options to purchase an
additional 565,109 shares of Common Stock will be granted upon completion of
the Offering under the 1997 Stock Incentive Plan with exercise prices equal to
the initial public offering price set forth on the cover of this Prospectus.
All options granted under the 1997 Stock Incentive Plan vest 20% annually, are
fully vested on the fifth anniversary of the date of grant and expire 10 years
after the date of grant.
No options were granted pursuant to the Company's 1997 Stock Incentive Plan
in 1996. The Board of Directors and shareholders have approved the 1997 Stock
Incentive Plan. The Company has granted to Messrs. Looney, Tusa, Wilson and
Creasman options to purchase 200,000, 150,000, 25,000 and 40,000 shares of
Common Stock, respectively, at an exercise price per share equal to the
initial public offering price set forth on the cover of this Prospectus.
Messrs. Looney, Tusa, Wilson and Creasman hold no other options to purchase
Common Stock. The Company has not granted options to any other Named Executive
Officer.
Stock Option Plan for Non-Employee Directors
The Company has adopted the U.S. Legal Support, Inc. Stock Option Plan for
Non-Employee Directors (the "Directors' Stock Option Plan"). A total of
150,000 shares of Common Stock have been reserved for issuance under the
Directors' Stock Option Plan, which provides for the grant of options to
purchase 25,000 shares of Common Stock with an exercise price equal to the
fair market value on the date of grant, to each incumbent director and to each
person who becomes a director concurrently with his or her first election to
the Board. Options granted under the Directors' Stock Option Plan vest 20%
annually and are fully vested on the fifth anniversary of the date of grant.
Upon completion of the Offering, each non-employee director of the Company
will be awarded options to purchase 25,000 shares of Common Stock.
LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
Pursuant to the Company's Articles of Incorporation, as amended, and under
Texas law, the directors of the Company are not liable to the Company or its
shareholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or
omissions not in good faith which involve intentional misconduct or a knowing
violation of law, for unlawful dividend payments or stock repurchases or any
transaction in which a director has derived an improper personal benefit. The
Company intends to maintain liability insurance for the benefit of its
directors and its officers.
41
<PAGE>
CERTAIN TRANSACTIONS
In connection with the initial capitalization of the Company on October 2,
1996, the Company issued 843,840 shares of Common Stock to Mr. Looney, the
Chairman of the Board, President and Chief Executive Officer of the Company,
in exchange for services rendered to the Company by Mr. Looney, which were
valued by the Company at $8,438.40, the aggregate par value of the shares
issued. In January 1997, the Company and Looney entered into a business
combination in which the Company acquired the capital stock of Looney for
consideration consisting of $4,087,834 in cash and 2,046,667 shares of Series
B Preferred Stock.
On January 17, 1997, the Company acquired all of the outstanding capital
stock of Klein Bury from Mr. Klein who became a director of the Company upon
consummation of the sale. The purchase price consisted of: (i) $3,850,397 in
cash; (ii) 170,600 shares of Common Stock issued to Mr. Klein; (iii) a
Subordinated Promissory Note issued by a subsidiary of the Company in the
adjusted principal amount of $1,424,113, which bears interest at the rate of
10% annually and is due on February 1, 2002; and (iv) options to purchase
40,000 shares of Common Stock granted to various employees and independent
contractors of Klein Bury. At the option of Mr. Klein, the payment of the
principal and all accrued interest on the note may be accelerated at any time
after the Offering. The Company expects to repay the principal and accrued
interest on the note with a portion of the proceeds of the Offering. In
addition, Mr. Klein may receive contingent consideration equal to 50% of the
accounts receivable of Klein Bury that were 120 days past due as of January
16, 1997 but which are collected by the Company. Such contingent consideration
is estimated by the Company to be $500,000, the contractual maximum. In
addition, since 1993, Klein Bury has leased its offices in Fort Lauderdale,
Florida from Mr. Klein, his wife and Richard Bury. The lease expires on March
31, 1998, and provides for annual rental of approximately $50,400. The Company
believes that the terms of the lease are no less favorable to the Company than
would be available under a similar lease entered into with an unaffiliated
third party.
On January 17, 1997, the Company sold $9,000,000 principal amount of Senior
Subordinated Notes and 1,000,000 shares of Series A Preferred Stock to three
investors for an aggregate purchase price of $10,000,000. The Company used the
proceeds from the sale to finance a portion of the purchase price for the
acquisition of Looney and Klein Bury. Mr. Robert Cresci, a director of the
Company, is a Managing Partner of Pecks Management Partners Ltd., which
provides investment advisory services to each of the investors. Pecks received
a $35,000 structuring fee paid by the Company in connection with the
transaction. The Senior Subordinated Notes bear interest at an annual interest
rate of 12% and will be due and payable on January 27, 2004, subject to
mandatory prepayment two days following the completion of the Offering. The
Company intends to repay the Senior Subordinated Notes with a portion of the
proceeds of the Offering. The Series A Convertible Preferred Stock will be
converted into a total of 1,560,000 shares of Common Stock upon completion of
the Offering. The Company and the investors also entered into a Registration
Rights Agreement pursuant to which the Company has agreed in certain
circumstances to register the shares of Common Stock issued on conversion of
the Series A Preferred Stock. See Note 8 of Notes to Consolidated Financial
Statements of U.S. Legal Support, Inc. and "Shares Eligible For Future Sale--
Registration Rights."
On August 29, 1997, the Company acquired substantially all of the assets of
Legal Enterprise. Mr. Maddocks, who serves as Vice President, Sales and
Marketing of the Company, was the President and a 50% shareholder of Legal
Enterprise. The purchase price consisted of: (i) $1,200,000 in cash,
$1,189,169 as adjusted; (ii) a Subordinated Promissory Note in the principal
amount of $319,340, $316,458, as adjusted; (iii) a Convertible Subordinated
Promissory Note in the principal amount of $821,160, $813,748, as adjusted;
and (iv) options to purchase 7,000 shares of Common Stock to an employee of
Legal Enterprise. The promissory notes bear interest at a rate of 6.375% per
annum, are payable on August 31, 2005 and were issued by a subsidiary of the
Company. At the option of Legal Enterprise, the payment of the principal and
all interest accrued on the Subordinated Promissory Note may be accelerated at
any time after the Offering. The Company expects to repay the principal and
accrued interest on the Subordinated Promissory Note with a portion of the
proceeds of the Offering. Concurrently with the Offering, the Convertible
Subordinated Promissory Note will be converted into 95,735 shares of Common
Stock at a conversion rate of $8.50 per share of Common Stock. Any accrued but
unpaid interest on such note will be paid to Legal Enterprise, in cash, upon
the completion of the Offering. In addition, Legal Enterprise may receive
additional consideration (the "Additional Consideration") based on an amount
42
<PAGE>
equal to the excess of six times earnings before taxes, depreciation and
amortization of the acquired business over the initial purchase price, subject
to adjustment on February 28, 2000. Sixty-five percent of the Additional
Consideration is payable in cash and thirty-five percent is payable in shares
of Common Stock valued at the average trading price per share of Common Stock
over the first ten business days after the end of each period in which
Additional Consideration is calculated. Interim payments of the Additional
Consideration are to be made every six months until the aggregate amount of
such payments is equal to $934,000. Thereafter, no additional payments will be
made until April 15, 2000, at which time any Additional Consideration owed is
required to be paid to Legal Enterprise.
On September 4, 1997, the Company acquired substantially all of the non-cash
assets of Amicus One, a holder of more than 5% of the currently outstanding
Common Stock. The purchase price consisted of: (i) $1.9 million in cash; (ii)
116,471 shares of Common Stock; and (iii) a Subordinated Promissory Note issued
by a subsidiary of the Company in the principal amount of $560,000, which bears
interest at the rate of 6% annually, and is due on July 1, 2002. The Company
expects to repay the principal and accrued interest on the note with a portion
of the proceeds of the Offering. At the option of Amicus One, the payment of
the principal and all accrued interest on the note may be accelerated
concurrently with the Offering.
On September 17, 1997, the Company acquired all of the outstanding capital
stock of Burton House, Inc, doing business as Ziskind Greene, from Gregg
Ziskind and Susan Ziskind. The purchase price consisted of $1.4 million in cash
and 158,824 shares of Common Stock. In addition, the Ziskinds may receive
additional consideration beginning on January 1, 1998, in the amount of 20% of
the amount by which earnings before taxes, depreciation and amortization of
Burton House, Inc. exceeds threshhold amounts ranging from $150,000 for the
period from the date of the acquisition through December 31, 1997, to $750,000
for the year ended December 31, 2000.
The Company has entered into Registration Rights Agreements with Messrs.
Looney, Maddocks, Klein, Ziskind and Susan Ziskind and Amicus One, pursuant to
which the Company has agreed to include shares of Common Stock held by them in
any registration of securities effected by the Company, subject to certain
customary provisions restricting the number of shares to be included.
The Company and James M. Wilson entered into an Asset Purchase Agreement
dated September 25, 1997, and on that date Mr. Wilson was appointed Vice
President, Legal Staffing of the Company. Under the Asset Purchase Agreement,
the Company will acquire from Mr. Wilson the assets of Commander Wilson, a sole
proprietorship, in exchange for approximately $1.4 million in cash and 56,250
shares of Common Stock, valued at the initial public offering price. The
Company and Mr. Wilson entered into a letter agreement dated May 7, 1997,
pursuant to which Mr. Wilson assisted the Company in identifying acquisition
candidates in the legal placement and staffing industry. Pursuant to this
agreement, the Company paid Mr. Wilson a non-refundable retainer of $50,000 and
reimbursed him for certain expenses. The letter agreement will be terminated
upon completion of the Company's acquisition of Commander Wilson. See Note 6 of
Notes to Financial Statements of Commander Wilson.
In October 1996, the Company issued 150,000 shares of its Common Stock to
GulfStar Investments, Ltd., an affiliated partnership of Gulfstar, in exchange
for investment banking services rendered to the Company by GulfStar. GulfStar
has provided merger and acquisition advisory services to the Company since its
inception. Mr. Kahle, a director of the Company, is a Managing Director of
GulfStar. In addition, the Company paid investment banking fees aggregating
$475,000 to GulfStar for services in connection with the placement of the
Senior Subordinated Notes and Series A Convertible Preferred Stock, negotiation
of the Company's Bank Credit Agreement, and the acquisitions of Looney and
Klein Bury in January 1997. Pursuant to the terms of a letter agreement dated
April 24, 1997 (the "Letter Agreement") between GulfStar and the Company,
GulfStar has agreed to provide negotiation and other financial advisory
services to the Company in connection with the Company's evaluation of
acquisitions and will be paid advisory fees equal to 1.0% of the total purchase
price for each acquisition, as well as reimbursement of out-of-pocket expenses.
The fees payable to GulfStar under the Letter Agreement in connection with the
Completed Acquisitions and the Pending Acquisitions will be $480,000, of which
$33,000 has been paid.
NationsBank of Texas, N.A. has agreed to act as arranger, syndication agent
and a lender in connection with the Company's $40.0 million credit facility.
43
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of November 30, 1997, certain information
with respect to the ownership of shares of Common Stock, before and after the
Offering and the Pending Acquisitions, by: (i) each person who is or is
expected to be the beneficial owner of 5% or more of the outstanding shares of
Common Stock upon consummation of the Offering; (ii) each person who is or is
expected to become a director upon completion of the Offering; (iii) each Named
Executive Officer; (iv) the Selling Shareholder; and (v) all officers and
directors of the Company as a group. All persons listed have an address in care
of the Company's principal executive offices at 1001 Fannin Street, Suite 650,
Houston, Texas 77002, and have sole voting and investment power with respect to
shares beneficially owned by them, unless otherwise noted. Information set
forth in the table with respect to beneficial ownership of the Company's equity
securities has been provided to the Company by such holders.
<TABLE>
<CAPTION>
PERCENTAGE OWNED
-----------------
BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OFFERING OFFERING
- -------------------------------------------------- --------- -------- --------
<S> <C> <C> <C>
Richard O. Looney (1)............................. 1,027,233 53.6% 13.1%
David P. Tusa (2)................................. -- -- --
Tony Maddocks (3)................................. 101,975 5.6 1.3
James M. Wilson (4)............................... -- -- *
Scott R. Creasman (5)............................. -- -- --
Michael A. Klein.................................. 170,600 9.8 2.2
Fentress Bracewell (6)............................ -- -- --
Robert J. Cresci (7).............................. 1,560,000 47.3 20.0
G. Kent Kahle (8)................................. 150,000 8.6 1.9
Ronald C. Lassiter (6)............................ -- -- --
Delaware State Employees' Retirement Fund (9)..... 1,045,200 37.6 13.4
Declaration of Trust for Defined Benefit Plan of
ICI American Holdings Inc. (10)................. 304,200 14.9 3.9
Declaration of Trust for Defined Benefit Plan of
Zeneca Holdings Inc. (11)....................... 210,600 10.8 2.7
GulfStar Investments, Ltd. (12).................. 150,000 8.6 1.9
Gregg M. and Susan L. Ziskind (13)................ 158,824 9.2 2.0
Legal Enterprise, Inc. (14)...................... 95,735 5.2 1.2
Amicus One (15)................................... 116,471 6.7 1.5
All executive officers and directors as a group
(10 persons) (16)................................ 3,009,808 80.8 38.5
</TABLE>
- --------
* Beneficially owns less than 1% of the outstanding shares of Common Stock.
(1) Includes (a) 183,393 shares of Common Stock issuable upon conversion of
the Series B Convertible Preferred Stock; (b) 90,000 shares of Common
Stock held by trusts for the benefit of Mr. Looney's children; and (c)
10,000 shares subject to a three-year option granted by Mr. Looney to an
officer of Gulfstar. Excludes 200,000 shares of Common Stock subject to
unvested options granted pursuant to the Company's 1997 Stock Incentive
Plan. Mr. Looney has granted the Underwriters a 30-day option to purchase
up to 100,000 shares of Common Stock solely to cover any over-allotments.
If this option is exercised in full, Mr. Looney would hold 927,233 shares
of Common Stock, representing 12.0% of the outstanding Common Stock after
the Offering.
(2) Excludes 150,000 shares of Common Stock subject to unvested options
granted pursuant to the Company's 1997 Stock Incentive Plan.
(3) Includes 95,735 shares of Common Stock issuable upon conversion of a
Convertible Subordinated Promissory Note held by Legal Enterprise, a
corporation of which Mr. Maddocks is President and a 50% shareholder.
44
<PAGE>
(4) Mr. Wilson owns no shares directly. Excludes 56,250 shares of Common
Stock issuable as a portion of the purchase price in a Pending
Acquisition and 25,000 shares of Common Stock subject to unvested options
granted pursuant to the Company 1997 Stock Incentive Plan to be awarded
upon completion of the Offering.
(5) Excludes 40,000 shares of Common Stock subject to unvested options
granted pursuant to the Company's 1997 Stock Incentive Plan.
(6) Excludes 25,000 shares of Common Stock subject to unvested options
granted pursuant to the Directors' Stock Option Plan to be awarded upon
completion of the Offering.
(7) Mr. Cresci owns no shares directly. Includes 1,560,000 shares issuable
upon conversion of an aggregate of 1,000,000 shares of Series A Preferred
Stock, which is held by three pension or defined benefit plans for whom
Pecks Management Partners, Ltd. provides investment management services.
Mr. Cresci is a Managing Director of Pecks Management Partners, Ltd. and
therefore may be deemed to be a beneficial owner of such shares. Mr.
Cresci disclaims beneficial ownership of all such shares. Excludes 25,000
shares of Common Stock subject to unvested options granted pursuant to
the Directors' Stock Option Plan to be awarded upon completion of the
Offering. The shareholders' addresses of record is c/o Pecks Management
Partners Ltd., One Rockefeller Plaza, New York, New York 10020.
(8) Mr. Kahle owns no shares directly. Includes 150,000 shares held by
GulfStar Investments, Ltd., an affiliate of GulfStar. Mr. Kahle serves as
a Managing Director of GulfStar. Excludes 25,000 shares of Common Stock
subject to unvested options to be awarded upon completion of the Offering
pursuant to the Company's Directors' Stock Option Plan.
(9) Represents shares of Common Stock issuable upon conversion of 670,000
shares of Series A Preferred Stock. The shareholder's address of record
is c/o Pecks Management Partners Ltd., One Rockefeller Plaza, New York,
New York 10020.
(10) Represents shares of Common Stock issuable upon conversion of 195,000
shares of Series A Preferred Stock. The shareholder's address of record
is c/o Pecks Management Partners Ltd., One Rockefeller Plaza, New York,
New York 10020.
(11) Represents shares of Common Stock issuable upon conversion of 135,000
shares of Series A Preferred Stock. The shareholder's address of record
is c/o Pecks Management Partners Ltd., One Rockefeller Plaza, New York,
New York 10020.
(12) The shareholder's address of record is 700 Louisiana Street, Suite 3800,
Houston, Texas 77002.
(13) The shareholder's address of record is 2666 Overland Avenue, Suite 600,
Los Angeles, California 90064.
(14) Represents shares of Common Stock issuable upon conversion of a
Convertible Subordinated Promissory Note. The shareholder's address of
record is 4232-1 Las Virgenes Road, Suite 100, Calabasas, California
91302.
(15) The shareholder's address of record is 20 Vesey Street, 9th Floor, New
York, New York 10007.
(16) Excludes an aggregate of 415,000 shares of Common Stock subject to
unvested options granted pursuant to the Company's 1997 Stock Incentive
Plan and 100,000 shares subject to unvested options granted pursuant to
the Company's Directors' Option Plan.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Under the Company's Articles of Incorporation, as amended (the "Articles"),
the Company has authority to issue 110,000,000 shares of capital stock,
consisting of 10,000,000 shares of Preferred Stock, par value $1.00 per share
(the "Preferred Stock") and 100,000,000 shares of Common Stock, par value $.01
per share. As of November 15, 1997, the Company had outstanding 1,734,564
shares of Common Stock and 3,277,917 shares of Preferred Stock (1,000,000
shares of Series A Preferred Stock, 2,046,667 shares of Series B Preferred
Stock and 231,250 shares of Series C Preferred Stock). All of the outstanding
Preferred Stock will be converted into Common Stock upon completion of the
Offering or will be redeemed with the net proceeds of the Offering. See Note 8
of Notes to Consolidated Financial Statements of U.S. Legal Support, Inc. for
a description of the terms of each of the outstanding series of Preferred
Stock. Shares of Preferred Stock that are redeemed will return to authorized
shares of Preferred Stock undesignated as to series.
The following summary description of the capital stock of the Company is
intended as a summary only and is qualified in its entirety by reference to
the Articles, a copy of which has been filed as an exhibit to this
Registration Statement.
PREFERRED STOCK
The Articles authorize the issuance of the Preferred Stock, in one or more
series having designations, rights and preferences determined from time to
time by the Board of Directors. One of the effects of undesignated Preferred
Stock may be to enable the Board of Directors, without approval of holders of
Common Stock, to issue Preferred Stock with dividends, liquidation,
conversion, voting or other rights that could adversely affect the voting
power or other rights of the holders of the Common Stock. In the event of
issuance, the Preferred Stock could be used, under certain circumstances, as a
method of discouraging, delaying or preventing a change in control of the
Company. Although the Company has no present intention to issue any additional
shares of its Preferred Stock, there can be no assurance that it will not do
so in the future.
COMMON STOCK
Voting Rights. Holders of Common Stock are entitled to one vote for each
share on all matters on which shareholders generally are entitled to vote,
including elections of directors. The Articles do not provide for cumulative
voting for the election of directors; therefore, the holders of a majority of
the voting power of the total number of outstanding shares of Common Stock are
able to elect the entire Board of Directors of the Company. Holders of Common
Stock have no preemptive, subscription, redemption or conversion rights.
Dividends. Subject to the preferential rights of any outstanding Preferred
Stock created by the Board of Directors under the Articles, dividends may be
paid to holders of Common Stock when, as and if declared by the Board of
Directors out of funds legally available for such purpose. Dividends may be
paid by the Company out of "surplus" (as defined under Article 1.02 of the
Texas Business Corporation Act) or, if there is no surplus, out of net profits
for the fiscal year in which the dividends are declared and/or the preceding
fiscal year. Further, dividends may be paid out of any net profits for the
current and/or prior fiscal year, if any. The declaration and payment of
dividends on Common Stock could be restricted by the terms of any Preferred
Stock issued.
Liquidation. In the event of the dissolution or winding up of the Company,
after payment or provision for payment of debts and other liabilities of the
Company and any other series or class of the Company's securities that rank
senior to the Common Stock, the holders of Common Stock will be entitled to
share ratably in all remaining assets of the Company. All outstanding shares
of Common Stock are, and the shares of Common Stock to be sold by the Company
in this Offering will be, duly and validly issued, fully paid and
nonassessable.
The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank, Houston, Texas.
46
<PAGE>
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to Article 13 of the TBCA ("Article 13") which, with
certain exceptions, prohibits a Texas corporation from engaging in a "business
combination" (as defined in Article 13) with any shareholder who is a
beneficial owner of 20% or more of the corporation's voting power for a period
of three years after such shareholder's acquisition of a 20% ownership,
unless: (i) the board of directors of the corporation approves the transaction
or the shareholder's acquisition of shares prior to the acquisition or (ii)
two-thirds of the unaffiliated shareholders of the corporation approve the
transaction at a shareholders' meeting held no earlier than six months after
the shareholder acquires that ownership. Shares that are issuable pursuant to
options, conversion or exchange rights or other agreements are not considered
outstanding for purposes of Article 13.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
approximately 7,813,115 shares of Common Stock (8,238,115 shares if the
Underwriters' over-allotment option is exercised in full). Of these shares,
the 3,500,000 shares (4,025,000 shares if the Underwriters' over-allotment
option is exercised in full) sold in the Offering will be freely tradable in
the public market without restriction or limitation under the Securities Act,
except for any shares purchased by an "affiliate" (as defined in the
Securities Act) of the Company. The remaining 4,313,115 shares of Common Stock
held by existing shareholders of the Company are "restricted securities"
within the meaning of Rule 144 promulgated under the Securities Act of 1933,
as amended.
The Company's directors, executive officers and certain shareholders, who
hold an aggregate of 3,285,080 shares of Common Stock, have entered into lock-
up agreements with the Representatives of the Underwriters. These persons have
agreed not to offer, sell, contract to sell, grant any option with respect to,
pledge, hypothecate or otherwise dispose of, any shares of Common Stock owned
by them until the date occurring 180 days after the date of this Prospectus
without the prior written consent of the Representatives. All such shares will
become available for sale upon expiration of these lock-up agreements, subject
to compliance with Rule 144 promulgated under the Securities Act. In addition,
certain shareholders have the right to have the shares of Common Stock owned
by them registered by the Company under the Securities Act as described below.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned, for a
least one year, shares of Common Stock that have not been registered under the
Securities Act or that were acquired from an "affiliate" of the Company is
entitled to sell within any three-month period the number of shares of Common
Stock which does not exceed the greater of one percent of the number of the
then outstanding shares or the average weekly reported trading volume during
the four calendar weeks preceding the sale. Sales under Rule 144 are also
subject to certain notice requirements and to the availability of current
public information about the Company and must be made in unsolicited brokers'
transactions or to a market maker. A person (or persons whose shares are
aggregated) who is not an "affiliate" of the Company under the Securities Act
during the three months preceding a sale and who has beneficially owned such
shares for at least two years is entitled to sell such shares under Rule 144
without regard to the volume and notice provisions of such Rule. Commencing 90
days after the completion of the Offering, approximately 2,920,000
"restricted" shares of Common Stock will be eligible for resale pursuant to
Rule 144, subject to the volume, manner of sale and other limitations thereof.
The remaining "restricted" shares will become eligible for resale pursuant to
Rule 144 from time to time thereafter.
On the date of this Prospectus, the Company had outstanding options to
purchase 649,024 shares of Common Stock granted pursuant to the 1997 Stock
Incentive Plan. In addition, the Company intends to grant options to purchase
100,000 shares of Common Stock pursuant to the Company's Stock Option Plan for
Non-Employee Directors upon completion of the Offering. Options to purchase at
least an additional 150,000 shares of Common Stock are available for grant
under the 1997 Stock Incentive Plan and the Non Employee Directors Stock
Option Plan. The Company expects to file a registration statement on Form S-8
under the Securities Act to register all of the 900,000 shares of Common Stock
issuable upon exercise of options granted under the 1997 Stock Incentive Plan
and the Non Employee Directors Stock Option Plan. Accordingly, such shares
will be freely tradeable by holders who are not affiliates of the Company and,
subject to the volume and manner of sale limitations of Rule 144, by holders
who are affiliates of the Company. In addition, on the date of this
Prospectus, the Company had outstanding options to purchase 131,856 shares of
Common Stock granted in connection with the Completed Acquisitions.
Prior to this Offering, there has been no market for the Common Stock. No
predictions can be made of the effect, if any, that market sales of shares of
Common Stock or the availability of such shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of significant
amounts of Common Stock could adversely affect the prevailing market price of
Common Stock, as well as impair the ability of the Company to raise capital
through the issuance of additional equity securities.
48
<PAGE>
REGISTRATION RIGHTS
Pursuant to several Registration Rights Agreements (the "Registration Rights
Agreements"), the Company has agreed to register under the Securities Act
substantially all of the shares of Common Stock outstanding on the date of
this Prospectus (approximately 1,734,564 shares) as well as the 183,393 shares
of Common Stock issuable upon conversion of the Series B Preferred Stock, and
will enter similar agreements with respect to 609,268 shares of Common Stock
to be issued in the Pending Acquisitions. Pursuant to the Registration Rights
Agreements, shareholders and their permitted transferees have certain
"piggyback" registration rights and will be entitled, subject to certain
limitations, to include their shares of Common Stock in a registration of
shares of Common Stock by the Company under the Securities Act.
In addition, a Registration Rights Agreement with the holders of the Series
A Convertible Preferred Stock provides that following the Offering, any one or
more of such shareholders shall twice have the right to require the Company to
effect registration of all or any part of the shareholders' shares of Common
Stock under the Securities Act. In order to demand registration of the Common
Stock, the holder or holders of Common Stock requesting such registration must
own more than 50% (by number of shares) of the shares subject to the agreement
and the aggregate market value to be registered must be at least $3.0 million.
The number of shares included in any registration is subject to customary
provisions providing for a reduction in the number of shares to be registered
if in the opinion of the managing underwriter such shares would affect the
marketing or the selling price of the securities to be sold.
The Registration Rights Agreements require the Company to pay the expenses
associated with any registration other than sales discounts, commissions,
transfer taxes and amounts to be borne by underwriters or as otherwise
required by law and include customary provisions for indemnification against
liabilities arising under federal securities laws in connection with such
registration.
49
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), have severally agreed,
subject to the terms and conditions in the underwriting agreement (the
"Underwriting Agreement") by and between the Company and the Underwriters, to
purchase from the Company the number of shares of Common Stock indicated below
opposite their respective names, at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are
committed to purchase all of the shares of Common Stock, if they purchase any.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
NationsBanc Montgomery Securities, Inc..........................
Hambrecht & Quist LLC...........................................
J.C. Bradford & Co..............................................
---------
Total......................................................... 3,500,000
=========
</TABLE>
The Underwriters have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow
selected dealers a concession of not more that $ per share; and the
Underwriters may allow to selected dealers, and such dealers may reallow, a
concession of not more than $ per share to certain other dealers. After
the Offering, the public offering price and other selling terms may be changed
by the Underwriters. The Common Stock is offered subject to receipt and
acceptance by the Underwriters, and to certain other conditions, including the
right to reject orders in whole or in part.
The Company and a shareholder have granted to the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to a
maximum of 525,000 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the initial 3,500,000 shares to be
purchased by the Underwriters. To the extent that the Underwriters exercise
this option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with the Offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under
the Securities Act of 1933, as amended, or will contribute to payments the
Underwriters may be required to make in respect thereof.
Certain shareholders of the Company and the Company's executive officers and
directors have agreed that for a period of 180 days after the date of this
Prospectus they will not, without the prior written consent of NationsBanc
Montgomery Securities, Inc., offer, sell, or otherwise dispose of any shares
of Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable or exercisable for or convertible into shares of
Common Stock. The Company has also agreed not to issue, offer, sell, grant
options to purchase or otherwise dispose of any of the Company's equity
securities for a period of 180 days after the date of this Prospectus without
the prior written consent of NationsBanc Montgomery Securities, Inc., except
for: (i) the issuance of shares of Common Stock upon conversion of debt or
equity securities of the Company or any of its subsidiaries outstanding as of
the date of this Prospectus; (ii) the grant, award, issuance or sale of shares
of Common Stock or options or other rights to purchase or acquire Common Stock
pursuant to the terms of any stock option, stock bonus or other plan or
arrangement referred to in this Prospectus; or (iii) the issuance of shares of
Common Stock, Preferred Stock or any security convertible into or exchangeable
for Common Stock or Preferred Stock in connection with the acquisition of
court reporting, certified record retrieval and legal staffing and placement
businesses and related assets.
50
<PAGE>
Certain persons participating in this Offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market. Such transactions may include stabilizing bids, effecting
syndicate covering transactions or imposing penalty bids. A stabilizing bid
means the placing of any bid or effecting any purchase for the purpose of
pegging, fixing or maintaining the price of the Common Stock. A syndicate
covering transaction means the placing of any bid on behalf of the
underwriting syndicate or the effecting of any purchase to reduce a short
position created in connection with the Offering. A penalty bid means an
arrangement that permits the Underwriters to reclaim a selling concession from
a syndicate member in connection with the Offering when shares of Common Stock
sold by the syndicate member are purchased in syndicate covering transactions.
Such transactions may be effected on the Nasdaq National Market, in the over-
the-counter market, or otherwise.
The Underwriters have informed the Company that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts
over which they exercise discretionary authority in excess of 5% of the number
of shares of Common Stock offered hereby.
Prior to the Offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock has been determined by negotiations between the Company and the
Underwriters. Among the factors considered in such negotiations were the
results of operations of the businesses acquired in recent periods, the
prospects for the Company and the industry in which the Company competes, an
assessment of the Company's management, its financial condition, the prospects
for future earnings of the Company, the present state of the Company's
development, the general condition of the economy and the securities markets
at the time of the Offering and the market prices of and demand for publicly
traded common stock of comparable companies in recent periods.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for the
Company by Bracewell & Patterson, L.L.P., Houston, Texas, and for the
Underwriters by Locke Purnell Rain Harrell (A Professional Corporation),
Dallas, Texas.
EXPERTS
The financial statements and schedules of U.S. Legal Support, Inc., Looney,
Klein Bury, G&G, San Francisco Reporting, Legal Enterprise, Elaine Dine,
Ziskind Greene, Jilio, Reporting Service, Kirby Kennedy, Johnson Group, Amicus
One, Block and Commander Wilson included in this Prospectus and elsewhere in
the Registration Statement, to the extent and for the periods indicated in
their reports, have been audited by Coopers & Lybrand L.L.P., independent
accountants, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing. The report on the financial
statements of U.S. Legal Support, Inc. includes an explanatory paragraph
regarding the Company's ability to continue as a going concern.
51
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (which
term encompasses any and all amendments thereto) under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus, which is filed as
part of the Registration Statement, does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain items of which were omitted in accordance with the rules and
regulations of the Commission. Statements made in this Prospectus concerning
the contents of any contract, agreement or other document referred to are
summaries of the terms of such contract, agreement or other document and are
not necessarily complete. With respect to each such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
hereby made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. For further information with respect to the Company, reference
is hereby made to the Registration Statement and such exhibits and schedules
filed as a part thereof, which may be inspected, without charge, at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following regional
offices of the Commission: 7 World Trade Center, Suite 1300, New York, New
York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any portion of the Registration Statement may
be obtained from the Public Reference facilities of the Commission, upon
payment of the prescribed fees. The Registration Statement is also available
on the Internet at the Commission's World Wide Web site at http://www.sec.gov.
As a result of the Offering, the Company will be subject to the reporting
requirements under the Exchange Act and, in accordance therewith, will file
reports, proxy statements, information statements and other information with
the Commission. The Company intends to furnish annual reports to its
shareholders containing audited financial statements reported on by an
independent certified public accounting firm.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
U.S. LEGAL SUPPORT, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
U.S. LEGAL SUPPORT, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS:
Basis of Presentation..................................................... F-5
Unaudited Pro Forma Combined Balance Sheet as of September 30, 1997....... F-7
Notes to Unaudited Pro Forma Combined Balance Sheet....................... F-8
Unaudited Pro Forma Combined Statement of Income for the Nine Months Ended
September 30, 1997....................................................... F-10
Unaudited Pro Forma Combined Statement of Income for the Nine Months Ended
September 30, 1996....................................................... F-10
Unaudited Pro Forma Combined Statement of Income for the Year Ended
December 31, 1996........................................................ F-11
Notes to Unaudited Pro Forma Combined Statement of Income ................ F-12
UNAUDITED HISTORICAL FINANCIAL STATEMENTS:
Report of Independent Accountants......................................... F-13
Consolidated Balance Sheet as of September 30, 1997 (Unaudited)........... F-14
Consolidated Statement of Income for the Nine Months Ended September 30,
1997 (Unaudited)......................................................... F-15
Consolidated Statement of Stockholders' Equity for the Nine Months Ended
September 30, 1997 (Unaudited)........................................... F-16
Consolidated Statement of Cash Flows for the Nine Months Ended September
30, 1997 (Unaudited)..................................................... F-17
Notes to Consolidated Financial Statements (Unaudited).................... F-18
LOONEY & COMPANY
Report of Independent Accountants......................................... F-32
Balance Sheet as of December 31, 1995 and 1996............................ F-33
Statement of Operations for the Years Ended December 31, 1994, 1995 and
1996 and for the Nine Months Ended September 30, 1996 (Unaudited)........ F-34
Statement of Stockholder's Equity for the Years Ended December 31, 1994,
1995 and 1996............................................................ F-35
Statement of Cash Flows for the Years Ended December 31, 1994, 1995 and
1996 and for the Nine Months Ended September 30, 1996 (Unaudited)........ F-36
Notes to Financial Statements............................................. F-37
KLEIN, BURY & ASSOCIATES
Report of Independent Accountants......................................... F-42
Balance Sheet as of September 30, 1995 and December 31, 1996.............. F-43
Statement of Income for the Years Ended September 30, 1995 and December
31, 1996................................................................. F-44
Statement of Stockholders' Equity for the Years Ended September 30, 1995
and December 31, 1996.................................................... F-45
Statement of Cash Flows for the Years Ended September 30, 1995 and
December 31, 1996........................................................ F-46
Notes to Financial Statements............................................. F-47
G&G COURT REPORTERS
Report of Independent Accountants......................................... F-50
Balance Sheet as of December 31, 1995 and 1996............................ F-51
Statement of Income for the Years Ended December 31, 1995 and 1996 and for
the Six Months Ended June 30, 1996 and the Period from January 1, 1997
through Date of Acquisition, May 19, 1997 (Unaudited).................... F-52
Statement of Owner's Equity for the Years Ended December 31, 1995 and 1996
and the Period from January 1, 1997 through Date of Acquisition, May 19,
1997 (Unaudited)......................................................... F-53
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996
and the Period from January 1, 1997 through Date of Acquisition, May 19,
1997 (Unaudited)......................................................... F-54
Notes to Financial Statements............................................. F-55
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SAN FRANCISCO REPORTING SERVICE
Report of Independent Accountants......................................... F-57
Balance Sheet as of December 31, 1996 and May 14, 1997.................... F-58
Statement of Income for the Year Ended December 31, 1996 and for the Six
Months Ended June 30, 1996 and for the Period from January 1, 1997
through Date of Acquisition, May 14, 1997................................ F-59
Statement of Partners' Capital for the Year Ended December 31, 1996 and
for the Period from January 1, 1997 through Date of Acquisition, May 14,
1997..................................................................... F-60
Statement of Cash Flows for the Year Ended December 31, 1996 and for the
Period from January 1, 1997 through Date of Acquisition, May 14, 1997.... F-61
Notes to Financial Statements............................................. F-62
LEGAL ENTERPRISE, INC.
Report of Independent Accountants......................................... F-65
Balance Sheet as of December 31, 1996 and June 30, 1997 (Unaudited)....... F-66
Statement of Income for the Years Ended December 31, 1995 and 1996 and the
Six Months Ended June 30, 1996 and 1997 (Unaudited)...................... F-67
Statement of Stockholders' Equity for the Years Ended December 31, 1995
and 1996 and the Six Months Ended June 30, 1996 and 1997 (Unaudited)..... F-68
Statement of Cash Flows for the Years Ended December 31, 1995 and 1996 and
the Six Months Ended June 30, 1996 and 1997 (Unaudited).................. F-69
Notes to Financial Statements............................................. F-70
ELAINE P. DINE, INC.
Report of Independent Accountants......................................... F-72
Balance Sheet as of March 31, 1996 and 1997 and June 30, 1997
(Unaudited).............................................................. F-73
Statement of Income for the Years Ended March 31, 1996 and 1997 and for
the Three Months Ended June 30, 1996 and 1997 (Unaudited)................ F-74
Statement of Stockholder's Equity for the Years Ended March 31, 1996 and
1997 and the Three Months Ended June 30, 1997 (Unaudited)................ F-75
Statement of Cash Flows for the Years Ended March 31, 1996 and 1997 and
the Three Months Ended June 30, 1996 and 1997 (Unaudited)................ F-76
Notes to Financial Statements............................................. F-77
BURTON HOUSE, INC.
D.B.A. ZISKIND, GREENE, WATANABE & NASON
Report of Independent Accountants......................................... F-79
Balance Sheet as of December 31, 1995 and 1996 and June 30, 1997
(Unaudited).............................................................. F-80
Statement of Operations for the Years Ended December 31, 1995 and 1996 and
the Six Months Ended June 30, 1996 and 1997 (Unaudited).................. F-81
Statement of Stockholder's Deficit for the Years Ended December 31, 1995
and 1996 and the Six Months Ended June 30, 1997 (Unaudited).............. F-82
Statement of Cash Flows for the Years Ended December 31, 1995 and 1996 and
the Six Months Ended June 30, 1996 and 1997 (Unaudited).................. F-83
Notes to Financial Statements............................................. F-84
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
JILIO & ASSOCIATES
Report of Independent Accountants........................................ F-87
Balance Sheet as of December 31, 1995 and 1996 and September 30, 1997
(Unaudited)............................................................. F-88
Statement of Operations for the Years Ended December 31, 1995 and 1996
and the Nine Months Ended September 30, 1996 and 1997 (Unaudited)....... F-89
Statement of Owner's Equity for the Years Ended December 31, 1995 and
1996 and the Nine Months Ended September 30, 1997 (Unaudited)........... F-90
Statement of Cash Flows for the Years Ended December 31, 1995 and 1996
and the Nine Months Ended September 30, 1996 and 1997 (Unaudited)....... F-91
Notes to Financial Statements............................................ F-92
REPORTING SERVICE ASSOCIATES, INC.
Report of Independent Accountants........................................ F-95
Balance Sheet as of December 31, 1995 and 1996 and September 30, 1997
(Unaudited)............................................................. F-96
Statement of Income for the Years Ended December 31, 1995 and 1996 and
the Nine Months Ended September 30, 1996 and 1997 (Unaudited)........... F-97
Statement of Stockholder's Equity for the Years Ended December 31, 1995
and 1996 and the Nine Months ended September 30, 1996 and 1997
(Unaudited)............................................................. F-98
Statement of Cash Flows for the Years Ended December 31, 1995 and 1996
and the Nine Months Ended September 30, 1996 and 1997 (Unaudited)....... F-99
Notes to Financial Statements............................................ F-100
KIRBY A. KENNEDY & ASSOCIATES
Report of Independent Accountants........................................ F-102
Balance Sheet as of December 31, 1995 and 1996 and September 30, 1997
(Unaudited)............................................................. F-103
Statement of Income for the Years Ended December 31, 1995 and 1996 and
the Nine Months Ended September 30, 1996 and 1997 (Unaudited)........... F-104
Statement of Partners' Capital for the Years Ended December 31, 1995 and
1996 and the Nine Months Ended September 30, 1997 (Unaudited)........... F-105
Statement of Cash Flows for the Years Ended December 31, 1995 and 1996
and the Nine Months Ended September 30, 1996 and 1997 (Unaudited)....... F-106
Notes to Financial Statements............................................ F-107
JOHNSON COURT REPORTING GROUP
Report of Independent Accountants........................................ F-109
Combined Balance Sheet as of December 31, 1995 and 1996 and June 30, 1997
(Unaudited)............................................................. F-110
Combined Statement of Income for the Years Ended December 31, 1995 and
1996 and for the Six Months Ended June 30, 1996 and 1997 (Unaudited).... F-111
Combined Statement of Shareholder's Equity for the Years Ended December
31, 1995 and 1996 and for the Six Months Ended June 30, 1997
(Unaudited)............................................................. F-112
Combined Statement of Cash Flows for the Years Ended December 31, 1995
and 1996 and for the Six Months Ended June 30, 1996 and 1997
(Unaudited)............................................................. F-113
Notes to Combined Financial Statements................................... F-114
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AMICUS ONE LEGAL SUPPORT SERVICES, INC.
Report of Independent Accountants........................................ F-117
Balance Sheet as of December 31, 1996 and September 5, 1997.............. F-118
Statement of Income for the Year Ended December 31, 1996 and the Period
Ended September 5, 1997................................................. F-119
Statement of Stockholders' Equity for the Year Ended December 31, 1996
and the Period Ended September 5, 1997.................................. F-120
Statement of Cash Flows for the Year Ended December 31, 1996 and the
Period Ended September 5, 1997.......................................... F-121
Notes to Financial Statements............................................ F-122
BLOCK COURT REPORTING, INC.
Report of Independent Accountants........................................ F-125
Balance Sheet as of December 31, 1995 and 1996 and June 30, 1997
(Unaudited)............................................................. F-126
Statement of Operations for the Years Ended December 31, 1995 and 1996
and the Six Months Ended June 30, 1997 and 1996 (Unaudited)............. F-127
Statement of Stockholder's Equity (Deficit) for the Years Ended December
31, 1995 and 1996 and the Six Months Ended June 30, 1997 (Unaudited).... F-128
Statement of Cash Flows for the Years Ended December 31, 1995 and 1996
and the Six Months Ended June 30, 1997 and 1996 (Unaudited)............. F-129
Notes to Financial Statements............................................ F-130
COMMANDER WILSON, INC.
Report of Independent Accountants........................................ F-133
Balance Sheet as of December 31, 1995 and 1996 and September 30, 1997
(Unaudited)............................................................. F-134
Statement of Income for the Years Ended December 31, 1995 and 1996 and
the Nine Months Ended September 30, 1996 and 1997 (Unaudited)........... F-135
Statement of Owner's Deficit for the Years Ended December 31, 1995 and
1996 and the Nine Months Ended September 30, 1997 (Unaudited)........... F-136
Statement of Cash Flows for the Years Ended December 31, 1995 and 1996
and the Nine Months Ended September 30, 1996 and 1997 (Unaudited)....... F-137
Notes to Financial Statements............................................ F-138
</TABLE>
F-4
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following Unaudited Pro Forma Combined Balance Sheet as of September 30,
1997 and the Unaudited Pro Forma Combined Statements of Operations for the
year ended December 31, 1996 and the nine months ended September 30, 1997 and
1996 have been prepared to reflect adjustments to the historical financial
position and results of operations to give effect to the transactions
described below. The Unaudited Pro Forma Combined Balance Sheet reflects such
transactions as if they had occurred as of September 30, 1997, and the
Unaudited Pro Forma Combined Statements of Operations for the year ended
December 31, 1996 and the nine months ended September 30, 1997 and 1996
reflect such transactions as if they had occurred as of January 1, 1996.
U.S. Legal Support, Inc., a Texas Corporation ("U.S. Legal") was formed in
October 1996 to continue the business of Looney & Company, a Texas
Corporation, ("Looney") and to create a leading provider of legal support and
staffing services to law firms, insurance providers and major corporations. In
January, U.S. Legal was combined with Looney in a transaction accounted for as
a merger of entities under common control in which Looney became a wholly-
owned subsidiary of U.S. Legal (Looney and U.S. Legal are hereinafter referred
to as the "Company"). Simultaneously, the Company entered into a Securities
Purchase Agreement (the "Securities Purchase Agreement") with three investors
represented by Pecks Management Partners Ltd. pursuant to which the Company
issued 1,000,000 shares of Series A Convertible Preferred Stock (the "Series A
Preferred Stock") and $9.0 million principal amount of 12% Senior Subordinated
Notes (the "Senior Subordinated Notes"). Concurrently, the Company entered
into a Bank Credit Agreement with a commercial bank, which provided for a
revolving credit facility of $4.0 million. The Company amended the Bank Credit
Agreement to, among other things, reduce the revolving credit facility to $2.0
million and to provide for term loans up to $14.0 million, for acquisitions.
See Note 7 to the Company's financial statements. In October 1997, the Company
increased the revolving line of credit to $3.25 million through December 31,
1997.
On the same date as the transactions described above, the Company acquired
all of the outstanding capital stock of Klein, Bury & Associates, Inc. ("Klein
Bury") headquartered in Miami, Florida with offices in various locations
throughout the state of Florida. In May 1997, the Company acquired certain net
assets of G & G Court Reporters and San Francisco Reporting Service
headquartered in Los Angeles and San Francisco, California, respectively.
In August 1997, the Company acquired all of the outstanding capital stock of
Goren of Newport, Inc., Rapidtext, Inc. and Medtext, Inc. (the "Johnson Court
Reporting Group") and acquired certain assets and assumed certain liabilities
of Legal Enterprise, Inc. Both companies are headquartered in California.
In September 1997, the Company acquired the assets and assumed certain
liabilities of Elaine P. Dine, Inc. and acquired all of the outstanding
capital stock of Burton House, Inc. d.b.a. Ziskind Greene Watanabe & Nason
headquartered in New York, New York and Los Angeles, California, respectively.
Additionally, the Company acquired all of the outstanding capital stock of
Block Court Reporting, Inc. and acquired certain assets and assumed certain
liabilities of Amicus One Legal Support Services, Inc. headquartered in
Washington, D.C. and New York, New York respectively.
The Company intends to sell approximately 3,500,000 shares of common stock,
par value $.01 per share (the "Common Stock") (at an assumed initial price of
$12.00 per share) to the public (the "Offering"). The businesses acquired
prior to the Offering ("Completed Acquisitions") were acquired using a
combination of cash, preferred stock, Common Stock and subordinated promissory
notes. Upon completion of the Offering, all of the shares of preferred stock
will be converted into shares of Common Stock, other than 231,250 shares of
Series C Preferred Stock which will be redeemed for $231,250 upon completion
of the Offering. The aggregate consideration paid by the Company for the
Completed Acquisitions consisted of: (i) $21,400,000 in cash, (ii) 2,046,667
shares of Series B Convertible Preferred Stock (the "Series B Preferred
Stock"); (iii) 231,250 shares of Series C Preferred Stock (the "Series C
Preferred Stock"); (iv) $4,979,000 of Subordinated Promissory Notes; and (v)
$1,845,000 Convertible Subordinated Promissory Notes.
F-5
<PAGE>
Additionally, the Company has entered into definitive agreements with
respect to the acquisition of Jilio & Associates, Kirby A. Kennedy &
Associates, Reporting Service Associates, Inc. and Commander Wilson, Inc. (the
"Pending Acquisitions," collectively with the Completed Acquisitions, the
"Acquisitions"). All of the Pending Acquisitions are expected to close
contemporaneously with, and are conditional upon, the closing of this
Offering.
The Unaudited Pro Forma Combined Balance Sheet as of September 30, 1997
gives effect to: (i) the sale of 3,500,000 shares of Common Stock in the
Offering and the application of the net proceeds therefrom, as described in
"Use of Proceeds"; (ii) the conversion of all outstanding shares of Series A
Preferred Stock and Series B Preferred Stock into shares of Common Stock;
(iii) the conversion of $1,845,000 of Convertible Subordinated Promissory
Notes into shares of Common Stock; (iv) the redemption of 231,250 shares of
Series C Preferred Stock for cash; and (v) the Acquisitions, as if each of
such transactions had occurred as of September 30, 1997. The Unaudited Pro
Forma Combined Statements of Operations for the year ended December 31, 1996,
and the nine months ended September 30, 1996 and 1997, give effect to: (i) the
sale of 3,500,000 shares of Common Stock in the Offering and the application
of net proceeds therefrom as described in "Use of Proceeds"; (ii) the
conversion of all outstanding shares of Series A and Series B Preferred Stock
into shares of Common Stock; (iii) the conversion of $1,845,000 principal
amount of Convertible Subordinated Promissory Notes into Common Stock; and
(iv) the Acquisitions, as if each of such transactions had occurred as of
January 1, 1996.
The pro forma combined financial statements have been prepared by the
Company based on the historical financial statements of the Company and the
businesses acquired or to be acquired, the financial statements of which are
included elsewhere in this Prospectus. These pro forma combined financial
statements are presented for illustrative purposes only and are not
necessarily indicative of the results that would have been obtained if the
transactions had occurred on the dates indicated or that may be realized in
the future. The Company is not aware of any known contingencies that could
result in adjustments that would have a material effect on the unaudited pro
forma financial statements. The pro forma information should be read in
conjunction with the Consolidated Financial Statements of U.S. Legal Support,
Inc. and the Notes thereto and the historical financial statements of the
companies acquired or to be acquired and the notes thereto included elsewhere
in this Prospectus.
F-6
<PAGE>
U.S. LEGAL SUPPORT, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
---------- ------------
PENDING
OFFERING PENDING ACQUISITIONS
COMPANY ADJUSTMENTS AS ACQUISITIONS ADJUSTMENTS PRO
ASSETS (A) (B) ADJUSTED (C) (C)(D) FORMA
------ ---------- ----------- -------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash................... $559 $6,600 $7,159 $103 $(103) $1,238
(5,921)
Accounts receivable.... 6,990 -- 6,990 2,119 (1,458) 7,651
Prepaid expenses and
other current assets.. 189 -- 189 21 (3) 207
Deferred income taxes.. 48 -- 48 -- -- 48
------- ------- ------- ------ ------- -------
Total current
assets.............. 7,786 6,600 14,386 2,243 (7,485) 9,144
Property and equipment,
net.................... 1,153 -- 1,153 109 -- 1,262
Intangibles............. 27,980 -- 27,980 -- 22,973 51,238
285
Other assets............ 1,801 (250) 1,008 -- -- 1,008
(543)
------- ------- ------- ------ ------- -------
Total assets......... $38,720 $5,807 $44,527 $2,352 $15,773 $62,652
======= ======= ======= ====== ======= =======
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
--------------------
<S> <C> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable
Trade.................. $3,689 $ -- $3,689 $395 $(167) $3,917
Affiliates............. 316 -- 316 -- -- 316
Accrued liabilities.... 2,715 -- 2,715 32 285 3,032
Income taxes payable... 34 -- 34 -- -- 34
Deferred income taxes.. -- -- -- -- -- --
Current maturities of
long-term
obligations........... 3,936 (3,861) 75 -- -- 75
Other current
liabilities........... -- -- -- -- -- --
------- ------- ------- ------ ------- -------
Total current
liabilities......... 10,690 (3,861) 6,829 427 118 7,374
Long-term obligations,
net of current
maturities............. 26,339 (26,256) 83 -- 11,000 11,083
Deferred income taxes... 255 -- 255 -- -- 255
Commitments and
contingencies
Redeemable preferred
stock
Series A Convertible
Preferred Stock....... 1,479 (1,479) -- -- -- --
Series B Convertible
Preferred Stock....... 2,047 (2,047) -- -- -- --
Series C Convertible
Preferred Stock....... 231 (231) -- -- -- --
------- ------- ------- ------ ------- -------
Total redeemable
preferred stock..... 3,757 (3,757) -- -- -- --
------- ------- ------- ------ ------- -------
Stockholders' equity
(deficit):
Common stock........... 17 55 72 195 (189) 78
Additional paid-in
capital............... 3,840 41,311 45,151 -- 6,574 51,725
Retained earnings
(deficit)............. (6,178) (1,685) (7,863) 1,730 (1,730) (7,863)
------- ------- ------- ------ ------- -------
Total stockholders'
equity (deficit): (2,321) 39,681 37,360 1,925 4,655 43,940
------- ------- ------- ------ ------- -------
Total liabilities and
stockholders' equity
(deficit)........... $38,720 $5,807 $44,527 $2,352 $15,773 $62,652
======= ======= ======= ====== ======= =======
</TABLE>
F-7
<PAGE>
U.S. LEGAL SUPPORT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(A) Represents the September 30, 1997 historical consolidated balance sheet
of the Company.
(B) Represents the issuance of 3,500,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $12.00 per
share and the use of proceeds therefrom as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
<S> <C>
Gross proceeds of the Offering.............................. $42,000
Underwriting discounts and commissions...................... (2,940)
Expenses related to the Offering............................ (2,500)
-------
Net proceeds.............................................. 36,560
Repayment of long-term debt, including current portion...... (29,979)
Redemption of 231,250 shares of Series C preferred stock at
$1.00 per share............................................ (231)
Expenses paid at September 30, 1997 related to Offering..... 250
-------
Net increase in cash and cash equivalents................. $6,600
=======
</TABLE>
In addition, upon completion of the Offering, $1,845,000 of Subordinated
Convertible Promissory Notes, the 1,000,000 shares of Series A Preferred Stock
and the 2,046,667 shares of the Series B Preferred Stock will be converted
into shares of Common Stock. The principal amount of Subordinated Convertible
Promissory Notes convert at prices ranging from $7.56 to $8.50 per share. The
1,000,000 shares of Series A Preferred Stock convert into 1,560,000 shares of
common stock. The Series B Preferred Stock converts at 93% of the assumed
initial public offering price and the Company anticipates recording a $154,000
noncash dividend, that reflects the discount from the assumed initial offering
price at which it will convert to Common Stock.
The Offering and the conversion of the Convertible Subordinated Promissory
Notes, Series A Preferred Stock and Series B Preferred Stock will affect the
pro forma equity, as follows (in thousands):
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN-
STOCK CAPITAL TOTAL
------ ---------- -------
<S> <C> <C> <C>
Offering....................................... $35 $36,525 $36,560
Subordinated Convertible Promissory Notes...... 2 1,278 1,280
Series A Preferred Stock....................... 16 1,463 1,479
Series B Preferred Stock....................... 2 2,045 2,047
--- ------- -------
$55 $41,311 $41,366
=== ======= =======
</TABLE>
The net repayment of long-term obligations is calculated as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
<S> <C>
Other assets............................................... $(543)(a)
Current portion of long-term obligations................... 3,861
Long-term debt, net of current maturities.................. 26,256
Common Stock............................................... (2)
Additional paid-in capital................................. (1,278)
Retained earnings.......................................... 1,685 (b)
-------
Cash paid.................................................. $29,979
=======
</TABLE>
- --------
(a) To write off deferred financing costs related to the retirement of the
Senior Subordinated Notes.
(b) To reflect the reduction in retained earnings for extraordinary losses on
the retirement of indebtedness repaid with cash.
F-8
<PAGE>
U.S. LEGAL SUPPORT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET--(CONTINUED)
(C) Represents the September 30, 1997 historical combined balance sheets of
businesses to be acquired in the Pending Acquisitions, and the purchase
adjustments thereto.
The estimated fair value of the assets to be acquired in the Pending
Acquisitions is summarized below:
<TABLE>
<CAPTION>
KIRBY REPORTING COMMANDER
TOTAL JILIO KENNEDY SERVICE WILSON
------- ------ ------- --------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Accounts receivables, net......... $661 $ 404 $ 257 $ -- $ --
Prepaid expenses and other current
assets........................... 18 18 -- -- --
Property and equipment............ 109 25 42 42 --
Excess of cost over fair value of
net assets acquired, including
goodwill of $22,933 and covenants
not to compete of $40............ 22,973 7,648 3,442 9,858 2,025
Accounts payable and accrued
liabilities...................... (260) (95) (165) -- --
------- ------ ------ ------ ------
$23,501 $8,000 $3,576 $9,900 $2,025
======= ====== ====== ====== ======
</TABLE>
The adjustments also reflect the elimination of certain assets and
liabilities not acquired or assumed.
The consideration for the Pending Acquisitions will be as follows:
<TABLE>
<CAPTION>
KIRBY REPORTING COMMANDER
TOTAL JILIO KENNEDY SERVICE WILSON
------- ------ ------- --------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Cash (includes $5,921 from Offering
proceeds and $11,000 from new
borrowings)....................... $16,921 $5,600 $2,503 $7,400 $1,418
Issuance of 609,268 shares of
Common Stock...................... 6,580 2,400 1,073 2,500 607
------- ------ ------ ------ ------
$23,501 $8,000 $3,576 $9,900 $2,025
======= ====== ====== ====== ======
</TABLE>
The value of the Common Stock to be issued is based upon 90 percent of the
assumed initial public offering price of $12.00 per share. The excess of cost
over the fair value of the identifiable net assets acquired in the Pending
Acquisitions will be amortized over 40 years.
(D) Includes estimated transaction costs of $285,000.
F-9
<PAGE>
U.S. LEGAL SUPPORT, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------- HISTORICAL
COMPLETED PENDING PENDING
COMPANY ACQUISITIONS OFFERING ACQUISITIONS ACQUISITIONS PRO
(A) (B) ADJUSTMENTS COMBINED ADJUSTMENTS SUBTOTAL (C) ADJUSTMENTS FORMA
------- ------------ ----------- -------- ----------- -------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $14,549 $14,801 $ -- $29,350 $ -- $29,350 $7,927 $ -- $37,277
Cost of services..... 9,287 8,199 -- 17,486 -- 17,486 3,775 -- 21,261
------- ------- ----- ------- ------ ------- ------ ------- -------
Gross profit......... 5,262 6,602 -- 11,864 -- 11,864 4,152 -- 16,016
Selling, general and
administrative
expenses............ 3,855 4,769 (760)(D) 7,864 -- 7,864 1,571 (70)(D) 9,365
Depreciation and
amortization........ 332 161 372 (F) 865 -- 865 35 437 (F) 1,337
------- ------- ----- ------- ------ ------- ------ ------- -------
Operating income..... 1,075 1,672 388 3,135 -- 3,135 2,546 (367) 5,314
Interest expense..... 1,147 47 1,298 (G) 2,492 (2,459)(H) 33 14 660 (G) 707
------- ------- ----- ------- ------ ------- ------ ------- -------
Income (loss) before
income taxes........ (72) 1,625 (910) 643 2,459 3,102 2,532 (1,027) 4,607
Provision for income
taxes............... 11 757 (425)(I) 343 983 (I) 1,326 -- 602 (I) 1,928
------- ------- ----- ------- ------ ------- ------ ------- -------
Net (loss) income.... (83) 868 (485) 300 1,476 1,776 2,532 (1,629) 2,679
Accretion of
preferred stock..... (479) -- -- (479) 479 (K) -- -- -- --
------- ------- ----- ------- ------ ------- ------ ------- -------
Net income (loss)
attributable to
common
shareholders........ $ (562) $ 868 $(485) $ (179) $1,955 $ 1,776 $2,532 $(1,629) $ 2,679
======= ======= ===== ======= ====== ======= ====== ======= =======
Net income (loss) per
share............... $ (0.13) $ .33
======= =======
Weighted average
outstanding shares.. 4,226 8,002(J)
======= =======
</TABLE>
U.S. LEGAL SUPPORT, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------- HISTORICAL
COMPLETED PENDING PENDING
COMPANY ACQUISITIONS OFFERING ACQUISITIONS ACQUISITIONS PRO
(A) (B) ADJUSTMENTS COMBINED ADJUSTMENTS SUBTOTAL (C) ADJUSTMENTS FORMA
------- ------------ ----------- -------- ----------- -------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $5,886 $19,656 $ -- $25,542 $ -- $25,542 $6,482 $ -- $32,024
Cost of services...... 3,726 11,423 -- 15,149 -- 15,149 3,426 -- 18,575
------ ------- ------- ------- ------- ------- ------ ------- -------
Gross profit.......... 2,160 8,233 -- 10,393 -- 10,393 3,056 -- 13,449
Selling, general and
administrative
expenses............. 1,310 6,533 (830)(D) 7,507 -- 7,507 1,348 (435)(D) 8,420
494 (E)
Depreciation and
amortization......... 159 145 548 (F) 852 -- 852 43 437 (F) 1,332
------ ------- ------- ------- ------- ------- ------ ------- -------
Operating income...... 691 1,555 (212) 2,034 -- 2,034 1,665 (2) 3,697
Interest expense...... 177 61 2,253 (G) 2,491 (2,483)(H) 8 16 644 (G) 668
------ ------- ------- ------- ------- ------- ------ ------- -------
Income (loss) before
income taxes......... 514 1,494 (2,465) (457) 2,483 2,026 1,649 (646) 3,029
Provision (benefit)
for income taxes..... 175 102 (374)(I) (97) 993 (I) 896 -- 402 (I) 1,298
------ ------- ------- ------- ------- ------- ------ ------- -------
Net income (loss)..... $ 339 $ 1,392 $(2,091) $ (360) $ 1,490 $ 1,130 $1,649 $(1,048) $ 1,731
====== ======= ======= ======= ======= ======= ====== ======= =======
Net income per share.. $ .22
=======
Weighted average
shares outstanding... 8,002(J)
=======
</TABLE>
F-10
<PAGE>
U.S. LEGAL SUPPORT, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------- HISTORICAL
COMPLETED PENDING PENDING
COMPANY ACQUISITIONS OFFERING ACQUISITIONS ACQUISITIONS PRO
(A) (B) ADJUSTMENTS COMBINED ADJUSTMENTS SUBTOTAL (C) ADJUSTMENTS FORMA
------- ------------ ----------- -------- ----------- -------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $7,667 $26,743 $ -- $34,410 $ -- $34,410 $8,995 $ -- $43,405
Cost of services...... 4,839 15,819 -- 20,658 -- 20,658 4,816 -- 25,474
------ ------- ------- ------- ------ ------- ------ ------- -------
Gross profit.......... 2,828 10,924 -- 13,752 -- 13,752 4,179 -- 17,931
Selling, general and
administrative
expenses............. 2,352 8,846 (2,280)(D) 9,577 -- 9,577 1,971 (580)(D) 10,968
659 (E)
Depreciation and
amortization......... 212 173 730 (F) 1,115 -- 1,115 56 583 (F) 1,754
------ ------- ------- ------- ------ ------- ------ ------- -------
Operating income...... 264 1,905 891 3,060 -- 3,060 2,152 (3) 5,209
Interest expense...... 238 63 3,021 (G) 3,322 (3,322)(H) -- 20 860 (G) 880
------ ------- ------- ------- ------ ------- ------ ------- -------
Income (loss) before
income taxes......... 26 1,842 (2,130) (262) 3,322 3,060 2,132 (863) 4,329
Provision (benefit)
for income taxes..... 10 232 (232)(I) 10 1,329 (I) 1,339 -- 508 (I) 1,847
------ ------- ------- ------- ------ ------- ------ ------- -------
Net income (loss)..... $ 16 $ 1,610 $(1,898) $ (272) $1,993 $ 1,721 $2,132 $(1,371) $ 2,482
====== ======= ======= ======= ====== ======= ====== ======= =======
Net income per share.. $ .31
=======
Weighted average
outstanding shares... 8,002(J)
=======
</TABLE>
F-11
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
(A) Represents the historical Consolidated Statement of Operations data of
the Company, which includes the operations of the Completed
Acquisitions from respective dates of acquisition through September 30,
1997.
(B) Represents the combined historical statement of operations data for the
Completed Acquisitions from January 1, 1997 through their respective
dates of acquisition.
(C) Represents the combined historical statements of operations data of the
Pending Acquisitions.
(D) Represents adjustments to reflect the excess of historical compensation
paid to owners of businesses acquired in the Acquisitions over
compensation that would have been payable under the terms of employment
agreements entered into in connection with each acquisition as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ------------
1997 1996 1996
-------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Aggregate owners historical
compensation.......................... $1,776 $ 2,353 $4,310
Less: Aggregate Salary Per Post-
Acquisition Employment Contract....... (946) (1,088) (1,450)
-------- -------- ------
Adjustment........................... $830 $1,265 $2,860
======== ======== ======
</TABLE>
(E) Represents corporate office compensation for personnel-related costs
that would have been necessary to perform administrative functions in
1996.
(F) Represents an increase in amortization of goodwill associated with the
Acquisitions. The excess of cost over the fair value of the net assets
acquired will be amortized over a period of 10 to 40 years.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
----------------- DECEMBER 31,
1997 1996 1996
-------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Completed Acquisitions................... $ 372 $ 548 $730
Pending Acquisitions..................... 437 437 583
-------- -------- ------
$ 809 $985 $1,313
======== ======== ======
</TABLE>
(G) Represents (i) an adjustment to accrue interest expense on debt
incurred in connection with the Completed Acquisitions, such expense
computed based on fixed or variable interest rates, as appropriate, at
the time the Company entered into each agreement; and (ii) an
adjustment to reflect the interest expense on debt to be incurred in
connection with the Pending Acquisitions based on pro forma debt of
$11.0 million computed based upon the terms of the New Credit Agreement
which bears interest at 8.00% (LIBOR plus 200 basis points). The effect
on net income of a 1/8% variance of the interest rate would be $8,250
(annual basis).
(H) Represents an adjustment to reduce interest expense on debt that will
be repaid with proceeds of the Offering.
(I) Represents adjustments to accrue income taxes on earnings for certain
Acquisitions not previously taxed at the corporate level and to reflect
the tax effects of adjustments based on estimated combined federal and
state statutory tax rates of 40%. The Company's total effective tax
rate approximates 41% and 43% for the nine months ended September 30,
1997 and 1996, and 42% for the year ended December 31, 1996,
respectively because of non-deductible portion of the goodwill recorded
in connection with the Acquisitions.
(J) Pro forma earnings per share gives effect to: (i) 1,734,564 shares
outstanding prior to the offering, (ii) 609,268 shares to be issued in
the Pending Acquisitions; (iii) 3,500,000 shares to be issued in the
Offering; and (iv) 1,969,283 shares to be issued upon conversion of
preferred stock and Subordinated Convertible Promissory Notes. Also,
Common Shares, options and warrants issued within one year prior to the
initial public offering have been treated as outstanding for all
periods presented.
(K) Represents adjustment to eliminate accretion of redeemable preferred
stock which will be converted to Common Stock.
F-12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
U.S. Legal Support, Inc.:
We have audited the accompanying consolidated balance sheet of U.S. Legal
Support, Inc. as of September 30, 1997, and the related consolidated
statements of income, stockholder's deficit and cash flows for the nine months
ended September 30, 1997. These financial statements are the responsibility of
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 consolidated financial position of U.S. Legal
Support, Inc. as of September 30, 1997 and the consolidated results of its
operations and its cash flows for the nine months ended September 30, 1997 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared on the
going concern basis of accounting. As more fully described in Note 1 to the
consolidated financial statements, proceeds from a planned initial public
offering are to be used to repay current maturities of debt. The success of
the initial public offering cannot presently be determined. As a result, there
is substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Houston, Texas
December 15, 1997
F-13
<PAGE>
U.S. LEGAL SUPPORT, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
UNAUDITED PRO
FORMA
SEPTEMBER 30, SEPTEMBER 30,
1997 1997(1)
ASSETS ------------- -------------
<S> <C> <C>
Current assets:
Cash.................................................. $ 558,574 $ 558,574
Accounts receivable, net of allowance of $777,480..... 6,990,522 6,990,522
Prepaid expenses and other current assets............. 188,969 188,969
Deferred income taxes................................. 47,632 47,632
----------- -----------
Total current assets.............................. 7,785,697 7,785,697
Property and equipment, net............................. 1,153,015 1,153,015
Intangibles, net........................................ 27,980,167 27,980,167
Deferred charges........................................ 1,546,526 1,546,526
Other assets............................................ 254,806 254,806
----------- -----------
Total assets............................................ $38,720,211 $38,720,211
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities:
Accounts payable...................................... $ 3,689,227 $ 3,689,227
Accounts payable, related parties..................... 315,886 315,886
Accrued liabilities................................... 2,714,558 2,714,558
Income taxes payable.................................. 33,637 33,637
Current maturities of long-term obligations........... 3,935,964 3,935,964
----------- -----------
Total current liabilities......................... 10,689,272 10,689,272
Long-term obligations, net of current maturities........ 26,339,283 25,058,991
Deferred income taxes................................... 255,356 255,356
Redeemable preferred stock:
Series A Convertible Preferred Stock, $1.00 par value,
2,000,000 shares authorized; 1,000,000 shares issued
and outstanding...................................... 1,479,000 --
Series B Convertible Preferred Stock, $1.00 par value,
2,500,000 shares authorized; 2,046,667 shares issued
and outstanding...................................... 2,046,667 --
Series C Convertible Preferred Stock, $1.00 par value,
231,250 shares authorized, issued and outstanding.... 231,250 231,250
----------- -----------
Total redeemable preferred stock.................. 3,756,917 231,250
Commitments and contingencies
Stockholders' deficit:
Preferred Stock, $1.00 par value, 5,268,750
authorized, no shares issued or outstanding.......... -- --
Common Stock, $.01 par value, 100,000,000 shares
authorized; 1,734,564 shares issued and outstanding
(3,703,847 pro forma shares issued and outstanding).. 17,346 37,039
Additional paid-in capital............................ 3,840,117 8,626,383
Accumulated deficit................................... (6,178,080) (6,178,080)
----------- -----------
Total stockholders' deficit....................... (2,320,617) 2,485,342
----------- -----------
Total liabilities and stockholders' deficit............. $38,720,211 $38,720,211
=========== ===========
</TABLE>
- --------
(1) Gives effect to the conversion of (i) 1,000,000 shares of Series A
Convertible Preferred Stock into 1,560,000 shares of Common Stock; (ii)
2,046,667 shares of Series B Convertible Preferred Stock into 183,393
shares of Common Stock; and (iii) $1,844,955 principal amount (1,280,292
net of discount) of Convertible Subordinated Promissory Notes into 225,890
shares of Common Stock.
The accompanying notes are an integral part of the consolidated financial
statements.
F-14
<PAGE>
U.S. LEGAL SUPPORT, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1997
-------------
<S> <C>
Revenues........................................................ $14,549,056
Cost of services................................................ 9,287,213
-----------
Gross profit.................................................... 5,261,843
Selling, general and administrative expenses.................... 3,854,666
Depreciation and amortization................................... 331,896
-----------
Operating income............................................ 1,075,281
Interest expense................................................ 1,147,595
-----------
Loss before income taxes........................................ (72,314)
Provision for income taxes...................................... 11,041
-----------
Net loss........................................................ (83,355)
Accretion of preferred stock.................................... (479,000)
-----------
Net loss attributable to common shareholders.................... $ (562,355)
===========
Net loss per common share....................................... $ (.14)
===========
Weighted average shares outstanding............................. 3,893,000
===========
If the shares necessary to fund the cash portion of the
distribution to Richard O. Looney were outstanding for the
entire period, net loss per common share and weighted average
shares outstanding would have been as follows:
Pro forma net loss per common share........................... $ (.13)
===========
Weighted average shares outstanding........................... 4,226,000
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-15
<PAGE>
U.S. LEGAL SUPPORT, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
--------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance as of January 1,
1997................... 993,840 $9,938 -- $(72,761) $(62,823)
Net assets acquired in
connection with
reorganization of the
Company and Looney &
Company ............... -- -- -- 207,763 207,763
Distribution in
connection with
reorganization of the
Company and Looney &
Company................ -- -- -- (6,227,902) (6,227,902)
Issuance of Common
Stock.................. 740,724 7,408 4,319,117 -- 4,326,525
Accretion of Preferred
Stock.................. (479,000) (479,000)
Preferred Stock
Dividend............... -- -- -- (1,825) (1,825)
Net loss................ -- -- -- (83,355) (83,355)
--------- ------- ---------- ----------- -----------
Balance as of September
30, 1997............... 1,734,564 $17,346 $3,840,117 $(6,178,080) $(2,320,617)
========= ======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-16
<PAGE>
U.S. LEGAL SUPPORT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1997
-------------
<S> <C>
Cash flows from operating activities:
Net loss........................................................ $(83,355)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.................................. 331,896
Amortization of debt issue costs and debt discount............. 166,600
Provision for doubtful accounts................................ 154,467
Deferred taxes................................................. (213,026)
Changes in operating assets and liabilities:
Accounts receivable........................................... (1,186,127)
Prepaid expenses and other current assets..................... (78,069)
Accounts payable and accrued liabilities...................... 2,330,567
Income taxes payable.......................................... (183,730)
Deferred charges and other assets............................. (1,236,783)
-----------
Net cash provided by operating activities.................. 2,440
-----------
Cash flows from investing activities:
Capital expenditures............................................ (110,827)
Acquisitions, net of cash acquired.............................. (20,307,527)
-----------
Net cash used in investing activities...................... (20,418,354)
-----------
Cash flows from financing activities:
Issuance of redeemable preferred stock.......................... 1,000,000
Debt issuance costs............................................. (572,139)
Borrowings under senior credit agreement........................ 16,000,000
Issuance of subordinated debt................................... 9,580,260
Principal payments on long-term obligations..................... (964,578)
Dividends paid ................................................. (1,825)
Distribution to the Looney and Company shareholder.............. (4,087,835)
-----------
Net cash provided by financing activities.................. 20,953,883
-----------
Increase in cash and cash equivalents............................ 537,969
Cash and cash equivalents at beginning of period................. 20,605
-----------
Cash and cash equivalents at end of period....................... $558,574
===========
Supplemental cash flow information:
Cash paid for interest.......................................... $606,888
Cash paid for income taxes...................................... 360,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-17
<PAGE>
U.S. LEGAL SUPPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY:
U.S. Legal Support, Inc. (the "Company") was founded in 1996 by Richard O.
Looney and GulfStar Investments, Ltd. to continue the business of Looney &
Company ("Looney") and create a leading provider of legal support services,
including court reporting, certified record retrieval, legal placement and
temporary staffing, to law firms, insurance providers and major corporations
throughout the United States. As described in Note 3 to these financial
statements, the merger with Looney was accounted for as a merger of entities
under common control. Accordingly, these financial statements should be read
in conjunction with the historical financial statements of Looney included
elsewhere in this prospectus. The Company operates in one business segment.
The Company, including Looney, has completed the acquisition of 13 companies,
and has entered into definitive agreements to acquire an additional four
businesses. The Company requires additional financing in order to implement
its business strategy. The Company intends to offer and sell 3,500,000 shares
of common stock, par value $.01 per share (the "Common Stock") at an estimated
offering price between $11 and $13 per share. Additionally, 609,268 shares are
expected to be issued in connection with Pending Acquisitions described in
Note 3 and 1,969,283 shares are expected to be issued upon the conversion of
(i) 1,000,000 shares of Series A Convertible Preferred Stock into 1,560,000
shares of Common Stock; (ii) 2,046,667 shares of Series B Convertible
Preferred Stock into 183,393 shares of Common Stock; and (iii) $1,800,000
principal amount of Convertible Subordinated Promissory Notes into 225,890
shares of Common Stock (see unaudited pro forma balance sheet).
The Company's operations to date have been financed through the issuance of
redeemable convertible preferred stock, convertible debt, subordinated debt
and bank debt. The proceeds of the planned initial public offering would be
used to repay debt, redeem preferred stock and pay the cash portion of pending
acquisitions (Note 3). Certain convertible debt and convertible preferred
stock is expected to be converted into common stock upon completion of the
initial public offering. The failure to raise additional equity in the planned
initial public offering would require restructuring of its debt and equity
securities. Additionally, without additional equity financing, the Company
would be unable to consummate the pending acquisitions and implement its
business strategy beyond 1997. Unless the Company were able to obtain
financing from other sources or negotiate an extension, the bank could
exercise its rights under the loan agreement giving it additional authority
over the Company's operations and the ability to call the outstanding balance
of the revolving line of credit and term loans (Note 7). Any impediment to the
Company's ability to obtain additional capital could have a material adverse
effect on the Company's business, financial position, results of operations
and cash flows.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Unless the context requires otherwise, the term
"Company" refers to U.S. Legal Support, Inc. and its consolidated
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain 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.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid debt instruments purchased
with original maturities of three months or less. The Company maintains cash
deposits in banks. The balance, at times, may exceed federally insured amounts
although management believes the risk of loss is minimal.
F-18
<PAGE>
U.S. LEGAL SUPPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment is recorded at cost and is depreciated on the
straight-line basis over the estimated useful lives of the assets.
Expenditures for improvements that extend the life of such assets are
capitalized, while maintenance and repairs are charged to expense as incurred.
When property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the related accounts and any
resulting gain or loss is included in operations.
Intangibles
Intangibles consist primarily of goodwill, which is amortized on a straight
line basis over the estimated useful life of 10 to 40 years. Accumulated
amortization of goodwill was $150,613 at September 30, 1997. Amounts allocated
to covenants not to compete in the amount of $105,000 are amortized over the
lives of the related contract. Accumulated amortization of such covenants was
$7,750 at September 30, 1997. The Company evaluates, for impairment, the
carrying value of intangible assets by comparing the carrying value to the
anticipated future undiscounted cash flows from the businesses whose
acquisition gave rise to the asset. If the intangible asset is impaired, the
asset is written down to fair value.
Debt Issue Costs
Debt issue costs relating to long-term debt are included in other assets and
are amortized to interest expense over the scheduled maturity of the debt
utilizing the interest method.
Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Deferred income taxes are recognized for the tax consequences of differences
in the tax bases of assets and liabilities and their financial reporting
amounts based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income. A
valuation allowance is established, when necessary, to reduce deferred income
tax assets to the amount expected to be realized.
Revenue Recognition
The Company recognizes revenues from its court reporting and certified
record retrieval services upon delivery of prepared transcripts and as
documents or records are delivered to customers. With respect to the Company's
legal placement and staffing services, the Company recognizes revenue from its
permanent placement services when candidates accept job offers, and with
respect to its temporary placement services, as services are provided to the
Company's clients. An allowance is provided for anticipated bad debts, based
primarily on historical experience and current estimates.
Concentration of Credit Risk
The Company grants credit, primarily to law firms, insurance companies, and
major corporations. The Company maintains allowances for potential credit
losses, and such losses have been within management's estimates.
Earnings per Share Data
Earnings per share data is computed using the weighted average number of
common and common equivalent shares outstanding during each year presented.
Common equivalent shares consist of convertible debt, convertible preferred
stock, and stock options and are computed using the treasury stock method.
Under guidelines issued by the Securities and Exchange Commission, common
shares, options and warrants issued within one year prior to a public offering
at prices below the initial offering price are treated as outstanding for all
periods presented (using the Treasury stock method) in computing net earnings
(loss) per share. Pro forma earnings (loss) per share have been presented for
the nine months ended September 30, 1997 to reflect issuance
F-19
<PAGE>
U.S. LEGAL SUPPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of the number of shares that would have been necessary to fund the cash
portion of the $6,227,902 distribution to Richard O. Looney in January 1997
(at an assumed public offering price of $12.00 per share). Fully diluted
earnings per share is not presented because such amounts would be the same as
amounts computed for primary earnings per share.
Stock-Based Compensation
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock-based
compensation plans.
Financial Instruments
For all financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable, and long-term debt, the carrying value is
considered to approximate fair value.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 changes the computation of earnings per share and
requires dual presentation of basic and diluted earnings per share. SFAS 128
is effective for financial statements issued for periods ending after December
15, 1997, including interim periods.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131").
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. It requires (a) classification of the
components of other comprehensive income by their nature in a financial
statement and (b) the display of the accumulated balance of the other
comprehensive income separate from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS 130
is effective for years beginning after December 15, 1997 and is not expected
to have a material impact on financial position or results of operations.
SFAS 131 establishes standards for reporting information about operating
segments in annual financial statements and requires selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company has not determined
the impact of SFAS 131 on its financial reporting practices.
3. REORGANIZATION AND BUSINESS COMBINATIONS:
Completed through September 30, 1997
In a reorganization in January 1997, the Company received 100% of the
outstanding capital stock of Looney & Company ("Looney"), a Texas-based court
reporting and certified records retrieval company. The Company paid Richard
Looney approximately $4,088,000 in cash and issued 2,046,667 shares of the
Company's Series B Convertible Preferred Stock, $1.00 par value (the "Series B
Preferred Stock"). Looney has been deemed to be the accounting acquiror
because the two companies were under common control and prior to their
combination, the Company had no substantive operations. Therefore, the net
assets of Looney have been recorded at their historical cost basis. The
consideration paid for the net assets of Looney was recorded as a capital
distribution to Looney's shareholder.
F-20
<PAGE>
U.S. LEGAL SUPPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In January 1997, the Company acquired all of the outstanding capital stock
of Klein, Bury and Associates, Inc. ("Klein Bury"), a Florida based court
reporting company. The purchase price consisted of approximately $3,850,000 in
cash; 170,600 shares of the Company's Common Stock; a $1,424,000 promissory
note payable over five years with interest at 10%; options to purchase 40,000
shares of the Company's Common Stock and 50% of amounts collected in respect
of accounts receivable over 120 days past due as of the closing date, up to a
maximum of $500,000. The acquisition was accounted for under the purchase
method of accounting. The results of operations of Klein Bury are included
from the date of the acquisition. The excess of the cost over the fair value
of the assets acquired less liabilities assumed attributed to goodwill is
approximately $5,373,000 and is being amortized over 40 years.
In May 1997, the Company acquired the assets of San Francisco Reporting
Service ("San Francisco Reporting"), a California-based court reporting
company. The purchase price consisted of approximately $545,000 in cash,
30,608 shares of the Company's Common Stock and 231,250 shares of the
Company's Series C Convertible Preferred Stock, $1.00 par value. The
acquisition was accounted for under the purchase method of accounting. The
results of operations of San Francisco Reporting are included from the date of
acquisition. The excess of the cost over the fair value of the assets acquired
less liabilities assumed attributed to goodwill is approximately $811,000 and
is being amortized over 40 years.
In May 1997, the Company acquired the assets of G & G Court Reporters
("G&G"), a California-based court reporting company. The purchase price
consisted of approximately $1,268,000 in cash and two subordinated promissory
notes in the aggregate amount of $1,038,000, which were subsequently adjusted
to $996,000. The acquisition was accounted for under the purchase method of
accounting. The results of operations of G&G are included from the date of
acquisition. The excess of the cost over the fair value of the assets acquired
less liabilities assumed attributed to goodwill is approximately $1,919,000
and is being amortized over 40 years.
In August 1997, the Company acquired by merger Goren of Newport, Inc.,
Rapidtext, Inc. and Medtext, Inc. (the "Johnson Group"), three California-
based companies involved in court reporting, closed captioning, and medical
transcription. The purchase price consisted of approximately $983,000 in cash,
$246,000 in subordinated notes and 142,476 shares of the Company's Common
Stock. The acquisition has been accounted for under the purchase method of
accounting. The results of operations of the Johnson Group are included from
the date of acquisition. The excess of the cost over the fair value of the
assets acquired less liabilities assumed attributed to goodwill is
approximately $2,256,000 and is being amortized over 40 years.
In August 1997, the Company acquired the assets of Legal Enterprise, Inc.,
("Legal Enterprise") a California-based document retrieval and data management
company. The purchase price consisted of approximately $1,200,000 in cash,
$1,140,500 in subordinated notes and options to purchase 7,000 shares of
Company Common Stock. The acquisition has been accounted for under the
purchase method of accounting. The results of operations of Legal Enterprise
are included from the date of acquisition. The excess of the cost over the
fair value of the assets acquired less liabilities assumed attributed to
goodwill is approximately $1,460,000 and is being amortized over 40 years.
In September 1997, the Company acquired the assets of Amicus One Legal
Support Services, Inc. ("Amicus"), a New York-based court reporting company.
The purchase price was approximately $1,886,000 in cash, $560,000 in a
subordinated note and 116,471 shares of the Company's common stock. The
acquisition has been accounted for under the purchase method of accounting.
The results of operations of Amicus are included from the date of acquisition.
The excess of the cost over the fair value of the assets acquired less
liabilities assumed attributed to goodwill is approximately $3,033,000 and is
being amortized over 40 years.
In September 1997, the Company acquired the stock of Block Court Reporting
("Block"), a court reporting company serving Washington, D.C., Northern
Virginia, and Baltimore. The purchase price was approximately
F-21
<PAGE>
U.S. LEGAL SUPPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$600,000 in cash and $600,000 in subordinated notes. The acquisition has been
accounted for under the purchase method of accounting. The results of
operations of Block are included from date of acquisition. The excess of the
cost over the fair value of the assets acquired less liabilities assumed
attributed to goodwill is approximately $1,018,000 and is being amortized over
40 years.
In September 1997, the Company acquired the stock of Burton House, Inc.
d.b.a. Ziskind, Greene, Watanabe and Nason ("Ziskind Greene"), a California-
based company providing permanent legal search services. The purchase price
was approximately $1,350,000 in cash and 158,824 shares of the Company's
Common Stock. The acquisition has been accounted for under the purchase method
of accounting. The results of operations of Ziskind Greene have been included
from the date of acquisition. The excess of the costs over the fair value of
the assets acquired less liabilities assumed attributed to goodwill is
approximately $2,750,000 and is being amortized over 40 years.
In September 1997, the Company acquired the assets of Elaine P. Dine, Inc.,
("Elaine Dine"), a New York-based company providing permanent legal search and
temporary legal staffing services. The purchase price was approximately
$6,000,000 in cash, $2,000,000 in subordinated notes and 76,471 shares of the
Company's Common Stock and 41,176 options to purchase shares of Company Common
Stock. The acquisition was accounted for under the purchase method of
accounting. The results of operations of Elaine Dine have been included from
the date of acquisition. The excess of the cost over the fair value of the
assets acquired less liabilities assumed attributed to goodwill is
approximately $8,687,000 and is being amortized over 40 years. In addition,
the Company is obligated to pay $500,000 for an estimated tax liability.
The following unaudited pro forma summary presents consolidated results of
operations information as if the aforementioned acquisitions had been
completed at the beginning of the period presented. These results do not
purport to be indicative of the results of operations of the Company that
might have occurred nor are they indicative of future results.
<TABLE>
<S> <C>
Revenues..................................................... $29,350,000
Net income................................................... $300,000
Earnings per common share.................................... $0.07
</TABLE>
Adjustments made in arriving at the pro forma unaudited results of
operations include interest expense on acquisition debt, amortization of
goodwill, compensation reductions and related tax adjustments. No effect has
been given to synergistic benefits which may be realized from the acquisition
or to the use of proceeds from the Company's proposed initial public offering
(the "Offering").
In addition, with respect to certain of the businesses acquired, the Company
may be obligated to pay cash or common stock in the form of an "earn-out"
payment. In most cases, the earn-out is a function of cash and common stock
based on increases in the businesses' future operating income in excess of
historical levels. With respect to certain of the businesses acquired, the
Company is obligated to pay contingent consideration equal to six times the
amount by which pre-tax earnings exceed a specified amount. Contingent
consideration paid will be recorded as additional goodwill.
Pending Acquisitions (the "Pending Acquisitions")
All of the Pending Acquisitions will be accounted for under the purchase
method of accounting. In addition, the cash consideration to be paid for each
of the Pending Acquisitions is subject to post-closing adjustments.
Upon completion of the Offering, the Company will acquire the assets of
Reporting Service Associates, Inc., a Philadelphia-based court reporting
services firm serving the mid-Atlantic markets. The purchase price will be
approximately $7,400,000 in cash and 231,481 shares of the Company's Common
Stock.
F-22
<PAGE>
U.S. LEGAL SUPPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Upon completion of the Offering, the Company will acquire the assets of
Jilio & Associates, a Southern California-based court reporting services firm.
The purchase price will be approximately $5,600,000 in cash and 222,222 shares
of the Company's Common Stock.
Upon completion of the Offering, the Company will acquire the assets of
Kirby Kennedy & Associates, a court reporting services firm which serves the
Minneapolis and St. Paul, Minnesota markets. The purchase price will be
approximately $2,500,000 in cash and 99,315 shares of the Company's Common
Stock.
Upon completion of the Offering, the Company will acquire the assets of
Commander Wilson, Inc., a firm that provides permanent legal search services
to national and Texas law firms and legal departments of major corporations.
The purchase price will be approximately $1,400,000 in cash and 56,250 shares
of the Company's Common Stock.
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
USEFUL LIVES 1997
------------ -------------
<S> <C> <C>
Leasehold improvements......................... 5 years $163,764
Furniture, fixtures and equipment.............. 5 to 7 years 2,142,860
----------
2,306,624
Less accumulated depreciation.................. (1,153,609)
----------
$1,153,015
==========
</TABLE>
The Company has entered into various capital leases. The leases were
recorded upon their inception using the interest rate implicit in the lease
agreements. The capitalized cost of leased office equipment and related
accumulated depreciation was approximately $324,000 and $235,000,
respectively, at September 30, 1997.
5. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Accrued interest............................................ $374,107
Deferred purchase price..................................... 500,000
Payroll..................................................... 574,374
Customer overpayments....................................... 507,150
Stock options............................................... 438,535
Other....................................................... 320,392
----------
$2,714,558
==========
</TABLE>
Customer overpayments arise primarily when customers make duplicate payments
or payments in excess of billed amounts. The customers have generally denied
the Company's refund attempts, which the management of the Company believes is
due to the significant volume and relatively small amount of each individual
billing.
F-23
<PAGE>
U.S. LEGAL SUPPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES:
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Current..................................................... $ 224,067
Deferred.................................................... (213,026)
---------
$ 11,041
=========
</TABLE>
A reconciliation of the differences between income taxes computed at the U.S.
federal statutory rate of 34% and the Company's reported provision for income
taxes is:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Income tax provision at statutory rate..................... $(24,587)
State tax provision, net of federal income tax benefit..... (2,893)
Nondeductible amortization and other expenses.............. 38,521
--------
$11,041
========
</TABLE>
The components of deferred income tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Deferred tax assets:
Accrued liabilities...................................... $19,000
Allowance for doubtful accounts.......................... 149,920
---------
Deferred tax assets................................... 168,920
---------
Deferred tax liabilities:
Conversion from cash to accrual basis for tax reporting
purposes................................................ (306,867)
Property and equipment................................... (18,387)
Intangibles.............................................. (51,390)
---------
Deferred tax liability................................ (376,644)
---------
Net deferred income taxes............................. $(207,724)
=========
</TABLE>
F-24
<PAGE>
U.S. LEGAL SUPPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Bank notes payable:
Revolving line of credit...................................... $2,000,000
Term loans.................................................... 14,000,000
Senior subordinated notes, interest at 12% payable quarterly,
principal due in three annual installments beginning January
2002 but must be repaid within two days of an initial public
offering of common stock or a change of control................ 9,000,000
Subordinated Promissory Note, interest at 10% discounted to
yield an effective interest rate of 15%, quarterly principal
payments of $71,206 through February 1, 2002 but must be repaid
within two days of an initial public offering of common stock
or a change of control......................................... 1,281,701
Subordinated Promissory Notes, interest at rates ranging from 6%
to 7.5% payable beginning August 1997, discounted to yield an
effective interest rate of 15%, principal payments payable
beginning August 1998, maturing in 2002, principal must be
paid, or at the holders' option, converted into common stock at
the issuance price on the closing date of an initial public
offering or a change of control................................ 1,696,873
Convertible Subordinated Promissory Notes, interest at 6.375%
payable monthly, principal due in 2005, discounted to yield an
effective interest rate of 15% convertible at the holders'
option into common stock at conversion prices ranging from
$7.56 to $8.50, automatically converts into common stock on the
closing date of an initial public offering or a change of
control........................................................ 1,844,955
Subordinated Promissory Notes, interest at 6.375% payable
monthly, discounted to yield an effective interest rate of 15%,
principal due in 2005, principal must be repaid at the closing
date of an initial public offering or a change of control...... 2,000,000
Capital lease obligations....................................... 158,911
-----------
Total debt...................................................... 31,982,440
Less discount on debt(1)........................................ 1,707,193
-----------
Long term debt, net of discount................................. 30,275,247
Less current maturities......................................... 3,935,964
-----------
$26,339,283
===========
</TABLE>
- --------
(1) The debt discount is applicable to the various categories of long-term
debt as follows:
<TABLE>
<S> <C>
10% Subordinated Promissory Note.............................. $ 131,855
6% to 7.5% Subordinated Promissory Notes...................... 347,640
6.375% Convertible Subordinated Promissory Notes.............. 564,663
6.375% Subordinated Promissory Notes.......................... 663,035
----------
$1,707,193
==========
</TABLE>
Revolving Credit and Term Loan Agreements
The Company's Bank Credit Agreement provided for a revolving line of credit
of $2,000,000, all of which had been fully utilized at September 30, 1997 and
matures on July 10, 1998. The Bank Credit Agreement also provides for an
acquisition line of credit of $14,000,000, all of which had been fully
utilized at September 30, 1997. The acquisition line of credit borrowings have
been made under term loans with maturity dates through May 2000. Borrowings
under this agreement bear interest at the base rate plus 0.75%, or LIBOR plus
2.5%, at the Company's option. At September 30, 1997, the average interest
rate under the credit facility was 8.2%. Borrowings under the facility are
collateralized by substantially all the assets of the Company and the stock of
the subsidiaries. The Bank Credit Agreement contains various financial
covenants including the maintenance of certain financial ratios, restrictions
on capital expenditures, and a prohibition against the payment of dividends.
F-25
<PAGE>
U.S. LEGAL SUPPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In October 1997, the Company amended the Bank Credit Agreement to increase
the revolving line of credit from $2,000,000 to $3,250,000 and further amended
the Agreement in December 1997 to increase the revolving line of credit to
$4,250,000. The additional borrowings of $2,250,000 mature on February 15,
1998. If the Company is unable to pay such amount, the bank has the ability to
call the outstanding balance of both the revolving line of credit and the term
loans. The revolving credit and term loans must be repaid within three days of
the closing of an initial public offering of Common Stock or a change of
control. Also, the holders of the Senior Subordinated Notes agreed to defer
the receipt of interest payments in the amount of $540,000 until the earlier
of February 15, 1998 or the completion of an initial public offering of the
Company's Common Stock.
The Company has entered into an agreement with a commercial bank for a new
$40.0 million revolving credit facility which will be effective upon the
closing of the Company's initial public offering (the "New Credit Facility").
The Company expects that, immediately upon completion of the initial public
offering, approximately $12.1 million will have been borrowed and
approximately $10.0 million will be available for additional borrowings under
the New Credit Facility. From time to time, additional borrowing capacity will
be available to the Company under the New Credit Agreement provided that the
Company achieves certain levels of financial performance through operations or
through acquisitions. Loans under the New Credit Facility will bear interest
at rates based, at the Company's option, on either LIBOR or the base rate
plus, in each case, an applicable margin. The applicable margin will be
contingent upon the debt coverage ratio as defined in the New Credit Facility
and will vary from 1.75% to 2.25% in the case of LIBOR loans and 0% to .50% in
the case of base rate loans. In addition, the Company will be required to pay
to the lenders a quarterly fee with respect to the unused portion of the New
Credit Facility. The New Credit Agreement will also have a $2.5 million
sublimit for the issuance of letters of credit.
Borrowings under the New Credit Facility will be secured by substantially
all of the assets of the Company and the stock of the subsidiaries. The New
Credit Facility also will require the Company to comply with various covenants
related to, among other matters: (i) the maintenance of certain financial
ratios, (ii) limitations on the incurrence of indebtedness, (iii) restrictions
on liens, guarantees, dividends and stock redemptions, and (iv) limitations on
mergers and sales of assets. The New Credit Facility will terminate, and all
borrowings will be required to be repaid on December 31, 2000.
Maturities of debt, excluding capital lease obligations of $158,911, are as
follows:
<TABLE>
<S> <C>
1997 (three months)........................................... $ 100,373
1998.......................................................... 4,624,743
1999.......................................................... 3,458,040
2000.......................................................... 9,603,850
2001.......................................................... 3,658,032
2002.......................................................... 3,214,197
Thereafter.................................................... 7,164,294
-----------
$31,823,529
===========
</TABLE>
8. PREFERRED STOCK:
Series A Preferred Stock
Pursuant to the terms of the Articles of Incorporation, the Board of
Directors has created a series of Preferred Stock consisting of 2,000,000
shares of Series A Convertible Preferred Stock (the "Series A Preferred
Stock"). As of September 30, 1997, 1,000,000 shares of Series A Preferred
Stock were issued and outstanding. The Series A Preferred Stock (a) has a
liquidation preference of $1.00 per share, plus accrued but unpaid
F-26
<PAGE>
U.S. LEGAL SUPPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
dividends and (b) entitles the holder, concurrently with each dividend paid on
the Common Stock, to dividends in the same amount payable on the number of
shares of Common Stock then issuable on conversion of the Series A Preferred
Stock. Holders of Series A Preferred Stock vote together with the Common Stock
on all matters submitted to a vote of the shareholders, and each share of
Series A Preferred Stock entitles the holder to one vote for each share of
Common Stock issuable on conversion thereof. The Series A Preferred Stock
ranks on a parity with the Common Stock with respect to dividends and senior
to Common Stock and the Series B Preferred Stock described below as to
distributions of assets upon liquidation. Shares of Series A Preferred Stock
may be converted into Common Stock, at the option of the holder, at an initial
conversion rate of 1.56 shares of Common Stock for each share of Series A
Preferred Stock, subject to adjustment. The Company may elect to convert all
outstanding Series A Preferred Stock into shares of Common Stock at the
foregoing conversion rate, at any time after the closing of an underwritten
public offering of equity securities of the Company resulting in gross
proceeds of at least $15,000,000 (a "Qualifying Public Offering"), provided
the $9,000,000 principal amount of 12% Senior Subordinated Notes issued by a
subsidiary of the Company are no longer outstanding. Under the terms of the
Securities Purchase Agreement pursuant to which the Series A Preferred Stock
was issued, the holders have the right to require the Company to redeem any or
all shares of Series A Preferred Stock upon the occurrence of a Change of
Control (as defined in the Agreement). The redemption price is payable in cash
in an amount equal to the Market Price (as defined) at the time notice of the
Change of Control is given, together with a premium in the maximum aggregate
amount of $2,700,000. If at any time after January 17, 2003, there is no
Liquid Secondary Market (as defined), the holders of the Series A Preferred
Stock shall have the right to require the Company to redeem any or all of the
outstanding shares of Series A Preferred Stock in three annual installments,
at a redemption price equal to the Fair Market Value (as defined) of the
shares of Common Stock into which the Series A Preferred Stock are then
convertible, together with interest on the unpaid balance at an annual rate of
12.0%. For the nine months ended September 30, 1997, the Company has accreted
$479,000 toward the redemption value of the Series A Preferred Stock. Subject
to the rights of the holders of the Series A Preferred Stock to convert their
shares into Common Stock, the Company may redeem the Series A Preferred Stock,
in whole but not in part, at any time on or after a Qualifying Public
Offering, provided the Senior Subordinated Notes are no longer outstanding.
The redemption price for shares redeemed at the option of the Company shall be
$.001 for each share of Common Stock issuable upon conversion of the Series A
Preferred Stock so redeemed (subject to adjustments).
Series B Preferred Stock
Pursuant to the terms of the Articles of Incorporation, the Board of
Directors has created a series of Preferred Stock consisting of 2,500,000
shares of Series B Convertible Preferred Stock (the "Series B Preferred
Stock"). As of September 30, 1997, 2,046,667 shares of Series B Preferred
Stock were issued and outstanding. The Series B Preferred Stock (a) has a
liquidation preference of $1.00 per share, (b) ranks junior to the Series A
Preferred Stock with respect to distributions of assets on liquidation and (c)
is convertible into Common Stock in the event of a Qualifying Public Offering
at a conversion price equal to 93% of the price at which shares of Common
Stock are offered to the public in the Qualifying Public Offering. Holders of
Series B Preferred Stock are not entitled to receive any dividends. Within
five business days after the receipt of notice from the Company that the
Company has filed a Registration Statement with the Securities and Exchange
Commission (the "Commission") related to a Qualifying Public Offering, the
holder is required to notify the Company if such holder elects to cause the
Company to redeem all or part of the Series B Preferred Stock for a cash
redemption price of $1.00 per share or to convert such shares into Common
Stock at the rate specified above. In the event the holder fails to give the
Company notice of its election, all conversion and redemption rights shall
immediately terminate. Any shares of Series B Preferred Stock not redeemed or
converted into Common Stock, must be redeemed by the Company quarterly, during
the 20 fiscal quarters following the quarter in which a Qualifying Public
Offering occurs. The Series B Preferred Stock does not entitle the holders to
vote on any matter submitted to the Company's shareholders, except as required
by law.
F-27
<PAGE>
U.S. LEGAL SUPPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Series C Preferred Stock
The Board of Directors has created a series of Preferred Stock consisting of
231,250 shares of Series C Convertible Preferred Stock (the "Series C
Preferred Stock"). As of September 30, 1997, 231,250 shares of Series C
Preferred Stock were issued and outstanding. The Series C Preferred Stock has
a liquidation preference of $1.00 per share, plus accrued and unpaid
dividends. The Series C Preferred Stock ranks senior to the Series A Preferred
Stock and the Common Stock with respect to dividends and distributions of
assets upon liquidation, and ranks senior to the Series B Preferred Stock with
respect to distributions of assets on liquidation. The Series C Preferred
Stock carries an annual dividend equal to $.06 per share, payable quarterly in
respect of any quarter in which aggregate net income before taxes,
depreciation, and amortization of the business represented by SFRS exceeds
$160,000. Dividends of $1,825 were paid on the Series C Preferred Stock in the
nine months ended September 30, 1997. The Series C Preferred Stock is
convertible into Common Stock upon the occurrence of a Qualifying Public
Offering, at a conversion rate equal to the initial public offering price.
Within 10 business days after the receipt of notice from the Company that the
Company has filed a Registration Statement with the Commission related to a
Qualifying Public Offering, the holder is required to notify the Company if
such holder elects to cause the Company to redeem all or part of the Series C
Preferred Stock for a cash redemption price of $1.00 per share or to convert
such shares into Common Stock at the rate specified above. In the event the
holder fails to give the Company notice of its election, all conversion and
redemption rights shall immediately terminate. On or after May 15, 1998, any
holder of Series C Preferred Stock may require the Company to redeem all such
holders of shares of Series C Preferred Stock quarterly over the 16 fiscal
quarters ended after notice of such election is delivered to the Company. The
Series C Preferred Stock does not entitle the holders to vote on any matter
submitted to the Company's shareholders, except as required by law.
9. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases various office space under noncancelable operating leases
with remaining terms of up to four years. The Company also leases certain
office and computer equipment under operating leases. Rental expense
associated with these operating leases for the nine months ended September 30,
1997 was approximately $355,000.
The future minimum rental payments under noncancelable operating leases from
1997 through 2002 are as follows (in thousands):
<TABLE>
<S> <C>
1997 (three months)............................................ $189,746
1998........................................................... 723,699
1999........................................................... 658,839
2000........................................................... 528,387
2001........................................................... 231,121
2002........................................................... 46,832
----------
$2,378,624
==========
</TABLE>
Independent Contractors
The Company, like most court reporting firms, provides court reporting
services through the use of independent contractors, who are not employees of
the Company. The Company does not pay or withhold federal or state employment
taxes with respect to these independent contractors. Independent court
reporters are responsible for acquiring and operating their court reporting
equipment. The use of independent contractors as court reporters is consistent
with industry practice and allows the Company to control costs. In the event
the Company were required to treat these court reporters as its employees, the
Company could become responsible for the taxes required to be withheld and
could incur additional costs associated with employee benefits and other
employee costs.
F-28
<PAGE>
U.S. LEGAL SUPPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Legal Proceedings
The Company is involved in certain lawsuits and claims arising in the normal
course of business. In the opinion of management, uninsured losses, if any,
resulting from the ultimate resolution of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
10. STOCK OPTION PLANS:
1997 Stock Incentive Plan
The Company's 1997 Stock Incentive Plan provides for the granting to
eligible employees or directors of the Company and its subsidiaries of options
to purchase shares of Common Stock, which may be incentive stock options
within the meaning of Section 422(b) of the Internal Revenue Code or non-
qualified options. The 1997 Stock Incentive Plan is administered by the
Compensation Committee of the Board of Directors, which designates the
employees who will receive options, the type of options, the number of shares
of Common Stock subject to these options and their terms and conditions,
including their exercise price and vesting schedule. A total of 750,000 shares
of Common Stock have been reserved for issuance pursuant to options granted
under the 1997 Stock Incentive Plan. As of September 30, 1997 options to
purchase a total of 138,915 shares of Common Stock had been granted under the
1997 Stock Incentive Plan with exercise prices ranging from $6.41 to $10.20.
All options granted under the 1997 Stock Incentive Plan vest 20% annually, are
fully vested on the fifth anniversary of the date of grant and expire 10 years
after the date of grant. Subsequent to September 30, 1997, the Company granted
an additional 470,109 stock options under the 1997 Stock Incentive Plan with
an exercise price equal to the initial public offering price.
Stock Option Plan for Non-Employee Directors
The Company also has adopted the U.S. Legal Support, Inc. Stock Option Plan
for Non-Employee Directors (the "Directors' Stock Option Plan"). A total of
150,000 shares of Common Stock have been reserved for issuance under the
Directors' Stock Option Plan which provides for the grant of options to
purchase 25,000 shares of Common Stock, with an exercise price equal to the
fair market value on the date of grant, to each incumbent director and to each
person who becomes a director concurrently with his or her first election to
the Board. Options granted under the Directors' Stock Option Plan vest 20%
annually and are fully vested on the fifth anniversary of the date of grant.
Upon completion of the Offering, each director of the Company will be awarded
options to purchase 25,000 shares of Common Stock with an exercise price equal
to the per share price set forth on the cover page of this Prospectus.
The following is a summary of stock option activity for the nine months
ended September 30, 1997:
<TABLE>
<CAPTION>
# OF SHARES OF
UNDERLYING WEIGHTED AVERAGE
OPTIONS EXERCISE PRICES
-------------- ----------------
<S> <C> <C>
Outstanding at beginning of the year.......... -- --
Granted....................................... 138,915 $7.94
Exercised..................................... -- --
Forfeited..................................... -- --
Expired....................................... -- --
Outstanding at end of period.................. 138,915 $7.94
Exercisable at end of period.................. -- --
Weighted average fair value of options
granted...................................... $2.54
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using The Black-Scholes pricing model with the following assumptions for
grants during the nine months ended September 30, 1997: expected dividend
yield of 0%; risk-free interest rates of 6%; and weighted average expected
life of five years. The minimum value method has been applied, which excludes
expected volatility.
F-29
<PAGE>
U.S. LEGAL SUPPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options outstanding as of September 30, 1997 are summarized below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------- -----------------------
WGTD.
AVG. WGTD. WGTD.
REMAINING AVG. AVG.
RANGE OF NUMBER LIFE (IN EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING YEARS) PRICE EXERCISABLE PRICE
- --------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$6.41 to $8.50 98,915 9 $7.02 -- --
$10.20 40,000 9 $10.20 -- --
- --------------- ------- --- ------
$6.41 to $10.20 138,915 9 $7.94 -- --
</TABLE>
Had the compensation expense for the 1997 Stock Incentive Plan been
recognized in accordance with SFAS 123, the Company's net loss and net loss
per common share for the nine months ended September 30, 1997 would have been
as follows (in thousands except per share data):
<TABLE>
<CAPTION>
AS
REPORTED PRO FORMA
--------- ---------
<S> <C> <C>
Net loss attributable to common shareholders....... $(562,355) $(586,583)
Net loss per common share.......................... $ (.14) $ (.15)
</TABLE>
The effects of applying SFAS 123 for only 1997 option grants may not be
representative of the pro forma impact in future years.
Purchase Price Options
In connection with the acquisitions of Klein Bury, Legal Enterprise and
Elaine Dine, the Company granted non-compensatory stock options as partial
consideration. The fair value of the options granted was determined at the
date of acquisition and accounted for as part of the purchase price.
Additionally, options were granted to employees of Looney in connection with
the combination of Looney and compensation expense of approximately $20,000
was recognized.
Other Options outstanding as of September 30, 1997 are summarized below:
<TABLE>
<CAPTION>
OPTION OPTIONS OPTIONS
GRANTED PRICE EXERCISED OUTSTANDING
------- ------ --------- -----------
<S> <C> <C> <C>
104,336 $.01 12,480 91,856
40,000 $.10 -- 40,000
</TABLE>
11. RELATED PARTY TRANSACTIONS:
To finance the distribution to Richard Looney and the acquisition of Klein
Bury, the Company issued $9,000,000 principal amount of Senior Subordinated
Notes to three investors managed by Pecks Management Partners Ltd. in January
1997. A director of the Company serves as a Managing Partner of Pecks
Management Partners Ltd.
The GulfStar Group, Inc. ("GulfStar") has provided merger and acquisition
advisory services to the Company since its inception. A director of the
Company is a Managing Director of GulfStar. In October 1996, GulfStar
Investments, Ltd., an affiliate of GulfStar was issued 150,000 shares of
Common Stock at a price of $.01 per share, or $1,500, in exchange for services
rendered in connection with the organization of the Company and strategic
planning. The estimated fair value of the shares received by GulfStar was
approximately $60,000, or $.40 per share, based on a January 17, 1997
valuation which considers the combination with Looney. Upon completion of the
initial public offering, such amount will be recorded as a simultaneous
increase and decrease to paid-in capital. If the offering is not successful,
such amount will be charged to expense. GulfStar also received an investment
banking fee aggregating $475,000 in exchange for services in connection with
the placement of $9,000,000 of Senior Subordinated Notes, the placement of the
Series A Preferred Stock, the
F-30
<PAGE>
U.S. LEGAL SUPPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
negotiation of the Bank Credit Agreement and the acquisition of Looney and
Klein Bury in January 1997. Pursuant to the terms of a letter agreement dated
April 24, 1997, between GulfStar and the Company, GulfStar agreed to provide
negotiation and other financial advisory services to the Company in connection
with the Company's evaluation of acquisitions and will be paid advisory fees
equal to 1.0% of the total purchase price of each acquisition as well as
reimbursement of out-of-pocket expenses. GulfStar has received a total of
$33,000 under the letter agreement and will be entitled to an additional
$450,000 upon completion of the initial public offering.
12. SUPPLEMENTAL CASH FLOW INFORMATION:
The following represents supplemental noncash investing and financing
activities:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Common control exchange of
shares between Looney and
the Company
Net assets acquired in
connection with
reorganization......... $207,763
Issuance of Series B
Preferred Stock........ 2,046,667
Acquisition of Klein Bury
Net assets acquired, net
of cash................ 510,521
Grant of stock options.. 12,000
Issuance of a note
payable................ 1,424,113
Issuance of Common
Stock.................. 68,240
Acquisition of San
Francisco Reporting
Net assets acquired, net
of cash................ 112,814
Issuance of Preferred
Stock.................. 231,250
Issuance of Common
Stock.................. 12,243
Acquisition of G&G
Net assets acquired, net
of cash................ 152,012
Issuance of notes
payable................ 995,568
Acquisition of Legal
Enterprise
Net assets acquired, net
of cash................ 625,707
Grant of stock options.. 59,500
Issuance of notes
payable................ 1,140,500
Acquisition of Ziskind
Greene
Net assets acquired, net
of cash................ 4,259
Issuance of Common
Stock.................. 1,350,000
Acquisition of Block
Net assets acquired, net
of cash................ (32,494)
Issuance of notes
payable................ 600,000
Acquisition of Elaine Dine
Net assets acquired, net
of cash................ 286,000
Issuance of Common
Stock.................. 650,000
Grant of stock options.. 350,000
Issuance of notes
payable................ 2,000,000
Deferred purchase
price.................. 500,000
Acquisition of Johnson
Group
Net assets acquired, net
of cash................ 199,868
Issuance of Common
Stock.................. 1,211,046
Issuance of notes
payable................ 245,760
Acquisition of Amicus One
Net assets acquired, net
of cash................ 363,029
Issuance of Common
Stock.................. 990,000
Issuance of a note
payable................ 560,000
</TABLE>
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
U.S. Legal Support, Inc.:
We have audited the accompanying balance sheet of Looney & Company as of
December 31, 1995 and 1996, and the related statements of operations,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
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 financial statements referred to above present fairly,
in all material respects, the financial position of Looney & Company as of
December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
September 5, 1997
F-32
<PAGE>
LOONEY & COMPANY
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
ASSETS ---------- ----------
<S> <C> <C>
Current assets:
Cash.................................................... $-- $20,605
Accounts receivable:
Trade, net of allowance of $142,581 and $223,331,
respectively.......................................... 2,095,032 1,307,330
Related parties........................................ 69,531 319,302
Prepaid expenses and other current assets............... 56,049 45,926
Deferred income taxes................................... -- 26,742
---------- ----------
Total current assets............................... 2,220,612 1,719,905
Property and equipment, net.............................. 590,101 426,296
Other assets............................................. 51,041 27,500
Deferred income taxes.................................... -- 18,500
---------- ----------
Total assets............................................. $2,861,754 $2,192,201
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable........................................ $452,125 $183,389
Accrued liabilities..................................... 897,265 1,140,163
Income taxes payable.................................... 123,303 --
Deferred income taxes................................... 15,188 --
Current maturities of long-term obligations............. 832,157 529,413
---------- ----------
Total current liabilities.......................... 2,320,038 1,852,965
Long-term obligations, net of current maturities......... 227,378 131,473
Deferred income taxes.................................... 122,274 --
Commitments and contingencies
Stockholder's equity:
Common stock, $1 par value, 100,000 shares authorized,
1,000 shares issued and outstanding.................... 1,000 1,000
Retained earnings....................................... 191,064 206,763
---------- ----------
Total stockholder's equity......................... 192,064 207,763
---------- ----------
Total liabilities and stockholder's equity............... $2,861,754 $2,192,201
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-33
<PAGE>
LOONEY & COMPANY
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------- SEPTEMBER 30,
1994 1995 1996 1996
---------- ---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues...................... $8,362,920 $9,103,728 $7,667,539 $5,886,022
Cost of services.............. 5,589,599 5,763,195 4,838,932 3,725,852
---------- ---------- ---------- ----------
Gross profit.................. 2,773,321 3,340,533 2,828,607 2,160,170
Selling, general and
administrative expenses...... 3,042,999 1,970,310 2,351,669 1,309,628
Depreciation.................. 223,680 230,353 212,277 159,208
---------- ---------- ---------- ----------
Operating income (loss)....... (493,358) 1,139,870 264,661 691,334
Interest expense.............. 184,414 229,969 238,251 177,920
---------- ---------- ---------- ----------
Income (loss) before income
taxes........................ (677,772) 909,901 26,410 513,414
Income tax (benefit) expense.. (182,979) 327,177 10,711 174,550
---------- ---------- ---------- ----------
Net income (loss)............. $ (494,793) $ 582,724 $ 15,699 $ 338,864
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-34
<PAGE>
LOONEY & COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED STOCKHOLDER'S
STOCK EARNINGS EQUITY
------ -------- -------------
<S> <C> <C> <C>
Balance as of January 1, 1994.................... $1,000 $103,133 $104,133
Net loss......................................... -- (494,793) (494,793)
------ -------- --------
Balance as of December 31, 1994.................. 1,000 (391,660) (390,660)
Net income....................................... -- 582,724 582,724
------ -------- --------
Balance as of December 31, 1995.................. 1,000 191,064 192,064
Net income....................................... -- 15,699 15,699
------ -------- --------
Balance as of December 31, 1996.................. $1,000 $206,763 $207,763
====== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-35
<PAGE>
LOONEY & COMPANY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------ SEPTEMBER 30,
1994 1995 1996 1996
---------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............... $(494,793) $582,724 $15,699 $338,864
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation................... 223,680 230,353 212,277 159,208
Provision for doubtful
accounts...................... 28,566 82,773 80,750 60,037
Deferred income taxes.......... 40,263 75,272 (182,704) (19,639)
Loss on disposal of equipment.. 47,345 -- -- --
Changes in operating assets and
liabilities:
Accounts receivable........... (161,513) (256,538) 706,952 982,208
Other receivables, related
parties...................... -- 34,407 (249,771) (217,235)
Prepaid expenses and other
current assets............... (12,116) (1,199) 10,123 (96,102)
Accounts payable and accrued
liabilities.................. 275,578 (305,706) 76,138 (673,138)
Income taxes payable.......... -- 123,303 (123,303) (33,967)
Other assets.................. 148,305 3,010 23,541 19,226
---------- -------- -------- --------
Net cash provided by
operating activities...... 95,315 568,399 569,702 519,462
---------- -------- -------- --------
Cash flows from investing
activities:
Purchase of property and
equipment...................... (182,331) (7,654) (51,028) (41,180)
---------- -------- -------- --------
Net cash used in investing
activities ............... (182,331) (7,654) (51,028) (41,180)
---------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from borrowings........ 972,517 -- -- --
Principal payments on long-term
obligations.................... (1,013,769) (491,404) (396,093) (280,881)
Other........................... 128,268 (69,341) (101,976) (101,976)
---------- -------- -------- --------
Net cash provided by (used
in) financing activities
.......................... 87,016 (560,745) (498,069) (382,857)
---------- -------- -------- --------
Increase in cash................. -- -- 20,605 95,425
Cash and cash equivalents at
beginning of period............. -- -- -- --
---------- -------- -------- --------
Cash and cash equivalents at end
of period....................... $ -- $ -- $ 20,605 $ 95,425
========== ======== ======== ========
Cash paid for interest........... $252,906 $229,969 $238,251 --
Cash paid for income taxes....... -- 120,000 297,590 --
Non cash investing and financing
activities:
Equipment acquired under capital
leases......................... 123,126 44,504 13,051 --
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-36
<PAGE>
LOONEY & COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
Looney & Company (the "Company"), a Texas corporation, was founded in 1988
and operates in six Texas offices, providing litigation support services
primarily to insurance companies, law firms and large corporations. The
Company's primary business is court reporting, the transcription of spoken
legal testimony into the written word, the retrieval of records used in
conjunction with the investigation and litigation of legal proceedings, and
copying services. Looney is the predecessor to U.S. Legal Support, Inc.
("USLS"). The interim financial statements for the nine months ended September
30, 1996 should be read in conjunction with the interim financial statements
of USLS included elsewhere in this prospectus.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Preparation of Interim Financial Statements
The financial statements for the nine months ended September 30, 1996,
reflect all adjustments that are, in the opinion of management, necessary or a
fair presentation of the results for the period. Such adjustments are
considered to be of a normal recurring nature unless otherwise identified.
Use 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 amount 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.
Cash
Cash is maintained in two banks. The balances, at times, may exceed
federally insured amounts although management believes that risk of loss is
minimal.
Property and Equipment
Property and equipment is recorded at cost and is depreciated on the
straight-line basis over the estimated useful lives of the assets.
Expenditures for improvements that extend the life of such assets are
capitalized while maintenance and repairs are charged to expense as incurred.
When property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the related accounts and any
resulting gain or loss is included in the statement of operations.
Revenue Recognition
The Company recognizes revenue as the documents or records are delivered to
its customers. An allowance is provided for anticipated bad debts based
primarily on historical experience and current estimates.
Concentration of Credit Risk
The Company grants credit to various companies primarily in the legal and
insurance industries which may be affected by economic or other external
conditions. The Company maintains allowances for potential credit losses, and
such losses have been within management's expectations.
Income Taxes
Deferred income taxes are provided for the accumulated temporary differences
in the bases of assets and liabilities for financial reporting and income tax
purposes using enacted tax rates and laws in effect in the years in which the
differences are expected to reverse.
F-37
<PAGE>
LOONEY & COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. RECEIVABLES, RELATED PARTIES:
Receivables, related parties, consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
Shareholder............................................. $69,531 --
U.S. Legal Support, Inc................................. -- $258,988
Klein, Bury & Associates................................ -- 60,314
------- --------
$69,531 $319,302
======= ========
</TABLE>
In 1996, the Company paid, on behalf of Klein, Bury & Associates ("Klein
Bury") and U.S. Legal Support, Inc. ("USLS"), costs incurred related to the
January 1997 acquisitions of the Company and Klein Bury by USLS (see Note 9).
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
USEFUL LIVES 1995 1996
------------ ---------- ----------
<S> <C> <C> <C>
Furniture, fixtures and
equipment.............. 5 to 7 years $1,304,264 $1,367,342
Vehicles................ 5 years 56,640 21,782
---------- ----------
1,360,904 1,389,124
Less accumulated
depreciation........... (770,803) (962,828)
---------- ----------
$ 590,101 $ 426,296
========== ==========
</TABLE>
The Company has entered into various capital leases. The leases were
recorded upon their inception using the interest rate implicit in the lease
agreements. The capitalized cost of leased office equipment was approximately
$581,000 and $594,000 at December 31, 1995 and 1996, respectively.
F-38
<PAGE>
LOONEY & COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM OBLIGATIONS:
Long-term obligations consisted of the following at December 31:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
--------- --------
<S> <C> <C>
Note payable to a bank under line of credit, providing
borrowings up to $1,500,000, with interest at the prime
rate plus 2.25%, collateralized by substantially all
assets of the Company not otherwise pledged............. $657,422 $438,853
Obligations under capital leases of certain equipment,
due in monthly installments through July 2000, with
implicit interest rates ranging from 8.0% to 20%........ 319,024 218,533
Notes payable to bank, due in monthly installments,
including interest at 7% to 9.25%, through January 1997,
collateralized by certain equipment..................... 83,089 3,500
--------- --------
1,059,535 660,886
Less current maturities.................................. (832,157) (529,413)
--------- --------
$227,378 $131,473
========= ========
</TABLE>
At December 31, 1996, future minimum payments under long-term obligations
were as follows:
<TABLE>
<CAPTION>
NOTE CAPITAL
YEAR ENDED PAYABLE LEASES
---------- -------- --------
<S> <C> <C>
1997................................................... $442,353 $109,516
1998................................................... -- 83,560
1999................................................... -- 59,179
2000................................................... -- 9,093
-------- --------
442,353 261,348
Less amounts representing interest..................... -- 42,815
-------- --------
$442,353 $218,533
======== ========
</TABLE>
6. INCOME TAXES:
The provision for income taxes consisted of the following for the years ended
December 31:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
--------- -------- --------
<S> <C> <C> <C>
Current........................................... $(223,242) $251,905 $193,415
Deferred.......................................... 40,263 75,272 (182,704)
--------- -------- --------
$(182,979) $327,177 $ 10,711
========= ======== ========
</TABLE>
F-39
<PAGE>
LOONEY & COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the differences between income taxes computed at the
U.S. federal statutory rate of 34% and the Company's reported provision
(benefit) for income taxes follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
--------- -------- -------
<S> <C> <C> <C>
Income tax provision (benefit) at statutory
rate............................................ $(230,442) $309,366 $8,979
State tax provision, net of federal income tax
benefit......................................... 20,333 27,297 792
Nondeductible expenses and other................. 27,130 (9,486) 940
--------- -------- -------
$(182,979) $327,177 $10,711
========= ======== =======
</TABLE>
The components of deferred income tax assets and liabilities were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
--------- -------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities....................................... $54,331 $84,884
Allowance for doubtful accounts........................... 52,755 82,632
--------- -------
Deferred tax assets..................................... 107,086 167,516
Deferred tax liabilities:
Conversion from cash to accrual basis for tax reporting
purposes................................................. 244,548 122,274
--------- -------
Net deferred tax asset (liability)...................... $(137,462) $45,242
========= =======
</TABLE>
7. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
-------- ----------
<S> <C> <C>
Customer overpayments...................................... $602,361 $ 519,711
Payroll.................................................... 154,904 160,452
Litigation settlements and other........................... 140,000 100,000
Ownership interests........................................ -- 360,000
-------- ----------
$897,265 $1,140,163
======== ==========
</TABLE>
The Company recorded a charge of $360,000 in the fourth quarter of 1996 for
the fair value of ownership interests granted to certain employees by the
Company's shareholder. The obligation was satisfied in January 1997 in
connection with the acquisition of the Company's stock (Note 9).
Customer overpayments arise primarily when customers make duplicate payments
or payments in excess of billed amounts. The customers have generally denied
the Company's refund attempts, which the management of the Company believes is
due to the significant volume and relatively small amount of each individual
billing. Legal counsel has advised the Company that any claims by third
parties for overpayments are subject to statute-of-limitation laws and related
interpretations, which vary by state, and the ultimate resolution of any such
third-party claims, if made, is not certain.
In 1997, the Company paid all outstanding amounts owed under litigation
settlements.
F-40
<PAGE>
LOONEY & COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS AND CONTINGENCIES:
Independent Contractors
The Company, like most court reporting firms, provides court reporting
services through the use of independent contractors, who are not employees of
the Company. The Company does not pay or withhold federal or state employment
taxes with respect to these independent contractors. Independent court
reporters are responsible for acquiring and operating their court reporting
equipment. The use of independent contractors as court reporters is consistent
with industry practice and allows the Company to control costs. In the event
the Company were required to treat these court reporters as its employees, the
Company could become responsible for the taxes required to be withheld and
could incur additional costs associated with employee benefits and other
employee costs.
Operating Leases
Aggregate minimum rental commitments under noncancelable operating leases
with lease terms in excess of one year are as follows:
<TABLE>
<S> <C>
1997............................................................. $274,314
1998............................................................. 242,035
1999............................................................. 197,163
2000............................................................. 143,637
2001............................................................. 73,110
--------
$930,259
========
</TABLE>
Rent expense recorded in 1995 and 1996 totaled approximately $295,000 and
$260,000, respectively. Certain rental agreements provide for additional rent
based on the lessors' operating expenses.
Legal Proceedings
The Company is involved in certain lawsuits and claims arising in the normal
course of business. In the opinion of management, uninsured losses, if any,
resulting from the ultimate resolution of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
9. FORMATION OF NEW COMPANY:
In October 1996, the Company's shareholder, along with an investment firm,
formed U.S. Legal Support, Inc. ("USLS") to create a nationwide a leading
provider of legal support and staffing services to law firms, insurance
providers and major corporations. In January 1997, the Company's stock was
exchanged for stock of USLS as part of a common control combination (see Note
1 of the U.S. Legal Support, Inc. financial statements).
F-41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
U.S. Legal Support, Inc.:
We have audited the accompanying balance sheet of Klein, Bury & Associates,
Inc. as of September 30, 1995 and December 31, 1996, and the related
statements of income, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of 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 financial statements referred to above present fairly,
in all material respects, the financial position of Klein, Bury & Associates,
Inc. as of September 30, 1995 and December 31, 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
August 15, 1997
F-42
<PAGE>
KLEIN, BURY & ASSOCIATES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1996
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash.............................................. $ -- $315,437
Accounts receivable, net of allowance of $216,619
and $235,823, respectively....................... 1,908,325 2,120,265
---------- ----------
Total current assets............................ 1,908,325 2,435,702
Property and equipment, net......................... 61,278 30,411
Other assets........................................ 4,405 4,405
---------- ----------
Total assets........................................ $1,974,008 $2,470,518
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable.................................. $ 843,577 $1,167,787
Accrued liabilities............................... 4,296 4,638
Income taxes payable.............................. -- 140,482
Deferred income taxes............................. 425,407 358,474
---------- ----------
Total current liabilities....................... 1,273,280 1,671,381
Deferred income taxes............................... 25,605 26,507
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value, 500 shares authorized,
issued and outstanding........................... 500 500
Additional paid-in capital........................ 30,000 30,000
Retained earnings................................. 644,623 742,130
---------- ----------
Total stockholders' equity...................... 675,123 772,630
---------- ----------
Total liabilities and stockholders' equity.......... $1,974,008 $2,470,518
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-43
<PAGE>
KLEIN, BURY & ASSOCIATES, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1995 1996
------------- ------------
<S> <C> <C>
Revenues............................................. $7,302,368 $8,525,386
Cost of services..................................... 4,837,854 5,586,241
---------- ----------
Gross profit......................................... 2,464,514 2,939,145
Selling, general and administrative expenses......... 2,263,112 2,779,564
Depreciation......................................... 16,343 15,367
---------- ----------
Income before income taxes........................... 185,059 144,214
Income taxes......................................... 76,901 55,065
---------- ----------
Net income......................................... $ 108,158 $ 89,149
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-44
<PAGE>
KLEIN, BURY & ASSOCIATES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
October 1, 1994...................... $500 $ -- $536,465 $536,965
Capital contributions................ -- 30,000 -- 30,000
Net income........................... -- -- 108,158 108,158
---- ------- -------- --------
September 30, 1995................... 500 30,000 644,623 675,123
Net income, three months ended
December 31, 1995................... -- -- 8,358 8,358
---- ------- -------- --------
December 31, 1995.................... 500 30,000 652,981 683,481
Net income........................... -- -- 89,149 89,149
---- ------- -------- --------
December 31, 1996.................... $500 $30,000 $742,130 $772,630
==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-45
<PAGE>
KLEIN, BURY & ASSOCIATES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1995 1996
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................... $108,158 $89,149
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 16,343 15,367
Provision for doubtful accounts................... 86,801 64,366
Deferred tax expense.............................. 76,901 92,528
Changes in operating assets and liabilities:
Accounts receivable.............................. (453,406) (428,690)
Accounts payable................................. 12,451 244,132
Accrued liabilities.............................. 141,336 (63,740)
-------- --------
Net cash provided by operating activities..... (11,416) 13,112
-------- --------
Cash flows from investing activities:
Capital expenditures............................... -- (2,261)
-------- --------
Net cash used in investing activities......... -- (2,261)
-------- --------
Cash flows from financing activities:
Capital contribution............................... 30,000 --
Cash overdraft..................................... (18,616) --
-------- --------
Net cash provided by financing activities..... 11,384 --
-------- --------
Increase (decrease) in cash......................... (32) 10,851
Cash and cash equivalents at beginning of year...... 32 304,586
-------- --------
Cash and cash equivalents at end of year............ $ -- $315,437
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-46
<PAGE>
KLEIN, BURY & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
Klein, Bury & Associates, Inc., (the "Company"), a Florida corporation, was
founded in 1977 as a court reporting business based in Miami, Florida, with
four additional offices in Florida. The Company provides general court
reporting services, the transcription of spoken legal testimony into the
written word, and has particular expertise in handling cases involving medical
malpractice.
The Company changed its fiscal year end for reporting purposes from
September 30 to December 31. The results of operations for the three months
ended December 31, 1996 have been included in the statement of stockholders'
equity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use 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 amount 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.
Cash
Cash is maintained at one bank. The balances, at times, may exceed federally
insured amounts, although management believes that risk of loss is minimal.
Property and Equipment
Property and equipment is recorded at cost and is depreciated on the
straight-line basis over the estimated useful lives of the assets.
Expenditures for improvements that extend the life of such assets are
capitalized while maintenance and repairs are charged to expense as incurred.
When property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the related accounts and any
resulting gain or loss is included in the statement of income.
Revenue Recognition
The Company recognizes revenue as the documents or records are delivered to
its customers. An allowance is provided for anticipated bad debts, based
primarily on historical experience and current estimates.
Concentration of Credit Risk
The Company grants credit to various companies primarily in the legal and
insurance industries which may be affected by economic or other external
conditions. The Company maintains allowances for potential credit losses, and
such losses have been within management's expectations.
Income Taxes
Deferred income taxes are provided for the accumulated temporary differences
in the bases of assets and liabilities for financial reporting and income tax
purposes using enacted tax rates and laws in effect in the years in which the
differences are expected to reverse.
F-47
<PAGE>
KLEIN, BURY & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
USEFUL LIVES 1995 1996
------------ ------------- ------------
<S> <C> <C> <C>
Leasehold improvements.......... 5 years $26,085 $26,085
Furniture, fixtures and
equipment...................... 5 to 7 years 116,393 118,654
------- --------
142,478 144,739
Less accumulated depreciation... (81,200) (114,328)
------- --------
$61,278 $30,411
======= ========
</TABLE>
4. INCOME TAXES:
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1996
------------- ------------
<S> <C> <C>
Current........................................ $ -- $(37,463)
Deferred....................................... 76,901 92,528
------- --------
$76,901 $ 55,065
======= ========
</TABLE>
A reconciliation of the differences between income taxes computed at the
U.S. federal statutory rate of 34% and the Company's reported provision for
income taxes follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1996
------------- ------------
<S> <C> <C>
Income tax provision at statutory rate....... $62,920 $49,033
State tax provision, net of federal income
tax benefit................................. 6,847 5,336
Nondeductible expenses and other............. 7,134 696
------- -------
$76,901 $55,065
======= =======
</TABLE>
The components of deferred income tax assets and liabilities were as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1996
------------- ------------
<S> <C> <C>
Deferred tax liabilities:
Conversion from accrual to cash basis........ $425,407 $358,474
Property and equipment....................... 25,605 26,507
-------- --------
$451,012 $384,981
======== ========
</TABLE>
5. RELATED-PARTY TRANSACTIONS:
During the years ended September 30, 1995 and December 31, 1996, the Company
incurred rent expense of approximately $41,000 and $45,600, respectively, for
office space leased from a partnership in which an interest is held by the
Company's president and majority shareholder.
F-48
<PAGE>
KLEIN, BURY & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES:
Independent Contractors
The Company, like most court reporting firms, provides court reporting
services through the use of independent contractors, who are not employees of
the Company. The Company does not pay or withhold federal or state employment
taxes with respect to these independent contractors. Independent court
reporters are responsible for acquiring and operating their court reporting
equipment. The use of independent contractors as court reporters is consistent
with industry practice and allows the Company to control costs. In the event
the Company were required to treat these court reporters as its employees, the
Company could become responsible for the taxes required to be withheld and
could incur additional costs associated with employee benefits and other
employee costs.
Operating Leases
Aggregate minimum rental commitments under noncancelable operating leases
with lease terms in excess of one year are as follows:
<TABLE>
<S> <C>
1997.......................................................... $281,398
1998.......................................................... 244,222
1999.......................................................... 225,855
2000.......................................................... 232,702
2001.......................................................... 177,381
----------
$1,161,558
==========
</TABLE>
Rent expense for the years ended September 30, 1995 and December 31, 1996
totaled approximately $240,000 and $276,000, respectively. Certain rental
agreements provide for additional rent based on the lessors' operating
expenses.
Legal Proceedings
The Company is involved in certain lawsuits and claims arising in the normal
course of business. In the opinion of management, uninsured losses, if any,
resulting from the ultimate resolution of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
7. SALE OF THE COMPANY:
In January 1997, the Company's stock was acquired by U.S. Legal Support,
Inc.
F-49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
U.S. Legal Support, Inc.:
We have audited the accompanying balance sheet of G & G Court Reporters (a
Sole Proprietorship) as of December 31, 1995 and 1996, and the related
statements of income, owner's equity and cash flows for the years then ended.
These financial statements are the responsibility of 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 financial statements referred to above present fairly,
in all material respects, the financial position of G & G Court Reporters as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
September 4, 1997
F-50
<PAGE>
G & G COURT REPORTERS
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
ASSETS -------- --------
<S> <C> <C>
Current assets:
Accounts receivable, net of allowance of $15,500 in 1995
and 1996.................................................. $281,925 $251,103
-------- --------
Total current assets..................................... 281,925 251,103
Property and equipment, net.................................. 1,693 1,403
-------- --------
Total assets................................................. $283,618 $252,506
======== ========
<CAPTION>
LIABILITIES AND OWNER'S EQUITY
<S> <C> <C>
Current liabilities:
Cash overdraft............................................. $ 23,193 $ 709
Accounts payable........................................... 4,218 3,163
Accrued liabilities........................................ 4,451 11,754
-------- --------
Total current liabilities................................ 31,862 15,626
Commitments and contingencies
Owner's equity............................................... 251,756 236,880
-------- --------
Total liabilities and owner's equity......................... $283,618 $252,506
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-51
<PAGE>
G & G COURT REPORTERS
STATEMENT OF INCOME
<TABLE>
<CAPTION>
SIX
YEAR ENDED DECEMBER MONTHS JANUARY 1,
31, ENDED THROUGH
--------------------- JUNE 30, MAY 19,
1995 1996 1996 1997
---------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................ $1,544,379 $1,517,377 $745,412 $543,282
Cost of services.................... 813,646 837,774 412,850 321,716
---------- ---------- -------- --------
Gross profit........................ 730,733 679,603 332,562 221,566
Selling, general and administrative
expenses........................... 281,725 286,861 138,900 98,112
Depreciation........................ 318 290 145 145
---------- ---------- -------- --------
Net income.......................... $ 448,690 $ 392,452 $193,517 $123,309
========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-52
<PAGE>
G & G COURT REPORTERS
STATEMENT OF OWNER'S EQUITY
<TABLE>
<S> <C>
Balance, January 1, 1995.............................................. $265,153
Distributions......................................................... (462,087)
Net income............................................................ 448,690
--------
Balance, December 31, 1995............................................ 251,756
Distributions......................................................... (407,328)
Net income............................................................ 392,452
--------
Balance, December 31, 1996............................................ 236,880
Distributions (unaudited)............................................. (199,594)
Net income (unaudited)................................................ 123,309
--------
Balance, May 19, 1997 (unaudited)..................................... $160,595
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-53
<PAGE>
G & G COURT REPORTERS
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX JANUARY
YEAR ENDED MONTHS 1,
DECEMBER 31, ENDED THROUGH
------------------ JUNE 30, MAY 19,
1995 1996 1996 1997
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $448,690 $392,452 $193,517 $123,309
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 318 290 145 145
Changes in operating assets and
liabilities:
Accounts receivable................. 22,479 30,822 73,191 29,636
Accounts payable and accrued
liabilities........................ 4,203 6,248 4,619 45,795
-------- -------- -------- --------
Net cash provided by operating
activities...................... 475,690 429,812 271,472 198,885
-------- -------- -------- --------
Cash flows from financing activities:
Cash overdraft........................ (13,603) (22,484) 9,670 709
Distributions......................... (462,087) (407,328) (281,142) (199,594)
-------- -------- -------- --------
Net cash used in financing
activities...................... (475,690) (429,812) (271,472) (198,885)
-------- -------- -------- --------
Change in cash......................... -- -- -- --
Cash and cash equivalents at beginning
of period............................. -- -- -- --
-------- -------- -------- --------
Cash and cash equivalents at end of
period................................ $ -- $ -- $ -- $ --
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-54
<PAGE>
G & G COURT REPORTERS
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
G & G Court Reporters, a Sole Proprietorship (the "Company"), operates in
California, providing litigation support services primarily for insurance
companies, law firms and large corporations. The Company's primary business is
court reporting, the transcription of spoken legal testimony into the written
word.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Preparation of Interim Financial Statements
The unaudited financial statements for the periods ended June 30, 1996 and
May 19, 1997 reflect all adjustments that are, in the opinion of management,
necessary for a fair presentation of the results for the periods. Such
adjustments are considered to be of a normal recurring nature unless otherwise
identified.
Use 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 amount 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.
Cash
Cash is maintained primarily in one bank. The balances, at times, may exceed
federally insured amounts, although management believes that risk of loss is
minimal.
Property and Equipment
Property and equipment is recorded at cost and depreciated on the straight-
line basis over the estimated useful lives of the assets. Expenditures for
improvements that extend the life of such assets are capitalized while
maintenance and repairs are charged to expense as incurred. When property and
equipment is retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the related accounts and any resulting gain or
loss is included in the statements of income.
Income Taxes
The Company is organized as a sole proprietorship. No provision for federal
income taxes is provided in these financial statements because the Company's
income is included in the owner's separate income tax return.
Revenue Recognition
The Company recognizes revenue as the documents or records are delivered to
its customers. An allowance is provided for anticipated bad debts, based
primarily on historical experience and current estimates.
Concentration of Credit Risk
The Company grants credit to various companies primarily in the legal and
insurance industries which may be affected by economic or other external
conditions. The Company maintains allowances for potential credit losses, and
such losses have been within management's expectations.
F-55
<PAGE>
G & G COURT REPORTERS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
USEFUL LIVES 1995 1996
------------ ------- -------
<S> <C> <C> <C>
Furniture, fixtures and equipment................ 5 to 7 years $55,700 $51,181
Less accumulated depreciation.................... (54,007) (49,778)
------- -------
$ 1,693 $ 1,403
======= =======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES:
Independent Contractors
The Company, like most court reporting firms, provides court reporting
services through the use of independent contractors, who are not employees of
the Company. The Company does not pay or withhold federal or state employment
taxes with respect to these independent contractors. Independent court
reporters are responsible for acquiring and operating their court reporting
equipment. The use of independent contractors as court reporters is consistent
with industry practice and allows the Company to control costs. In the event
the Company were required to treat these court reporters as its employees, the
Company could become responsible for the taxes required to be withheld and
could incur additional costs associated with employee benefits and other
employee costs.
Operating Leases
Rent expense totalled approximately $59,000 and $56,000 for the years ended
December 31, 1995 and 1996, respectively. The Company's office lease expired
in June 1997. The Company entered a new office lease in June 1997 expiring
July 2002 with annual rent of approximately $44,000.
Legal Proceedings
The Company is involved in certain lawsuits and claims arising in the normal
course of business. In the opinion of management, uninsured losses, if any,
resulting from the ultimate resolution of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
5. SALE OF THE BUSINESS:
On May 19, 1997, certain of the Company's net assets were sold to U.S. Legal
Support, Inc.
F-56
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
U.S. Legal Support, Inc.:
We have audited the accompanying balance sheet of San Francisco Reporting
Service (a California Partnership) as of December 31, 1996 and May 14, 1997,
and the related statements of income, partners' capital and cash flows for the
year ended December 31, 1996 and the period from January 1, 1997 through May
14, 1997. These financial statements are the responsibility of 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of San Francisco Reporting
Service as of December 31, 1996 and May 14, 1997, and the results of its
operations and its cash flows for the year ended December 31, 1996 and the
period from January 1, 1997 through May 14, 1997 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
September 19, 1997
F-57
<PAGE>
SAN FRANCISCO REPORTING SERVICE
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MAY 14,
1996 1997
------------ --------
ASSETS
<S> <C> <C>
Current assets:
Cash.................................................... $ -- $19,309
Accounts receivable, net of allowance of $4,000 at 1996
and 1997............................................... 112,772 197,543
Prepaid expenses and other current assets............... 5,296 8,762
-------- --------
Total current assets.................................. 118,068 225,614
Property and equipment, net............................... 42,939 38,222
-------- --------
Total assets.............................................. $161,007 $263,836
======== ========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Current liabilities:
Note payable to bank.................................... $21,195 $63,425
Accounts payable........................................ 65,703 144,166
Due to related parties.................................. 11,000 --
Cash overdraft.......................................... 28,709 --
Current maturities of capital lease obligation.......... 2,477 2,477
-------- --------
Total current liabilities............................. 129,084 210,068
Capital lease obligation.................................. 3,580 2,586
Commitments and contingencies
Partners' capital......................................... 28,343 51,182
-------- --------
Total liabilities and partners' capital................... $161,007 $263,836
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-58
<PAGE>
SAN FRANCISCO REPORTING SERVICE
STATEMENT OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
YEAR ENDED ENDED ENDED
DECEMBER 31, JUNE 30, MAY 14,
1996 1996 1997
------------ ----------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues.................................... $1,139,538 $586,754 $467,424
Cost of services............................ 745,336 406,321 289,842
---------- -------- --------
Gross profit................................ 394,202 180,433 177,582
Selling, general and administrative
expenses................................... 356,284 168,696 141,682
Depreciation................................ 11,800 5,900 4,717
---------- -------- --------
Operating income.......................... 26,118 5,837 31,183
Interest expense............................ 4,993 3,571 2,344
---------- -------- --------
Net income................................ $ 21,125 $ 2,266 $ 28,839
========== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-59
<PAGE>
SAN FRANCISCO REPORTING SERVICE
STATEMENT OF PARTNERS' CAPITAL
<TABLE>
<S> <C>
Balance as of January 1, 1996.......................................... $26,218
Distributions.......................................................... (19,000)
Net income............................................................. 21,125
-------
Balance as of December 31, 1996........................................ 28,343
Distributions.......................................................... (6,000)
Net income............................................................. 28,839
-------
Balance as of May 14, 1997............................................. $51,182
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-60
<PAGE>
SAN FRANCISCO REPORTING SERVICE
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, ENDED JUNE MAY 14,
1996 30, 1996 1997
------------ ---------- -------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $21,125 $2,266 $28,839
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation................................ 11,800 5,900 4,717
Provision for doubtful accounts............. 2,000 -- --
Changes in operating assets and liabilities:
Accounts receivable........................ 63,171 19,543 (84,771)
Prepaid expenses and other current assets.. (176) (133) (3,466)
Accounts payable........................... (47,687) (12,903) 67,463
------- ------- -------
Net cash provided by operating
activities............................. 50,233 14,673 12,782
------- ------- -------
Cash flows from investing activities:
Capital expenditures......................... (18,573) (18,573) --
------- ------- -------
Net cash used in investing activities... (18,573) (18,573) --
------- ------- -------
Cash flows from financing activities:
Change in note payable to bank............... (39,412) 15,002 42,230
Payments on capital lease obligation......... (1,660) (536) (994)
Distributions to partners.................... (19,000) (14,000) (6,000)
Cash overdraft............................... 28,412 3,434 (28,709)
------- ------- -------
Net cash provided by (used in) financing
activities............................. (31,660) 3,900 6,527
------- ------- -------
Increase in cash.............................. -- -- 19,309
Cash and cash equivalents at beginning of
period....................................... -- -- --
------- ------- -------
Cash and cash equivalents at end of period.... $ -- $ -- $19,309
======= ======= =======
Cash paid for interest........................ $ 4,993 $3,571 $ 2,344
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-61
<PAGE>
SAN FRANCISCO REPORTING SERVICE
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
San Francisco Reporting Service (the "Company"), a California partnership,
operates in California, providing litigation support services primarily for
insurance companies, law firms and large corporations. The Company's primary
business is court reporting, the transcription of spoken legal testimony into
the written word. An additional component of the Company's litigation support
services is the retrieval of records used in conjunction with the
investigation and litigation of legal proceedings. The Company also provides
copying services. On May 14, 1997, certain of the Company's net assets were
sold to U.S. Legal Support, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Preparation of Interim Financial Statements
The financial statements for the six month period ended June 30, 1996,
reflect all adjustments that are, in the opinion of management, necessary for
a fair presentation of the results for the periods. Such adjustments are
considered to be of a normal recurring nature unless otherwise identified.
Use 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 amount 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.
Cash
Cash is maintained in one bank. The balances, at times, may exceed federally
insured amounts although management believes the risk of loss is minimal.
Property and Equipment
Property and equipment is recorded at cost and depreciated on the straight-
line basis over the estimated useful lives of the assets. Expenditures for
improvements that extend the life of such assets are capitalized, while
maintenance and repairs are charged to expense as incurred. When property and
equipment is retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the related accounts and any resulting gain or
loss is included in the statement of operations.
Revenue Recognition
The Company recognizes revenue as the documents or records are delivered to
its customers. An allowance is provided for anticipated bad debts, based
primarily on historical experience and current estimates.
Concentration of Credit Risk
The Company grants credit to various companies primarily in the legal and
insurance industries which may be affected by economic or other external
conditions. The Company maintains allowances for potential credit losses, and
such losses have been within management's expectations.
Income Taxes
No provision for federal income taxes is provided in these financial
statements, because the Company's income or loss is included in the partners'
separate income tax returns.
F-62
<PAGE>
SAN FRANCISCO REPORTING SERVICE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 14,
USEFUL LIVES 1996 1997
------------ ------------ -------
<S> <C> <C> <C>
Furniture, fixtures and equipment.... 5 to 7 years $60,603 $60,603
Less accumulated depreciation........ (17,664) (22,381)
------- -------
$42,939 $38,222
======= =======
</TABLE>
4. NOTE PAYABLE TO BANK:
At December 31, 1996, the note payable to bank represented amounts borrowed
under a $75,000 revolving line of credit agreement with interest at 3.75%
above the bank's prime rate (8.25% at December 31, 1996), maturing in December
1997. The note was guaranteed by the partners. The note was repaid in May
1997.
5. CAPITAL LEASE OBLIGATION:
In 1996, the Company acquired office equipment for $7,717 financed by a
long-term capital lease. Future minimum lease payments under the capital lease
are as follows:
<TABLE>
<S> <C>
May 15, 1997 through December 31, 1997............................ $1,818
1998.............................................................. 3,116
1999.............................................................. 779
------
5,713
Less: Amount representing interest................................ (650)
------
Present value of net minimum capital lease payments............... 5,063
Less: Current portion............................................. (2,477)
------
Long-term portion................................................. $2,586
======
</TABLE>
6 . COMMITMENTS AND CONTINGENCIES:
Independent Contractors
The Company, like most court reporting firms, provides court reporting
services through the use of independent contractors, who are not employees of
the Company. The Company does not pay or withhold federal or state employment
taxes with respect to these independent contractors. Independent court
reporters are responsible for acquiring and operating their court reporting
equipment. The use of independent contractors as court reporters is consistent
with industry practice and allows the Company to control costs. In the event
the Company were required to treat these court reporters as its employees, the
Company could become responsible for the taxes required to be withheld and
could incur additional costs associated with employee benefits and other
employee costs.
F-63
<PAGE>
SAN FRANCISCO REPORTING SERVICE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Operating Leases
Aggregate minimum rental commitments under noncancelable operating leases
and negotiated renewal options with lease terms in excess of one year as of
December 31, 1996, are as follows:
<TABLE>
<S> <C>
May 15 through December 31, 1997................................. $17,043
1998............................................................. 36,156
1999............................................................. 37,326
2000............................................................. 28,602
--------
$119,127
========
</TABLE>
Rent expense totaled approximately $30,000 and $14,000 for the year ended
December 31, 1996 and for the period from January 1, 1997 through May 14,
1997, respectively.
7. RELATED PARTY TRANSACTIONS:
For the year ended December 31, 1996, the Company paid the partners
approximately $95,000 for court reporting services. The balance due to the
partners for court reporting services at December 31, 1996, of approximately
$11,000 was included in accounts payable. There were no payments due to
partners at May 14, 1997.
F-64
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
U.S. Legal Support, Inc.:
We have audited the accompanying balance sheet of Legal Enterprise, Inc. as
of December 31, 1995 and 1996, and the related statements of income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of 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 financial statements referred to above present fairly,
in all material respects, the financial position of Legal Enterprise, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Houston, Texas
September 5, 1997
F-65
<PAGE>
LEGAL ENTERPRISE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash........................................... $ -- $27,958 $47,368
Accounts receivable, net of allowance of
$9,640, $20,960 and $18,086, respectively..... 339,414 513,365 528,039
Prepaid expenses and other current assets...... 11,808 15,536 13,860
-------- -------- --------
Total current assets......................... 351,222 556,859 589,267
Property and equipment, net...................... 161,386 193,559 252,301
Other assets..................................... 13,492 14,351 14,376
-------- -------- --------
Total assets..................................... $526,100 $764,769 $855,944
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $48,494 $68,193 $50,102
Accrued liabilities............................ 20,959 43,084 56,606
Notes payable--shareholder..................... 354,270 411,315 345,319
-------- -------- --------
Total current liabilities.................... 423,723 522,592 452,027
Notes payable--shareholder....................... -- -- 38,615
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value, 75,000 shares
authorized, 2,000 shares issued and
outstanding................................... 2,000 2,000 2,000
Paid-in-capital................................ 48,000 48,000 48,000
Retained earnings.............................. 52,377 192,177 315,302
-------- -------- --------
Total stockholders' equity................... 102,377 242,177 365,302
-------- -------- --------
Total liabilities and stockholders' equity....... $526,100 $764,769 $855,944
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-66
<PAGE>
LEGAL ENTERPRISE, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED JUNE
31, 30,
--------------------- ---------------------
1995 1996 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.......................... $2,756,466 $3,706,782 $1,718,985 $2,231,106
Cost of services.................. 1,785,906 2,292,138 1,076,707 1,508,737
---------- ---------- ---------- ----------
Gross profit...................... 970,560 1,414,644 642,278 722,369
Selling, general and
administrative expenses.......... 830,261 1,206,578 554,495 559,412
Depreciation...................... 39,826 40,579 16,487 25,000
---------- ---------- ---------- ----------
Operating income.............. 100,473 167,487 71,296 137,957
Interest expense.................. 10,767 27,687 14,888 14,832
---------- ---------- ---------- ----------
Net income.................... $ 89,706 $ 139,800 $ 56,408 $ 123,125
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-67
<PAGE>
LEGAL ENTERPRISE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PAID- TOTAL
COMMON IN- RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ------- -------- -------------
<S> <C> <C> <C> <C>
Balance as of January 1, 1994.......... $2,000 $48,000 $(37,329) $12,671
Net income............................. -- -- 89,706 89,706
------ ------- -------- --------
Balance as of December 31, 1995........ 2,000 48,000 52,377 102,377
Net income............................. -- -- 139,800 139,800
------ ------- -------- --------
Balance as of December 31, 1996........ 2,000 48,000 192,177 242,177
Net income (unaudited)................. -- -- 123,125 123,125
------ ------- -------- --------
Balance as of June 30, 1997
(unaudited)........................... $2,000 $48,000 $315,302 $365,302
====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-68
<PAGE>
LEGAL ENTERPRISE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEARS ENDED MONTHS ENDED JUNE
DECEMBER 31, 30,
-------------------- ------------------
1995 1996 1996 1997
--------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income......................... $89,706 $139,800 $56,408 $123,125
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation..................... 39,826 40,579 16,487 25,000
Provision for doubtful accounts.. -- 11,320 11,320 (2,874)
Changes in operating assets and
liabilities:
Accounts receivable............ (166,197) (185,271) (93,382) (11,800)
Prepaid expenses and other
current assets................ (915) (3,728) (3,750) 1,676
Accounts payable and accrued
liabilities................... (4,460) 82,935 65,148 2,667
Other assets................... (13,392) (859) -- (25)
--------- --------- -------- --------
Net cash provided by (used
in) operating activities.... (55,432) 84,776 52,231 137,769
--------- --------- -------- --------
Cash flows from investing activities:
Capital expenditures............... (64,904) (72,752) (22,700) (83,742)
--------- --------- -------- --------
Net cash used in investing
activities.................. (64,904) (72,752) (22,700) (83,742)
--------- --------- -------- --------
Cash flows from financing activities:
Principal payments on notes
payable--shareholder.............. -- (62,037) (43,326) (81,002)
Proceeds from notes payable--
shareholder....................... 95,733 95,000 -- 46,385
Other.............................. 17,029 (17,029) 13,795 --
--------- --------- -------- --------
Net cash provided by (used
in) financing activities.... 112,762 15,934 (29,531) (34,617)
--------- --------- -------- --------
Increase (decrease) in cash.......... (7,574) 27,958 -- 19,410
Cash and cash equivalents at
beginning of period................. 7,574 -- -- 27,958
--------- --------- -------- --------
Cash and cash equivalents at end of
period.............................. $ -- $ 27,958 $ -- $ 47,368
========= ========= ======== ========
Cash paid for interest............... $10,767 $3,605 $2,847 $7,596
========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-69
<PAGE>
LEGAL ENTERPRISE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
Legal Enterprise, Inc. (the "Company"), a California corporation, operates
in California offices, providing litigation support services primarily for
insurance companies, law firms and large corporations. The Company's primary
business is the retrieval of records used in conjunction with the
investigation and litigation of legal proceedings. The Company also provides
copying services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Preparation of Interim Financial Statements
The financial statements for the six month periods ended June 30, 1996 and
1997 reflect all adjustments that are, in the opinion of management, necessary
for a fair presentation of the results for the periods. Such adjustments are
considered to be of a normal recurring nature unless otherwise identified.
Use 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 amount 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.
Cash
Cash is maintained in one bank. The balances, at times, may exceed federally
insured amounts although management believes the risk of loss is minimal.
Property and Equipment
Property and equipment is recorded at cost and depreciated on the straight-
line basis over the estimated useful lives of the assets. Expenditures for
improvements that extend the life of such assets are capitalized while
maintenance and repairs are charged to expense as incurred. When property and
equipment is retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the related accounts and any resulting gain or
loss is included in the statements of operations.
Revenue Recognition
The Company recognizes revenue as the documents or records are delivered to
its customers. An allowance is provided for anticipated bad debts, based
primarily on historical experience and current estimates.
Concentration of Credit Risk
The Company grants credit to various companies primarily in the legal and
insurance industries which may be affected by economic or other external
conditions. The Company maintains allowances for potential credit losses, and
such losses have been within management's expectations.
Income Taxes
The Company is an S corporation under the Internal Revenue Code and thus for
federal tax purposes is not considered to be a tax paying entity but instead
taxes are paid at the shareholder level. The provision for income taxes
consists of California state income taxes.
F-70
<PAGE>
LEGAL ENTERPRISE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
USEFUL LIVES 1995 1996
------------ -------- --------
<S> <C> <C> <C>
Furniture, fixtures and equipment.............. 5 to 7 years $218,213 $283,592
Less accumulated depreciation.................. (56,827) (90,033)
-------- --------
$161,386 $193,559
======== ========
</TABLE>
4. NOTES PAYABLE--SHAREHOLDER:
At December 31, 1996, the note payable--shareholder is due on demand. The
interest rate on the loan is prime rate plus 1%.
In May 1997, the Company obtained an additional loan from a shareholder in
the amount of $46,385 related to the purchase of certain equipment which is
pledged as collateral for the loan. The loan bears interest at 9.5% and is
payable in monthly principal and interest installments to May 2002.
5. COMMITMENTS AND CONTINGENCIES:
Operating Leases
Aggregate minimum rental commitments under noncancelable operating leases
with lease terms in excess of one year are as follows:
<TABLE>
<S> <C>
1997.......................................... $101,016
1998.......................................... 101,016
1999.......................................... 101,016
2000.......................................... 101,016
2001.......................................... 53,495
--------
$457,559
========
</TABLE>
Rent expense totaled approximately $100,000 for the years ended December 31,
1995 and 1996. Certain rental agreements provide for additional rent based on
the lessors' operating expenses.
6. EMPLOYEE BENEFITS:
The Company has adopted a contributory profit sharing plan pursuant to
Internal Revenue Code Section 401(k) covering substantially all employees.
Each year the Company determines, at its discretion, the amount of matching
contributions. Contributions charged to operations was $7,327 for the year
ended December 31, 1996. There were no contributions charged to operations for
the year ended December 31, 1995.
7. SALE OF THE BUSINESS:
On August 28, 1997, certain of the Company's net assets were sold to U.S.
Legal Support, Inc. Summary financial information pertaining to the Company's
operations from January 1, 1997 through the acquisition date is as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Revenues............................................................ $3,050,086
Gross profit........................................................ 985,178
Operating income.................................................... 200,399
Income before income taxes.......................................... 180,426
</TABLE>
F-71
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
U.S. Legal Support, Inc.:
We have audited the accompanying balance sheet of Elaine P. Dine, Inc. as of
March 31, 1996 and 1997, and the related statements of income, changes in
stockholder's equity and cash flows for the years then ended. These financial
statements are the responsibility of 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 financial statements referred to above present fairly,
in all material respects, the financial position of Elaine P. Dine, Inc. as of
March 31, 1996 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Houston, Texas
August 29, 1997
F-72
<PAGE>
ELAINE P. DINE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
------------------- JUNE 30,
1996 1997 1997
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................... $245,394 $336,321 $125,648
Accounts receivable.......................... 295,907 1,227,258 1,075,126
Prepaid expenses and other current assets.... 5,893 -- --
-------- ---------- ----------
Total current assets....................... 547,194 1,563,579 1,200,774
Property and equipment, net.................... 125,821 123,044 112,195
Other assets................................... 302 74,803 263,083
-------- ---------- ----------
Total assets................................... $673,317 $1,761,426 $1,576,052
======== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable............................. $165,383 $529,871 $550,846
Accrued liabilities.......................... 45,037 158,059 96,921
-------- ---------- ----------
Total current liabilities.................. 210,420 687,930 647,767
Commitments and contingencies
Stockholder's equity
Capital stock, no par value; 11,612 shares
authorized issued and outstanding........... 13,112 13,112 13,112
Retained earnings............................ 449,785 1,060,384 915,173
-------- ---------- ----------
Total stockholder's equity................. 462,897 1,073,496 928,285
-------- ---------- ----------
Total liabilities and stockholder's equity..... $673,317 $1,761,426 $1,576,052
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-73
<PAGE>
ELAINE P. DINE, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEARS ENDED MONTHS ENDED JUNE
MARCH 31, 30,
--------------------- -------------------
1996 1997 1996 1997
---------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................ $3,503,580 $4,657,760 $694,650 $1,182,334
Cost of services.................... 2,030,058 2,640,374 357,959 635,942
---------- ---------- -------- ----------
Gross profit........................ 1,473,522 2,017,386 336,691 546,392
Selling, general and administrative
expenses........................... 1,210,636 1,120,540 153,380 210,923
Depreciation........................ 52,183 26,461 10,628 10,849
---------- ---------- -------- ----------
Income before income taxes.......... 210,703 870,385 172,683 324,620
State income taxes.................. 22,621 96,563 18,539 33,089
---------- ---------- -------- ----------
Net income...................... $ 188,082 $ 773,822 $154,144 $ 291,531
========== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-74
<PAGE>
ELAINE P. DINE, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
TOTAL
CAPITAL RETAINED STOCKHOLDER'S
STOCK EARNINGS EQUITY
------- --------- -------------
<S> <C> <C> <C>
Balance on April 1, 1995...................... $13,112 $458,534 $471,646
Distributions to stockholder.................. -- (196,831) (196,831)
Net income.................................... -- 188,082 188,082
------- --------- ---------
Balance on March 31, 1996..................... 13,112 449,785 462,897
Distributions to stockholder.................. -- (163,223) (163,223)
Net income.................................... -- 773,822 773,822
------- --------- ---------
Balance on March 31, 1997..................... 13,112 1,060,384 1,073,496
Distributions to stockholder (unaudited)...... -- (436,742) (436,742)
Net income (unaudited)........................ -- 291,531 291,531
------- --------- ---------
Balance on June 30, 1997 (unaudited).......... $13,112 $915,173 $928,285
======= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-75
<PAGE>
ELAINE P. DINE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEARS ENDED MONTHS ENDED JUNE
MARCH 31, 30,
-------------------- --------------------
1996 1997 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income....................... $188,082 $773,822 $154,144 $291,531
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation................... 52,183 26,461 10,628 10,849
Change in operating assets and
liabilities:
Accounts receivable.......... 189,229 (931,351) 14,105 152,132
Other assets................. (5,195) (73,768) (73,468) (188,280)
Accounts payable............. 2,864 364,488 (165,383) 20,975
Accrued liabilities.......... 14,018 113,022 (28,180) (61,138)
--------- --------- --------- ---------
Net cash provided by (used
in) operating activities.. 441,181 272,674 (88,154) 226,069
Cash flows from investing
activities:
Capital expenditures............. (1,758) (18,524) (6,367) --
--------- --------- --------- ---------
Net cash used in investing
activities................ (1,758) (18,524) (6,367) --
--------- --------- --------- ---------
Cash flows from financing
activities:
Cash overdraft................... 20,385
Distributions to stockholder..... (196,831) (163,223) (171,258) (436,742)
--------- --------- --------- ---------
Net cash used in financing
activities................ (196,831) (163,223) (150,873) (436,742)
--------- --------- --------- ---------
Increase (decrease) in cash and
cash equivalents.................. 242,592 90,927 (245,394) (210,673)
Cash and cash equivalents at the
beginning of period............... 2,802 245,394 245,394 336,321
--------- --------- --------- ---------
Cash and cash equivalents at the
end of the period................. $245,394 $336,321 $ -- $125,648
========= ========= ========= =========
Cash paid for income taxes......... $ 26,860 $ 26,470 $ 6,615 $ 8,306
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-76
<PAGE>
ELAINE P. DINE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
Elaine P. Dine, Inc. (the "Company"), a New York corporation, founded in
1983, provides litigation recruitment services primarily to law firms and
large corporations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Preparation of Interim Financial Statements
The unaudited financial statements for the periods ended June 30, 1996 and
1997 reflect all adjustments that are in the opinion of management, necessary
for a fair presentation of the results for the periods. Such adjustments are
considered to be of a normal recurring nature unless otherwise identified.
Use 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 amount 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.
Cash and Cash Equivalents
Cash is maintained in one bank. The balance, at times, may exceed federally
insured amounts although management believes the risk of loss is minimal. Cash
equivalents are short-term highly liquid investments with maturities of 90
days or less.
Property and Equipment
Property and equipment is recorded at cost and is depreciated on the
straight-line basis over the estimated useful lives of the assets. Art work
which is included in property and equipment is not depreciated. Expenditures
for improvements that extend the life of such assets are capitalized, while
maintenance and repairs are charged to expense as incurred. When property and
equipment is retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the related accounts and any resulting gain or
loss is included in operations.
Revenue Recognition
The Company records revenue when candidates accept a job offer. An allowance
is provided for bad debts, based primarily on historical experience and
current estimates.
Concentration of Credit Risk
The Company grants credit to primarily law firms and large corporations
which may be affected by economic or other external conditions. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations.
Income Taxes
The Company is an S corporation under Internal Revenue Code and thus for
federal tax purposes is not considered to be a tax paying entity. Income taxes
are paid at the shareholder level. Section 7519 of the Internal Revenue Code
requires prepayment of taxes if a company elects to pay taxes for a period
other than the required taxable calendar year. As the Company has elected not
to pay taxes based on a calendar year, it has deposited $74,201 for related
prepayments as of March 31, 1997. No such deposits were made as of March 31,
1996.
Deferred state income taxes are provided for the accumulated temporary
differences in the bases of assets and liabilities for financial reporting and
income tax purposes using enacted tax rates and laws in effect in the years in
which the differences are expected to reverse.
F-77
<PAGE>
ELAINE P. DINE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Employee Benefit Plan
The Company has adopted a contributory profit sharing plan pursuant to
Internal Revenue Code Section 401(k) covering substantially all employees.
Each year the Company determines, at its discretion, the amount of matching
contributions. Contributions charged to operations for the years ended March
31, 1996 and 1997 were $5,253 and $6,494, respectively.
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------
USEFUL LIVES 1996 1997
------------ -------- --------
<S> <C> <C> <C>
Furniture and fixtures......................... 5 to 7 years $289,076 $293,531
Art............................................ 46,925 52,085
Office equipment............................... 5 to 7 years 107,549 121,619
Leasehold improvements......................... 5 years 531,436 531,436
-------- --------
974,986 998,671
Less accumulated depreciation.................. (849,165) (875,627)
-------- --------
$125,821 $123,044
======== ========
</TABLE>
4. INCOME TAXES:
The provision for income taxes consisted of New York state income taxes as
follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Current........................................................ $28,514 $31,058
Deferred....................................................... (5,893) 65,505
------- -------
$22,621 $96,563
======= =======
</TABLE>
Temporary differences arise primarily from the conversion from accrual to
cash basis of accounting and depreciation.
5. COMMITMENTS AND CONTINGENCIES:
Operating Leases
At March 31, 1997, aggregate minimum rental commitments under noncancelable
operating leases with lease terms in excess of one year are as follows:
<TABLE>
<S> <C>
1998.......................................... $82,223
1999.......................................... 82,223
2000.......................................... 54,815
--------
$219,261
========
</TABLE>
6. SALE OF THE BUSINESS:
On September 17, 1997, certain of the Company's net assets were sold to U.S.
Legal Support, Inc. Summary financial information pertaining to the Company's
operations from January 1, 1997 through the acquisition date is as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Revenues................................... $4,553,763
Gross profit............................... 2,510,436
Operating income........................... 1,057,269
Income before income taxes................. 1,064,258
</TABLE>
F-78
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
U.S. Legal Support, Inc.:
We have audited the accompanying balance sheet of Burton House, Inc., d.b.a.
Ziskind, Greene, Watanabe, & Nason, as of December 31, 1995 and 1996, and the
related statements of operations, stockholder's deficit and cash flows for the
years then ended. These financial statements are the responsibility of
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 financial statements referred to above present fairly,
in all material respects, the financial position of Burton House, Inc., d.b.a.
Ziskind, Greene, Watanabe & Nason, as of December 31, 1995 and 1996 and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Houston, Texas
September 5, 1997
F-79
<PAGE>
BURTON HOUSE, INC., D.B.A. ZISKIND, GREENE, WATANABE, & NASON
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash......................................... $1,936 $22,901 $116,514
Accounts receivable, net of allowance of $0,
$27,500 and $27,500, respectively........... 92,000 18,750 240,792
Deferred income taxes........................ 16,170 3,941 2,730
Prepaid expenses and other current assets.... 800 800 800
-------- -------- --------
Total current assets....................... 110,906 46,392 360,836
Other assets................................... 9,360 9,735 9,735
-------- -------- --------
Total assets................................... $120,266 $56,127 $370,571
======== ======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable............................. $ 49,125 $19,698 $ 38,948
Accrued liabilities.......................... 111,973 89,354 209,644
Income taxes payable......................... -- 1,712 62,548
-------- -------- --------
Total current liabilities.................. 161,098 110,764 311,140
Note payable to bank........................... 100,000 100,000 100,000
Commitments and contingencies
Stockholder's deficit:
Common stock, no par value, 1,000,000 shares
authorized, 8,500 shares issued and
outstanding................................. 18,493 18,493 18,493
Accumulated deficit............................ (159,325) (173,130) (59,062)
-------- -------- --------
Total stockholder's deficit................ (140,832) (154,637) (40,569)
-------- -------- --------
Total liabilities and stockholder's deficit.... $120,266 $56,127 $370,571
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-80
<PAGE>
BURTON HOUSE, INC., D.B.A. ZISKIND, GREENE, WATANABE, & NASON
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------- ---------------------
1995 1996 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues........................ $1,442,257 $1,841,309 $1,026,686 $1,178,643
Cost of services................ 964,069 1,125,329 654,674 636,005
---------- ---------- ---------- ----------
Gross profit.................... 478,188 715,980 372,012 542,638
Selling, general and
administrative expenses........ 588,039 704,785 348,282 357,393
---------- ---------- ---------- ----------
Operating income (loss)..... (109,851) 11,195 23,730 185,245
Interest expense................ 7,644 10,259 5,438 7,419
---------- ---------- ---------- ----------
Income (loss) before income
taxes.......................... (117,495) 936 18,292 177,826
Income tax expense (benefit).... (23,644) 14,741 7,317 63,758
---------- ---------- ---------- ----------
Net income (loss)........... $ (93,851) $ (13,805) $ 10,975 $ 114,068
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-81
<PAGE>
BURTON HOUSE, INC., D.B.A. ZISKIND, GREENE, WATANABE, & NASON
STATEMENT OF STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
TOTAL
COMMON STOCKHOLDER'S
STOCK DEFICIT DEFICIT
------- -------- -------------
<S> <C> <C> <C>
Balance as of January 1, 1995................... $18,493 $(65,474) $(46,981)
Net loss........................................ -- (93,851) (93,851)
------- -------- --------
Balance as of December 31, 1995................. 18,493 (159,325) (140,832)
Net loss........................................ -- (13,805) (13,805)
------- -------- --------
Balance as of December 31, 1996................. 18,493 (173,130) (154,637)
Net income (unaudited).......................... -- 114,068 114,068
------- -------- --------
Balance as of June 30, 1997 (unaudited)......... $18,493 $(59,062) $(40,569)
======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-82
<PAGE>
BURTON HOUSE, INC., D.B.A. ZISKIND, GREENE, WATANABE, & NASON
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------ -----------------
1995 1996 1996 1997
-------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... $(93,851) $(13,805) $10,975 $114,068
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for doubtful accounts...... -- 27,500 -- --
Changes in operating assets and
liabilities:
Accounts receivable................ 122,162 45,750 (50,000) (222,042)
Deferred income taxes.............. (16,170) 12,229 -- 1,211
Income taxes payable............... (9,340) 1,712 -- 60,836
Prepaid expenses and other current
assets............................ -- (375) -- --
Accounts payable and accrued
liabilities....................... (101,407) (52,046) 46,030 139,540
-------- -------- ------- --------
Net cash provided by (used in)
operating activities............ (98,606) 20,965 7,005 93,613
Cash flows from investing activities..... -- -- -- --
Cash flows from financing activities:
Proceeds from note payable............. 100,000 -- -- --
-------- -------- ------- --------
Increase in cash......................... 1,394 20,965 7,005 93,613
Cash at beginning of period.............. 542 1,936 1,936 22,901
-------- -------- ------- --------
Cash at end of period.................... $ 1,936 $ 22,901 $ 8,941 $116,514
======== ======== ======= ========
Cash paid for interest................... $ 7,644 $ 10,259 $ 5,438 $ 7,419
======== ======== ======= ========
Cash paid for taxes...................... -- $ 800 $ 800 $ 8,957
======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-83
<PAGE>
BURTON HOUSE, INC., D.B.A. ZISKIND, GREENE, WATANABE, & NASON
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
Burton House, Inc., d.b.a. Ziskind, Greene, Watanabe, & Nason (the
"Company"), a California corporation, was founded in 1982 and operates in
California, providing placement services primarily for law firms and
corporations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Preparation of Interim Financial Statements
The unaudited financial statements for six months ended June 30, 1996 and
1997 reflect all adjustments that, in the opinion of management, are necessary
for a fair presentation of the results for the periods. Such adjustments are
considered to be of a normal recurring nature unless otherwise identified.
Use 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 amount 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.
Cash
Cash is maintained in one bank. The balance, at times, may exceed federally
insured amounts although management believes the risk of loss is minimal.
Property and Equipment
Property and equipment is recorded at cost and is depreciated on the
straight-line basis over the estimated useful lives of the assets which was 5
years. Expenditures for improvements that extend the life of such assets are
capitalized while maintenance and repairs are charged to expense as incurred.
When property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the related accounts and any
resulting gain or loss is included in operations. All property and equipment
is fully depreciated.
Revenue Recognition
The Company recognizes revenue when candidates accept a job offer. An
allowance is provided for anticipated bad debts, based primarily on historical
experience and current estimates.
Concentration of Credit Risk
The Company grants credit primarily to law firms and major corporations
which may be affected by economic or other external conditions. The Company
maintains allowances for potential credit losses, and such losses have been
within management's expectations.
Federal Income Taxes
Deferred income taxes are provided for the accumulated temporary differences
in the bases of assets and liabilities for financial reporting and income tax
purposes using enacted tax rates and laws in effect in the years in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
F-84
<PAGE>
BURTON HOUSE, INC., D.B.A. ZISKIND, GREENE, WATANABE, & NASON
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
USEFUL LIVES 1995 1996
------------ -------- --------
<S> <C> <C> <C>
Furniture and fixtures......................... 5 years $47,429 $47,429
Office equipment............................... 5 years 33,734 34,234
Leasehold improvements......................... 5 years 7,576 7,576
-------- --------
88,739 89,239
Less accumulated depreciation.................. (88,739) (89,239)
-------- --------
$ -- $ --
======== ========
</TABLE>
4. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
-------- -------
<S> <C> <C>
Commissions................................................... $ 89,075 $10,313
Compensation--stockholder..................................... 22,898 79,041
-------- -------
$111,973 $89,354
======== =======
</TABLE>
5. NOTE PAYABLE TO BANK:
The note payable to a bank under a line of credit provides borrowings up to
$100,000 with interest at the prime rate plus 1.50%, collateralized by the
assets of the Company. The line of credit has no set maturity date. Based on
the terms of the agreement, the principal balance of the line of credit must
be fully repaid in twenty-four equal consecutive monthly installments,
together with accrued monthly interest and any other charges, beginning
approximately 30 days after the bank terminates the Company's right to obtain
loans under the existing agreement. Until terminated, the Company is required
only to pay interest.
F-85
<PAGE>
BURTON HOUSE, INC., D.B.A. ZISKIND, GREENE, WATANABE, & NASON
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES:
The significant components of the Company's deferred tax assets and
liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts...................................... $ -- $ 9,625
Accounts payable............................................. 17,194 6,894
Accrued liabilities.......................................... 31,176 3,610
------- -------
Total deferred tax assets.................................. 48,370 20,129
------- -------
Deferred tax liabilities:
Accounts receivable.......................................... 32,200 16,188
------- -------
Total deferred tax liabilities............................. 32,200 16,188
------- -------
Net deferred income taxes.................................. $16,170 $ 3,941
======= =======
</TABLE>
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
-------- -------
<S> <C> <C>
Current....................................................... $1,866 $2,512
Deferred...................................................... (25,510) 12,229
-------- -------
Total....................................................... $(23,644) $14,741
======== =======
</TABLE>
The reconciliation of the provision (benefit) for income taxes to the income
tax expense (benefit) resulting from the application of the federal statutory
tax rate to pretax income is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
-------- -------
<S> <C> <C>
Tax at statutory rate........................................ $(41,123) $328
Nondeductible travel and entertainment....................... 6,341 13,893
State income taxes........................................... 800 520
Nondeductible life insurance premiums........................ 1,325 --
Other........................................................ 9,013 --
-------- -------
Total.................................................... $(23,644) $14,741
======== =======
</TABLE>
7. SALE OF THE BUSINESS:
On September 17, 1997, the Company sold certain of its net assets to U.S.
Legal Support, Inc. Summary financial information pertaining to the Company's
operations from January 1, 1997 through the acquisition date is as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Revenues................................... $1,623,300
Gross profit............................... 690,005
Operating income........................... 223,936
Income before income taxes................. 214,439
</TABLE>
F-86
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
U.S. Legal Support, Inc.:
We have audited the accompanying balance sheet of Jilio & Associates (a Sole
Proprietorship) as of December 31, 1995 and 1996, and the related statements
of operations, owner's equity and cash flows for the years then ended. These
financial statements are the responsibility of 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 financial statements referred to above present fairly,
in all material respects, the financial position of Jilio & Associates as of
December 31, 1995 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P
Houston, Texas
September 5, 1997
F-87
<PAGE>
JILIO & ASSOCIATES
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1995 1996 1997
-------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash....................................... $22,982 $ -- $ --
Accounts receivable, net of allowance of
$41,256, $106,177 and $178,720,
respectively.............................. 601,039 1,101,415 807,778
Prepaid expenses and other current assets.. 10,205 2,808 17,939
-------- ---------- --------
Total current assets..................... 634,226 1,104,223 825,717
Property and equipment, net.................. 61,026 32,688 25,089
-------- ---------- --------
Total assets................................. $695,252 $1,136,911 $850,806
======== ========== ========
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Cash overdraft............................. $ -- $ 68,088 $ 15,529
Accounts payable........................... 29,367 38,897 34,319
Accrued liabilities........................ 4,572 34,913 31,305
-------- ---------- --------
Total current liabilities................ 33,939 141,898 81,153
Commitments and contingencies
Owner's equity............................... 661,313 995,013 769,653
-------- ---------- --------
Total liabilities and owner's equity......... $695,252 $1,136,911 $850,806
======== ========== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-88
<PAGE>
JILIO & ASSOCIATES
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------- ---------------------
1995 1996 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.......................... $3,365,754 $4,022,445 $2,771,986 $3,084,611
Cost of services.................. 1,697,290 1,970,094 1,366,435 1,571,057
---------- ---------- ---------- ----------
Gross profit...................... 1,668,464 2,052,351 1,405,551 1,513,554
Selling, general and
administrative expenses.......... 874,734 1,062,058 742,606 847,846
Depreciation...................... 16,706 17,401 13,506 9,642
---------- ---------- ---------- ----------
Net income.................... $ 777,024 $ 972,892 $ 649,439 $ 656,066
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-89
<PAGE>
JILIO & ASSOCIATES
STATEMENT OF OWNER'S EQUITY
<TABLE>
<S> <C>
Balance as of January 1, 1995......................................... $671,702
Owner's distributions................................................. (787,413)
Net income............................................................ 777,024
--------
Balance as of December 31, 1995....................................... 661,313
Owner's distributions................................................. (639,192)
Net income............................................................ 972,892
--------
Balance as of December 31, 1996....................................... 995,013
Owner's distributions (unaudited)..................................... (881,426)
Net income (unaudited)................................................ 656,066
--------
Balance as of September 30, 1997 (unaudited).......................... $769,653
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-90
<PAGE>
JILIO & ASSOCIATES
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------ ------------------
1995 1996 1996 1997
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................... $777,024 $972,892 $649,439 $656,066
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation....................... 16,706 17,401 13,506 9,642
Provision for doubtful accounts.... 41,256 64,921 44,547 72,543
Loss on disposal of property and
equipment......................... -- 13,428 2,375 --
Changes in operating assets and
liabilities:
Accounts receivable.............. (5,291) (565,297) (368,749) 221,094
Prepaid expenses and other
current assets.................. (5,301) 7,397 2,397 (15,131)
Accounts payable................. (372) 9,530 1,784 (4,578)
Accrued liabilities.............. 4,572 30,341 118,323 (3,608)
-------- -------- -------- --------
Net cash provided by operating
activities.................... 828,594 550,613 463,622 936,028
-------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures................. (20,931) (2,491) (2,493) (2,043)
-------- -------- -------- --------
Net cash used in investing
activities.................... (20,931) (2,491) (2,493) (2,043)
-------- -------- -------- --------
Cash flows from financing activities:
Owner distributions.................. (787,413) (639,192) (507,192) (881,426)
Cash overdraft....................... 68,088 23,081 (52,559)
-------- -------- -------- --------
Net cash used in financing
activities.................... (787,413) (571,104) (484,111) (933,985)
-------- -------- -------- --------
Increase (decrease) in cash............ 20,250 (22,982) (22,982) --
Cash and cash equivalents at beginning
of period............................. 2,732 22,982 22,982 --
-------- -------- -------- --------
Cash and cash equivalents at end of
period................................ $ 22,982 $ -- $ -- $ --
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-91
<PAGE>
JILIO & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
Jilio & Associates (the "Company"), a California sole proprietorship, was
founded in 1984 and operates in Costa Mesa, California, providing litigation
support services primarily for insurance companies and law firms. The
Company's primary business is court reporting, the transcription of spoken
legal testimony into the written word.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Preparation of Interim Financial Statements
The financial statements for the nine month periods ended September 30, 1996
and 1997 reflect all adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for the periods. Such
adjustments are considered to be of a normal recurring nature unless otherwise
identified.
Use 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 amount 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.
Cash
Cash is maintained in one bank. The balance, at times, may exceed federally
insured amounts although management believes that risk of loss is minimal.
Property and Equipment
Property and equipment is recorded at cost and is depreciated on the
straight-line basis over the estimated useful lives of the assets.
Expenditures for improvements that extend the life of such assets are
capitalized while maintenance and repairs are charged to expense as incurred.
When property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the related accounts and any
resulting gain or loss is included in the statement of operations.
Revenue Recognition
The Company recognizes revenue after the documents or records have been
shipped. An allowance is provided for anticipated bad debts based primarily on
historical experience and current estimates.
Income Taxes
The Company is a sole proprietorship and thus is not a tax-paying entity.
Income taxes on the Company's earnings are paid by the owner.
Concentration of Credit Risk
The Company grants credit to various companies primarily in the legal and
insurance industries which may be affected by economic or other external
conditions. The Company maintains allowances for credit losses, and such
losses have been within management's expectations.
F-92
<PAGE>
JILIO & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
USEFUL LIVES 1995 1996
------------ ------- -------
<S> <C> <C> <C>
Property and equipment:
Furniture and fixtures......................... 5 to 7 years $73,476 $71,585
Office equipment and computers................. 5 years 71,277 18,982
------- -------
144,753 90,567
Less accumulated depreciation.................... (83,727) (57,879)
------- -------
Total........................................ $61,026 $32,688
======= =======
</TABLE>
The Company had fully depreciated assets totaling approximately $31,000 and
$2,000 at December 31, 1995 and 1996, respectively.
4. COMMITMENTS AND CONTINGENCIES:
Independent Contractors
The Company, like most court reporting firms, provides court reporting
services through the use of independent contractors, who are not employees of
the Company. The Company does not pay or withhold federal or state employment
taxes with respect to these independent contractors. Independent court
reporters are responsible for acquiring and operating their court reporting
equipment. The use of independent contractors as court reporters is consistent
with industry practice and allows the Company to control costs. In the event
the Company were required to treat these court reporters as its employees, the
Company could become responsible for the taxes required to be withheld and
could incur additional costs associated with employee benefits and other
employee costs.
Operating Leases
Aggregate minimum rental commitments under noncancelable operating leases
with lease terms in excess of one year are as follows:
<TABLE>
<S> <C>
1997.......................................... $130,727
1998.......................................... 60,546
1999.......................................... 10,416
2000.......................................... 10,416
2001.......................................... 7,812
--------
$219,917
========
</TABLE>
Rent expense in 1995 and 1996 totaled approximately $94,000 and $140,000,
respectively. Certain rental agreements provide for additional rent based on
the lessors' operating expenses.
Legal Proceedings
The Company is involved in certain lawsuits and claims arising in the normal
course of business. In the opinion of management, uninsured losses, if any,
resulting from the ultimate resolution of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
F-93
<PAGE>
JILIO & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. LINE OF CREDIT:
The Company has a line of credit with a bank for up to $100,000 at an
interest rate of 10%. As of December 31, 1995 and 1996, there were no funds
drawn on the line of credit.
6. SALE OF THE BUSINESS:
In August 1997, the Company's owner agreed to sell certain of the Company's
net assets to U.S. Legal Support, Inc.
F-94
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
U.S. Legal Support, Inc.:
We have audited the accompanying balance sheet of Reporting Service
Associates, Inc. as of December 31, 1995 and 1996, and the related statements
of income, stockholder's equity and cash flows for the years then ended. These
financial statements are the responsibility of 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 financial statements referred to above present fairly,
in all material respects, the financial position of Reporting Service
Associates, Inc. as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Houston, Texas
August 29, 1997, except as
to the information presented in
Notes 4 and 6, for which the date
is September 12, 1997
F-95
<PAGE>
REPORTING SERVICE ASSOCIATES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------- -------------
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash......................................... $54,304 $268,118 $29,221
Accounts receivable, net of allowance of
$6,200, $16,000 and $24,000, respectively... 343,050 656,168 1,054,511
Prepaid expenses and other current assets.... -- -- 2,570
-------- -------- ----------
Total current assets....................... 397,354 924,286 1,086,302
Property and equipment, net.................... 22,242 38,782 42,309
-------- -------- ----------
Total assets................................... $419,596 $963,068 $1,128,611
======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $154,633 $198,075 $167,729
Note payable................................. 200,000 200,000 --
-------- -------- ----------
Total current liabilities.................. 354,633 398,075 167,729
-------- -------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock, $10 par value, 100 shares
authorized, issued and outstanding.......... 1,000 1,000 1,000
Retained earnings............................ 63,963 563,993 959,882
-------- -------- ----------
Total stockholder's equity................. 64,963 564,993 960,882
-------- -------- ----------
Total liabilities and stockholder's equity..... $419,596 $963,068 $1,128,611
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-96
<PAGE>
REPORTING SERVICE ASSOCIATES, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------- ---------------------
1995 1996 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.......................... $1,905,831 $3,012,153 $2,171,005 $3,067,261
Cost of services.................. 1,156,566 1,682,021 1,179,007 1,356,939
---------- ---------- ---------- ----------
Gross profit...................... 749,265 1,330,132 991,998 1,710,322
Selling, general and
administrative expenses.......... 420,994 578,957 391,437 505,467
Depreciation...................... 3,006 6,965 5,223 6,124
---------- ---------- ---------- ----------
Operating income.............. 325,265 744,210 595,338 1,198,731
Interest expense.................. 19,902 18,922 14,245 14,300
---------- ---------- ---------- ----------
Net income.................... $ 305,363 $ 725,288 $ 581,093 $1,184,431
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-97
<PAGE>
REPORTING SERVICE ASSOCIATES, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED STOCKHOLDER'S
STOCK EARNINGS EQUITY
------ --------- -------------
<S> <C> <C> <C>
Balance as of January 1, 1995.................. $1,000 $30,923 $31,923
Net income..................................... -- 305,363 305,363
Distributions.................................. -- (272,323) (272,323)
------ --------- ---------
Balance as of December 31, 1995................ 1,000 63,963 64,963
Net income..................................... -- 725,288 725,288
Distributions.................................. -- (225,258) (225,258)
------ --------- ---------
Balance as of December 31, 1996................ 1,000 563,993 564,993
Net income (Unaudited)......................... -- 1,184,431 1,184,431
Distributions (Unaudited)...................... -- (788,542) (788,542)
------ --------- ---------
Balance as of September 30, 1997 (Unaudited)... $1,000 $959,882 $960,882
====== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-98
<PAGE>
REPORTING SERVICE ASSOCIATES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------ --------------------
1995 1996 1996 1997
-------- -------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income......................... $305,363 $725,288 $581,093 $1,184,431
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation..................... 3,006 6,965 5,223 6,124
Provision for doubtful accounts.. 6,200 9,800 4,800 8,000
Changes in operating assets and
liabilities:
Accounts receivable............ (63,575) (322,918) (272,295) (406,343)
Prepaid expenses and other
current assets................ -- -- -- (2,570)
Accounts payable............... 10,533 43,442 41,619 (30,346)
-------- -------- -------- ----------
Net cash provided by
operating activities........ 261,527 462,577 360,440 759,296
Cash flows from investing activities:
Capital expenditures............... (25,248) (23,505) (19,811) (9,651)
Cash flows from financing activities:
Repayment of note payable.......... -- -- -- (200,000)
Stockholder distributions.......... (272,323) (225,258) (162,567) (788,542)
-------- -------- -------- ----------
Net cash used by financing
activities.................. (272,323) (225,258) (162,567) (988,542)
Increase (decrease) in cash.......... (36,044) 213,814 178,062 (238,897)
Cash and cash equivalents at the
beginning of period................. 90,348 54,304 54,304 268,118
-------- -------- -------- ----------
Cash and cash equivalents at the end
of the period....................... $54,304 $268,118 $232,366 $29,221
======== ======== ======== ==========
Cash paid for interest............... $19,902 $18,922 $14,245 $14,300
======== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-99
<PAGE>
REPORTING SERVICE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
Reporting Service Associates, Inc. (the "Company"), a Pennsylvania
corporation founded in 1982 and located in Philadelphia, provides litigation
support services primarily for insurance companies, law firms and large
corporations in the Philadelphia and Southern New Jersey areas. The Company's
primary business is court reporting, the transcription of spoken legal
testimony into the written word. An additional component of the Company's
litigation support services is the retrieval of records used in conjunction
with the investigation and litigation of legal proceedings. The Company also
provides copying and videotaping services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Preparation of Interim Financial Statements
The financial statements for the nine month periods ended September 30, 1996
and 1997 reflect all adjustments that are, in the opinion of management,
necessary for a fair presentation of the results for the periods. Such
adjustments are considered to be of a normal recurring nature unless otherwise
identified.
Use 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 amount 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.
Cash
Cash is maintained in one bank. The balance, at times, may exceed federally
insured amounts although management believes the risk of loss is minimal.
Property and Equipment
Property and equipment is recorded at cost and is depreciated on the
straight-line basis over the estimated useful lives of the assets.
Expenditures for improvements that extend the life of such assets are
capitalized, while maintenance and repairs are charged to expense as incurred.
When property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the related accounts and any
resulting gain or loss is included in the statement of income.
Revenue Recognition
The Company recognizes revenue as the documents or records are delivered to
its customers. An allowance is provided for anticipated bad debts based
primarily on historical experience and current estimates.
Concentration of Credit Risk
The Company grants credit primarily to insurance companies, law firms and
major corporations which may be affected by economic or other external
conditions. The Company maintains allowances for potential credit losses, and
such losses have been within management's expectations.
Income Taxes
The Company is an S corporation under the Internal Revenue Code and thus for
federal tax purposes is not considered to be a tax paying entity. Income taxes
are paid at the stockholder level.
F-100
<PAGE>
REPORTING SERVICE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
USEFUL LIVES 1995 1996
------------ ------- -------
<S> <C> <C> <C>
Furniture, fixtures and equipment............. 5 to 7 years $23,248 $29,154
Computer hardware and software................ 5 years 2,000 19,599
------- -------
25,248 48,753
Less accumulated depreciation................. (3,006) (9,971)
------- -------
$22,242 $38,782
======= =======
</TABLE>
4. NOTE PAYABLE:
The Company has outstanding a demand promissory note for $200,000. The note
is personally guaranteed by the sole stockholder of the Company, and
collateralized by the stockholder's deposits held at the bank. Interest on
unpaid borrowings accrues at the bank's prime rate and is payable monthly. In
September 1997, the Company repaid the note.
5. COMMITMENTS AND CONTINGENCIES:
Independent Contractors
The Company, like most court reporting firms, provides court reporting
services through the use of independent contractors, who are not employees of
the Company. The Company does not pay or withhold federal or state employment
taxes with respect to these independent contractors. Independent court
reporters are responsible for acquiring and operating their court reporting
equipment. The use of independent contractors as court reporters is consistent
with industry practice and allows the Company to control costs. In the event
the Company were required to treat these court reporters as its employees, the
Company could become responsible for the taxes required to be withheld and
could incur additional costs associated with employee benefits and other
employee costs.
Operating Leases
Aggregate minimum rental commitments under noncancelable operating leases
with lease terms in excess of one year are as follows:
<TABLE>
<S> <C>
1997.......................................... $63,860
1998.......................................... 73,148
1999.......................................... 75,724
2000.......................................... 39,660
2001.......................................... 25,783
Thereafter.................................... 1,712
--------
$279,887
========
</TABLE>
Rent expense totaled approximately $35,000 in each of the years ended
December 31, 1995 and 1996.
6. SALE OF THE BUSINESS:
In September 1997, the Company's stockholder agreed to sell certain of the
Company's net assets to U.S. Legal Support, Inc.
F-101
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
U.S. Legal Support, Inc.:
We have audited the accompanying balance sheet of Kirby A. Kennedy &
Associates (a Minnesota Partnership) as of December 31, 1995 and 1996, and the
related statements of income, partners' capital and cash flows for the years
then ended. These financial statements are the responsibility of 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 financial statements referred to above present fairly,
in all material respects, the financial position of Kirby A. Kennedy &
Associates as of December 31, 1995 and 1996, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Houston, Texas
August 29, 1997
F-102
<PAGE>
KIRBY A. KENNEDY & ASSOCIATES
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash......................................... $ -- $ -- $74,007
Accounts receivable.......................... 133,372 176,959 257,126
-------- -------- --------
Total current assets....................... 133,372 176,959 331,133
Property and equipment, net.................... 73,896 77,719 41,355
-------- -------- --------
Total assets................................... $207,268 $254,678 $372,488
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Cash overdraft............................... $21,943 $7,137 $ --
Accounts payable............................. 86,692 127,463 177,549
Accrued liabilities.......................... 294 1,138 1,175
Note payable................................. 23,500 -- --
-------- -------- --------
Total current liabilities.................. 132,429 135,738 178,724
Commitments and contingencies
Partners' capital.............................. 74,839 118,940 193,764
-------- -------- --------
Total liabilities and partners' capital........ $207,268 $254,678 $372,488
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-103
<PAGE>
KIRBY A. KENNEDY & ASSOCIATES
STATEMENT OF INCOME
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------- ---------------------
1995 1996 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.................. $1,629,448 $1,866,355 $1,455,153 $1,427,674
Cost of services.......... 1,094,237 1,164,405 880,242 846,706
---------- ---------- ---------- ----------
Gross profit.............. 535,211 701,950 574,911 580,968
Selling, general and
administrative expenses.. 191,858 261,025 179,972 181,435
Depreciation.............. 27,563 32,160 24,120 19,270
---------- ---------- ---------- ----------
Operating income...... 315,790 408,765 370,819 380,263
Interest expense.......... 1,412 1,527 1,131 356
---------- ---------- ---------- ----------
Net income............ $ 314,378 $ 407,238 $ 369,688 $ 379,907
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-104
<PAGE>
KIRBY A. KENNEDY & ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL
<TABLE>
<S> <C>
Partners' capital, January 1, 1995............... $59,859
Distributions.................................... (299,398)
Net income....................................... 314,378
--------
Partners' capital, December 31, 1995............. 74,839
Distributions.................................... (363,137)
Net income....................................... 407,238
--------
Partners' capital, December 31, 1996............. 118,940
Distributions (Unaudited)........................ (305,083)
Net income for the nine months ended
September 30, 1997 (Unaudited).................. 379,907
--------
Partners' capital, September 30, 1997
(Unaudited).................................... $193,764
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-105
<PAGE>
KIRBY A. KENNEDY & ASSOCIATES
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------ ------------------
1995 1996 1996 1997
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................... $314,378 $407,238 $369,688 $379,907
Adjustments to reconcile net income
to cash provided by operating
activities:
Depreciation....................... 27,563 32,160 24,120 19,270
Changes in operating assets and
liabilities:
Accounts receivable.............. (14,886) (43,587) (10,978) (80,167)
Accounts payable................. (4,567) 40,771 17,635 50,086
Accrued liabilities.............. (6,001) 844 -- 37
-------- -------- -------- --------
Net cash provided by operating
activities.................... 316,487 437,426 400,465 369,133
-------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures................. (27,810) (35,983) (5,472) (3,536)
-------- -------- -------- --------
Net cash used in investing
activities.................... (27,810) (35,983) (5,472) (3,536)
-------- -------- -------- --------
Cash flows from financing activities:
Cash overdraft....................... (12,779) (14,806) (21,943) (7,137)
Proceeds from note payable........... 23,500 -- -- 25,000
Principal payments on note payable... -- (23,500) (23,500) (25,000)
Distributions........................ (299,398) (363,137) (261,789) (284,453)
-------- -------- -------- --------
Net cash used in financing
activities.................... (288,677) (401,443) (307,232) (291,590)
-------- -------- -------- --------
Increase in cash....................... -- -- 87,761 74,007
Cash and cash equivalents at beginning
of period............................. -- -- -- --
-------- -------- -------- --------
Cash and cash equivalents at end of
period................................ $ -- $ -- $ 87,761 $ 74,007
======== ======== ======== ========
Cash paid for interest................. $ 1,412 $ 1,527 $ 1,131 $ 356
======== ======== ======== ========
Supplemental schedule of noncash
investing and financing activities:
Distributions of automobiles to
Partners at net book value............ $ -- $ -- $ -- $ 20,630
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-106
<PAGE>
KIRBY A. KENNEDY & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
Kirby A. Kennedy & Associates, a Minnesota Partnership (the "Partnership"),
was founded in 1979 and provides litigation support services primarily for law
firms and insurance companies in the United States. The Partnership's primary
business is court reporting, the transcription of the spoken legal testimony
into the written word. The Partnership also provides copying services, video
services, special exhibit handling and complete case management. Income is
allocated 75% to Jeanne Kennedy and 25% to Kirby Kennedy.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Preparation of Interim Financial Statements
The financial statements for the nine month periods ended September 30, 1996
and 1997 reflect all adjustments that are, in the opinion of management,
necessary for a fair presentation of the results for the periods. Such
adjustments are considered to be of a normal recurring nature unless otherwise
identified.
Use 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 amount 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.
Cash
Cash in maintained at one bank. The balance, at times, may exceed federally
insured amounts, although management believes the risk of loss is minimal.
Property and Equipment
Property and equipment is recorded at cost and depreciated on the straight-
line basis over the estimated useful lives of the assets. Expenditures for
improvements that extend the life of such assets are capitalized, while
maintenance and repairs are charged to expense as incurred. When property and
equipment is retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the related accounts and any resulting gain or
loss is included in the statement of income.
Income Taxes
No provision for federal income taxes is provided in these financial
statements because the Partnership's income or loss is included in the
partners' separate income tax returns.
Revenue Recognition
The Partnership recognizes revenue as the documents or records are delivered
to its customers. An allowance is provided for anticipated bad debts based
primarily on historical experience and current estimates.
Concentration of Credit Risk
The Partnership grants credit primarily to law firms and insurance companies
which may be affected by economic or other external conditions.
F-107
<PAGE>
KIRBY A. KENNEDY & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
USEFUL LIVES 1995 1996
------------ -------- --------
<S> <C> <C> <C>
Furniture, fixtures and equipment.............. 5 to 7 years $230,888 $237,061
Vehicles....................................... 5 years 113,944 110,148
-------- --------
344,832 347,209
Less accumulated depreciation.................. (270,936) (269,490)
-------- --------
$73,896 $77,719
======== ========
</TABLE>
In the third quarter of 1997, automobiles having a book value of $20,630 at
December 31, 1996 were distributed to the partners.
4. COMMITMENTS AND CONTINGENCIES:
Independent Contractors
The Partnership, like most court reporting firms, provides court reporting
services through the use of independent contractors, who are not employees of
the Partnership. The Partnership does not pay or withhold federal or state
employment taxes with respect to these independent contractors. Independent
court reporters are responsible for acquiring and operating their court
reporting equipment. The use of independent contractors as court reporters is
consistent with industry practice and allows the Partnership to control costs.
In the event the Partnership were required to treat these court reporters as
its employees, the Partnership could become responsible for the taxes required
to be withheld and could incur additional costs associated with employee
benefits and other employee costs.
Operating Leases
Aggregate minimum rental commitments under a noncancelable operating lease
with a term in excess of one year are as follows:
<TABLE>
<S> <C>
1997.......................................... $35,127
1998.......................................... 35,127
1999.......................................... 35,127
--------
$105,381
========
</TABLE>
Rent expense totaled approximately $35,000 for the years ended December 31,
1995 and 1996. The rental agreement provides for additional rent based on
yearly increases in the lessors' operating expenses.
5. SALE OF THE BUSINESS:
In August 1997, the Partnership agreed to sell certain of its net assets to
U.S. Legal Support, Inc.
F-108
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
U.S. Legal Support, Inc.:
We have audited the accompanying combined balance sheet of the Johnson Court
Reporting Group as of December 31, 1995 and 1996, and the related combined
statements of income, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of 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 financial statements referred to above present fairly,
in all material respects, the combined financial position of the Johnson Court
Reporting Group as of December 31, 1995 and 1996, and the combined results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Houston, Texas
September 19, 1997
F-109
<PAGE>
JOHNSON COURT REPORTING GROUP
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.......................................... $22,253 $38,905 $13,084
Accounts receivable........................... 246,636 252,480 383,399
Prepaid expenses and other current assets..... 17,789 10,100 20,431
-------- -------- --------
Total current assets........................ 286,678 301,485 416,914
Property and equipment, net..................... 185,821 169,140 168,119
Other assets.................................... 16,216 42,050 64,115
-------- -------- --------
Total assets.................................... $488,715 $512,675 $649,148
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $73,121 $94,558 $169,121
Income taxes payable.......................... 9,152 89,027 101,561
Accrued liabilities........................... 88,212 72,289 85,045
Deferred income taxes......................... 63,370 72,077 119,341
-------- -------- --------
Total current liabilities................... 233,855 327,951 475,068
Notes payable, including related parties of
$103,734, $28,995 and $15,911, respectively.... 133,099 68,265 77,113
Deferred income taxes........................... 14,866 13,531 13,450
Commitments and contingencies
Stockholders' equity:
Common stock.................................. 77,000 77,000 77,000
Retained earnings............................. 29,895 25,928 6,517
-------- -------- --------
Total stockholders' equity.................. 106,895 102,928 83,517
-------- -------- --------
Total liabilities and stockholders' equity...... $488,715 $512,675 $649,148
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-110
<PAGE>
JOHNSON COURT REPORTING GROUP
COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------- ---------------------
1995 1996 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.......................... $1,713,593 $2,154,933 $1,068,290 $1,227,628
Cost of services.................. 845,694 1,039,876 494,388 586,482
---------- ---------- ---------- ----------
Gross profit...................... 867,899 1,115,057 573,902 641,146
Selling, general and administra-
tive expenses.................... 642,756 835,786 469,596 426,558
Depreciation...................... 19,670 38,401 35,107 26,080
---------- ---------- ---------- ----------
Operating income.............. 205,473 240,870 69,199 188,508
Interest expense.................. 11,438 19,023 8,383 5,896
---------- ---------- ---------- ----------
Income before income taxes.... 194,035 221,847 60,816 182,612
Income taxes...................... 83,498 89,099 24,507 73,045
---------- ---------- ---------- ----------
Net income.................... $ 110,537 $ 132,748 $ 36,309 $ 109,567
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-111
<PAGE>
JOHNSON COURT REPORTING GROUP
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED STOCKHOLDERS'
STOCK EARNINGS EQUITY
------- -------- -------------
<S> <C> <C> <C>
Balance as of January 1, 1995................... $77,000 $22,923 $99,923
Dividends....................................... -- (103,565) (103,565)
Net income...................................... -- 110,537 110,537
------- -------- --------
Balance as of December 31, 1995................. 77,000 29,895 106,895
Dividends....................................... -- (136,715) (136,715)
Net income...................................... -- 132,748 132,748
------- -------- --------
Balance as of December 31, 1996................. 77,000 25,928 102,928
Dividends (unaudited)........................... -- (128,978) (128,978)
Net income (unaudited).......................... -- 109,567 109,567
------- -------- --------
Balance as of June 30, 1997 (unaudited)......... $77,000 $6,517 $83,517
======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-112
<PAGE>
JOHNSON COURT REPORTING GROUP
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE SIX
ENDED DECEMBER MONTHS ENDED JUNE
31, 30,
------------------ ------------------
1995 1996 1996 1997
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................... $110,537 $132,748 $36,309 $109,567
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation....................... 19,670 38,401 35,107 26,080
Deferred income taxes.............. 63,334 7,372 (7,280) 47,183
Changes in operating assets and
liabilities:
Accounts receivable.............. (142,112) (5,844) (16,062) (130,919)
Prepaid expenses and other....... (20,481) (18,145) 16,834 (32,396)
Accounts payable................. 35,071 21,437 (10,093) 50,381
Income taxes payable............. 16,400 79,875 3,406 12,534
Accrued liabilities.............. 65,525 (15,923) 29,398 12,756
-------- -------- -------- --------
Net cash provided by operating
activities.................... 147,944 239,921 87,619 95,186
-------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures................. (102,347) (21,720) (10,813) (25,059)
-------- -------- -------- --------
Net cash used in investing
activities.................... (102,347) (21,720) (10,813) (25,059)
-------- -------- -------- --------
Cash flows from financing activities:
Notes payable........................ 62,275 (64,834) (43,444) 8,848
Dividends............................ (103,565) (136,715) (67,661) (128,978)
Other................................ -- -- 27,872 24,182
-------- -------- -------- --------
Net cash used in financing
activities.................... (41,290) (201,549) (83,233) (95,948)
-------- -------- -------- --------
Increase (decrease) in cash............ 4,307 16,652 (6,427) (25,821)
Cash and cash equivalents at beginning
of period............................. 17,946 22,253 22,253 38,905
-------- -------- -------- --------
Cash and cash equivalents at end of
period................................ $ 22,253 $ 38,905 $ 15,826 $ 13,084
======== ======== ======== ========
Cash paid for interest................. $ 11,438 $ 19,023 $ 8,383 $ 5,896
======== ======== ======== ========
Cash paid for taxes.................... $ 3,764 $ 1,852 $ 1,369 $ 1,289
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-113
<PAGE>
JOHNSON COURT REPORTING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
Johnson Court Reporting Group (the "Company"), operating through Goren of
Newport, Inc., Rapidtext, Inc. and Medtext, Inc., provides litigation support
services, closed-captioning services for the hearing impaired, remote
classroom captioning services, medical transcription services, and scanning
and imaging services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying combined financial statements include the accounts of Goren
of Newport, Inc., Rapidtext, Inc. and Medtext, Inc. all of which are operated
under common management. All intercompany amounts have been eliminated.
Preparation of Interim Financial Statements
The financial statements for the six month periods ended June 30, 1996 and
1997 reflect all adjustments that are, in the opinion of management, necessary
for a fair presentation of the results for the periods. Such adjustments are
considered to be of a normal recurring nature unless otherwise identified.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount 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.
Cash
Cash is maintained in two banks. The balances, at times, may exceed
federally insured amounts although management believes that risk of loss is
minimal.
Property and Equipment
Property and equipment is recorded at cost and is depreciated on the
straight-line basis over the estimated useful lives of the assets.
Expenditures for improvements that extend the life of such assets are
capitalized while maintenance and repairs are charged to expense as incurred.
When property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the related accounts and any
resulting gain or loss is included in the statement of income.
Income Taxes
The Company provides for deferred income taxes utilizing the liability
method whereby deferred income taxes are recognized for the tax consequences
in future years of differences in the tax bases of assets and liabilities and
their financial reporting amounts based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Revenue Recognition
The Company recognizes revenue after the documents or records have been
prepared for shipment or the services have been provided. An allowance is
provided for anticipated bad debts based primarily on historical experience
and current estimates.
Concentration of Credit Risk
The Company grants credit to various companies primarily in the legal,
medical and insurance industries which may be affected by economic or other
external conditions. The Company maintains allowances for potential credit
losses, and such losses have been within management's expectations. During the
six-month period ended June 30, 1997, approximately 16% of revenues was from
one company.
F-114
<PAGE>
JOHNSON COURT REPORTING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
USEFUL LIVES 1995 1996
------------ -------- --------
<S> <C> <C> <C>
Property and equipment:
Furniture and fixtures....................... 5 to 7 years $8,098 $9,542
Office equipment and computers............... 5 years 258,852 277,265
-------- --------
266,950 286,807
Less accumulated depreciation.................. (81,129) (117,667)
-------- --------
Total...................................... $185,821 $169,140
======== ========
</TABLE>
4. INCOME TAXES:
The components of deferred income tax assets and liabilities consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Deferred income tax assets
Accrued liabilities........................................... $35,284 $28,916
------- -------
Total deferred income tax assets............................ 35,284 28,916
------- -------
Deferred income tax liabilities
Accounts receivable........................................... 98,654 100,993
Property and equipment........................................ 14,866 13,531
------- -------
Total deferred income tax liabilities....................... 113,520 114,524
------- -------
Net deferred income tax liability........................... $78,236 $85,608
======= =======
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Current....................................................... $20,164 $81,727
Deferred...................................................... 63,334 7,372
------- -------
$83,498 $89,099
======= =======
</TABLE>
The difference between the Company's provision for income taxes and the
amount that would have been derived by applying the federal statutory tax rate
to pretax income for the years ended December 31, 1995 and 1996 is summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Tax at federal statutory rate.................................. $65,972 $75,427
State income taxes, net of federal tax benefit................. 9,702 11,092
Other.......................................................... 7,824 2,580
------- -------
$83,498 $89,099
======= =======
</TABLE>
F-115
<PAGE>
JOHNSON COURT REPORTING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES:
Independent Contractors
The Company provides court reporting, captioning, transcription, and
scanning and imaging services through the use of independent contractors, who
are not employees of the Company. The Company does not pay or withhold federal
or state employment taxes with respect to these independent contractors.
Independent contractors are responsible for acquiring and operating their
equipment. The use of independent contractors is consistent with industry
practice and allows the Company to control costs. In the event the Company
were required to treat these independent contractors as its employees, the
Company could become responsible for the taxes required to be withheld and
could incur additional costs associated with employee benefits and other
employee costs.
Operating Leases
Aggregate minimum rental commitments under noncancelable operating leases
with lease terms in excess of one year are as follows:
<TABLE>
<S> <C>
1997........................................... $5,885
1998........................................... 6,147
1999........................................... 2,832
2000........................................... 2,832
2001........................................... 2,832
-------
$20,528
=======
</TABLE>
Rent expense in 1995 and 1996 totaled $57,030 and $68,967, respectively.
Certain rental agreements provide for additional rent based on the lessors'
operating expenses.
Legal Proceedings
The Company is involved in certain lawsuits and claims arising in the normal
course of business. In the opinion of management, uninsured losses, if any,
resulting from the ultimate resolution of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
6. NOTES PAYABLE:
The Company has lines of credit with two financial institutions for up to
$225,000 at an interest rate of 13%, collateralized by the Company's accounts
receivable. These lines are drawn on when needed and are normally repaid
within the fiscal year. As of December 31, 1995 and 1996, the Company had
$29,365 and $39,270 borrowed under the lines of credit.
The Company has notes payable of $103,734 and $28,995 to shareholders at
December 31, 1995 and 1996.
7. SALE OF COMMON STOCK:
On August 19, 1997, the Company's common stock was acquired by U.S. Legal
Support, Inc. Summary financial information pertaining to the Company's
operations from January 1, 1997 through the acquisition date is as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Revenues................................... $1,471,072
Gross profit............................... 766,808
Operating income........................... 161,028
Income before income taxes................. 154,482
</TABLE>
F-116
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
U.S. Legal Support, Inc.:
We have audited the accompanying balance sheet of Amicus One Legal Support
Services, Inc. as of December 31, 1996 and September 5, 1997 and the related
statements of income, stockholders' equity and cash flows for the year ended
December 31, 1996 and the period from January 1, 1997 through September 5,
1997. These financial statements are the responsibility of 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of Amicus One Legal Support
Services, Inc. as of December 31, 1996 and September 5, 1997, and the results
of its operations and its cash flows for the year ended December 31, 1996 and
the period from January 1, 1997 through September 5, 1997 in conformity with
generally accepted accounting principles.
Coopers & Lybrand l.l.p.
Houston, Texas
October 21, 1997
F-117
<PAGE>
AMICUS ONE LEGAL SUPPORT SERVICES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
COMBINED
PREDECESSORS COMPANY
DECEMBER 31, SEPTEMBER 5,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................... $1,626 $249,058
Accounts receivable, net of allowance of $48,240
and $100,000, respectively........................ 513,608 321,991
Prepaid expenses and other current assets.......... 11,398 1,467
-------- --------
Total current assets............................. 526,632 572,516
Property and equipment, net.......................... 65,334 96,998
Other assets......................................... 34,014 15,032
-------- --------
Total assets......................................... $625,980 $684,546
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations........ $24,400 $253,978
Advance from U.S. Legal Support, Inc. ............. -- 277,043
Accounts payable................................... 30,945 53,988
Accrued liabilities................................ 52,467 33,742
-------- --------
Total current liabilities........................ 107,812 618,751
Long-term obligations................................ 10,423 2,774
Commitments and contingencies
Stockholders' equity:
Common stock....................................... 11,750 49,499
Retained earnings.................................. 495,995 13,522
-------- --------
Total stockholders' equity....................... 507,745 63,021
-------- --------
Total liabilities and stockholders' equity........... $625,980 $684,546
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-118
<PAGE>
AMICUS ONE LEGAL SUPPORT SERVICES, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
COMBINED
COMBINED PREDECESSORS
PREDECESSORS NINE MONTHS COMPANY
YEAR ENDED ENDED PERIOD ENDED
------------ ------------- ------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 5,
1996 1996 1997
------------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues.............................. $1,882,380 $1,394,243 $1,384,613
Cost of services...................... 890,098 695,302 723,252
---------- ---------- ----------
Gross profit.......................... 992,282 698,941 661,361
Selling, general and administrative
expenses............................. 796,744 562,027 598,918
Depreciation.......................... 39,580 22,323 23,607
---------- ---------- ----------
Operating income.................. 155,958 114,591 38,836
Interest expense...................... 6,613 5,730 12,689
---------- ---------- ----------
Income before income taxes............ 149,345 108,861 26,147
Income taxes.......................... 9,879 244 625
---------- ---------- ----------
Net income........................ $ 139,466 $ 108,617 $ 25,522
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-119
<PAGE>
AMICUS ONE LEGAL SUPPORT SERVICES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED STOCKHOLDERS'
STOCK EARNINGS EQUITY
------- --------- -------------
<S> <C> <C> <C>
Combined Predecessors:
Balance as of January 1, 1996................ $11,750 $ 391,137 $ 402,887
Distributions................................ -- (34,608) (34,608)
Net income................................... -- 139,466 139,466
------- --------- ---------
Balance as of December 31, 1996.............. 11,750 495,995 507,745
Company:
Reorganization to form new entity and
distribution of certain net assets to
owners...................................... 37,749 (495,995) (458,246)
Net income................................... -- 25,522 25,522
Distributions................................ -- (12,000) (12,000)
------- --------- ---------
Balance as of September 5, 1997.............. $49,499 $ 13,522 $ 63,021
======= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-120
<PAGE>
AMICUS ONE LEGAL SUPPORT SERVICES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
COMBINED
COMBINED PREDECESSORS
PREDECESSORS NINE MONTHS COMPANY
YEAR ENDED ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 5,
1996 1996 1997
------------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................... $139,466 $108,617 $25,522
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation....................... 39,580 22,323 23,607
Provision for doubtful accounts.... 24,152 24,152 90,160
Changes in operating assets and
liabilities:
Accounts receivable.............. (81,766) (30,565) (325,334)
Prepaid expenses and other
current assets.................. 1,661 1,562 (69)
Other assets..................... 17,366 (250) (11,893)
Accounts payable................. 866 26,036 31,678
Accrued liabilities.............. 17,339 14,747 (27,123)
-------- -------- --------
Net cash provided by (used in)
operating activities.......... 158,664 166,622 (193,452)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures................. (85,272) (65,058) (55,271)
Investment in note receivable from
officer............................. -- (4,927) --
-------- -------- --------
Net cash used in investing
activities.................... (85,272) (69,985) (55,271)
-------- -------- --------
Cash flows from financing activities:
Distributions........................ (34,608) (33,928) (12,000)
Proceeds from borrowings............. 820,898
Repayment of borrowings.............. (38,647) (23,789) (311,926)
-------- -------- --------
Net cash (used in) provided by
financing activities.......... (73,255) (57,717) 496,972
-------- -------- --------
Increase in cash....................... 137 38,920 248,249
Cash and cash equivalents at beginning
of period............................. 1,489 1,489 809
-------- -------- --------
Cash and cash equivalents at end of pe-
riod.................................. $ 1,626 $ 40,409 $249,058
======== ======== ========
Cash paid for interest................. $ 6,613 $ 5,730 $ 12,689
======== ======== ========
Cash paid for income taxes............. $ 9,040 $ 244 $ 825
======== ======== ========
Issuance of common stock for non-cash
assets................................ $157,906
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-121
<PAGE>
AMICUS ONE LEGAL SUPPORT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
Amicus One Legal Support Services, Inc. (the "Company"), a New York
Subchapter S Corporation, was formed on January 1, 1997 through the
contribution of certain assets at predecessor cost by three shareholders who
together owned two court reporting businesses known as Cardinal Reporting Co.,
Inc. ("Cardinal") and AM Court Reporting, Ltd. ("AM"). The owners of the
"combined predecessors" have presented combined financial statements of the
combined predecessor for 1996 to reflect the financial position and results of
operations for the periods on a comparable basis. The Company operates in New
York providing litigation support services primarily for insurance companies
and law firms. The Company's primary business is court reporting, the
transcription of spoken legal testimony into written word.
The Company has 200 shares of no par value capital stock authorized, issued
and outstanding at September 5, 1997. At December 31, 1996, Cardinal and AM
were organized as a C Corporation and a S Corporation, respectively. Cardinal
and AM had 2,500 and 200 shares, respectively, of no par value capital stock
authorized, issued and outstanding at December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Preparation of Interim Financial Statements
The financial statements for the periods ended September 30, 1996 and
January 5, 1997 reflect all adjustments that are, in the opinion of
management, necessary for a fair presentation of the results for the period.
Such adjustments are considered to be of a normal recurring nature unless
otherwise identified.
Use 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 amount 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.
Cash
Cash is maintained in several banks. The balance, at times, may exceed
federally insured amounts although management believes that risk of loss is
minimal.
Property and Equipment
Property and equipment is recorded at cost and is depreciated on the
straight-line basis over the estimated useful lives of the assets.
Expenditures for improvements that extend the life of such assets are
capitalized while maintenance and repairs are charged to expense as incurred.
When property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the related accounts and any
resulting gain or loss is included in the statements of operations.
Revenue Recognition
The Company recognizes revenue as the documents or records are delivered to
customers. An allowance is provided for anticipated bad debts, based primarily
on historical experience and current estimates.
Income Taxes
The Company is and AM was an S Corporation under the Internal Revenue Code
and thus, for federal tax purposes, are not considered to be tax paying
entities. Cardinal provided for deferred income taxes utilizing the liability
method whereby deferred income taxes are recognized for the tax consequences
in future years of
F-122
<PAGE>
AMICUS ONE LEGAL SUPPORT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
differences in the tax bases of assets and liabilities and their financial
reporting amounts based on enacted tax laws and statutory tax rates applicable
to the periods in which differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be utilized.
Concentration of Credit Risk
The Company grants credit to various companies primarily in the legal and
insurance industries which may be affected by economic or other external
conditions. The Company maintains allowances for potential credit losses, and
such losses have been within management's expectations.
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 5,
USEFUL LIVES 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Furniture and fixtures................... 5 to 7 years $112,812 $142,627
Office equipment and computers........... 5 years 19,274 44,730
-------- --------
132,086 187,357
Less accumulated depreciation............ (66,752) (90,359)
-------- --------
Total................................ $ 65,334 $ 96,998
======== ========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES:
Independent Contractors
The Company, like most court reporting firms, provides court reporting
services through the use of independent contractors, who are not employees of
the Company. The Company does not pay or withhold federal or state employment
taxes with respect to these independent contractors. Independent court
reporters are responsible for acquiring and operating their court reporting
equipment. The use of independent contractors as court reporters is consistent
with industry practice and allows the Company to control costs. In the event
the Company were required to treat these court reporters as its employees, the
Company could become responsible for the taxes required to be withheld and
could incur additional costs associated with employee benefits and other
employee costs.
Operating Leases
Aggregate minimum rental commitments under noncancelable operating leases
with lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>
<S> <C>
September 6, 1997 through December 31, 1997......................... $31,612
1998................................................................ 96,221
1999................................................................ 89,719
2000................................................................ 67,144
2001................................................................ 68,838
Thereafter.......................................................... 59,933
--------
$413,467
========
</TABLE>
Rent expense totaled approximately $103,000 and $68,000 for the year ended
December 31, 1996 and the period ended September 5, 1997. Certain rental
agreements provide for additional rent based on the lessors' operating
expenses.
F-123
<PAGE>
AMICUS ONE LEGAL SUPPORT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM OBLIGATIONS:
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 5,
1996 1997
------------ ------------
<S> <C> <C>
Line of credit with a bank for up to $50,000 with
interest at prime plus .25%. The line has no set
maturity date.................................... $14,888 $ --
Line of credit with a financial institution for up
to $300,000 with interest of 30-day commercial
paper rate plus 3.15% which was 8.77% at June 30,
1997, collateralized by accounts receivable. The
line has no set maturity date.................... -- 243,677
Capital lease obligations......................... 19,935 13,075
------- --------
34,823 256,752
Less current portion.............................. (24,400) (253,978)
------- --------
$10,423 $2,774
======= ========
</TABLE>
The $300,000 line of credit was repaid in September 1997 with funds advanced
by U.S. Legal Support Inc. (See Note 1).
6. SALE OF NET ASSETS:
On September 6, 1997, the Company's net assets were sold to U.S. Legal
Support, Inc.
F-124
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
U.S. Legal Support, Inc.:
We have audited the accompanying balance sheet of Block Court Reporting,
Inc. as of December 31, 1995 and 1996, and the related statements of
operations, stockholder's equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of 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 financial statements referred to above present fairly,
in all material respects, the financial position of Block Court Reporting,
Inc. as of December 31, 1995 and 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Houston, Texas
September 19, 1997
F-125
<PAGE>
BLOCK COURT REPORTING, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash........................................... $994 $1,852 $4,437
Accounts receivable, net of allowance of
$10,000, $15,000 and $15,000, respectively.... 141,279 207,911 142,214
Deferred income taxes.......................... 6,074
-------- -------- --------
Total current assets......................... 142,273 209,763 152,725
Property and equipment, net...................... 125,271 89,830 84,489
Other assets..................................... 6,568 6,568 6,568
-------- -------- --------
Total assets..................................... $274,112 $306,161 $243,782
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................... $7,640 $164,213 $149,921
Accrued liabilities............................ 6,332 17,129 56,228
Long-term obligations, current portion......... 109,905 68,218 62,990
Deferred income taxes.......................... 45,910 14,107 --
-------- -------- --------
Total current liabilities.................... 169,787 263,667 269,139
Long-term obligations............................ 12,329 15,125 --
Stockholder's equity (deficit):
Common stock, $.01 par value, 1,000 shares
authorized, issued, and outstanding........... 10 10 10
Additional paid in capital..................... 990 990 990
Retained earnings (accumulated deficit)........ 90,996 26,369 (26,357)
-------- -------- --------
Total stockholder's equity (deficit)......... 91,996 27,369 (25,357)
-------- -------- --------
Total liabilities and stockholder's equity
(deficit)....................................... $274,112 $306,161 $243,782
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-126
<PAGE>
BLOCK COURT REPORTING, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------- ------------------
1995 1996 1996 1997
---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.......................... $1,024,931 $1,316,782 $693,458 $517,838
Cost of services.................. 496,301 661,838 376,756 262,455
---------- ---------- -------- --------
Gross profit...................... 528,630 654,944 316,702 255,383
Selling, general and
administrative expenses.......... 524,864 740,279 339,110 331,936
---------- ---------- -------- --------
Operating income (loss)....... 3,766 (85,335) (22,408) (76,553)
Interest expense.................. 14,197 13,302 8,833 4,306
---------- ---------- -------- --------
Loss before income taxes.......... (10,431) (98,637) (31,241) (80,859)
Income tax benefit................ (3,575) (34,010) (11,055) (28,133)
---------- ---------- -------- --------
Net loss...................... $ (6,856) $ (64,627) $(20,186) $(52,726)
========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-127
<PAGE>
BLOCK COURT REPORTING, INC.
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED TOTAL
ADDITIONAL EARNINGS STOCKHOLDER'S
COMMON PAID-IN (ACCUMULATED EQUITY
STOCK CAPITAL DEFICIT) (DEFICIT)
------ ---------- ------------ -------------
<S> <C> <C> <C> <C>
January 1, 1995.................. $ 100 $ 2,790 $ 97,852 $100,742
Issuance of common stock......... 10 990 -- 1,000
Retirement of common stock....... (100) (2,790) -- (2,890)
Net loss......................... -- -- (6,856) (6,856)
----- ------- -------- --------
December 31, 1995................ 10 990 90,996 91,996
Net loss......................... -- -- (64,627) (64,627)
----- ------- -------- --------
December 31, 1996................ 10 990 26,369 27,369
Net loss (Unaudited)............. -- -- (52,726) (52,726)
----- ------- -------- --------
June 30, 1997 (Unaudited)........ $ 10 $ 990 $(26,357) $(25,357)
===== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-128
<PAGE>
BLOCK COURT REPORTING, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE SIX
ENDED DECEMBER MONTHS ENDED
31, JUNE 30,
----------------- ------------------
1995 1996 1996 1997
------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $(6,856) $(64,627) $(20,186) $(52,726)
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Depreciation........................ 36,464 35,441 11,271 9,388
Changes in operating assets and
liabilities:
Accounts receivable............... (88,025) (66,632) (16,843) 65,697
Accounts payable.................. 33,555 156,573 152,600 (14,292)
Accrued liabilities............... (56,414) 10,797 9,920 39,099
Deferred income taxes............. 45,910 (31,803) -- (20,181)
Due from shareholder.............. -- -- (48,934) --
Income taxes payable.............. -- -- (30,157) --
Other assets...................... (6,568) -- 37,879 --
------- -------- -------- --------
Net cash (used in) provided by
operating activities........... (41,934) 39,749 95,550 26,985
------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures.................. (21,483) -- -- (4,047)
------- -------- -------- --------
Net cash used in investing
activities..................... (21,483) -- -- (4,047)
------- -------- -------- --------
Cash flows from financing activities:
Net payments of long-term
obligations.......................... (414) (38,891) (26,554) (20,353)
------- -------- -------- --------
Net cash used in financing
activities..................... (414) (38,891) (26,554) (20,353)
------- -------- -------- --------
Net (decrease) increase in cash......... (63,831) 858 68,996 2,585
Cash and cash equivalents at beginning
of year................................ 64,825 994 994 1,852
------- -------- -------- --------
Cash and cash equivalents at end of
year................................... $ 994 $ 1,852 $ 69,990 $ 4,437
======= ======== ======== ========
Cash paid for interest.................. $14,197 $ 13,302 $ 8,833 $ 4,306
======= ======== ======== ========
Cash paid for income taxes.............. $ 1,000
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-129
<PAGE>
BLOCK COURT REPORTING, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
Block Court Reporting, Inc. (the "Company"), a District of Columbia
corporation, is a court reporting business based in Washington, D.C. The
Company provides general court reporting services, the transcription of spoken
legal testimony into the written word as well as video captioning services to
the Washington, D.C., Northern Virginia, and Baltimore, Maryland markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Preparation of Interim Financial Statements
The financial statements for the six month periods ended June 30, 1996 and
1997 reflect all adjustments that are, in the opinion of management, necessary
for a fair presentation of the results for the period. Such adjustments are
considered to be of a normal recurring nature unless otherwise identified.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount 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.
Cash
Cash is maintained primarily in one bank. The balance, at times, may exceed
federally insured amounts although management believes that risk of loss is
minimal.
Property and Equipment
Property and equipment is recorded at cost and is depreciated on the
straight-line basis over the estimated useful lives of the assets.
Expenditures for improvements that extend the life of such assets are
capitalized while maintenance and repairs are charged to expense as incurred.
When property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the related accounts and any
resulting gain or loss is included in the statements of operations.
Revenue Recognition
The Company recognizes revenue as the documents or records are delivered to
customers. An allowance is provided for anticipated bad debts, based primarily
on historical experience and current estimates.
Concentration of Credit Risk
The Company grants credit to various companies primarily in the legal
industry which may be affected by economic or other external conditions. The
Company maintains allowance for potential credit losses, and such losses have
been within management's expectations.
F-130
<PAGE>
BLOCK COURT REPORTING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
USEFUL LIVES 1995 1996
------------ -------- -------
<S> <C> <C> <C>
Property and equipment:
Vehicles...................................... 5 years $60,538 $60,538
Furniture and fixtures........................ 7 years 26,063 23,425
Office equipment, computers and software...... 3 to 5 years 75,134 75,905
-------- -------
161,735 159,868
Less accumulated depreciation................... (36,464) (70,038)
-------- -------
Total....................................... $125,271 $89,830
======== =======
</TABLE>
The Company had fully depreciated assets totaling approximately $19,000 at
December 31, 1996.
4. COMMITMENTS AND CONTINGENCIES:
Independent Contractors
The Company, like most court reporting firms, provides court reporting
services through the use of independent contractors, who are not employees of
the Company. The Company does not pay or withhold federal or state employment
taxes with respect to these independent contractors. Independent court
reporters are responsible for acquiring and operating their court reporting
equipment. The use of independent contractors as court reporters is consistent
with industry practice and allows the Company to control costs. In the event
the Company were required to treat these court reporters as its employees, the
Company could become responsible for the taxes required to be withheld and
could incur additional costs associated with employee benefits and other
employee costs.
Operating Lease
The Company leases office space under a noncancelable operating lease which
expires on July 31, 1997. The remaining rental commitment under this lease at
December 31, 1996 was approximately $50,000. Subsequent to year-end, the
Company entered into new noncancelable operating lease for office space
commencing on October 1, 1997 and ending on September 30, 2000. The minimum
rental commitment under this lease for each of the next four years
approximates $10,000, $42,000, $42,000, and $32,000. Both agreements provide
for additional rent based on increases determined from indices specified
within the lease agreements. Additionally, the Company is required to pay its
pro rata share of increases in real estate taxes.
Rent expense in both 1995 and 1996 totalled approximately $97,000.
5. INCOME TAXES:
The benefit for income taxes consisted of the following:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER
31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Current..................................................... $(49,485) $ (2,207)
Deferred.................................................... 45,910 (31,803)
-------- --------
Total................................................... $ (3,575) $(34,010)
======== ========
</TABLE>
F-131
<PAGE>
BLOCK COURT REPORTING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of deferred income tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Accounts payable......................................... $2,600 $ 55,832
Deferred tax liabilities:
Accounts receivable...................................... 48,510 69,939
-------- --------
Net deferred income taxes.............................. $(45,910) $(14,107)
======== ========
</TABLE>
6. LONG-TERM OBLIGATIONS:
The Company has a line of credit with a bank for up to $25,000 at an
interest rate equal to the prime lending rate plus two percentage points. As
of December 31, 1996 and June 30, 1997, there was $18,000 and $23,000 drawn on
this line of credit, respectively. These borrowings have been classified as
current.
The Company has a promissory note with a bank at an interest rate equal to
the prime lending rate plus one percentage point. At December 31, 1996, the
maturities of the promissory note for each of the next two years approximated
$38,000 and $15,000.
The Company leases vehicles under long-term capital leases which expire
during 1997. At December 31, 1996, future minimum payments under these leases
approximated $13,000.
7. RELATED PARTY TRANSACTIONS:
The Company subleases certain office space to an affiliate for approximately
$2,000 per month.
8. SALE OF THE COMPANY:
On September 5th 1997, the Company's stock was acquired by U.S. Legal
Support, Inc. Summary financial information pertaining to the Company's
operations from January 1, 1997 through the acquisition date is as follows:
<TABLE>
<CAPTION>
(UNUADITED)
<S> <C>
Revenues.................................................... $701,401
Gross profit................................................ 426,178
Operating loss.............................................. (90,940)
Income before income taxes.................................. (93,448)
</TABLE>
F-132
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
U.S. Legal Support, Inc.:
We have audited the accompanying balance sheet of Commander Wilson, Inc. (a
sole proprietorship) as of December 31, 1995 and 1996, and the related
statements of income, owner's deficit and cash flows for the years then ended.
These financial statements are the responsibility of 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 financial statements referred to above present fairly,
in all material respects, the financial position of Commander Wilson, Inc. (a
sole proprietorship) as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Coopers & Lybrand l.l.p.
Houston, Texas
September 22, 1997
F-133
<PAGE>
COMMANDER WILSON, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Prepaid expenses.............................. $1,969 $ -- $--
------- ------- ----
Total current assets........................ 1,969 -- --
------- ------- ----
Total assets.................................... $1,969 $ -- $--
======= ======= ====
LIABILITIES AND OWNER'S DEFICIT
Current liabilities
Accounts payable and accrued liabilities...... $36,000 $37,303 $--
------- ------- ----
Total current liabilities................... 36,000 37,303
Commitments and contingencies
Owner's deficit................................. (34,031) (37,303) --
------- ------- ----
Total liabilities and owner's deficit........... $1,969 $ -- $--
======= ======= ====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-134
<PAGE>
COMMANDER WILSON, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- ----------------
1995 1996 1996 1997
-------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.................................... $577,733 $94,291 $84,291 $335,540
Cost of services............................ 100,570 -- -- --
-------- ------- ------- --------
Gross profit................................ 477,163 94,291 84,291 335,540
Selling, general and administrative
expenses................................... 284,170 68,528 51,021 61,763
-------- ------- ------- --------
Net income.............................. $192,993 $25,763 $33,270 $273,777
======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-135
<PAGE>
COMMANDER WILSON, INC.
STATEMENT OF OWNER'S DEFICIT
<TABLE>
<CAPTION>
OWNER'S
EQUITY
(DEFICIT)
---------
<S> <C>
Balance on January 1, 1995........................................... $5,800
Net income........................................................... 192,993
Distributions to owner, net.......................................... (232,824)
--------
Balance on December 31, 1995......................................... (34,031)
Net income........................................................... 25,763
Distributions to owner, net.......................................... (29,035)
--------
Balance on December 31, 1996......................................... (37,303)
Net income (unaudited)............................................... 273,777
Distributions to owner, net (unaudited).............................. (236,474)
--------
Balance on September 30, 1997 (unaudited)............................ $ --
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-136
<PAGE>
COMMANDER WILSON, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE NINE MONTHS
ENDED DECEMBER ENDED
31, SEPTEMBER 30,
----------------- ---------------------
1995 1996 1996 1997
-------- ------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income......................... $192,993 $25,763 $33,270 $273,777
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in operating assets and
liabilities:
Accounts payable............... 41,800 1,303 -- (37,303)
Prepaid expenses............... (1,969) 1,969 1,969 --
-------- ------- --------- ----------
Net cash provided by
operating activities........ 232,824 29,035 35,239 236,474
Cash flows from investing
activities.......................... -- -- -- --
Cash flows from financing activities:
Distributions to owner............. (232,824) (29,035) (35,239) (236,474)
-------- ------- --------- ----------
Net cash used in financing
activities.................. (232,824) (29,035) (35,239) (236,474)
-------- ------- --------- ----------
Change in cash....................... -- -- -- --
Cash and cash equivalents at the
beginning of period................. -- -- -- --
-------- ------- --------- ----------
Cash and cash equivalents at the end
of the period....................... $ -- $ -- $ -- $ --
======== ======= ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-137
<PAGE>
COMMANDER WILSON, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
Commander Wilson, Inc. (the "Company"), a sole proprietorship, provides
legal recruitment services to law firms and corporations primarily in Texas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Preparation of Interim Financial Statements
The unaudited financial statements for the periods ended September 30, 1996
and 1997 reflect all adjustments that are, in the opinion of management,
necessary for a fair presentation of the results for the periods. Such
adjustments are considered to be of a normal recurring nature unless otherwise
identified.
Use 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 amount 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.
Cash
The Company does not maintain a cash account. All cash receipts are
deposited into the owner's bank account and recorded as distributions to the
owner. All cash disbursements are made from the owner's bank account and
recorded as contributions to the Company.
Property and Equipment
Property and equipment is recorded at cost and is depreciated on the
straight-line basis over the estimated useful lives of the assets.
Expenditures for improvements that extend the life of such assets are
capitalized, while maintenance and repairs are charged to expense as incurred.
When property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the related accounts and any
resulting gain or loss is included in operations. All property and equipment
is fully depreciated.
Revenue Recognition
The Company records revenue when candidates accept a job offer. Non-
refundable retainers to provide recruitment services on an exclusive basis are
earned upon receipt. An allowance is provided for bad debts, based primarily
on historical experience and current estimates.
Concentration of Credit Risk
The Company grants credit to primarily law firms and corporations which may
be affected by economic or other external conditions. The Company maintains
allowances for potential credit losses and such losses have been within
management's expectations. During the years ended December 31, 1995 and 1996
approximately 53% and 93% of revenues was earned from two and five companies,
respectively. During the six months ended June 30, 1997 approximately 48% of
revenues was earned from two companies.
Income Taxes
The Company is organized as a sole proprietorship. No provision for federal
income taxes is provided in these financial statements because the Company's
income is included in the owner's tax return.
F-138
<PAGE>
COMMANDER WILSON, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. COMMITMENTS AND CONTINGENCIES:
Operating Leases
At December 31, 1996, aggregate minimum rental commitments under
noncancelable operating leases with lease terms in excess of one year are as
follows:
<TABLE>
<S> <C>
1997........................................... $22,548
1998........................................... 5,599
-------
$28,147
=======
</TABLE>
4. LITIGATION:
In September 1994, an independent contractor filed a lawsuit against the
Company claiming breach of contract for approximately $600,000. In April 1997,
the Company settled the lawsuit for approximately $36,000. Legal expenses of
approximately $57,000 are included in selling, general and administrative
expenses for the year ended December 31, 1995.
5. SALE OF THE BUSINESS:
In September 1997, the owner agreed to sell the Company's business to U.S.
Legal Support, Inc.
6. BANKRUPTCY:
In May 1996, the Company's owner filed a voluntary petition for Chapter XIII
bankruptcy relief following the initiation of a lawsuit filed by a former
independent contractor engaged by the Company. The Company's owner has
submitted a Chapter XIII plan which has not yet been confirmed by the
presiding bankruptcy court. The ultimate outcome and the effect, if any, of
this matter on the Company cannot be determined.
F-139
<PAGE>
[Logo of U.S. Legal Support, Inc. appears here]
A leading provider of court reporting,
certified record retrieval and legal
placement and staffing services
Court Reporting
[Photo of court reporter transcribing]
Certified Record Retrieval
[Photo of certified records retrieval]
Legal Placement and Staffing
[Photo of attorney working]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any information
or to make any representations other than those contained in this Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company or any of the Underwriters. This
Prospectus does not constitute an offer to sell or the solicitation of an offer
to buy any security other than the Common Stock offered by this Prospectus, nor
does it constitute an offer to sell or the solicitation of an offer to buy the
shares of Common Stock to anyone in any jurisdiction in which such offer or
solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such other or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information contained herein is correct as of any time subsequent to
the date hereof.
------------------
TABLE OF CONTENTS
------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
The Company.............................................................. 12
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Financial Data.................................................. 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 31
Management............................................................... 39
Certain Transactions..................................................... 43
Principal Shareholders................................................... 45
Description of Capital Stock............................................. 47
Shares Eligible for Future Sale.......................................... 49
Underwriting............................................................. 51
Legal Matters............................................................ 52
Experts.................................................................. 52
Available Information.................................................... 53
Index to Financial Statements............................................ F-1
</TABLE>
----------------
Until , 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock offering hereby, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,500,000 SHARES
[LOGO OF U.S. LEGAL SUPPORT APPEARS HERE]
COMMON STOCK
----------------
PROSPECTUS
----------------
NationsBanc Montgomery
Securities, Inc.
Hambrecht & Quist
J.C. Bradford & Co.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the securities being registered. All amounts are estimates
except for the fees payable to the Commission and the NASD and the listing
fee.
<TABLE>
<CAPTION>
AMOUNT
-------------
<S> <C>
Securities and Exchange Commission registration fee....... $ 15,950.00
National Association of Securities Dealers, Inc. filing
fee...................................................... 5,732.50
NASDAQ listing fee........................................ 50,000.00
Printing and engraving expenses........................... 350,000.00
Legal fees and expenses................................... 600,000.00
Accounting fees and expenses.............................. 1,250,000.00
Blue sky fees and expenses................................ 1,500.00
Transfer Agent fees....................................... 10,000.00
Miscellaneous............................................. 16,817.50
-------------
TOTAL................................................. $2,350,000.00
=============
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Registrant's Articles of Incorporation, as amended (the "Articles of
Incorporation") and Bylaws require the Registrant to indemnify officers and
directors of the Registrant to the fullest extent permitted by Article 2.02-1
of the Business Corporation Act of the State of Texas (the "TBCA"). The
Articles of Incorporation and Bylaws are filed as Exhibits 3.1 and 3.2 to the
Registration Statement. Generally, Article 2.02-1 of the TBCA permits a
corporation to indemnify a person who was, is, or is threatened to be made a
named defendant or respondent in a proceeding because the person was or is a
director or officer if it is determined that such person (i) conducted himself
in good faith; (ii) reasonably believed (a) in the case of conduct in his
official capacity as a director or officer of the corporation, that his
conduct was in the corporation's best interests, or (b) in other cases, that
his conduct was at least not opposed to the corporation's best interests; and
(iii) in the case of any criminal proceedings, had no reasonable cause to
believe that his conduct was unlawful. In addition, the TBCA requires a
corporation to indemnify a director or officer for any action that such
director or officer is wholly successful in defending on the merits.
The Articles of Incorporation provide that a director of the Registrant will
not be liable to the corporation for monetary damages for an act or omission
in the director's capacity as a director, except to the extent not permitted
by law. Texas law does not permit exculpation of liability in the case of (i)
a breach of the director's duty of loyalty to the corporation or its
shareholders; (ii) an act or omission not in good faith that involves
intentional misconduct or a knowing violation of the law; (iii) a transaction
from which a director received an improper benefit, whether or not the benefit
resulted from an action taken within the scope of the director's office; (iv)
an act or omission for which the liability of the director is expressly
provided by statute; or (v) an act related to an unlawful stock repurchase or
payment of dividend.
The Form of Underwriting Agreement filed herewith as Exhibit 1.1, under
certain circumstances, provides for indemnification by the Underwriters of the
directors, officers and controlling persons of the Company.
The Company has purchased liability insurance policies covering the
directors and officers of the Company, including, to provide protection where
the Company cannot legally indemnify a director or officer
II-1
<PAGE>
and where a claim arises under the Employee Retirement Income Security Act of
1974 against a director or officer based on an alleged breach of fiduciary
duty or other wrongful act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
All information set forth in this Item 15 gives effect to a 100-for-one
stock split with respect to the Common Stock and Preferred Stock of the
Company effected on December 16, 1996.
In connection with the initial capitalization of the Company, on October 2,
1996, the Company issued 150,000 shares of Common Stock to GulfStar
Investments, Ltd. at a price of $.01 per share for services rendered valued at
$1,500 and 843,840 shares of Common Stock to Richard O. Looney at a price of
$.01 per share for services rendered valued at $8,438.40. On January 17, 1997,
the Company issued: (i) 135,000 shares of Series A Convertible Preferred Stock
to the Trust for Defined Benefit Plans of Zeneca Holdings Inc. at a price of
$1.00 per share for an aggregate sales price of $135,000; (ii) 670,000 shares
of Series A Convertible Preferred Stock to the Delaware State Employees'
Retirement Fund at a price of $1.00 per share for an aggregate sales price of
$670,000; and (iii) 195,000 shares of Series A Convertible Preferred Stock to
the Trust for Defined Benefit Plans of ICI American Holdings Inc. at a price
of $1.00 per share for an aggregate sales price of $195,000. On July 22, 1997,
the Company issued 25,000 shares to David W. Pfleghar at a price of $.01 per
share for an aggregate sales price of $250.00. All of such sales were
completed without registration under the Securities Act in reliance upon the
exemption provided by Section 4(2) of the Securities Act, no public offering
being involved.
On January 17, 1997, the Company acquired all the issued and outstanding
capital stock of Looney & Company in exchange for cash and the issuance of
2,000,000 (2,046,667 as a result of a post-closing adjustment on June 23,
1997) shares of Series B Convertible Preferred to Richard O. Looney. On that
date, the Company also acquired all the issued and outstanding capital stock
of Klein, Bury & Associates in exchange for cash and the issuance of 170,600
shares of Common Stock to Michael Klein. On April 3, 1997, the Company
acquired all the assets of Cindi Rogers & Associates, Inc. in exchange for the
payment of cash and the issuance of 5,000 shares of Common Stock to Cynthia A.
Rogers. In connection with its acquisition of all the assets of San Francisco
Reporting Service, the Company paid cash and issued 15,304 shares of Common
Stock each to Jay Harbidge and Richard Posner on May 14, 1997, and 115,625
shares of Series C Convertible Preferred Stock each to Jay Harbidge and
Richard Posner on June 23, 1997. On May 19, 1997, the Company acquired all the
assets of G&G Court Reporters in exchange for cash and the issuance of a
$345,750 Convertible Subordinated Promissory Note and a $691,750 Convertible
Subordinated Promissory Note to the Giammanco Family Trust. On August 19,
1997, the Company acquired all the issued and outstanding capital stock of
Goren of Newport, Inc. d/b/a/ Johnson Court Reporting in exchange for cash and
the issuance of a $78,401 Subordinated Promissory Note and 46,118.117 shares
of Common Stock to Glory Johnson. On that date the Company also acquired all
the issued and outstanding capital stock of RapidText, Inc. in exchange for
cash and the issuance of a $22,738 Subordinated Promissory Note and 13,375.529
shares of Common Stock to Glory Johnson and a $37,598 Subordinated Promissory
Note and 22,116.471 shares of Common Stock to Seaquestor Trust. On that date
the Company also acquired all the issued and outstanding capital stock of
MedText, Inc. in exchange for cash and the issuance of a $107,023 Subordinated
Promissory Note and 60,865.764 shares of Common Stock to Seaquestor Trust. On
August 28, 1997, the Company acquired all the assets of Encore Court Reporting
in exchange for cash and the issuance of 2,941 shares of Common Stock to Jan
Coldren. On August 29, 1997, the Company acquired all the assets of Legal
Enterprise, Inc. in exchange for cash and the issuance of a $319,340
Subordinated Promissory Note and a $821,160 Convertible Subordinated
Promissory Note to Legal Enterprise, Inc. On September 4, 1997, the Company
acquired all the capital stock of Block Court Reporting, Inc. in exchange for
cash and the issuance of a $240,000 Subordinated Promissory Note and a
$360,000 Convertible Subordinated Promissory Note to Martin H. Block. On that
date, the Company also acquired all the assets of Amicus One Legal Support
Services, Inc. in exchange for cash and the issuance of a $560,000
Subordinated Promissory Note and 116,471 shares of Common Stock to Amicus One.
On September 17, 1997, the Company acquired all the issued and outstanding
capital stock of Burton House, Inc. d.b.a. Ziskind, Greene, Watanabe & Nason
in exchange for cash and the issuance of 158,824 shares of Common Stock to
Gregg M. Ziskind and Susan L. Ziskind. On that date the Company also acquired
all
II-2
<PAGE>
the assets of Elaine P. Dine, Inc. and Elaine P. Dine Temporary Attorneys,
L.L.C. in exchange for cash and the issuance of a $2,000,000 Junior
Subordinated Promissory Note and 76,471 shares of Common Stock to such
companies. All of such sales were completed without registration under the
Securities Act in reliance upon the exemption provided by Section 4(2) of the
Securities Act, no public offering being involved.
On January 17, 1997, the Company granted options to purchase 96,160 shares of
Common Stock to certain employees or other optionees of Looney & Company and
Klein Bury at exercise prices ranging from $.01 to $.10 in exchange for options
previously granted to such employees and optionees by such companies. On
September 17, 1997, the Company granted options to purchase 41,176 shares of
Common Stock to certain employees of Elaine P. Dine, Inc. at an exercise price
of $.01 per share in exchange for options previously granted to such employees
by such company. On September 25, 1997, options to purchase 12,480 shares of
Common Stock were exercised at a price of $.01 per share. The Company received
$124.80 in aggregate consideration upon the exercise of such options. All of
such sales were completed without registration under the Securities Act in
reliance upon the exemption provided by Section 4(2) of the Securities Act, no
public offering being involved. In addition, the Company believes that the
exemption provided by Rule 701 promulgated under the Securities Act is
applicable to such sales.
On September 8, 1997, the Company sold a number of shares of Common Stock
equal to $1,072,604 divided by 90% of the initial public offering price per
share to Kirby A. Kennedy & Associates in connection with a definitive
agreement in which the Company will acquire all of the assets of Kirby A.
Kennedy & Associates in exchange for cash and the issuance of such shares. On
September 15, 1997, the Company sold a number of shares of Common Stock equal
to $2,400,000 divided by 90% of the initial public offering price per share to
Colleen Jilio in connection with a definitive agreement in which the Company
will acquire all of the assets of Jilio & Associates in exchange for cash and
the issuance of such shares. On September 25, 1997, the Company sold a number
of shares of Common Stock equal to $2,500,000 divided by 90% of the initial
public offering price per share to Reporting Services Associates, Inc. in
connection with a definitive agreement in which the Company will acquire all of
the assets of Reporting Service Associates in exchange for cash and the
issuance of such shares. On that date the Company also sold a number of shares
of Common Stock equal to $607,500 divided by 90% of the initial public offering
price per share to James M. Wilson in connection with a definitive agreement in
which the Company will acquire all of the assets of Commander Wilson
Incorporated in exchange for cash and the issuance of such shares. All of such
sales were completed without registration under the Securities Act in reliance
upon the exemption provided by Section 4(2) of the Securities Act, no public
offering being involved. The shares of Common Stock referred to in this
paragraph will be issued and delivered simultaneously with the consummation of
the Offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1* Form of Underwriting Agreement between the Company and the
Underwriters named therein.
2.1 Stock Purchase Agreement by and between Litigation Resources of
America, Inc. and Richard O. Looney, dated as of January 17, 1997.
2.2 Stock Purchase Agreement by and between Litigation Resources of
America, Inc. and Michael Klein, dated as of January 17, 1997.
2.3 Securities Purchase Agreement by and among Litigation Resources of
America, Inc. (the "Company"), the Subsidiaries of the Company
listed on the signature pages thereto and the Investors listed on
the signature pages thereto, dated as of January 17, 1997, as
amended.
2.4 Agreement of Purchase and Sale of Assets by and between Litigation
Resources of America--California, Inc. and San Francisco Reporting
Service, dated May 14, 1997.
2.5 Agreement of Purchase and Sale of Assets by and between Litigation
Resources of America--California, Inc., Litigation Resources of
America, Inc., Peter Giammanco and Leslie Giammanco, individuals
d/b/a G&G Court Reporters, and Peter Giammanco and Leslie
Giammanco as Trustees of the Giammanco Family Trust, dated as of
May 19, 1997.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.6 Letter Agreement by and between Sandra Rocca and Litigation
Resources of America--Midwest, Inc., dated August 15, 1997
2.7 Plan and Agreement of Reorganization and Merger by and among
Litigation Resources of America--California, Inc., Goren of
Newport, Inc. d/b/a Johnson Court Reporting, Glory Johnson and
Litigation Resources of America, dated as of August 19, 1997.
2.8 Plan and Agreement of Reorganization and Merger by and among
Litigation Resources of America--California, Inc., RapidText,
Inc., Seaquestor Trust, Glory Johnson and Litigation Resources of
America, dated as of August 19, 1997.
2.9 Plan and Agreement of Reorganization and Merger by and among
Litigation Resources of America--California, Inc., MedText, Inc.,
Seaquestor Trust and Litigation Resources of America, dated as of
August 19, 1997.
2.10 Agreement of Purchase and Sale of Assets by and among Litigation
Resources of America--California, Inc., Litigation Resources of
America, Inc., Legal Enterprise, Inc., Tony L. Maddocks and Alan
Simon, dated as of August 29, 1997.
2.11 Agreement of Purchase and Sale of Assets by and among Litigation
Resources of America--Northeast, Inc., Litigation Resources of
America, Inc., Amicus One Legal Support Services, Inc., Richard A.
Portas, Joseph N. Spinozzi, Carl Anderson and Howard Breshin,
dated as of September 4, 1997.
2.12 Stock Purchase Agreement by and between Litigation Resources of
America, Inc., Litigation Resources of America--Northeast, Inc.,
and Martin H. Block, dated as of September 4, 1997.
2.13 Agreement of Purchase and Sale of Assets by and among Litigation
Resources of America--Midwest, Inc., Litigation Resources of
America, Inc., Kirby A. Kennedy & Associates, Kirby A. Kennedy and
Jeanne M. Kennedy, dated as of September 8, 1997.
2.14 Agreement of Purchase and Sale of Assets by and among Litigation
Resources of America--California, Inc., Litigation Resources of
America, Inc., and Colleen Jilio, a resident of California d.b.a.
Jilio & Associates, dated as of September 15, 1997.
2.15 Agreement of Purchase and Sale of Assets by and among Litigation
Resources of America--Northeast, Inc., Litigation Resources of
America, Inc., Elaine P. Dine, Inc., Elaine P. Dine Temporary
Attorneys, L.L.C., Elaine P. Siegel ane Laurie Becker, dated as of
September 17, 1997.
2.16 Stock Purchase Agreement by and between Litigation Resources of
America, Inc., Litigation Resources of America--California, Inc.,
Gregg M. Ziskind and Susan L. Ziskind, dated as of September 17,
1997.
2.17 Agreement of Purchase and Sale of Assets by and among Looney &
Company, U.S. Legal Support, Inc. and James M. Wilson, a resident
of Houston, Texas d.b.a Commander Wilson, Incorporated, dated as
of September 25, 1997.
2.18+ Agreement of Purchase and Sale of Assets by and among Litigation
Resources of America--Northeast, Inc., Litigation Resources of
America, Inc., Reporting Services Associates, Inc. and Lee
Goldstein, dated as of September 25, 1997.
3.1 Articles of Incorporation, as amended, of the Company.
3.2 Bylaws of the Company, as amended.
4.1 Registration Rights Agreement between the Company and Richard O.
Looney, dated
January 17, 1997.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
4.2 Registration Rights Agreement between the Company and Michael
Klein, dated January 17, 1997.
4.3 Registration Rights Agreement between the Company and certain
purchasers, dated January 17, 1997.
4.4 Form of Registration Rights Agreement among the Company and
certain holders of the Common Stock.
4.5 Securityholders Agreement among Litigation Resources of America,
Inc., the Investors named therein and the Shareholders named
therein, dated January 17, 1997, as amended.
4.6 Registration Rights Agreement between the Company and Gregg M.
Ziskind and Susan L. Ziskind, dated September 17, 1997.
5.1* Opinion of Bracewell & Patterson, L.L.P. as to the validity of the
Common Stock being offered.
10.1 U.S. Legal Support, Inc. 1997 Stock Incentive Plan.
10.2 Form of Option Agreement for 1997 Stock Incentive Plan.
10.3 U.S. Legal Support, Inc. 1997 Non-Employee Directors Stock Option
Plan.
10.4 Form of Option Agreement for Non-Employee Directors Stock Option
Plan.
10.5 Employment Agreement by and among the Company, Looney & Company
and Richard O. Looney, dated January 17, 1997.
10.6 Employment Agreement by and among the Company, Klein, Bury &
Associates and Michael Klein, dated January 17, 1997.
10.7 Employment Agreement by and among the Company, Litigation
Resources of America--California, Inc. and Tony L. Maddocks, dated
August 29, 1997.
10.8 Employment Agreement dated September 25, 1997 by and among the
Company and James M. Wilson dated September 25, 1997.
10.9 Letter Agreement dated May 7, 1997 by and between James M. Wilson
d.b.a. Commander Wilson, Inc. and the Company.
10.10 Termination of Letter Agreement dated May 7, 1997, between James
M. Wilson d.b.a. Commander Wilson, Inc. and the Company, dated
September 25, 1997.
10.11 Letter Agreement dated April 24, 1997 by and between the Company
and The GulfStar Group, Inc.
10.12 Fourth Amended and Restated Bank Credit Agreement among the
Company, its subsidiaries and Texas Commerce Bank, National
Association.
10.13+ First Amendment to Employment Agreement dated October 1, 1997 by
and among the Company, Looney & Company and Richard O. Looney.
10.14+ First Amendment to Employment Agreement dated October 1, 1997 by
and among Klein, Bury and Associates, Inc., Michael A. Klein and
the Company.
10.15+ Letter Agreement dated March 4, 1996 by and between The Gulf Star
Group, Inc. and Looney & Company.
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
11.1 Computation of Historical and SAB No. 55 Earnings Per Share.
11.2 Computation of Pro Forma Earnings Per Share.
21.1 Subsidiaries of the Company.
23.1* Consent of Bracewell & Patterson, L.L.P. (included in its opinion
filed as Exhibit 5 hereto).
23.2+ Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Fentress Bracewell.
23.4 Consent of Ronald C. Lassiter.
24.1 Powers of Attorney (See page II-7).
27 Financial Data Schedule
</TABLE>
- --------
+Filed herewith.
*To be filed by amendment.
(b) Financial Statement Schedules
The following financial statement schedules are included herein.
Schedule II--Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related instructions,
are inapplicable, or the information is included in the consolidated financial
statements, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required
by the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the provisions described in Item 14, or
otherwise, the Company has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than payment by
the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933 the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, U.S. LEGAL
SUPPORT, INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT THERETO
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF HOUSTON, STATE OF TEXAS, ON DECEMBER 17, 1997.
U.S. Legal Support, Inc.
/s/ Richard O. Looney
By: _________________________________
Richard O. Looney
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby revokes the Power of
Attorney dated September 25, 1997 and constitutes and appoints Richard O.
Looney and David P. Tusa, or either of them, the undersigned's true and lawful
attorney-in-fact and agent, with full power of substitution and
resubstitution, for the undersigned and in the undersigned's name, place and
stead, in any and all capacities (until revoked in writing), to sign this
Registration Statement, any Registration Statement filed pursuant to Rule
462(b), and any and all amendments (including post-effective amendments)
thereto, to file the same, together with all exhibits thereto and documents in
connection therewith, with the Securities and Exchange Commission, to sign any
and all applications, registration statements, notices and other documents
necessary or advisable to comply with the applicable state securities
authorities, granting unto said attorney-in-fact and agent, or their
substitute or substitutes, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises in order to effectuate the same as fully to all intents and purposes
as the undersigned might or could do if personally present, thereby ratifying
and confirming all that said attorneys-in-fact and agents, or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE INDICATED CAPACITIES ON DECEMBER 17, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ Richard O. Looney Director, President and Chief Executive Officer
------------------------------------ (principal executive officer)
Richard O. Looney
/s/ David P. Tusa Executive Vice President and Chief Financial
------------------------------------ Officer (principal financial officer)
David P. Tusa
/s/ Scott R. Creasman Vice President and Corporate Controller
------------------------------------ (principal accounting officer)
Scott R. Creasman
/s/ Michael A. Klein Director
------------------------------------
Michael A. Klein
/s/ Robert J. Cresci Director
------------------------------------
Robert J. Cresci
/s/ G. Kent Kahle Director
------------------------------------
G. Kent Kahle
</TABLE>
II-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
U.S. Legal Support, Inc.:
In connection with our audits of the financial statements of Looney &
Company as of December 31, 1995 and 1996, and for each of the three years in
the period December 31, 1996, and the financial statements of U.S. Legal
Support, Inc. as of September 30, 1997 and for the nine months ended September
30, 1997, which financial statements are included in the Prospectus, we have
also audited the financial statement schedule listed on S-2 herein.
In our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as whole, presents fairly, in
all material respects, the information required to be included herein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
December 15, 1997
S-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE CHARGED BALANCE
BEGINNING TO AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OTHER (1) OF PERIOD
----------- --------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
LOONEY & COMPANY
Year ended December 31, 1994:
Allowance for uncollectible
accounts................... $ 32 $ 28 $ -- $ -- $ 60
==== ==== ==== ==== ====
Year ended December 31, 1995:
Allowance for uncollectible
accounts................... $ 60 $ 83 $ -- $ -- $143
==== ==== ==== ==== ====
Year ended December 31, 1996:
Allowance for uncollectible
accounts................... $143 $ 80 $ -- $ -- $223
==== ==== ==== ==== ====
U.S. LEGAL SUPPORT, INC.
Nine months ended September
30, 1997
Allowance for uncollectible
accounts................... $223 $154 $(36) $436 $777
==== ==== ==== ==== ====
</TABLE>
- --------
(1) Acquired allowances for uncollectible accounts in acquisitions.
S-2
<PAGE>
EXHIBIT 2.18
AGREEMENT OF PURCHASE AND SALE OF ASSETS
This Agreement of Purchase and Sale of Assets (this "Agreement") is entered
into and effective as of September 25, 1997 by and among LITIGATION RESOURCES
OF AMERICA-NORTHEAST, INC., a New York corporation (the "Buyer"), LITIGATION
RESOURCES OF AMERICA, INC., a Texas corporation and the parent of Buyer (the
"Parent"), REPORTING SERVICES ASSOCIATES, INC., a Pennsylvania corporation
(the "Seller"), and Lee Goldstein, a resident of Florida, individually
("Goldstein") (Goldstein referred to sometimes as the "Stockholder"). Buyer,
Parent, Seller and the Stockholder are hereinafter sometimes referred to
collectively as the "Parties" or singularly as a "Party."
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Seller is the owner of various assets associated with the
Business (as hereinafter defined);
WHEREAS, the Buyer desires to purchase all of the Assets (as hereinafter
defined) owned by the Seller and used in the Business (such purchase of the
Assets being sometimes herein referred to as the "Acquisition"), and the Seller
desires to sell such Assets to the Buyer;
WHEREAS, in connection with the purchase and sale of the Assets, the Parties
desire to set forth in this Agreement the terms and conditions with respect to
the transfer of such Assets; and
WHEREAS, the parties understand that the Parent or its Affiliates may enter
into other agreements similar or dissimilar to this Agreement (the "Other
Agreements") for the acquisition by the Parent or such Affiliates of the assets
or stock of other entities (collectively, the "Other Acquired Businesses," and
each of those entities, individually, an "Other Acquired Business"), which Other
Agreements will be among those entities and their equity owners, the Parent and
Affiliates of the Parent;
NOW, THEREFORE, for and in consideration of the mutual covenants,
agreements, representations and warranties contained in this Agreement, and
other good and valuable consideration, the receipt, adequacy and sufficiency of
which are hereby acknowledged, the Parties hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
As used herein, the following terms shall have the following meanings:
<PAGE>
ACCOUNTS RECEIVABLE. The term "Accounts Receivable" shall mean all of the
accounts receivable, notes receivable, trade receivables and intercompany
receivables relating to the Business and existing as of the Effective Date.
ACQUISITION. The term "Acquisition" shall have the meaning set forth in the
preamble hereto.
AFFILIATE. The term "Affiliate" of a person shall mean, with respect to
that person, a person who directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
or is acting as agent on behalf of, or as an officer or director of that person.
As used in the definition of Affiliate, the term "control" (including the terms
"controlling," "controlled by," or "under common control with") means the
possession, direct or indirect, of the ability to affect the management and
policies of a person whether through the ownership of voting securities, by
contract, through the holding of a position as a director or officer of such
person, or otherwise. As used in this definition, the term "person" means an
individual, a corporation, a limited liability company, a partnership, an
association, a joint stock company, a trust, an incorporated organization, or a
Governmental Authority.
AGREEMENT. The term "Agreement" shall the meaning set forth in the preamble
hereto.
ANCILLARY AGREEMENTS. The term "Ancillary Agreements" shall have the
meaning set forth in Section 3.2.
ASSETS. The term "Assets" shall have the meaning set forth in Section 2.1.
ASSUMED LIABILITIES. The term "Assumed Liabilities" shall have the meaning
set forth in Section 2.6.
BALANCE SHEET DATE. The term "Balance Sheet Date" shall have the meaning
ascribed to it in Section 2.6.
BILL OF SALE. The term "Bill of Sale" shall have the meaning set forth in
Section 6.3(xiii).
BOOKS AND RECORDS. The term "Books and Records" shall have the meaning set
forth in Section 2.1(c).
BUSINESS. The term "Business" shall mean the court reporting and litigation
support business of the Seller as presently conducted.
BUYER. The term "Buyer" shall have the meaning set forth in the preamble
hereto.
BUYER INDEMNIFIED PARTIES. The term "Buyer Indemnified Parties" shall have
the meaning set forth in Section 7.1A.
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CAPITAL STOCK. The term "Capital Stock" shall mean, with respect to: (a)
any corporation, any share, or any depositary receipt or other certificate
representing any share, of an equity ownership interest in that corporation; and
(b) any other Entity, any share, membership or other percentage interest, unit
of participation or other equivalent (however designated) of an equity interest
in that Entity.
CASH PURCHASE PRICE. The term "Cash Purchase Price" shall have the meaning
set forth in Section 2.3(a).
CLOSING. The term "Closing" shall have the meaning set forth in
Section 6.1.
CLOSING DATE. The term "Closing Date" shall have the meaning set forth in
Section 6.1.
CLOSING MEMORANDUM. The term "Closing Memorandum" shall mean the form of
closing memorandum to be prepared by the Buyer and the Parent and approved by
the Seller (which approval will not be unreasonably withheld) for the Closing
under this Agreement in which are included the forms of officers certificates,
certificates of Stockholder, opinions of counsel and certain other documents to
be delivered at the Closing as provided herein.
CODE. The term "Code" shall mean the Internal Revenue Code of 1986, as
amended.
CONTRACTS. The term "Contracts" shall have the meaning as contained in
Section 2.1(b).
CUSTOMERS. The term "Customers" shall have the meaning as contained in
Section 3.25.
DAMAGES. The term "Damages" shall have the meaning set forth in
Section 7.1A.
EFFECTIVE DATE. The term "Effective Date" shall mean 12:01 a.m. on the
"Closing Date."
EMPLOYEE. The term "Employee" shall mean any employee of the Seller who, as
of the Effective Date, is employed or otherwise performs work or provides
services in connection with the operation of the Business, including those, if
any, on disability, sick leave, layoff or leave of absence, who, in accordance
with the Seller's applicable policies, are eligible to return to active status,
but shall not include any independent contractor providing court reporting
services to Seller from time to time.
EMPLOYMENT AGREEMENT. The term "Employment Agreement" shall have the
meaning ascribed to it in Section 3.18.
ENTITY. The term "Entity" shall mean any sole proprietorship, corporation,
partnership of any kind having a separate legal status, limited liability
company, business trust, unincorporated organization or association, mutual
company, joint stock company or joint venture.
ENVIRONMENTAL, HEALTH & SAFETY LAWS. The term "Environmental, Health &
Safety Laws" shall mean all laws (including rules and regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and charges thereunder) of
federal, state, local, and foreign
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Governmental Authorities concerning pollution or protection of the environment,
public health and safety, or employee health and safety.
EQUIPMENT. The term "Equipment" shall have the meaning as contained in
Section 2.1(a).
ERISA. The term "ERISA" shall have the meaning as contained in
Section 3.17.
EXCHANGE ACT. The term "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
EXCLUDED ASSETS. The term "Excluded Assets" shall have the meaning as
contained in Section 2.2.
EXPIRATION DATE. The term "Expiration Date" shall have the meaning set forth
in the introductory paragraph to Article III.
FINAL PROSPECTUS. The term "Final Prospectus" shall mean the prospectus
included in the Registration Statement at the time it becomes effective, except
that if the prospectus first furnished to the Underwriter after the Registration
Statement becomes effective for use in connection with the IPO differs from the
prospectus included in the Registration Statement at the time it becomes
effective (whether or not that prospectus so furnished is required to be filed
with the SEC pursuant to Securities Act Rule 424(b)), the prospectus so first
furnished is the "Final Prospectus."
FINANCIAL STATEMENTS. The term "Financial Statements" shall mean the
balance sheet, income statement and statement of changes of financial position
of the Seller.
GAAP. The term "GAAP" shall mean generally accepted accounting principles
of the Accounting Principles Board of the American Institute of Certified Public
Accountants and the Financial Accounting Standards Board that are applicable
from time to time.
GENERAL INTANGIBLES. The term "General Intangibles" shall have the meaning
set forth in Section 2.1(g).
GOLDSTEIN. The term "Goldstein" shall have the meaning ascribed to it in
the preamble hereto.
GOLDSTEIN EMPLOYMENT AGREEMENT. The term "Goldstein Employment Agreement"
shall have the meaning ascribed to it in Section 6.2(x).
GOVERNMENTAL APPROVAL. The term "Governmental Approval" shall mean at any
time any authorization, consent, approval, permit, franchise, certificate,
license, implementing order or exemption of, or registration or filing with, any
Governmental Authority, including any certification or licensing of a natural
person to engage in a profession or trade or a specific regulated activity, at
that time.
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GOVERNMENTAL AUTHORITY. The term "Governmental Authority" shall mean (a)
any national, state, county, municipal or other government, domestic or foreign,
or any agency, board, bureau, commission, court, department or other
instrumentality of any such government, or (b) any Person having the authority
under any applicable Governmental Requirement to assess and collect Taxes for
its own account.
GOVERNMENTAL REQUIREMENT. The term "Governmental Requirement" shall mean at
any time (a) any law, statute, code, ordinance, order, rule, regulation,
judgment, decree, injunction, writ, edict, award, authorization or other
requirement of any Governmental Authority in effect at that time, or (b) any
obligation included in any certificate, certification, franchise, permit or
license issued by any Governmental Authority or resulting from binding
arbitration, including any requirement under common law, at that time.
GUARANTEE OF PERFORMANCE. The term "Guarantee of Performance" shall have
the meaning set forth in Section 6.3(xv).
INTELLECTUAL PROPERTY. The term "Intellectual Property" shall have the
meaning as contained in Section 2.1(e).
IPO. The term "IPO" shall mean the first time a registration statement filed
under the Securities Act with respect to a primary offering by the Parent to the
public of Parent Shares is declared effective under the Securities Act and the
shares registered by that registration statement are issued and sold by the
Parent (otherwise than pursuant to the exercise by the Underwriter of any over-
allotment option).
IPO CLOSING. The term "IPO Closing" shall mean the delivery to the
Underwriters of Parent Shares against the receipt of payment therefor pursuant
to the IPO.
IPO CLOSING DATE. The term "IPO Closing Date" shall mean the date on which
the Parent first receives payment for the Parent Shares it sells to the
Underwriter in the IPO.
IPO PRICE. The term "IPO Price" shall mean the price per share of Parent
Shares which is set forth as the "price to public" on the cover page of the
Final Prospectus.
LEASED ASSETS. The term "Leased Assets" shall have the meaning ascribed
thereto in Section 3.6.
LITIGATION. The term "Litigation" shall mean any action, case, proceeding,
claim, grievance, suit or investigation or other proceeding conducted by or
pending before any Governmental Authority or any arbitration proceeding.
MATERIAL. The term "Material" shall mean, as applied to any Entity or the
Business, material to the business, operations, property or assets, liabilities,
financial condition or results of operations of the Business or that Entity and
its Subsidiaries considered as a whole, as the case may be.
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MATERIAL ADVERSE EFFECT. The term "Material Adverse Effect" shall mean, with
respect to the consequences of any fact or circumstance (including the
occurrence or non-occurrence of any event) to the Business, that such fact or
circumstance has caused, is causing or will cause, directly, indirectly or
consequentially, singly or in the aggregate with other facts and circumstances,
any material damages.
MINIMUM CASH AMOUNT. The term "Minimum Cash Amount" shall have the meaning
set forth in Section 6.2(iv).
NOTICE OF ACTION. The term "Notice of Action" shall have the meaning set
forth in Section 7.1C.
NOTICE OF ELECTION. The term "Notice of Election" shall have the meaning
set forth in Section 7.1C.
OFFSET. The term "Offset" shall have the meaning set forth in Section 8.2.
ORDINARY COURSE OF BUSINESS. The term "Ordinary Course of Business" shall
mean the ordinary course of Seller's Business consistent with past custom and
practice (including with respect to quantity and frequency).
OTHER ACQUIRED BUSINESSES. The term "Other Acquired Businesses" shall have
the meaning set forth in the preamble hereto.
OTHER AGREEMENTS. The term "Other Agreements" shall have the meaning set
forth in the preamble hereto.
OTHER FINANCING SOURCES. The term "Other Financing Sources" shall have the
meaning set forth in Section 6.2(iv).
PARENT. The term "Parent" shall have the meaning set forth in the preamble
hereto.
PARENT SHARES. The term "Parent Shares" shall mean any of the shares of
common stock of the Parent.
PARTY. The terms "Party" and "Parties" shall have the meanings set forth in
the preamble hereto.
PBGC. The term "PBGC" shall mean the Pension Benefits Guaranty Corporation.
PERSON. The term "Person" shall mean any natural person, Entity, estate,
trust, union or employee organization or Governmental Authority.
PRICING. The term "Pricing" shall have the meaning set forth in Section 6.1.
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PURCHASE PRICE. The term "Purchase Price" shall mean the consideration
payable to the Seller for the Assets as set forth or contemplated in
Section 2.3.
REGISTRATION RIGHTS AGREEMENT. The term "Registration Rights Agreement"
shall have the meaning set forth in Section 6.2(xi).
REGISTRATION STATEMENT. The term "Registration Statement" shall mean the
registration statement, including (a) each preliminary prospectus included
therein prior to the date on which that registration statement is declared
effective under the Securities Act (including any prospectus filed with the SEC
pursuant to Securities Act Rule 424(b)), (b) the Final Prospectus and (c) any
amendments and all supplements and exhibits thereto, filed by the Parent with
the SEC to register the Parent Shares under the Securities Act for public
offering and sale in the IPO.
RETAINED LIABILITIES. The term "Retained Liabilities" shall mean all
liabilities of the Seller other than the Assumed Liabilities.
SEC. The term "SEC" means the Securities and Exchange Commission or any
successor Governmental Authority.
SECURITIES ACT. The term "Securities Act" shall mean the Securities Act of
1933, as amended.
SELLER. The term "Seller" shall have the meaning set forth in the preamble
hereto.
SELLER INDEMNIFIED PARTIES. The term "Seller Indemnified Parties" shall
have the meaning set forth in Section 7.1B.
SELLER INDEMNITORS. The term "Seller Indemnitors" shall have the meaning
set forth in Section 7.1A.
SELLER'S NAME. The term "Seller's Name" shall have the meaning set forth in
Section 2.1(i).
SIDE LETTER. The term "Side Letter" shall have the meaning set forth in
Section 9.5.
STOCK PLEDGE AGREEMENT. The term "Stock Pledge Agreement" shall have the
meaning set forth in Section 6.3(xiv).
STOCKHOLDER. The term "Stockholder" shall have the meaning set forth in the
preamble hereto.
SUBSIDIARY. The term "Subsidiary," of any specified Person at any time,
shall mean any Entity a majority of the Capital Stock of which is at that time
owned or controlled, directly or indirectly, by the specified Person.
SUPPLEMENTAL INFORMATION. The term "Supplemental Information" shall have
the meaning set forth in Section 5.11.
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TAXES. The term "Taxes" shall mean any and all local, state or federal
taxes imposed upon the Business, the Seller or the Stockholder, including,
without limitation, tax obligations, tax claims, tax charges, tax fines or any
related tax liabilities, regardless of the source, cause or origin of such tax
liabilities, including taxes imposed as a result of the consummation of the
Acquisition.
UNDERWRITER. The term "Underwriter" shall mean collectively (a) the
investment banking firms that prospectively may enter into the Underwriting
Agreement, and (b) from and after the IPO Pricing Date, the investment banking
firms party to the Underwriting Agreement.
UNDERWRITING AGREEMENT. The term "Underwriting Agreement" shall mean the
underwriting agreement to be entered into between the Parent and the Underwriter
with respect to the IPO.
ARTICLE II
PURCHASE OF ASSETS AND PURCHASE PRICE
2.1 SALE OF ASSETS. Subject to the terms and conditions set forth in this
Agreement, the Seller agrees to sell, convey, transfer, assign and deliver to
the Buyer, and the Buyer agrees to purchase from the Seller on the Closing Date,
all assets owned by Seller and used in or derived from the Business (other than
those specifically excluded under Section 2.2 below) including the following
(such assets to be referred to herein as the "Assets"):
(a) All office equipment, furniture, artwork, service equipment,
supplies, computer hardware, data processing equipment, tools and supplies
(the "Equipment"), including the Equipment described on SCHEDULE 2.1(A);
(b) All contracts, documents, franchises, instruments, and other
written or oral agreements relating to the Business of Seller to which
Seller is a party or by which Seller or any of the Assets may be bound as
well as all rights, privileges, claims and options relating to the foregoing
(the "Contracts"), including the Contracts described on SCHEDULE 2.1(B);
(c) All customer and supplier files and databases, customer and
supplier lists, accounting and financial records, invoices, and other books
and records relating principally to the Business (the "Books and Records"),
including the Books and Records described on SCHEDULE 2.1(C);
(d) Seller's Employee files for those Employees actually hired by
Buyer;
(e) All right, title and interest of Seller, in, to and under all
service marks, trademarks, trade and assumed names, principally related to
the Business together with the right to recover for infringement thereon, if
any (the "Intellectual Property"), and other marks and/or names described on
SCHEDULE 2.1(E);
(f) All advertising materials and all other printed or written
materials related to the conduct of the Business;
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(g) All of the Seller's general intangibles, claims, rights of set
off, rights of recoupment and other proprietary intangibles, licenses and
sublicenses granted and obtained with respect thereto, and rights
thereunder, which are used in the Business, and remedies against
infringements thereof, and rights to protection of interests therein under
the laws of all jurisdictions (the "General Intangibles"), including the
General Intangibles described on SCHEDULE 2.1(G);
(h) All goodwill, going concern value and other intangible properties
related to the Business;
(i) The exclusive right to use the name "Reporting Services
Associates, Inc.", any similar name or derivative thereof, and any past or
present assumed names in connection with the Business or Seller's use of
the Assets (the "Seller's Name"); and
2.2 EXCLUDED ASSETS. Seller is not selling and Buyer is not purchasing
any of the following excluded assets related to the Business ("Excluded
Assets"): (i) cash, cash deposits, rights to receive cash refunds, and other
cash equivalents, (ii) cash investments, (iii) Accounts Receivable, notes
receivable and trade receivables accrued on or before the IPO Closing Date, all
as more specifically described on SCHEDULE 2.2.
2.3 PURCHASE PRICE. Upon the terms and subject to the conditions
contained herein and as consideration for the sale of the Assets and the
performance by the Seller of various other matters as provided herein, the Buyer
shall pay or deliver to the Seller, on the IPO Closing Date and as soon as
practicable after the IPO Closing, the aggregate amount $9,500,000.00, payable
by delivery of the following consideration (collectively the "Purchase Price"):
(a) Subject to the provisions of Section 2.5, a cash sum in the
amount of Seven Million and No/100 Dollars ($7,000,000) (the "Cash Purchase
Price"), paid by the wire transfer of immediately available funds; and
(b) Such number of whole Parent Shares on the IPO Closing Date as,
when multiplied by 90% of the IPO Price, will most nearly approximate, but
not exceed, $2,500,000.00.
2.4 ASSUMPTION OF LIABILITIES; LEASES. Upon the terms and subject to the
conditions contained herein, the Buyer agrees that on the Closing Date, it will
not assume any liabilities of Seller (except for those liabilities related to
Seller's premise and equipment lease payments as described on Schedule 3.6,)
("Assumed Liabilities").
2.5 ALLOCATION OF PURCHASE PRICE. For all federal, state and local tax
purposes, the Purchase Price shall be allocated among the various Assets in the
manner indicated in SCHEDULE 2.7 hereto. None of the Parties shall file any tax
return or report or take any position with any Governmental Authority which is
inconsistent with the foregoing allocation, except to the extent
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mandated by a Governmental Authority in a determination binding upon one Party
provided that such Party has given written notice and reasonable opportunity to
the other Party, at its expense, to contest and appeal such determination on
behalf of both Parties and such determination has nevertheless become final.
Within ninety (90) days after the Closing Date, the Parties shall prepare for
filing with the Internal Revenue Service a Form 8594 in accordance with the
foregoing allocation.
2.6 TAXES. Seller shall be liable for the payment of all sales and use
taxes arising out of the sale and transfer or removal of the Assets, if any, and
the assumption of the Assumed Liabilities. Within one year from the Closing
Date, the Seller agrees to furnish to the Buyer certificates from the state
taxing authorities, and any related certificates that the Buyer may reasonably
request, as evidence that all sales and use tax liabilities of the Seller
accruing before the Effective Date have been fully provided for or satisfied.
The Buyer shall not be responsible for any business, occupation, withholding or
similar tax, or any taxes of any kind of the Seller, related to any period
before the Effective Date and, in the event that any taxes are found to be due
or owing by Seller within one year of the Closing Date, Seller shall pay all
such amounts and Buyer shall have the right of offset against the Parent Shares
pledged under the Stock Purchase Agreement for such amounts, if any, as provided
in Section 8.2 hereof.
2.7 TITLE TO ASSETS AND RISK OF LOSS. At the Effective Time, title to the
Assets and risk of loss or damage to the Assets by casualty (whether or not
covered by insurance) will pass to the Buyer.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller and the Stockholder jointly and severally represent and warrant that
all of the following representations and warranties in this Article III are true
at the date of this Agreement and shall be true at the time of Closing and the
IPO Closing Date, and that such representations and warranties shall survive the
IPO Closing Date for a period of twelve months (the last day of such period
being the "Expiration Date"), except that (i) the warranties and representations
set forth in Section 3.29 hereof shall survive until such time as the
limitations period has run for all tax periods ended on or prior to the IPO
Closing Date, which shall be deemed to be the Expiration Date for Section 3.29,
and (ii) solely for purposes of determining whether a claim for indemnification
under Section 7.1 hereof has been made on a timely basis, and solely to the
extent that in connection with the IPO, the Seller or the Stockholder actually
incur liability under the Securities Act, the Exchange Act, or any other federal
or state securities laws, the representations and warranties set forth herein
shall survive until the expiration of any applicable limitations period, which
shall be deemed to be the Expiration Date for such purposes.
3.1 TITLE TO ASSETS. The Seller has good, marketable and indefeasible
title to the Assets, free and clear of restrictions or conditions to transfer or
assignment, mortgages, liens, pledges, charges, encumbrances, equities, claims,
easements, rights-of-way, covenants, conditions or restrictions, except with
respect to the Leased Assets as otherwise disclosed on SCHEDULE 2.1(A). The
Seller is in possession of all of the Leased Assets leased to it from others.
Except for the
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Excluded Assets, the Assets constitute all of the material property, whether
real, personal, mixed, tangible or intangible, that are used in the Business by
the Seller.
3.2 CONTRACTS AND AGREEMENTS. SCHEDULE 2.1(B) lists all of the material
contracts, agreements, and other written or oral arrangements relating to the
Business to which the Seller is a party, or by which the Seller or the Assets
are bound. As of the Closing Date, each of the Contracts is valid and in full
force and effect, and there has not been any default by the Seller or, to the
best of Seller's Knowledge, by any other party to any of the Contracts, or any
event that with notice or lapse of time or both, would constitute a default by
the Seller or, to the best of Seller's Knowledge, any other party to any of the
Contracts. Except as shall be disclosed in SCHEDULE 2.1(B), each Contract is
assignable to the Buyer without the consent of any other party. The Seller will
obtain and deliver at Closing all of the requisite consents relating to the
items set forth on SCHEDULE 2.1(B). Seller has not received notice that any
party to any of the Contracts intends to cancel or terminate any of the
Contracts or exercise or not exercise any options that they might have under any
of the Contracts. In the event any of the Contracts are, or are later
determined to be, non-assignable, and the other party to any such Contracts
refuses to consent to the assignment of same, then the Seller shall subcontract
to the Buyer or its designee, if the Buyer so desires, the remaining work on
such Contracts, and the Seller shall forward to the Buyer or its designee all
proceeds of such Contracts received by the Seller provided however, that Seller
shall be reimbursed for any reasonable out-of-pocket expenses incurred by it.
3.3 EQUIPMENT. All of the Equipment owned or leased by the Seller is
described on SCHEDULE 2.1(A) attached hereto. Except as disclosed on SCHEDULE
2.1(A), none of the Equipment will be, at the Effective Time, held under any
security agreement, conditional sales contract, or other title retention or
security arrangement or is located other than in the possession of the Seller
except for Equipment that is out of Seller's possession at certain job sites
and/or with certain of Seller's agents. To the best of Seller's Knowledge, the
Equipment is in good operating condition and repair, ordinary wear and tear
excepted.
3.4 LICENSES. Seller does not own any licenses or have any rights to use
any licenses in connection with the Business. Seller has not infringed, and is
not now infringing, on any license belonging to any other person, firm, or
corporation.
3.5 EMPLOYMENT CONTRACTS. Except as set forth in SCHEDULE 3.5, Seller
does not have any employment contracts and collective bargaining agreements to
which the Seller is a party or by which the Seller is bound relating to any
Employee. No Employees are represented by any labor organization, and, as of the
date hereof, no labor organization or group of Employees has made a written
demand to the Seller for recognition, or filed a petition with the National
Labor Relations Board, or announced its intention to hold an election of a
collective bargaining representative. There is no pending, or to the best
Knowledge and reasonable belief of Seller and Stockholder, threatened, labor
dispute, strike or work stoppage affecting or potentially affecting the
Business.
3.6 COMPLIANCE WITH LAWS. The Seller has complied with, and is not in
violation of, applicable federal, state or local statutes, laws, and regulations
(including, without limitation, any applicable building or other law, ordinance
or regulation) that affect, or are likely to affect, directly
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or indirectly, any of the Assets or the Business. The Seller has all permits,
licenses, and authorizations necessary to the conduct of the Business in the
manner and in the locations in which the Business is presently conducted, and
all such permits, licenses, or other authorizations are valid and in full force
and effect. To the best of Seller's Knowledge, there are not any uncured
violations of federal, state or municipal laws, ordinances, orders, regulations
or requirements affecting any portion of the Assets or the Business.
3.7 LITIGATION. Except as disclosed in SCHEDULE 3.7, there is no suit,
action, arbitration or legal, administrative or other proceeding or governmental
investigation pending or, to the best of Seller's Knowledge, threatened against
or affecting the Seller, its Affiliates, the Stockholder, the Assets, or the
Business that could result in a material adverse effect on the Business.
3.8 CONSENTS AND APPROVALS; NO BREACH OR DEFAULT. Except as set forth on
SCHEDULE 8(A), no consent, approval or authorization of, or filing or
registration with, any Person or Entity, is required to be made or obtained by
Seller in connection with the execution, delivery or performance of this
Agreement, or the consummation by Seller of the transactions contemplated
hereby. Except as set forth on SCHEDULE 3.8(B), neither the execution and
delivery of this Agreement or the Ancillary Agreements by Seller, nor the
consummation of the transactions contemplated herein by Seller, will (a) violate
any constitution, statute, regulation, rule, injunction, judgment, order,
decree, ruling, charge, or other restriction of any Governmental Authority to
which Seller is, or the Assets are, subject, or (b) conflict with, result in a
breach of, constitute a default under, result in the acceleration of, create in
any party the right to accelerate, terminate, modify or cancel, or require any
notice under, any agreement, contract, lease, license, instrument, promissory
note, conditional sales contract, partnership agreement or other arrangement to
which Seller or any of Seller's Affiliates is a party, or by which Seller is
bound, or to which the Assets are subject, or (c) conflict with or violate the
articles of incorporation, bylaws or other charter documents of Seller.
3.9 AUTHORITY. The Seller has the full right, power, legal capacity and
authority to execute, deliver and perform its obligations under this Agreement,
and all agreements ancillary to this Agreement which are part of the underlying
transaction made the basis of this Agreement and executed in connection herewith
including but not limited to the Exhibits hereto ("Ancillary Agreements"). The
sale of the Assets and the execution, delivery and performance of this Agreement
and the Ancillary Agreements by Seller have been duly authorized by the
Stockholder.
3.10 PERSONNEL. SCHEDULE 3.10(A) sets forth a complete and accurate list
of the names, addresses, hire dates, dates of birth and job descriptions of all
Employees employed by Seller in connection with the Business, current rates of
compensation including, if determined, bonuses payable to each following the
Closing.__SCHEDULE 3.10(B) is a complete and accurate list of the names,
addresses, hire dates, dates of birth and services provided by all independent
contractors used by Seller during the preceding one (1) year, stating their
rates and method of compensation.
3.11 VALID AND BINDING OBLIGATIONS. Upon execution and delivery, this
Agreement, the Ancillary Agreements and each document, instrument and agreement
to be executed by the Seller, or the Stockholder in connection herewith, will
constitute the legal, valid, and binding obligation of the Seller, or
Stockholder, enforceable against the Seller and/or Stockholder in accordance
with its
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terms, except as limited by bankruptcy laws, insolvency laws, and other similar
laws affecting the rights of creditors generally.
3.12 FINANCIAL STATEMENTS. The Financial Statements (a) are true, complete,
and correct in all material respects, (b) fairly and accurately present the
financial position of Seller as of the periods described therein, and the
results of the operations of Seller for the periods indicated, and (c) have been
prepared consistently and in accordance with the Seller's historical customs and
practices.
3.13 EMPLOYEE BENEFITS. SCHEDULE 3.13 is a true, correct and complete list
of each "employee benefit plan,' within the meaning of Section 3(3) of Employee
Retirement Income Security Act of 1974, as amended ("ERISA") which has ever been
maintained or sponsored by Seller or any of its Affiliates. Each such employee
benefit plan (and each related trust, insurance contract, or fund) is in full
force and effect, and complies in form and in operation in all respects with the
applicable requirements of ERISA, the Code, and other applicable laws. Neither
Seller, Stockholder nor any Affiliate is in default under any of the plans,
there have been no claims of default, and there are no facts, conditions or
circumstances which if continued, or on notice, will result in a default, under
any plan. None of the plans will, by its terms or under applicable law, become
binding upon or become an obligation of the Buyer. No assets of any plan are
being transferred to Buyer or to any plan of Buyer. Seller does not contribute
to, and has never contributed to, and has never been required to contribute to,
any multiemployer plan, and Seller does not have, and has never had, any
liability (including withdrawal liability) under any multiemployer plan.
3.14 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in SCHEDULE
3.14(A) with regard to the Business and the Assets, since the Balance Sheet
Date, there has been no:
(i) material adverse change in the condition, financial or
otherwise, of the Seller, the Assets or the Business;
(ii) waiver of any right of or claim held by the Seller;
(iii) material loss, destruction or damage to any property of the
Seller, whether or not insured;
(iv) material change in the personnel of the Seller or the terms or
conditions of their compensation or employment;
(v) acquisition or disposition of any assets (or any contract or
arrangement therefor), nor any other transaction by the Seller otherwise
than for value and in the ordinary course of business;
(vi) transaction or disbursement of funds or assets by the Seller
except in the ordinary course of business;
(vii) capital expenditure by the Seller exceeding $10,000 except in
the ordinary course of business;
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(viii) change in accounting methods or practices (including, without
limitation, any change in depreciation or amortization policies or rates) by
the Seller;
(ix) re-valuation by the Seller of any of its Assets;
(x) amendment, modification or termination of any Contract to
which the Seller is a party, except in the ordinary course of business;
(xi) mortgage, pledge or other encumbrance of any of the Assets;
(xii) litigation or facts or circumstances that could result in
litigation that, if adversely determined, might reasonably be expected to
have a material adverse effect on Seller, Seller's financial condition,
Seller's prospects, the Business or the Assets;
(xiii) increase in salary or other compensation payable or to become
payable by the Seller to any of its officers, directors or employees, or the
declaration, payment or commitment or obligation of any kind for the payment, by
the Seller, of a bonus or other additional salary or compensation to any such
person;
(xiv) loan by the Seller to any person or entity, or guaranty by the
Seller of any loan;
(xv) other event or condition of any character that has or might
reasonably be expected to have a material adverse effect on the Business,
the Assets or the financial condition of the Seller; or
(xvi) agreement by the Seller to do any of the things described in
the preceding clauses (i) through (xv).
Except as disclosed in SCHEDULE 3.14(B), there have been no contractual
commitments by Seller to spend more than $25,000 per contractual commitment over
a continuous 12-month period.
3.15 BROKERS. Neither Seller, the Stockholder, nor any of the Seller's or
the Stockholder's Affiliates has employed any broker, agent, or finder, or
incurred any liability for any brokerage fees, agent's fees, commission or
finder's fees in connection with the transactions contemplated herein.
3.16 SALE OF ASSETS. For purposes of determining whether a sales and use
tax charge is applicable, the sale of the Assets constitutes: (i) the sale of
all of the operating assets of a business or of a separate division, branch, or
identifiable segment of a business, and (ii) a sale outside the ordinary course
of Seller's Business, and represents an isolated or occasional sale by a seller
who does not regularly engage in such business. The income and expenses of the
Business can be separately established from the Books and Records in the same
manner as previously provided to Buyer.
3.17 ABSENCE OF CERTAIN BUSINESS PRACTICES. Neither the Seller, the
Stockholder, nor any agent of the Seller, or the Stockholder, nor to Seller's
or the Stockholder's best Knowledge any
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other person acting on Seller's or the Stockholder's behalf, has, directly or
indirectly, within the past five years, given or agreed to give any gift or
similar benefit to any customer, supplier, government employee of the United
States or any state or foreign government, or other person who is or may be in a
position to help or hinder the Business which (1) would subject the Seller to
any damage or penalty in any civil, criminal or governmental litigation or
proceeding, (2) if not given in the past, would have an adverse effect on the
Business, or (3) if not continued in the future, would have a material adverse
effect on the Business or the Assets, or which would subject the Seller to suit
or penalty in a private or governmental litigation or proceeding.
3.18 LIENS ON ASSETS. Except as set forth on SCHEDULE 3.18, all liens or
security interests of any third party as to any of the Assets have been removed
on or before the Closing Date, and the Seller has furnished evidence thereof to
Buyer.
3.19 CUSTOMERS. To the best of Seller's Knowledge, SCHEDULE 3.19 contains a
true and correct list of all customers of the Business within the last year (the
"Customers"). The Seller has no information, nor is the Seller aware of any
facts, indicating that any of the material Customers intend to cease doing
business with the Seller.
3.20 INSURANCE POLICIES. SCHEDULE 3.20 to this Agreement is a description
of all insurance policies held by the Seller concerning the Business and Assets.
The Seller maintains insurance protection on all its Assets and the Business of
such types and in such amounts as are customarily insured by similar companies
in the same industry, covering property damage and loss by fire, theft, or other
casualty.
3.21 INTEREST IN CUSTOMERS, SUPPLIERS AND COMPETITORS. Except as set forth
in SCHEDULE 3.21, neither the Seller, the Stockholder, nor any Affiliate of the
Seller or Stockholder, has any direct or indirect interest in any competitor,
supplier or customer of the Seller, or in any person from whom or to whom the
Seller leases any property, or in any other person with whom the Seller is doing
business.
3.22 ADVERSE INFORMATION. Neither Seller nor Stockholder has any actual
Knowledge of any change contemplated in any applicable laws, ordinances or
restrictions, or any judicial or administrative action, or any event, fact or
circumstance which will, or could be reasonably expected to, have a material
adverse effect on the Seller or its condition, financial or otherwise, the
Assets, or the condition, value or operation thereof.
3.23 ORGANIZATION. The Seller is a Pennsylvania corporation duly
organized, validly existing and in good standing under the laws of the State of
Pennsylvania, has all necessary powers to own the Assets and properties and to
operate the Business as now owned and operated by it, and is qualified to do
business in the State of Pennsylvania.
3.24 CONDITION. All of the Assets are in good operating condition and
repair, ordinary wear and tear excepted, and, as applicable, good working order.
To the best of the Seller's and the Stockholder's Knowledge, the buildings,
fixtures, and improvements leased by the Seller, including but not limited to
the parking areas, roofs, foundations, plumbing, electrical, air conditioning,
heating
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and ventilating systems, doors, building exteriors, landscaping, and interior
areas are in good condition, ordinary wear and tear excepted, and, as
applicable, good working order.
3.25 INTELLECTUAL PROPERTY. All of the Intellectual Property owned by the
Seller is described on SCHEDULE 2.1(E) attached hereto. The Seller is the sole
owner of all of the Intellectual Property, free and clear of any liens,
encumbrances, restrictions, or legal or equitable claims of others. The Seller
has registered all trade names, trademarks, and service marks in all
jurisdictions necessary to evidence and protect its ownership thereof, and to
permit the Seller to conduct its business in the manner in which it is currently
conducted, or otherwise has all rights or licenses necessary to use the same.
The Seller has all patents or patent applications and copyrights registered in
all jurisdictions necessary to evidence and protect the ownership thereof and to
permit the Seller to conduct its business in the manner in which it is currently
conducted, or otherwise has all rights or licenses necessary to use same.
Except as disclosed in this Agreement, all of the patents of the Seller are
valid and in full force and effect and are not subject to any taxes, maintenance
fees, or actions which have not been currently paid. None of the Intellectual
Property infringes upon any patents, trade or assumed names, trademarks, service
marks, or copyrights belonging to any other person or other entity. The Seller
is not a party to any license, agreement, or arrangement, whether as licensor,
licensee, or otherwise, with respect to any of the Intellectual Property. The
Seller does not have a license or a right to use any other patents, service
marks, trademarks, trade and assumed names, trade secrets and royalty rights and
other proprietary intangibles in connection with the Business, other than the
Intellectual Property.
3.26 POWERS OF ATTORNEY. No person or other entity holds a general or
special power of attorney from the Seller.
3.27 NO SEVERANCE PAYMENTS. Except as set forth in SCHEDULE 3.27, the
Seller will not owe a severance payment or similar obligation to any of its
Employees, officers, or directors, as a result of the transactions contemplated
by this Agreement, nor will any of such persons be entitled to an increase in
severance payments or other benefits as a result of the transactions
contemplated hereby, nor in the event of the subsequent termination of their
employment.
3.28 EMPLOYEES. Except as has occurred in the ordinary course of business,
the Seller has not, nor has it agreed to do in any unusual or extraordinary
amount or manner, any of the following acts with respect to its Employees in the
Business: (i) grant any increase in salaries payable or to become payable by it,
(ii) increase benefits, (iii) modify any collective bargaining agreement to
which it is a party or by which it may be bound, or (iv) declared any bonuses
for any of its Employees.
3.29 TAXES. Seller has filed all tax returns that Seller was required to
file, and all such tax returns were correct and complete in all respects. All
Taxes owed by Seller (whether or not shown on any tax return) have been paid.
Seller is not the beneficiary of any extension of time within which to file any
tax return, and Seller has not waived any statute of limitations in respect of
Taxes or agreed to any extension of time with respect to a Tax assessment or
deficiency. Seller has withheld and paid all Taxes required to have been
withheld or paid in connection with amounts paid or owing to the Stockholder and
any Employee, independent contractor, creditor, or other third party. Neither
Seller, an Employee responsible for Tax matters, nor the Stockholder of Seller
has reason to believe
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that any authority might assess any additional Taxes for any period for which
tax returns have been filed. There is no dispute or claim concerning any Tax
liability of Seller.
3.30 HIRING OF EMPLOYEES. As of the Closing Date, Seller shall permit
Buyer to offer employment to all of the Employees. At or prior to Closing,
Seller shall have paid such Employees all compensation and benefits to which
they are entitled by reason of their previous employment with the Seller on such
date, and Buyer shall have no liability with respect thereto. Seller shall use
Seller's best efforts to assist Buyer in any reasonable manner in the hiring by
Buyer of the Employees that Buyer desires to hire. Buyer shall have the right,
but not the obligation, to offer employment to such Employees that it desires to
hire in its sole discretion. Seller shall be solely responsible and liable for
all severance pay, if any, to the extent that any of the Employees are not
offered employment with Buyer or do not accept an offer of employment. Under no
circumstances shall the Seller or any of Seller's Affiliates be permitted to
employ or offer employment to any of the Employees after the Closing Date,
without the prior written consent of Buyer.
3.31 OPERATIONS OF THE SELLER. Except as disclosed in SCHEDULE 3.31, since
the Balance Sheet Date:
(i) Seller has used its best efforts to preserve the business organization
of the Seller intact, to keep available to the Business the Employees, and to
preserve its present relationships with suppliers, Customers and others having
business relationships with it;
(ii) Seller has maintained its existing insurance as to the Business and
the Assets, and otherwise maintained and operated the Business in a good and
businesslike manner in accordance with good and prudent business practices;
(iii) Seller has not entered into any agreement or instrument which would
constitute an encumbrance of the Assets, which would bind Buyer, the Seller or
the Assets after Closing, other than in the ordinary course of business, or
which would be outside the normal scope of maintaining and operating the
Business and the Assets in the ordinary course of business;
(iv) Seller has performed all of the Seller's material obligations under
all Contracts and commitments applicable to the Seller, the Business, and the
Assets, and has maintained the Seller's Books and Records in the usual, regular
and customary manner;
(v) to the best of Seller's Knowledge, the Seller has complied with all
statutes, laws, ordinances and regulations applicable to the Seller, the Assets,
and the conduct of the Business;
(vi) Seller has not removed or disposed of, nor permitted the removal or
disposal of, any Assets unless such Assets were replaced with an item of at
least equal value that is properly suited for its intended purpose;
(vii) Seller has paid all bills and other payments due with respect to the
ownership, use, insurance, operation and maintenance of the Business and the
Assets in the usual, regular and customary manner consistent with its prior
practices, and has taken all action necessary or prudent
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to prevent liens or other claims for the same from being filed or asserted
against any part of the Assets; and
(viii) all revenues received by the Seller relating to the Business have
been deposited in the Seller's account relating to the Business.
3.32 FULL DISCLOSURE. This Agreement, the Ancillary Agreements and the
Schedules hereto, and all other documents and written information furnished by
the Seller to the Buyer pursuant hereto or in connection herewith, are true,
complete and correct, and do not include any untrue statement of a material fact
or omit to state any material fact necessary to make the statements made herein
and therein not misleading. To the best of Seller's Knowledge, there are no
facts or circumstances relating to the Assets or the Business which adversely
affect or might reasonably be expected to adversely affect the Assets, the
Business (including the prospects or operations thereof), or the ability of the
Seller to perform this Agreement or any of Seller's obligations hereunder.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Parent and Buyer jointly and severally represent and warrant that all of the
following representations and warranties in this Article IV are true at the date
of this Agreement and shall be true at the time of Closing and the IPO Closing
Date, and that such representations and warranties shall survive the IPO Closing
Date until the Expiration Date, except that solely for purposes of determining
whether a claim for indemnification under Section 7.1 hereof has been made on a
timely basis, and solely to the extent that in connection with the IPO, the
Seller actually incurs liability under the Securities Act, the Exchange Act, or
any other federal or state securities laws, the representations and warranties
set forth herein shall survive until the expiration of any applicable
limitations period, which shall be deemed to be the Expiration Date for such
purposes.
4.1 ORGANIZATION. The Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of New York and has
all the necessary corporate powers to own its properties and to carry on its
business as now owned and operated by it. The Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas and has all the necessary corporate powers to own its properties and to
carry on its business as now owned and operated by it.
4.2 AUTHORITY. Each of Buyer and Parent, as applicable, has the right,
power, legal capacity, and authority to execute, deliver and perform this
Agreement and the Ancillary Agreements to which it is a party. The execution,
delivery and performance of this Agreement and any Ancillary Agreements by Buyer
and Parent, as applicable, have been duly authorized by all necessary corporate
action.
4.3 CAPITAL STOCK OF PARENT AND BUYER. The respective designations and
numbers of outstanding shares and voting rights of each class of outstanding
capital stock of the Parent and the Buyer are as follows: (i) immediately prior
to the Closing Date and the IPO Date, the authorized capital stock of Parent
will consist of 100,000,000 shares of common stock, of which the number of
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issued and outstanding shares will be set forth in the Registration Statement,
and 10,000,000 shares of preferred stock, $.01 par value, of which no shares
will be issued and outstanding, and a number of shares of restricted voting
common stock, $.01 par value, to be determined by Parent in good faith, all of
which will be issued and outstanding except as otherwise set forth in the
Registration Statement, and (ii) as of the date of this Agreement, the
authorized capital stock of Buyer consists of 10,000 shares of common stock, all
of which shares are issued and outstanding.
4.4 TRANSACTIONS IN CAPITAL STOCK; ORGANIZATION ACCOUNTING. Except for
the Other Agreements and except as set forth on in the Registration Statement,
(i) no option, warrant, call, conversion right or commitment of any kind exists
which obligates the Parent or the Buyer to issue any of their respective
authorized but unissued capital stock, and (ii) neither the Parent nor the Buyer
has any obligation (contingent or otherwise) to purchase, redeem or otherwise
acquire any of its equity securities or any interests therein or to pay any
dividend or make any distribution in respect thereof. SCHEDULE 4.4 includes
complete and accurate copies of all stock option or stock purchase plans,
including a list of all outstanding options, warrants or other rights (excluding
the Other Agreements) to acquire Parent Shares.
4.5 COMMON STOCK. At the time of issuance thereof and delivery to the
Seller, the Parent Shares to be delivered to the Seller pursuant to this
Agreement will constitute valid and legally issued Parent Shares, fully paid and
nonassessable, and with the exception of restrictions upon resale (a) set forth
in Section 9.2 hereof and (b) contained in the Stock Pledge Agreement, will be
identical in all substantive respects (which do not include the form of
certificate upon which it is printed or the presence or absence of a CUSIP
number on any such certificate) to the Parent Shares issued and outstanding as
of the date hereof by reason of the provisions of the Texas Business Corporation
Act. Except as provided in the previous sentence, the Parent Shares issued and
delivered to the Seller shall at the time of such issuance and delivery be free
and clear of any liens, claims or encumbrances of any kind or character. The
Parent Shares to be issued to the Seller pursuant to this Agreement will not be
registered under the 1933 Act, except as provided in the Registration Rights
Agreement.
4.6 ASSUMED LIABILITIES. Buyer shall assume the Assumed Liabilities as
defined in Section 2.6 herein.
4.7 ABSENT CERTAIN CHANGES. Since the Balance Sheet Date, there have been
no (a) material adverse changes in the business, financial condition, assets,
operations or prospects of Parent, (b) amendments, modifications or terminations
of any material contract applicable to Parent, (c) any changes in the accounting
methods or practices of Parent or (d) any litigation or facts or circumstances
that could result in litigation that, if adversely determined, might reasonably
be expected to have a material adverse effect on Parent or on its business,
financial condition or prospects.
4.8 LITIGATION. Except as disclosed in Schedule 4.8, there is no suit,
action, arbitration or legal, administrative or other proceeding or governmental
investigation pending or, to the best of the Parent's Knowledge, threatened
against or affecting the Parent or the Buyer that could result in a material
adverse effect on the Business.
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4.9 NO BREACH OR VIOLATION. As of the Effective Time and except as set
forth on Schedule 4.9, the consummation of the transactions contemplated by this
Agreement will not result in or constitute any of the following: (i) a default
or an event that, with notice or lapse of time or both, would be a default,
breach or violation, or give rise to a right of modification, termination,
cancellation or acceleration of any obligation or to a loss of a benefit under,
except for third party consents described in this Agreement or any schedule
prepared and delivered in connection herewith, of any lease, license, promissory
note, conditional sales contract, commitment, indenture, mortgage, deed of
trust, security agreement, concession, franchise, permit or other agreement,
instrument or arrangement by which the Parent or the Buyer may be affected, or
to which the Parent or the Buyer may be bound, (ii) the creation or imposition
of any lien, charge, or encumbrance on any of the assets of the Parent or the
Buyer, or (iii) a breach of any term or provision of this Agreement.
4.10 VALID AND BINDING OBLIGATIONS. Upon execution and delivery, each of
this Agreement and the Ancillary Agreements will constitute the legal, valid,
and binding obligation of Buyer or Parent, as applicable, enforceable in
accordance with its terms, except as limited by bankruptcy laws, insolvency
laws, and other similar laws affecting the rights of creditors generally.
4.11 BROKERS. Except for The GulfStar Group, Inc. neither Buyer nor any of
its respective Affiliates, officers, directors, or employees, has employed any
broker, agent, or finder, or incurred any liability for any brokerage fees,
agent's fees, commissions or finder's fees in connection with the transactions
contemplated herein.
4.12 CONSENTS AND APPROVALS. No consent, approval or authorization of, or
filing or registration with, any Person or Entity, is required to be made or
obtained by Buyer in connection with the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby.
ARTICLE V
COVENANTS OF THE PARTIES
Buyer and Seller covenant and agree as follows:
5.1 CONDUCT OF THE BUSINESS. Except as otherwise permitted by this
Agreement or consented to by Buyer in writing, Seller shall through the IPO
Closing Date conduct the Business in the ordinary course in substantially the
same manner as heretofore, using its best efforts to preserve intact its present
business organization, to keep available the services of its Employees, and to
preserve its relationships with Customers, suppliers and others having business
dealings with it.
5.2 CERTAIN CHANGES. Except as otherwise permitted by this Agreement or
consented to by Buyer in writing, Seller shall not: (a) subject any of the
Assets to any lien or encumbrance; (b) dispose of any of the Assets; or (c)
grant any increase in compensation or benefits to any Employee; (d) materially
modify any of the liabilities, or (e) with respect to the Business, perform any
act outside the Ordinary Course of Business except as otherwise contemplated by
this Agreement.
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5.3 NOTICE. Seller will notify Buyer immediately in writing if (i) any of
Seller's representations or warranties set forth in this Agreement are or become
untrue prior to the IPO Closing Date, (ii) Seller fails to fully perform all of
the covenants of Seller set forth in this Agreement, or (iii) there occurs any
Material adverse development in the Business or Seller's market position, sales,
profit trends, labor regulations, litigation or insurance claims or otherwise.
5.4 RECORDS. From the date of execution of this Agreement until the
Closing, Seller shall permit Buyer the right, during normal business hours, to
inspect any documents, Books and Records or other information pertaining to the
Assets.
5.5 U.C.C. SEARCHES. Within five (5) days from the date of execution
hereof, Buyer, at Buyer's sole cost and expense, shall deliver to Seller current
searches of all Uniform Commercial Code financing statements filed with the
Office of the Secretary of State of Pennsylvania and in any other state, or
county in which the Seller has an office, against Seller. Any and all liens,
pledges, mortgages, security interests and encumbrances affecting the Assets,
regardless of whether same are disclosed in such lien searches, shall be
released and discharged by Seller at or prior to Closing.
5.6 BULK SALES. It may not be practicable to comply or attempt to comply
with the procedures of the "Bulk Sales Act" or similar law in any or all of the
states in which the Assets are situated or of any other state which may be
asserted to be applicable to the transactions contemplated hereby. Accordingly,
to induce Buyer to waive any requirements for compliance with any or all of such
laws, Seller hereby agrees that except for the Assumed Liabilities, the
indemnity provisions of Article VII hereof shall apply to any Damages of Buyer
arising out of or resulting from the failure of Buyer or Seller to comply with
any such laws or any similar law which may be asserted to be applicable.
5.7 NON-COMPETITION AGREEMENT. The Seller agrees that, for the period
beginning on the Closing Date and continuing for five (5) years following the
Closing Date, neither Seller, Lee Goldstein, individually, nor any Affiliates,
shall, either directly or indirectly, individually or separately, for themselves
or as an owner, stockholder, joint venturer, promoter, consultant, manager,
independent contractor, agent, or in some similar capacity for any reason
whatsoever:
A. Enter into, engage in, or be connected with any business or
business operation or activity which consists in whole or in part of the
Business within the following Counties:
(list counties in Pennsylvania);
B. Call upon any customer whose account is or was serviced in whole or
in part by the Seller in relation to the Business or the Buyer with the
intent of selling or attempting to sell to any such customer any services
similar to the services provided by the Buyer; and
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C. Intentionally divert, solicit or take away any customer, supplier
or employee of the Buyer, or the patronage of any customer or supplier of
the Buyer, or otherwise interfere with or disturb the relationship existing
between the Buyer and any of its customers, suppliers, or employees,
directly or indirectly.
In the event the Buyer ceases operation of the Business other than in a
merger, consolidation, sale of assets or similar transaction, or upon the filing
of a bankruptcy or receivership proceeding against the Buyer, or upon the
appointment of a liquidator for the Buyer, the provisions of this Section 5.7
will not be applicable to the conduct of Seller subsequent thereto.
It is mutually understood and agreed that if any of the provisions relating
to the scope, time or territory in this Section 5.7 are more extensive than is
enforceable under applicable law or are broader than necessary to protect the
goodwill and legitimate business interests of the Buyer, then the Parties agree
that they will reduce the degree and extent of such provisions by whatever
minimal amount is necessary to bring such provisions within the ambit of
enforceability under applicable law.
The Parties acknowledge that the remedies at law for breach of Seller's
covenants contained in this Section 5.7 are inadequate, and they agree that the
Buyer shall be entitled, at its election, to injunctive relief (without the
necessity of posting bond against such breach or attempted breach), and to
specific performance of said covenants in addition to any other remedies at law
or equity that may be available to the Buyer.
5.8 TERMINATION OF EMPLOYMENT OF SELLER'S EMPLOYEES. Buyer anticipates
extending an offer of employment to substantially all of the Employees of the
Seller on substantially the same terms and conditions as the Employees currently
are employed by Seller. Notwithstanding the foregoing, nothing herein shall
imply or guarantee employment of any Employee of Seller by Buyer. If Seller's
Employees desire employment with Buyer, they will be interviewed in conjunction
with the applicants from other sources and given strong consideration for
available positions with Buyer, at the wages, hours, and conditions of
employment established by Buyer prior to hiring any Employees. Seller agrees to
use its best efforts to make available the Employees to the Buyer that Buyer
desires to hire for the purpose of operating the Business. Notwithstanding
anything to the contrary contained herein, Buyer agrees that it will offer to
employ substantially all of Seller's Employees. Nothing shall prohibit Buyer
from terminating any of Seller's Employees subsequent to their employment by
Buyer.
5.9 COOPERATION IN CONNECTION WITH THE IPO. The Seller and the Stockholder
will (a) provide the Parent and the Underwriter with all the Information
concerning Seller and the Stockholder which is reasonably requested by the
Parent and the Underwriter from time to time in connection with effecting the
IPO and (b) cooperate with the Parent and the Underwriter and their respective
representatives in the preparation and amendment of the Registration Statement
(including the Financial Statements) and in responding to the comments of the
SEC staff, if any, with respect thereto, to the extent that any of the foregoing
concern or reasonably relate to the Seller or the Stockholder. The Seller and
the Stockholder agree promptly to (a) advise the Parent if, at any time during
the period in which a prospectus relating to the IPO is required to be delivered
under the Securities Act, any information contained in the then current
Registration Statement prospectus
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concerning the Seller or the Stockholder becomes incorrect or incomplete in any
material respect and (b) provide the Parent with the information needed to
correct or complete that information.
5.10 ADDITIONAL FINANCIAL STATEMENTS. Seller shall promptly furnish to
Buyer a copy of all Financial Statements for each additional month-end period
beyond the Balance Sheet Date as soon as same is regularly prepared by Seller in
the Ordinary Course of Business. All such additional Financial Statements shall
be subject to the same representations and warranties as contained in Section
3.23 of this Agreement. The Parties acknowledge and agree that Buyer shall be
permitted to conduct at its sole cost and expense an audit of Seller for the
fiscal years ended 1994, 1995 and 1996 and 1997 (or any portion thereof) in
connection with the IPO. Buyer shall pay Seller's reasonable costs incurred in
preparing such monthly financial statements.
5.11 SUPPLEMENTAL INFORMATION. The Seller and the Stockholder agree that,
with respect to the representations and warranties of that party contained in
this Agreement, that party will have the continuing obligation through the IPO
Closing to provide the Parent promptly with such additional supplemental
Information (collectively, the "Supplemental Information"), in the form of (a)
amendments to then existing Schedules or (b) additional Schedules, as would be
necessary, in the light of the circumstances, conditions, events and states of
facts then known to the Seller or such Stockholder, to make each of those
representations and warranties true and correct as of the Closing and on the IPO
Closing Date. For purposes only of determining whether the conditions to the
obligations of the Parent and Buyer which are specified in Section 6.3 have been
satisfied, the Schedules as of the Closing and on the IPO Closing Date shall be
deemed to be the Schedules and the Investor Representation Letter as of the date
hereof as amended or supplemented by the Supplemental Information provided to
the Parent prior to the Effective Date pursuant to this Section 5.11; provided,
however, that (a) if the Supplemental Information so provided discloses the
existence of circumstances, conditions, events or states of facts which, in any
combination thereof, have had a Material Adverse Effect or, (b) based upon the
advice of the Underwriter the Parent has determined that subsequent events that
were revealed through RSA's submission of Supplemental Information pursuant to
this Section 5.11 (which shall be conclusive for purposes of this Section 5.11
and 8.3(a)(iv), but not for any purpose of Article VII), are having or will have
a Material Adverse Effect, the Parent will be entitled to terminate this
Agreement pursuant to Section 8.3(a)(iv); and provided, further, that if the
Parent is entitled to terminate this Agreement pursuant to Section 8.3(a)(iv),
but elects not to do so, it will be entitled to treat as Buyer Indemnified
Losses (which treatment will not prejudice the right of the Seller or the
Stockholder to contest Damage claims made by the Parent in respect of those
Buyer Indemnified Losses) all Damages to the Business which are attributable to
the circumstances, conditions, events and state of facts first disclosed herein
after the date hereof in the Supplemental Information. The Parent will provide
the Seller and the Stockholder with copies of the Registration Statement,
including all pre-effective amendments thereto, promptly after the filing
thereof with the SEC under the Securities Act.
5.12 INSURANCE. Seller shall assist, and shall cause its Affiliates to
assist, Buyer in transferring to Buyer any insurance applicable to the Assets or
the Leased Assets which Buyer elects to maintain in effect.
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5.13 CONFIDENTIALITY. Seller will not, and will not permit any of its
Affiliates to, disclose any information of a confidential or proprietary nature
concerning the Assets or the Business to any third parties, and in no event
shall Seller use, or allow any of its Affiliates to use, such confidential or
proprietary information for its or his own benefit or to the detriment of Buyer
or the Business. No public or private announcement shall be made of the
transactions contemplated herein, nor the terms hereof, by Seller or any of its
Affiliates, without the prior written approval of Buyer as to timing, form and
content.
ARTICLE VI
THE CLOSING
6.1 PRICING. At or prior to Pricing, the Parties shall take all actions
necessary to (a) complete the Acquisition (including the execution and delivery
of this Agreement and the Ancillary Agreements which shall be placed in escrow
under the control of the Parent for release to the Parties on the IPO Date), and
(b) effect the delivery of the Parent Shares referred to in Section 2.3 hereof,
provided however, that such actions shall not include the actual completion of
the Acquisition or the delivery of the Common Stock and funds referred to in
Section 2.3 hereof, each of which actions shall only be taken upon the IPO
Closing Date as herein provided. For purposes of this Article VI, the term
"Pricing" shall mean the date of determination by Parent and the Underwriter of
the public offering price of the Parent Shares in the IPO; the Parties
contemplate that the Pricing shall take place on the Closing Date. The escrow
agreement relating to this Agreement and the Ancillary Agreements shall provide
that in the event that there is no IPO Closing Date, and this Agreement
terminates as provided in Section 8.3(b)(ii), the Agreement and the Ancillary
Agreements shall not be delivered to the Parties. The taking of the actions
described in clauses (a) and (b) above (the "Closing") shall take place on the
closing date (the "Closing Date") at the offices of Boyer, Ewing & Harris
Incorporated, 9 Greenway Plaza, Suite 3100, Houston, Texas 77046. On the IPO
Closing Date, all transactions contemplated by this Agreement, including the
delivery of the Parent Shares, the wire transfer of the cash portion of the
Purchase Price which Seller is entitled to receive pursuant to Section 2.3
hereof, and the closing of the IPO shall occur and be completed. Except as
otherwise provided in Section 8.3 hereof, during the period from the Closing
Date to the IPO Closing Date, this Agreement may only be terminated by the
Parties if the Underwriting Agreement is terminated pursuant to the terms
thereof.
6.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER. The obligations of the
Seller with respect to actions to be taken on the Closing Date are subject to
the satisfaction or waiver on or prior to the Closing Date of all of the
following conditions other than the conditions set forth in this Section 6.2(i)
and (viii) that cannot be satisfied prior to the IPO Closing Date. The
obligations of the Seller with respect to actions to be taken on the IPO Closing
Date are subject to the satisfaction or waiver on or prior to the IPO Closing
Date of the conditions set forth in this Section 6.2(i) and (viii). As of (a)
the Closing Date if any such conditions have not been satisfied other than the
conditions set forth in this Section 6.2(i) and (viii) that cannot be satisfied
prior to the IPO Closing Date or (b) the IPO Closing Date, if any such
conditions have not been satisfied, the Seller shall have the right to terminate
this Agreement, or in the alternative, waive any condition not so satisfied.
Any act or
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action of the Seller in consummating the Closing on the Closing Date to the
extent set forth in the first sentence of Section 6.1 shall constitute a waiver
of any conditions not so satisfied other than the conditions set forth in this
Section 6.2(i) and (viii) that cannot be satisfied prior to the IPO Closing
Date. However, no such waiver shall be deemed to affect the survival of the
representations and warranties of Parent and Buyer contained in Article IV
hereof.
(i) REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All
representations and warranties of the Parent and the Buyer contained in
Article IV shall be true and correct in all Material respects as of the
Closing Date and the IPO Closing Date as though such representations and
warranties had been made as of that time; all of the terms, covenants and
conditions of this Agreement to be complied with and performed by the Parent
and the Buyer on or before the Closing Date and the IPO Closing Date shall
have been duly complied with and performed in all Material respects; and
certificates to the foregoing effect dated the Closing Date and the IPO
Closing Date, respectively, and signed by each of the Parent and the Buyer
shall have been delivered to the Seller.
(ii) NO LITIGATION. No action or proceeding before a Governmental
Authority shall have been instituted or threatened to restrain or prohibit
the Acquisition or the IPO and no Governmental Authority shall have taken
any other action or made any request of the Parent or the Buyer as a result
of which the management of the Seller deems it inadvisable to proceed with
the transactions hereunder.
(iii) OPINION OF COUNSEL. The Seller shall have received an opinion
from counsel for the Parent dated the Closing Date, in the form attached as
Exhibit G-1 hereto.
(iv) REGISTRATION STATEMENT. The Registration Statement, as amended
to cover the offering, issuance and sale by Parent of such number of Parent
Shares at the IPO Price (which need not be set forth in the Registration
Statement when it becomes effective under the Securities Act) as shall yield
aggregate cash proceeds to the Parent from that sale (net of Underwriter's
discount or commissions) in at least the amount (the "Minimum Cash Amount")
that is sufficient, when added to the funds, if any, available from other
sources (if any, and as set forth in the Registration Statement when it
becomes effective under the Securities Act)(the "Other Financing Sources"),
to enable the Parent to pay or otherwise deliver on the IPO Closing Date (i)
the total cash portion of the Purchase Price then to be delivered pursuant
to Article II; (ii) the total cash portion of the acquisition consideration
then to be delivered pursuant to the Other Agreements as a result of the
consummation of the acquisition transactions contemplated thereby, and (iii)
the total amount of indebtedness of the Seller, each Other Acquired Business
and the Parent which the Registration Statement discloses at the time it
becomes effective under the Securities Act will be repaid with proceeds
received by the Parent from the IPO and Other Financing Sources shall have
been declared effective by the SEC.
(v) CONSENTS AND APPROVALS. All necessary consents of and filings
with any Governmental Authority relating to the consummation of the
transactions contemplated herein
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shall have been obtained and made and no action or proceeding shall have
been instituted or threatened to restrain or prohibit the Acquisition.
(vi) GOOD STANDING CERTIFICATES. Parent and the Buyer each shall
have delivered to the Seller certificates, dated as of a date no later than
ten days prior to the Closing Date, duly issued by the Texas and New York
Secretaries of State, respectively, and in each state in which the Parent
and Buyer is authorized to do business, showing that each of the Parent and
the Buyer is in good standing and authorized to do business and that all
state franchise and/or income tax returns and taxes for the Parent and the
Buyer, respectively, for all periods prior to the Closing have been filed
and paid.
(vii) NO MATERIAL ADVERSE CHANGE. No event or circumstance shall
have occurred with respect to the Parent or the Buyer which would constitute
a Material Adverse Effect.
(viii) CLOSING OF IPO. The closing of the sale of the Parent Shares
to the Underwriters in the IPO shall have occurred simultaneously with the
IPO Closing Date hereunder.
(ix) SECRETARY'S CERTIFICATE. The Seller shall have received a
certificate or certificates, dated the Closing Date and signed by the
secretary of each of the Parent and the Buyer, certifying the truth and
correctness of attached copies of the Parent's and the Buyer's respective
resolutions of their boards of directors and, if required, the stockholders
of the Parent and the Buyer approving the Parent's and the Buyer's entering
into this Agreement and the consummation of the transactions contemplated
hereby.
(x) GOLDSTEIN EMPLOYMENT AGREEMENT. The Buyer shall have entered
into an employment agreement with Goldstein in the form attached as Exhibit
A ("Goldstein Employment Agreement").
(xi) REGISTRATION RIGHTS AGREEMENT. Parent shall have entered into
the Registration Rights Agreement with the Seller in the form attached as
Exhibit B ("Registration Rights Agreement").
(xii) AUDITED FINANCIALS. Parent shall have delivered to Seller a
certified copy of the audited reports, including a signed and certified opinion
letter, prepared by Coopers & Lybrand, L.L.P. for the calendar years 1995, 1996
and for the twelve months ended June 30, 1997 of the operations of Seller's
Business.
6.3 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PARENT AND THE BUYER. The
obligations of the Parent and the Buyer with respect to actions to be taken on
the Closing Date are subject to the satisfaction or waiver on or prior to the
Closing Date of all of the following conditions other than the conditions set
forth in this Section 6.3(i) and (viii) that cannot be satisfied prior to the
IPO Closing Date. The obligations of Parent and Buyer with respect to actions
to be taken on the IPO Closing Date are subject to the satisfaction or waiver on
or prior to the IPO Closing Date of all of the following conditions. As of (a)
the Closing Date if any such conditions other than the
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conditions set forth in this Section 6.3(i) and (viii) that cannot be satisfied
prior to the IPO Closing Date have not been satisfied or (b) as of the IPO
Closing Date, if any such conditions have not been satisfied, Parent and Buyer
shall have the right to terminate this Agreement, or waive any such condition,
but no such waiver shall be deemed to affect the survival of the representations
and warranties contained in Article III hereof.
(i) REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATION. All
the representations and warranties of the Seller and the Stockholder
contained in this Agreement shall be true and correct in all Material
respects as of the Closing Date and the IPO Closing Date with the same
effect as though such representations and warranties had been made on and as
of such date; all of the terms, covenants and conditions of this Agreement
to be complied with or performed by the Seller or the Stockholder on or
before the Closing Date or the IPO Closing Date, as the case may be, shall
have been duly performed or complied with in all Material respects; and the
Seller and the Stockholder shall have delivered to the Buyer certificates
dated the Closing Date and the IPO Closing Date, respectively, and signed by
them to such effect.
(ii) NO LITIGATION. No action or proceeding before a Governmental
Authority shall have been instituted or threatened to restrain or prohibit
the Acquisition or the IPO and no Governmental Authority shall have taken
any other action or made any request of Parent as a result of which the
management of Parent deems it inadvisable to proceed with the transactions
hereunder.
(iii) OPINION OF COUNSEL. Parent shall have received an opinion
from Counsel to the Seller, dated the Closing Date, substantially in the
form attached as Exhibit G-2 hereto.
(iv) REGISTRATION STATEMENT. The Registration Statement, as amended
to cover the offering, issuance and sale by Parent of such number of Parent
Shares at the IPO Price as shall yield aggregate cash proceeds to the Parent
from that sale (net of Underwriter's discount or commissions) in at least
the Minimum Cash Amount shall have been declared effective by the SEC.
(v) CONSENTS AND APPROVALS. All necessary consents of and filings
with any Governmental Authority relating to the consummation of the
transactions contemplated herein shall have been obtained and made; all
consents and approvals of third parties shall have been obtained; and no
action or proceeding shall have been instituted or threatened to restrain or
prohibit the Acquisition.
(vi) GOOD STANDING CERTIFICATES. Subject to Section 2.6, Seller
shall have delivered to the Buyer certificates, dated as of a date no later
than ten days prior to the Closing Date, duly issued by the Pennsylvania
Secretary of State showing that the Seller is in good standing and
authorized to do business and that all state franchise and/or income tax
returns and taxes for the Seller for all periods prior to the Closing have
been filed and paid.
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(vii) NO MATERIAL ADVERSE CHANGE. No event or circumstance shall
have occurred with respect to the Seller which would constitute a Material
Adverse Effect, and the Seller shall not have suffered any Material loss or
damages to any of its properties or assets, whether or not covered by
insurance, which change, loss or damage Materially affects or impairs the
ability of the Seller to conduct its business.
(viii) CLOSING OF IPO. The closing of the sale of the Parent Shares
to the Underwriter of the IPO shall have occurred simultaneously with the
IPO Closing Date hereunder.
(ix) CERTIFICATE. The Buyer shall have received a certificate or
certificates, dated the Closing Date and signed by the President and
Secretary of the Seller, certifying the truth and correctness of attached
copies of the Seller's articles of incorporation, bylaws and resolutions
authorizing the consummation of the transactions contemplated hereby.
(x) GOLDSTEIN EMPLOYMENT AGREEMENT. Goldstein shall have entered
into the Goldstein Employment Agreement.
(xi) REGISTRATION RIGHTS AGREEMENT. Seller shall have entered into
the Registration Rights Agreement.
(xii) BILL OF SALE. Seller shall have delivered to the Buyer
instruments of assignment and transfer or bills of sale signed by the Seller
as the Buyer reasonably requests, including the Bill of Sale attached as
Exhibit C ("Bill of Sale").
(xiii) INVESTOR REPRESENTATION LETTER. Seller and each of the
Stockholders shall have delivered to the Parent at or prior to the signing
of the Registration Statement an Investor Representation Letter in the form
attached as Exhibit D, with respect to the acquisition of the Parent Shares
to be issued to Seller.
(xiv) STOCK PLEDGE AGREEMENT. Seller shall have delivered to Buyer
a Stock Pledge Agreement in the form attached as Exhibit E ("Stock Pledge
Agreement") as well as the Parent Shares issuable to the Seller at the
Closing (complete with stock powers executed in blank).
(xv) GUARANTEE. Goldstein, individually, shall have delivered to
Buyer a Guaranty of Performance in the form of Exhibit F.
(xvi) SATISFACTION. All actions, proceedings, instruments and
documents required to carry out the transactions contemplated by this
Agreement or incidental hereto and all other related legal matters shall
have been approved by counsel to the Parent.
6.4 FURTHER ASSURANCES. At and after the Closing, each of the Parties
shall take all appropriate action and execute all documents of any kind which
may be reasonably necessary or desirable to carry out the transactions
contemplated hereby. The Seller, at any time at or after the
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Closing, will execute, acknowledge and deliver any further bills of sale,
assignments and other assurances, documents and instruments of transfer,
reasonably requested by the Buyer, and will take any other action consistent
with the terms of this Agreement that may reasonably be requested by the Buyer,
for the purpose of assigning and confirming to the Buyer, all of the Assets. The
Buyer shall notify the Seller promptly, and in no event more than ten (10)
business days after the Buyer's receipt, of any tax inquiries or notifications
thereof which relate to any period prior to the Effective Date, and the Seller
shall prepare and deliver responses to such inquiries as the Seller deems
necessary or appropriate. In addition, the Seller shall make available the Books
and Records of the Business during reasonable business hours and take such other
actions as are reasonably requested by the Buyer to assist the Buyer in the
operation of the Business.
6.5 CONFIDENTIAL INFORMATION. After the Closing and except as otherwise
specifically permitted in this Agreement or reasonably required by the Parent to
conduct its business and pursue the IPO, each Party to this Agreement agrees, on
behalf of itself and ifs Affiliates, to use reasonably efforts not to divulge,
communicate, use to the detriment of any other Party to this Agreement or its
Affiliates or for the benefit of any other person or persons, any confidential
information or trade secrets of such other Party with respect to the Assets or
the Business, including personnel information, secret processes, know-how,
customer lists, formulae, or other technical data; provided, if any Party to
this Agreement or any of its Affiliates is compelled to disclose such
information to any tribunal, regulatory or governmental authority or agency or
else stand liable for contempt or suffer other censure and penalty, such Party
may so disclose such information without any liability hereunder.
6.6 ASSIGNMENT OF CONTRACTS. On or before the Effective Date, Seller
shall have delivered to Buyer all of the Contracts presently in force and shall
have effected a valid assignment of all of Seller's rights and obligations
thereunder.
ARTICLE VII
INDEMNIFICATION
7.1 INDEMNIFICATION.
A. BY THE SELLER AND THE STOCKHOLDER. Subject to Section 7.1(E)
hereof, the Seller and the Stockholder, individually, jointly and severally,
(collectively herein "Seller Indemnitors") shall indemnify, save, defend and
hold harmless the Parent and Buyer and their respective shareholders, directors,
officers, partners, agents and employees (collectively, the "Buyer Indemnified
Parties") from and against any and all costs, lawsuits, losses, liabilities,
deficiencies, claims and expenses, including interest, penalties, attorneys'
fees and all amounts paid in investigation, defense or settlement of any of the
foregoing (collectively referred to herein as "Damages"), (i) incurred in
connection with or arising out of or resulting from or incident to any breach of
any covenant, breach of warranty as of the Effective Date, or the inaccuracy of
any representation as of the Effective Date, made by the Seller in or pursuant
to this Agreement or the Ancillary Agreements, or any other agreement
contemplated hereby or in any schedule, certificate, exhibit, or other
instrument furnished or to be furnished by the Seller or the Stockholder under
this Agreement, (ii) based upon, arising out of, or otherwise in respect of any
liability or obligation of the
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Business or relating to the Assets (a) relating to any period prior to the
Effective Date, other than those Damages based upon or arising out of the
Assumed Liabilities, or (b) arising out of facts or circumstances existing prior
to the Effective Date, other than those Damages based upon or arising out of the
Assumed Liabilities; provided however, that the Seller Indemnitors shall not be
liable for any such Damages to the extent, if any, such Damages result from or
arise out of a breach or violation of this Agreement by any Buyer Indemnified
Parties, and (iii) any liability under the Securities Act, the Exchange Act or
other federal or state law or regulation, at common law or otherwise, arising
out of or based upon any untrue statement or alleged untrue statement of a
Material fact relating to the Seller or the Stockholder, and provided to Parent
or its counsel by the Seller or the Stockholder, contained in the Registration
Statement or any prospectus forming a part thereof, or any amendment thereof or
supplement thereto, or arising out of or based upon any omission or alleged
omission to state therein a Material fact relating to the Seller or the
Stockholder required to be stated therein or necessary to make the statements
therein not misleading, provided however, that such indemnity shall not inure to
the benefit of Parent and Buyer to the extent such untrue statement (or alleged
untrue statement) was made in, or omission (or alleged omission) occurred in,
any preliminary prospectus and Seller or the Stockholder provided, in writing,
corrected information to Parent and Parent's counsel for inclusion in the Final
Prospectus, and such information was not included or properly delivered.
B. BY THE BUYER. Subject to Section 7.1(E) hereof, the Parent and
Buyer shall indemnify, save, defend and hold harmless the Seller and the
Stockholder (collectively, the "Seller Indemnified Parties") from and against
any and all Damages (i) incurred in connection with or arising out of or
resulting from or incident to any breach of any covenant, breach of warranty as
of the Effective Date, or the inaccuracy of any representation as of the
Effective Date, made by the Buyer or Parent in or pursuant to this Agreement,
the Ancillary Agreements, or any other agreement contemplated hereby or in any
schedule, certificate, exhibit, or other instrument furnished or to be furnished
by the Buyer under this Agreement, (ii) based upon, arising out of or otherwise
in respect of any liability or obligation of the Business or relating to the
Assets (a) relating to any period on and after the Effective Date, other than
those Damages based upon or arising out of the Retained Liabilities, or (b)
arising out of facts or circumstances existing on and after the Effective Date,
other than those Damages based upon or arising out of the Retained Liabilities;
provided, however, that the Buyer shall not be liable for any such Damages to
the extent, if any, such Damages result from or arise out of a breach or
violation of this Agreement by any Seller Indemnified Party, (iii) under the
Securities Act, the Exchange Act or other federal or state law or regulation, at
common law or otherwise, arising out of or based upon any untrue statement or
alleged untrue statement of a Material fact relating to Parent, Buyer or any
Other Acquired Business contained in any preliminary prospectus, the
Registration Statement or any prospectus forming a part thereof, or any
amendment thereof or supplement thereto, or arising out of or based upon any
omission (or alleged omission) to state therein a Material fact relating to
Parent or Buyer or any of the Other Acquired Businesses required to be stated
therein or necessary to make the statements therein not misleading.
C. DEFENSE OF CLAIMS. If any lawsuit or enforcement action is filed
against any Party entitled to the benefit of indemnity hereunder, written notice
thereof describing such lawsuit or enforcement action in reasonable detail and
indicating the amount (estimated, if necessary) or good faith estimate of the
reasonably foreseeable estimated amount of Damages (which estimate shall in
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no way limit the amount of indemnification the indemnified Party is entitled to
receive hereunder), shall be given to the indemnifying Party as promptly as
practicable (and in any event within ten (10) days, after the service of the
citation or summons) ("Notice of Action"); provided that the failure of any
indemnified Party to give timely notice and an estimated amount of Damages shall
not affect its rights to indemnification hereunder to the extent that the
indemnified Party demonstrates to the indemnifying Party that the amount of
Damages the indemnified Party is entitled to recover has not increased by its
failure to so notify the indemnifying Party within ten (10) days and so long as
the indemnifying Party is not materially prejudiced by the failure to receive
such notice. The indemnifying Party may elect to compromise or defend any such
asserted liability and to assume all obligations contained in this Section 7.1
to indemnify the indemnified Party by a delivery of notice of such election
("Notice of Election") within ten (10) days after delivery of the Notice of
Action. Upon delivery of the Notice of Election, the indemnifying Party shall be
entitled to take control of the defense and investigation of such lawsuit or
action and to employ and engage attorneys of its own choice to handle and defend
the same, at the indemnifying Party's sole cost, risk and expense, and the
indemnified Party shall cooperate in all reasonable respects, at the
indemnifying Party's sole cost, risk and expense (except with respect to the
fees and expenses of the indemnified Party's attorney, which shall be borne by
the indemnified Party) with the indemnifying Party and such attorneys in the
investigation, trial, and defense of such lawsuit or action and any appeal
arising therefrom; provided, however, that the indemnified Party may, at its own
cost, risk and expense, participate in such investigation, trial and defense of
such lawsuit or action and any appeal arising therefrom. If the Notice of
Election is delivered to the indemnified Party, the indemnified Party shall not
pay, settle or compromise such claim without the indemnifying Party's consent,
which consent shall not be unreasonably withheld. If the indemnifying Party
elects not to defend the claim of the indemnified Party or does not deliver to
the indemnified Party a Notice of Election within ten (10) days after delivery
of the Notice of Action, the indemnified Party may, but shall not be obligated
to, defend, compromise or settle (exercising reasonable business judgment) the
claim or other matter on behalf, for the account, and at the risk, of the
indemnifying Party.
D. THIRD PARTY CLAIMS. The provisions of this Section 7.1 are not
limited to matters asserted by the Parties, but cover Damages incurred in
connection with third party claims. The indemnity hereunder is in addition to
any and all rights and remedies of the Parties in connection herewith.
E. LIMITATION ON INDEMNIFICATION. Notwithstanding the other
provisions of this Section 7.1, Seller Indemnitors shall not be liable to Buyer
Indemnified Parties, and Parent and Buyer shall not be liable to Seller
Indemnified Parties, for the first $25,000 in aggregate Damages suffered by such
indemnified Parties; provided, however, that once any such indemnified Parties
have suffered Damages aggregating in excess of $25,000, the indemnifying Party
shall reimburse the indemnified Parties for the full amount of such Damages,
including the $25,000 in Damages initially excluded. In no event shall the
aggregate Damages payable by an indemnifying Party to indemnified Parties exceed
the Purchase Price.
7.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
representations, warranties, covenants and agreements of the Parties made herein
and at the time of the Closing or in writing delivered pursuant to the
provisions of this Agreement shall survive the consummation of the
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transactions contemplated hereby and any examination on behalf of the Parties
until the Expiration Date.
ARTICLE VIII
TERMINATION AND REMEDIES
8.1 SPECIFIC PERFORMANCE; REMEDIES. Each of the Parties hereby agrees
that the transactions contemplated by this Agreement are unique, and that each
Party shall have, in addition to any other legal or equitable remedy available
to it, the right to enforce this Agreement by decree of specific performance.
If any legal action or other proceeding is brought for the enforcement of this
Agreement or because of an alleged dispute, breach, default or misrepresentation
in connection with any of the provisions of this Agreement, the successful or
prevailing Party or Parties shall be entitled to recover reasonable attorneys'
fees and other costs incurred in that action or proceeding in addition to any
other remedies to which it, he or they may be entitled at law or equity. The
rights and remedies granted herein are cumulative and not exclusive of any other
right or remedy granted herein or provided by law.
8.2 OFFSET; REMEDIES. To the extent not otherwise prohibited by
applicable law, all amounts due and owing by the Buyer to the Seller or the
Stockholder under this Agreement, the Ancillary Agreements, or any other
document, instrument, or agreement executed in connection herewith shall be
subject to offset by the Buyer to the extent of any Damages incurred by any
breach by the Seller or the Stockholder, under this Agreement or any Ancillary
Agreement, or any document, instrument, or agreement executed in connection
herewith. In the event Buyer elects to offset any Damages incurred as a result
of any such breach, Buyer shall furnish Seller or the Stockholder, as
appropriate, notice containing detailed information about the breach, the
magnitude of the damages that Buyer has or reasonably expects to incur, and
whether the offset is against the Parent Shares pledged under the Stock Pledge
Agreement or otherwise (the act of offsetting by Buyer shall be referred to as
an "Offset"). The Seller and the Stockholder acknowledge and agree that but for
the right of Offset contained in this Agreement, the Buyer would not have
entered into this Agreement or any of the transactions contemplated herein. If
any legal action or other proceeding is brought for the enforcement of this
Agreement, any Ancillary Agreement, or any document, instrument, or agreement
executed in connection herewith, or because of an alleged dispute, breach,
default or misrepresentation in connection with any of the provisions of this
Agreement, or any Ancillary Agreement, or any document, instrument, or agreement
executed in connection herewith, the successful or prevailing Party or Parties
shall be entitled to recover other remedies to which it or they may be entitled
at law or equity. The rights and remedies granted herein are cumulative and not
exclusive of any other right or remedy granted herein or provided by law. Buyer
shall not effect an Offset hereunder without giving Seller or a Stockholder, as
appropriate, at least ten (10) days advance written notice of its intent to do
so.
8.3 TERMINATION. Termination of This Agreement. (a) This Agreement may be
terminated at any time prior to the Closing solely:
(i) by the mutual written consent of the Parent and the Seller;
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(ii) by the Seller, on the one hand, or by the Parent, on the other
hand, if the transactions contemplated by this Agreement to take place at
the Closing shall not have been consummated by January 15, 1998, (subject to
the terms of the Side Letter) unless the failure of such transactions to be
consummated results from the willful failure of the Party seeking to
terminate this Agreement to perform or materially adhere to any agreement
required hereby to be performed or adhered to by it prior to or at the
Closing or thereafter on the IPO Closing Date;
(iii) by the Seller, on the one hand, or by the Parent, on the other
hand, if a Material breach or default shall be made by the other Party in
the observance or in the due and timely performance of any of the covenants,
agreements or conditions contained herein; or
(iv) by the Parent if it is entitled to do so as provided in
Section 5.11.
(b) this Agreement may be terminated after the Closing solely:
(i) by the Parent or the Seller if the Underwriting Agreement is
terminated pursuant to its terms after the Closing and prior to the
consummation of the IPO; or
(ii) automatically and without action on the part of any party hereto
if the IPO is not consummated within ten (10) New York City business days
after the date of the Closing.
8.4 LIABILITIES IN EVENT OF TERMINATION. If this Agreement is terminated
pursuant to Section 8.3, there shall be no liability or obligation on the part
of any Party hereto except to the extent that such liability is based on the
breach by that Party of any of its representations, warranties or covenants set
forth in this Agreement.
ARTICLE IX
COVENANTS OF BUYER AND SELLER AFTER CLOSING
9.1. PREPARATION AND FILING OF TAX RETURNS.
(i) The Seller shall file or cause to be filed all federal income
tax returns of the Seller for all taxable periods that end on or before the
IPO Closing Date, and shall permit the Parent to review all such tax returns
prior to such filings.
(ii) Parent shall file or cause to be filed all separate tax returns
of, or that include, any Other Acquired Business for all taxable periods
ending after the IPO Closing Date.
(iii) Each Party shall, and shall cause its Subsidiaries and
Affiliates to, provide to each of the other Parties hereto such cooperation
and information as any of them reasonably may request in filing any tax
return, amended tax return or claim for refund, determining a liability for
taxes or a right to refund of taxes or in conducting any audit or other
proceeding in respect of taxes. Such cooperation and information shall
include providing copies of all
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relevant portions of relevant tax returns, together with relevant
accompanying schedules and relevant work papers, relevant documents relating
to rulings or other determinations by taxing authorities and relevant
records concerning the ownership and tax basis of property, which such Party
may possess. Each Party shall make its employees reasonably available on a
mutually convenient basis at its cost to provide explanation of any
documents or information so provided. Subject to the preceding sentence,
each Party required to file tax returns pursuant to this Agreement shall
bear all costs of filing such tax returns.
9.2 RESTRICTIVE LEGEND. The Seller consents to the imprinting on all
certificates representing Parent Shares issued to it as part of the Purchase
Price of the following legend:
THE SHARES OF COMMON STOCK REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, NOR THE SECURITIES
LAWS OF ANY STATE. SUCH SHARES MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED AT ANY TIME, EXCEPT UPON (1) SUCH REGISTRATION, OR (2)
DELIVERY TO THE ISSUER OF SUCH SHARES OF AN OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO THE ISSUER, THAT REGISTRATION IS NOT REQUIRED FOR SUCH
TRANSFER, OR (3) THE SUBMISSION TO THE ISSUER OF SUCH SHARES OF OTHER
EVIDENCE, REASONABLY ACCEPTABLE TO THE ISSUER, TO THE EFFECT THAT ANY SUCH
SALE, PLEDGE, HYPOTHECATION OR TRANSFER WILL NOT BE IN VIOLATION OF THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR OTHER APPLICABLE
SECURITIES LAWS OF ANY STATE, OR ANY RULES OR REGULATIONS
PROMULGATED THEREUNDER.
9.3 PLEDGE OF PARENT SHARES. Seller shall deliver all Parent Shares
acquired from the Buyer as part of the Purchase Price to Buyer to be held
pursuant to the terms of the Stock Pledge Agreement.
9.4 DELIVERY OF TAX CERTIFICATE. Within one year from the Closing Date,
Seller shall deliver such tax certificate to Buyer as required by Section 2.8 of
this Agreement.
9.5 SIDE LETTER The Side Letter, by and between Parent and Goldstein,
dated September 15, 1997 and attached hereto as Exhibit H, is incorporated
herein and made a part of this Agreement for all purposes (the "Side Letter").
ARTICLE X
MISCELLANEOUS
10.1 FEES. Except as expressly set forth herein to the contrary, each
Party shall be responsible for all costs, fees and expenses (including attorney
and accountant fees and expenses) paid or incurred by such Party in connection
with the preparation, negotiation, execution, delivery and performance of this
Agreement, or otherwise in connection with the transaction contemplated hereby.
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10.2 MODIFICATION OF AGREEMENT. This Agreement may be amended or modified
only in writing signed by all of the Parties.
10.3 NOTICES. All notices, consents, demands or other communications
required or permitted to be given pursuant to this Agreement shall be deemed
sufficiently given when delivered personally or telefaxed with receipt of
transmission confirmed during regular business hours during a business day to
the appropriate location described below, or three (3) business days after
posting thereof by United States first-class, registered or certified mail,
return receipt requested, with postage and fees prepaid and addressed as
follows:
IF TO SELLER OR Lee Goldstein
STOCKHOLDER: Reporting Services Associates
225 South 15th Street, 22nd Floor
Philadelphia, PA 19102
With a copy to: Benjamin S. Ohrenstein
Attorney at Law
354 W. Lancaster Avenue
Haverford, Pennsylvania 19041
IF TO BUYER
OR PARENT: Litigation Resources of America-Northeast, Inc.
Litigation Resources of America, Inc.
650 First City Tower, 1001 Fannin
Houston, Texas 77002
Phone: 713/653-7100
Fax: 713/653-7172
With a copy to: John R. Boyer, Jr.
Boyer, Ewing & Harris Incorporated
Nine Greenway Plaza, Suite 3100
Houston, Texas 77046
Phone: 713/871-2025
Fax: (713) 871-2024
Any addressee at any time by furnishing notice to the other addressees in the
manner described above may designate additional or different addresses for
subsequent notices or communications.
10.4 SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement shall not invalidate or affect the enforceability of any other
provision of this Agreement.
10.5 ENTIRE AGREEMENT; BINDING EFFECT. This Agreement and the Ancillary
Agreements set forth the entire agreement among the Parties with respect to the
subject matter hereof. This Agreement shall be binding upon and shall inure to
the benefit of the Parties and their respective successors and assigns.
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10.6 WAIVER. No delay in the exercise of any right under this Agreement
shall waive such rights. Any waiver, to be enforceable, must be in writing.
10.7 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
10.8 ASSIGNMENT. Neither Seller, nor Parent or Buyer may assign this
Agreement or any interest therein; provided that Seller may assign its rights
hereunder to Lee Goldstein, individually, and Parent and Buyer may assign their
rights hereunder to an Affiliate.
10.9 HEADINGS. Headings in this Agreement are for convenience only and
shall not affect the interpretation of this Agreement.
10.10 SCHEDULES AND EXHIBITS. All Schedules and Exhibits attached to this
Agreement or to be delivered by the Seller, upon review and approval by the
Buyer, are and shall be hereby incorporated in and made a part of this
Agreement. All Schedules to this Agreement must be delivered no later than four
(4) days prior to Closing, in order to provide the Buyer ample time to review
and evaluate the items described therein and disclosed thereby. Although the
Schedules remain subject to the review and approval of the Buyer, no such review
or approval shall constitute a waiver by the Buyer of any breach or default
caused by the inaccuracy or incompleteness of any Schedule, the accuracy and
completeness of the Schedules being the sole responsibility of the Seller.
10.11 RIGHTS AND LIABILITIES OF PARTIES. Nothing in this Agreement, whether
express or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any persons other than the Parties, the Buyer
Indemnified Parties and their respective successors and assigns, nor is anything
in this Agreement intended to relieve or discharge the obligation or liability
of any third persons to any Party to this Agreement, nor shall any provision
give any third person any right of subrogation or action over against any Party
to this Agreement.
10.12 SURVIVAL. Subject to Section 7.2, this Agreement, including but not
limited to all covenants, warranties, representations and indemnities contained
herein, shall survive the Closing, and the Bill of Sale and all other documents,
instruments or agreements relating to the Assets and the transactions
contemplated herein shall not be deemed merged therein.
10.13 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall have the force and effect of an original, and
all of which shall constitute one and the same agreement.
10.14 ARBITRATION AND LIMITATION ON CLAIMS. Any controversy, dispute or
claim arising out of, in connection with, or in relation to, the interpretation,
performance or breach of this Agreement, including, without limitation, the
validity, scope and enforceability of this Section which cannot first be settled
through ordinary negotiation between the Parties shall be submitted in good
faith to mediation by and in accordance with the Commercial Mediation Rules of
the American Arbitration Association or any successor organization. In the
event that mediation of such controversy, dispute or claim cannot be settled
through the mediation proceeding, the Parties agree
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that the controversy, dispute or claim shall be submitted to binding and final
arbitration conducted in Houston, Harris County, Texas by and in accordance with
the then existing Rules for Commercial Arbitration of the American Arbitration
Association or any successor organization. Any such arbitration shall be to a
three member panel selected through the rules governing selection and
appointment of such panels of the American Arbitration Association or any
successor organization. The award rendered by the arbitrators may be confirmed,
entered and enforced as a judgment in any court of competent jurisdiction;
however, the Parties otherwise waive any rights to appeal the award except with
regard to fraud by the panel. Any such action must be brought within two years
of the date the cause of action accrues. The arbitrators shall award the Party
which substantially prevails in any arbitration proceeding recovery of that
Party's attorneys' fees, the arbitrators' fees and all costs in connection with
the arbitration from the Party who does not substantially prevail. The Parties'
remedies are limited solely to the specific remedies provided in this agreement
or in the other. The parties waive any entitlement to punitive damages,
consequential damages and lost profits and will limit any damage claim to actual
economic damages incurred. Nothing in this Section 10.14 shall restrict any
Parties' ability to seek injunctive or other equitable relief in any court of
competent jurisdiction prior to initiating mediation or arbitration. In the
event that such injunctive or equitable relief is sought by any Party, such
Party is specifically entitled to enforce the appropriate provisions of the
Agreement in obtaining such relief in any court of competent jurisdiction and,
thereafter, submit the remaining controversy, dispute or claim to arbitration in
accordance with this Section 10.14.
10.15 DRAFTING. All Parties hereto acknowledge that each Party was actively
involved in the negotiation and drafting of this Agreement and that no law or
rule of construction shall be raised or used in which the provisions of this
Agreement shall be construed in favor or against any Party hereto because one is
deemed to be the author thereof.
10.16 BLUE SKY LAWS.
(a) Section 203(d) and 207(m)(2) of the Pennsylvania Securities Act of
1972, as amended (the "Act") requires that each person who accepts an offer
to purchase securities exempted from registration directly from an issuer,
shall receive written notice of such person's right to withdraw his
acceptance, without incurring any liability to the seller, the underwriter
or any other person, within two business days from the date of receipt by
the issuer of such person's written binding contract of purchase.
(b) By execution of this Agreement, Seller acknowledges that (i) it
has received written notice of its rights under Sections 203 and 207 of the
Act, and (ii) that Seller's right of withdrawal shall continue until the
close of business on the second business day following the execution date of
this Agreement.
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IN WITNESS WHEREOF, the undersigned have executed and delivered this
Agreement in multiple counterparts effective as of the date first written above.
BUYER:
LITIGATION RESOURCES OF
AMERICA-NORTHEAST, INC.,
a New York corporation
By: /s/ Richard O. Looney
------------------------------------
Richard O. Looney,
Chairman and Chief Executive Officer
PARENT:
LITIGATION RESOURCES OF AMERICA, INC.,
a Texas corporation
By: /s/ Richard O. Looney
------------------------------------
Richard O. Looney,
Chairman and Chief Executive Officer
SELLER:
REPORTING SERVICES ASSOCIATES, INC.
a Pennsylvania corporation
By: /s/ Lee Goldstein
------------------------------------
Lee Goldstein, President
STOCKHOLDER
/s/ Lee Goldstein
----------------------------------------
Lee Goldstein, Individually
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Schedules
- ---------
2.1(a) - Equipment
2.1(b) - Contracts
2.1(c) - Books and Records
2.1(e) - Intellectual Property
2.1(g) - General Intangibles
2.2 - Excluded Assets
2.7 - Allocation of Purchase Price
3.3(a) - Consents and Approvals
3.3(b) - Breaches or Defaults
3.5 - Exceptions to Title
3.6 - Leased Assets
3.13 - Insurance Policies
3.14 - Banking
3.16(a) - Employees
3.16(b) - Independent Contractors
3.17 - Employee Benefit Plans
3.18 - Employment Agreement
3.19 - Liabilities
3.20 - Litigation
3.24 - Certain Changes or Events
3.25 - Customers
Exhibits
- --------
A - Goldstein Employment Agreement
B - Registration Rights Agreement
C - Bill of Sale
D - Investor Representation Letter
E - Stock Pledge Agreement
F - Guaranty
G-1 - Legal Opinion
G-2 - Legal Opinion
H - Side Letter
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated effective the ____ day of
October, 1997 (the "Effective Date"), is entered into by and between LITIGATION
RESOURCES OF AMERICA-NORTHEAST, INC., a New York corporation (hereinafter called
the "Company," which term includes any directly or indirectly controlled
subsidiaries or successor entities), and Lee Goldstein, an individual residing
in the State of Florida (the "Employee"). The Company may sometimes hereinafter
be referred to as "Employer." The Employer and Employee may sometimes
hereinafter be referred to singularly as a "Party" or collectively as the
"Parties." All capitalized terms not otherwise defined herein shall have the
same meaning as contained in that certain Agreement of Purchase and Sale of
Assets executed as of September 24, 1997 (the "Purchase Agreement"), by and
among the Company, Reporting Services Associates, Inc. a Pennsylvania
corporation ("Seller"), the Employee, individually, and Litigation Resources of
America, Inc., a Texas corporation (the "Parent").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Employee has been and employee and the Owner of the Seller and its
business known as Reporting Services Associates, Inc. (the "RSA Business"), and
his knowledge of the affairs of the RSA Business, particularly its court
reporting business in Philadelphia, Pennsylvania, are of great value to the
Company; and
WHEREAS, pursuant to the terms of the Purchase Agreement the Company has
purchased from the Seller, and the Seller has sold to the Company, all or
substantially all of the Assets of the Seller, which required the approval of at
least a majority of the shareholders of the Seller; and
WHEREAS, part of the consideration given to the Seller and the Employee under
the Purchase Agreement included an agreement by the Company to enter into this
Agreement; and
WHEREAS, the Parties would not have entered into the Purchase Agreement
without the execution of this Agreement.
NOW THEREFORE, for and in consideration of the mutual covenants, promises and
undertakings herein contained and other consideration, the receipt, adequacy and
sufficiency of which are hereby acknowledged, the Parties hereby undertake and
agree as follows:
1. Employment Term. The Employer hereby employs the Employee commencing on
the Effective Date for a term of three (3) years (the "Employment Term"), unless
sooner terminated as hereinafter provided. The term of this Agreement may be
renewed or extended
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for one or more successive additional one (1) year terms upon mutual agreement
of the Parties at least 90 days prior to the expiration of the initial term or
any such renewal term. Unless otherwise provided herein, Sections 12 - 26 of
this Agreement shall survive the expiration or termination of this Agreement,
for any reason whatsoever. The Employee accepts such employment and agrees to
perform the services specified herein, all upon the terms and conditions
hereinafter stated.
2. Duties. The Employee shall serve as the President of the RSA Division of
the Company and as Northeast Regional Vice President, and shall report to, and
be subject to the general direction and control of the Chief Executive Officer
and the Board of Directors of the Company (the "Board"). The Employee shall
perform such management and administrative duties, consistent with the
Employee's position, as are from time to time reasonably assigned to the
Employee by the Chief Executive Officer and the Board including developing
local, regional, and national customers for the Company and its Affiliates
(defined below). The Employee also agrees to perform, without additional
compensation, such other services for the Company, and for any parent,
subsidiary or affiliate corporations of the Company and any partnerships in
which the Company may from time to time have an interest (herein collectively
called "Affiliates"), as the Chief Executive Officer or Board shall from time to
time reasonably specify, if such services are of the nature commonly associated
with the positions of Division President and of Regional Vice President of a
company engaged in activities similar to the activities engaged in by the
Company and to perform such other activities as are consistent with the
Employee's past responsibilities as an employee of the Seller and the RSA
Business; provided, that Employee shall not be required to engage in any
business that is not reasonably related to the Business of the Company. For
purposes of this Agreement, the "Business of the Company" or, alternatively,
"Business" shall be defined as the current business of the Company, including,
but not limited to, the marketing and providing of court reporting and
litigation support services in the Philadelphia, Pennsylvania area. The term
"Company" as used in this Agreement shall be deemed to include and refer to all
such Affiliates.
3. Extent of Service. The Employee shall devote his full business time,
attention and energy to the business of the Employer, and shall not be engaged
in any other business activity during the term of this Agreement. The foregoing
shall not be construed as preventing the Employee from making passive
investments in other businesses or enterprises, if (i) such investments will not
require services on the part of the Employee which would in any material way
impair the performance of his duties under this Agreement, (ii) such other
businesses or enterprises are not engaged in any business competitive with the
business of the Company, and (iii) the Employee has complied with Sections 12
and 13 of this Agreement with respect to each such passive investment.
4. Compensation. As payment for the services to be rendered by the
Employee hereunder during the initial term, the Employee shall be entitled to
receive:
(a) a salary in the amount of One Hundred Seventy-Five Thousand and
No/100 Dollars ($175,000.00)(representing One Hundred Thousand and No/100
Dollars ($100,000.00) for services rendered as a Division President and
Seventy-Five Thousand and No/100 Dollars ($75,000.00) for services rendered as
a Regional Vice
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President) per year effective as of the date hereof, which shall be payable
monthly or in accordance with the payroll policies of the Company in effect
from time to time if such policies provide for payment of salary more
frequently than monthly, until the termination of this Agreement;
(b) a monthly car allowance in the amount of Six Hundred and No/100
Dollars ($600.00), which shall be payable in accordance with the payroll
policies of the Company;
(c) a bonus consisting of two components to be calculated in
accordance with Schedule A attached hereto, payable within ninety (90) days
after the end of each fiscal year of the Company (the "Annual Bonus")
including, without limitation, the first fiscal year of the Company; provided
however, that any Annual Bonus calculated with respect to a fiscal year during
which the Employee was employed for only a part of such year shall be prorated
to account for the number of days during such year in which Employee was
employed by the Company; and
(d) a commission payment to be calculated in accordance with Schedule
B attached hereto, based upon the revenues generated from National Account (as
herein defined) sales originated by the Employee. The amount of commissions
payable will be based upon a formula ("Formula") as it exists on the date of
the origination of the National Account. A "National Account" is any account
established with an insurance or "Fortune 500" company pursuant to which two
or more of the Company's offices render services. Until notice of a change in
the Formula applicable to the Employee is given to the Employee by the
Company, the Formula applicable to the Employee shall be as set forth on
Schedule B; and
(e) In the event that the Employee identifies a business as an
acquisition candidate for the Company or any of its subsidiaries, and such
acquisition candidate has not been previously brought to the attention of the
Company, and the Company or any of its subsidiaries ultimately acquires such
business, the Employee shall be entitled to receive, at the closing of such
acquisition, a cash payment equal to 10% of the investment banking fee paid to
The Gulfstar Group, Inc. or such other investment banking firm by the Company
or its subsidiary in connection with such acquisition. In no event shall the
Company or any subsidiary be obligated to close any acquisition with regard to
any business identified by the Employee as an acquisition candidate, and no
fee shall be payable hereunder unless and until such acquisition is completed.
5. Expenses. During the term of this Agreement, the Employer shall
promptly pay or reimburse the Employee for all reasonable out-of-pocket expenses
for travel, meals, hotel accommodations and similar items incurred by him in
connection with the Business of the Company and approved by the Board or
incurred in accordance with the travel and reimbursement policies of
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the Company as the same shall be in effect from time to time, upon submission by
him of an appropriate statement documenting such expenses.
6. Employee Benefits. During the term of this Agreement, the
Employee shall be entitled to participate in all employee benefit plans from
time to time made generally available to the executive employees of the Company,
including any stock option plan, retirement plan, profit-sharing plan, group
life plan, health or accident insurance or other employee benefit plans as the
same shall be maintained in effect, as determined by the Board. Until the
Company is able to procure its own insurance coverage, the Company agrees to
continue the prior insurance previously provided to the Employee by Seller. The
Employer will use commercially reasonably efforts to assist Employee in
procuring insurance coverage for any preexisting conditions.
7. Vacation. During the term of this Agreement, the Employee shall
be entitled to annual vacation time determined in accordance with the vacation
policies of the Company in effect from time to time but not less than four (4)
weeks per year, during which time his compensation shall be paid in full.
Unused vacation time shall not accrue from year to year, unless otherwise
required by law.
8. Covenants of Employee. For and in consideration of the
employment herein contemplated and the consideration paid or promised to be paid
by the Company, the Employee does hereby covenant, agree and promise that during
the term hereof and thereafter to the extent specifically provided in this
Agreement:
(a) Except as otherwise specifically permitted by this Agreement,
during the term of this Agreement, Employee will not actively engage, directly
or indirectly, in any other business other than that of Company, except at the
direction or approval of the Company.
(b) The Employee will use his best reasonable efforts to truthfully
and accurately make, maintain and preserve all records and reports that the
Company may from time to time request or require.
(c) The Employee will fully account for all money, records, goods,
wares and merchandise or other property belonging to the Company of which the
Employee has custody, and will pay over and deliver same promptly whenever and
however he may be reasonably directed to do so by the Company.
(d) The Employee will obey all rules, regulations and special
instructions of the Company applicable to him, and will be loyal and faithful
to the Company at all times.
(e) The Employee will make available to the Company any and all of the
information of which he has knowledge relating to the business of the Company,
and
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will make all suggestions and recommendations which he feels will be of mutual
benefit to the Parties.
(f) The Employee agrees that upon termination of his employment
hereunder he will immediately surrender and turn over to the Company all
books, records, forms, specifications, formulae, data, processes, papers and
writings related to the Business of the Company and all other property
belonging to the Company, together with all copies of the foregoing, it being
understood and agreed that the same are the sole property of the Company.
(g) The Employee agrees that all ideas, concepts, processes,
discoveries, devices, machines, tools, materials, designs, improvements,
inventions and other things of value relating to the Business of the Company
(hereinafter collectively referred to as "intangible rights"), whether
patentable or not, which are conceived, made, invented or suggested by him
alone or in collaboration with others during the term of his employment, and
whether or not during regular working hours, shall be promptly disclosed in
writing to the Company and shall be the sole and exclusive property of the
Company. The Employee hereby assigns all of his right, title and interest in
and to all such intangible rights to the Company, and its successors or
assigns. In the event that any of such intangible rights shall be deemed by
the Company to be patentable or otherwise registerable under any federal,
state or foreign law, the Employee further agrees that, at the expense of the
Company, he will execute all documents and do all things reasonably necessary,
advisable or proper to obtain patents therefor or registration thereof, and to
vest in the Company full title thereto.
9. Mutual Covenants of the Company and the Employee. For and in
consideration of the employment herein contemplated and the compensation,
covenants, conditions and promises herein recited, the Company and the Employee
do hereby mutually agree that during the term hereof:
(a) The Employee shall not, by reason of this Agreement, have any
vested interest in, or right, title or claim to, any land, buildings,
equipment, machinery, processes, systems, products, contracts, goods, wares,
merchandise, business assets or other things of value belonging to or which
may hereafter be acquired or owned by the Company.
(b) In carrying out his duties as President of the RSA Division and
Northeast Regional Vice President of the Company, the Employee shall primarily
be responsible for making day-to-day decisions in the ordinary course of
business of the Company, subject to possible review by the Chief Executive
Officer and/or the Board. The responsibility for the Company's plans,
properties, contracts, methods, and policies shall be vested in the Board and
the Company may, in its sole and
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absolute discretion, give, sell, assign, transfer or otherwise dispose of any
or all of its assets or businesses in whole or in part, to any person, firm or
corporation, whether or not such person, firm or corporation is in any manner
owned by or associated with or affiliated with the Company.
(c) The Employee acknowledges that because of the nature of the
position for which he has been employed, the Employee may be called upon to
perform such duties and render such services as are required of him hereunder
irregularly, and agrees to perform to the best of his abilities such duties as
the business may reasonably demand, and acknowledges that the number of hours
per day or per week may vary. Notwithstanding the foregoing, the Employee
shall work in a manner that is consistent with his prior customary practice on
behalf of the Seller and the RSA Business.
(d) The Company agrees that it will not terminate any employee of the
Company without giving prior notification of such termination to the Employee.
10. Termination of Employment for Cause. The Employer may terminate
the employment of the Employee if the Employer suffers or may reasonably be
expected to suffer any material adverse effect as a result of the Employee (any
such termination being a termination for "Cause"):
(a) Breaching any material provision of this Agreement and failing to
cure such breach within ten (10) days after receipt of written notice thereof;
(b) Misappropriating funds or property of the Company;
(c) Securing any personal profit not thoroughly disclosed to and
approved by the Company in connection with any transaction entered into on
behalf of the Company;
(d) Engaging in conduct, even if not in connection with the
performance of his duties hereunder, which would reasonably be expected to
result in a material adverse effect to the interest of the Company if he was
retained as an employee, such as his commission of a felony or a crime of
moral turpitude;
(e) Becoming and remaining "Disabled," as hereinafter defined (either
physically, mentally or otherwise) for a period of one hundred thirty-five
(135) days during any consecutive twelve-month time period;
(f) Failing to carry out and perform the duties assigned to the
Employee in accordance with the terms hereof and failing to cure such breach
within ten (10) days after written notice thereof; or
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<PAGE>
(g) Failing to comply with corporate policies of the Company that
are promulgated from time to time and made known to Employee and failing to
cure such breach within ten (10) days after written notice thereof.
In the event of the death of the Employee, such occurrence shall
immediately constitute a termination for Cause. Except as provided in item (e)
above, no termination for Cause shall be effective if the Employee is Disabled.
In the event the Employee is terminated for Cause because he is
Disabled, the Employee may be permitted to participate in any disability
insurance policy the Company then has in effect.
In the event of termination of his employment for Cause, the Employee
shall be entitled to receive his compensation, as determined in Section 4 of
this Agreement, due or accrued on a pro rata basis to the date of termination.
Any salary or remuneration owed as of the date of termination shall be paid less
the amount of damages, if any, caused to the Company by such breach, but no such
damages offset shall extend beyond any compensation due and owing under this
Agreement.
Notwithstanding the cure provisions provided in Sections 10(a), 10 (f)
and 10(g), the Employee shall not have the opportunity to cure any violation of
these subsections if such violation cannot reasonably be expected to be cured.
In such event, the Company shall be required to furnish the Employee notice of
the violation, but the Employee shall not be furnished an opportunity to cure.
"Disabled" shall mean the continuous inability, whether mental or
physical, of Employee to perform his normal job functions as determined by at
least two of three medical physicians selected as follows: the Employee or his
legal designee shall be entitled to appoint one physician, the Company shall be
entitled to appoint one physician, and such two appointed physicians shall
mutually appoint a third physician. Notwithstanding the foregoing, the
Employee, or his designee, and the Company may mutually agree that he is
"Disabled" within the meaning of this Agreement.
11. Termination By the Company Without Cause or By the Employee With
Good Reason. The Company may terminate the employment of Employee for any
reason other than those for Cause, in which event such termination shall be
deemed a "Termination Without Cause." In addition, the Employee shall have the
right to terminate this Agreement for any material breach of this Agreement by
the Company, which shall include but not be limited to materially changing the
duties assigned to Employee beyond those contemplated in Section 2 of this
Agreement or causing Employee to relocate his primary residence in violation of
Section 2 of this Agreement; provided that the Company shall be furnished ten
(10) days notice of such breach and an opportunity to cure (any such termination
constituting a "Termination By Employee With Good Reason"). Notwithstanding the
cure provisions provided in the preceding sentence, the Employer shall not have
the opportunity to cure any violation of this Agreement if such violation cannot
reasonably be expected to be cured
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<PAGE>
but the Employee shall still furnish notice to the Company. In the event of a
Termination Without Cause or a Termination with Good Reason by the Employee, the
Company shall continue making payments to Employee, but at a salary level equal
to the Division President portion of Employee's compensation only, as set forth
in Section 4 of this Agreement, for a period equal to the lesser of (i) one (1)
year, or (ii) the remaining term of this Agreement, which amount, in the event
of a Termination Without Cause or a Termination By Employee With Good Reason,
shall constitute the full and total amount of liquidated damages that the
Employee shall be entitled to receive from the Company and its Affiliates for
any contractual or tort claims arising out of his employment relationship with
the Company.
12. Covenant Not to Compete. The Employee recognizes that the
Company has business goodwill and other legitimate business interests which must
be protected in connection with and in addition to the Information (as defined
hereinafter), and therefore, in exchange for access to the Information, the
specialized training and instruction which the Company will provide, the
Company's agreement to employ the Employee on the terms and conditions set forth
herein, the Company's agreement to execute and consummate the Purchase
Agreement, and the promotion and advertisement by the Company of Employee's
skill, ability and value in the Company's business, subject to the provisions of
the next full paragraph of this Section 12, the Employee agrees that in the
event (i) Employee is terminated for Cause, or (ii) Employee leaves the employ
of the Company other than a Termination By Employee With Good Reason prior to
expiration of the term of the Agreement, or (iii) upon the expiration of the
term of this Agreement, then for a period of the latest date of (i) five (5)
years after the date of this Agreement, or (ii) three (3) years after the date
employment is so terminated, except in the event of Termination Without Cause or
in the event of Termination By Employee With Good Reason By Employee:
(a) Employee will not in any capacity or relationship enter into,
engage in, or be connected with any business or business operation or activity
within a fifty (50) mile radius of any office location then operated by the
Employer at the time of such termination, which consists in whole or in part
of the Business of the Company; and
(b) Employee will not call upon any customer whose account is
serviced in whole or in part by the Employer or its Affiliates at the time of
the termination of Employee's employment, with the purpose of selling or
attempting to sell to any such customer any services included within that
offered by the Employer or its Affiliates; and
(c) Employee will not intentionally divert, solicit or take away any
customer, supplier or employee of the Employer or its Affiliates, or the
patronage of any customer or supplier of the Employer or its Affiliates, or
otherwise interfere with or disturb the relationship existing between the
Employer or its Affiliates and any of their respective customers, suppliers or
employees, directly or indirectly.
-8-
<PAGE>
The foregoing restrictive covenants shall apply to the Employee in the
event of his Termination Without Cause or in the event of Termination By
Employee With Good Reason by the Employee, but only for a period of one (1)
year.
In the event the Company ceases operation of the Business of the
Company other than in a merger, consolidation, or similar transaction, or upon
the filing of a bankruptcy or receivership proceeding against the Employer, or
upon the appointment of a liquidator for the Company, the provisions of this
Section 12 shall not be applicable to the conduct of Employee subsequent
thereto.
It is mutually understood and agreed that if any of the provisions
relating to the scope, time or territory in this Section 12 are more extensive
than is enforceable under applicable laws or are broader than necessary to
protect the good will and legitimate business interests of the Company, then the
Parties agree that they will reduce the degree and extent of such provisions by
whatever minimal amount is necessary to bring such provisions within the ambit
of enforceability under applicable law.
The Parties acknowledge that the remedies at law for breach of
Employee's covenants contained in this Section 12 are inadequate, and they agree
that the Company shall be entitled, at its election, to injunctive relief
(without the necessity of posting bond against such breach or attempted breach),
and to specific performance of such covenants in addition to any other remedies
at law or equity that may be available to the Company.
13. Business Opportunities. Except for passive investments by the
Employee in publicly traded entities, or investments in private ventures which
do not compete with, or are not in the same business as, the Company and which
come to the attention of the Employee outside of the scope of his employment,
for as long as the Employee shall be employed by the Company and thereafter with
respect to any business opportunities learned about during the time of
Employee's employment by the Company, the Employee agrees that with respect to
any future business opportunity or other new and future business proposal which
is offered to, or comes to the attention of, the Employee and which is in any
way related to, or connected with, the Business of the Company, the Company
shall have the right to take advantage of such business opportunity or other
business proposal for its own benefit. The Employee agrees to promptly deliver
notice to the Board in writing of the existence of such opportunity or proposal
and the Employee may take advantage of such opportunity only if the Employer
does not elect to exercise its right to take advantage of such opportunity.
14. Confidential Information. The Employee acknowledges that in the
course of his employment with the Company, he will receive certain trade
secrets, know-how, lists of customers, employee records and other confidential
information and knowledge concerning the Business of the Company (hereinafter
collectively referred to as "Information") which the Company desires to protect.
The Employee understands that such Information is confidential and he agrees
that he will not reveal such Information to anyone outside the Company except
(i) for information already known to the public, now or in the future, or (ii)
in connection with any legal proceeding
-9-
<PAGE>
regarding this Agreement, the Purchase Agreement or the transactions
contemplated thereby or as otherwise required by law or judicial order. The
Employee further agrees that during the term of this Agreement and thereafter he
will not use such Information in competing with the Company. Upon termination of
his employment hereunder, the Employee shall surrender to the Company all
papers, documents, writings and other property produced by him or coming into
his possession by or through his employment hereunder and relating to the
information referred to in this Section 14, which are not general knowledge in
the industry, and the Employee agrees that all such materials will at all times
remain the property of the Company.
15. Notices. All notices, consents, demands or other communications
required or permitted to be given pursuant to this Agreement shall be deemed
sufficiently given when delivered personally with a written receipt
acknowledging delivery or telefaxed with receipt confirmed, or three (3)
business days after the posting thereof by United States first class, registered
or certified mail, return receipt requested, with postage fee prepaid and
addressed as follows:
If to the Company: Litigation Resources of America-
Northeast, Inc.
1001 Fannin, Suite 650
Houston, Texas 77002
Telefax:(713) 653-7172
Attn: Richard O. Looney
If to the Employee: Lee Goldstein
Reporting Services Associates
225 South 15/th/ Street, 22/nd/ Floor
Philadelphia, PA 19102
Any Party may change its address for notice hereunder by providing written
notice of such change to the other Party hereto.
16. Specific Performance. The Employee acknowledges that a remedy at
law for any breach or attempted breach of Sections 12, 13 or 14 of this
Agreement will be inadequate, the Employee agrees that the Company shall be
entitled to specific performance and injunctive and other equitable relief in
case of any such breach or attempted breach, and further agrees to waive any
requirement for the securing or posting of any bond in connection with the
obtaining of any such injunctive or any other equitable relief.
17. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provisions shall be ineffective to the extent
of such provision or invalidity only, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
-10-
<PAGE>
18. Assignment. This Agreement may not be assigned by the Employee.
Neither the Employee, his spouse nor their estates shall have any right to
encumber or dispose of any right to receive payments hereunder, it being
understood that such payments and the right thereto are nonassignable and
nontransferable.
19. Binding Effect. Subject to the provisions of Section 18 of this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
Parties hereto, the Employee's heirs and personal representatives, and the
successors and assigns of the Company.
20. Governing Law. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Texas.
21. Prior Employment Agreements. Employee represents and warrants to
the Company that he has fulfilled all of the terms and conditions of all prior
employment agreements to which he may be or have been a party, and at the time
of execution of this Agreement is not a party to any other employment agreement.
22. Parol Evidence. This Agreement constitutes the sole and complete
agreement between the Parties hereto with respect to the subject matter hereof,
and no verbal or other statements, inducements or representations have been made
to or relied upon by either Party, and no modification hereof shall be effective
unless in writing signed and executed in the same manner as this Agreement,
provided, however, the amount of compensation to be paid Employee for services
to be performed for Company may be changed from time to time by the Parties
hereto by written agreement without in any other way modifying, changing or
affecting this Agreement and the performance by the Employee of any of the
duties of his employment with the Company. Written notification of any
modification of compensation paid or payable to the Employee for his services
shall be conclusively deemed to be a ratification and confirmation of this
Agreement amended by such change in compensation unless the Employee shall
object in writing with ten (10) days after such written notification from the
Company.
23. Waiver. Any waiver to be enforceable must be in writing and
executed by the Party against whom the waiver is sought to be enforced.
24. Arbitration. Any controversy, dispute or claim arising out of,
in connection with, or in relation to, the interpretation, performance or breach
of this Agreement, including, without limitation, the validity, scope and
enforceability of this Section which cannot first be settled through ordinary
negotiation between the Parties shall be submitted in good faith to mediation by
and in accordance with the Commercial Mediation Rules of the American
Arbitration Association or any successor organization. In the event that
mediation of such controversy, dispute or claim cannot be settled through the
mediation proceeding, the Parties agree that the controversy, dispute or claim
shall be submitted to binding and final arbitration conducted in Houston, Harris
County, Texas by and in accordance with the then existing Rules for Commercial
Arbitration of the American Arbitration Association or an successor
organization. Any such arbitration shall be to a three
-11-
<PAGE>
member panel selected through the rules governing selection and appointment of
such panels of the American Arbitration Association or any successor
organization. The award rendered by the arbitrators may be confirmed, entered
and enforced as a judgment in any court of competent jurisdiction; however, the
Parties otherwise waive any rights to appeal the award except with regard to
fraud by the panel. Any such action must be brought within two years of the date
the cause of action accrues. The arbitrators shall award the Party which
substantially prevails in any arbitration proceeding recovery of that Party's
attorneys fees, the arbitrators' fees and all costs in connection with the
arbitration from the Party who does not substantially prevail. The Parties'
remedies are limited solely to the specific remedies provided in this agreement.
The Parties waive any entitlement to punitive damages, consequential damages and
lost profits and will limit any damage claim to actual economic damages
incurred. Nothing in this Section 24 shall restrict the Company's ability to
seek injunctive or other equitable relief in any court of competent jurisdiction
prior to initiating mediation or arbitration for any violation by the Employee
of Sections 12, 13, 14 or 16 of this Agreement. In the event that such
injunctive or equitable relief is sought by the Company, the Company is
specifically entitled to enforce the provisions of these Sections in obtaining
such relief in any court of competent jurisdiction and, thereafter, submit the
remaining controversy, dispute or claim to arbitration in accordance with this
Section 24.
25. Drafting. All Parties hereto acknowledge that each was actively
involved in the negotiation and drafting of this Agreement and that no law or
rule of construction shall be raised or used in which the provisions of this
Agreement shall be construed in favor or against any Party hereto because one is
deemed to be the author thereof.
26. Multiple Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall have the force and effect of an original, and
all of which shall constitute one and the same agreement.
-12-
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date and year first above written.
THE COMPANY:
LITIGATION RESOURCES OF AMERICA-
NORTHEAST, INC., a New York corporation
By: _________________________________
Richard O. Looney
Chief Executive Officer
THE EMPLOYEE:
_______________________________________
Lee Goldstein
Schedule A--Calculation of Annual Bonus
Schedule B--Calculation of Commissions
-13-
<PAGE>
SCHEDULE A
----------
CALCULATION OF ANNUAL BONUS
Each year the accountants regularly employed by the Company shall
determine the amount of EBIT Profit, if any, of (i) the RSA Division and (ii)
the Northeast Region of the Company (being that region of the Company which Lee
Goldstein, as RVP, is responsible for managing) during each consecutive twelve
(12) month time period ending on the last day of the fiscal year of the Company
("respectively the "Annual RSA EBIT Profits" and the "Annual Northeast Region
EBIT Profits"), commencing with the first fiscal year of the Company and
continuing each year during the term of this Agreement. Beginning with the
first fiscal year of the Company, (x) to the extent that the Annual RSA EBIT
Profits for the current year exceed the Annual RSA EBIT Profits for the prior
year, the Employee shall be paid an annual bonus equal to ten percent (10%) of
the amount of such excess, if any ("Bonus Component 1"), and (y) to the extent
that the Annual Northeast Region EBIT Profits for the current year exceed the
Annual EBIT Profits for the prior year, the Employee shall be paid an annual
bonus equal to ten percent (10%) of the amount of such excess, if any ("Bonus
Component 2"); provided that for the first fiscal year of the Company (A)(i) the
Bonus Components 1 and 2, respectively shall be calculated for each full month
of operations and added together, (ii) the Bonus Components 1 and 2 respectively
for any partial month of operations shall be divided by the number of actual
days in such month and multiplied by 30 to create a full month and (iii) the sum
of (A)(i) and (A)(ii) shall be added together, that result divided by the number
of full and partial months of operations and the quotient multiplied by 12 to
create the number representing Bonus Components 1 and 2 for the first fiscal
year and (B) the Annual Northeast Region EBIT Profits for the prior year shall
be deemed to be $_________ [NET WORTH ON __________ BALANCE SHEET] and the
Annual RSA EBIT Profits for the prior year shall be deemed to be $____________.
For purposes of this calculation, EBIT Profits for each of the RSA Divisions in
the Northeast Region shall mean their gross earnings before income taxes,
interest, depreciation and amortization, but excluding the effects of any
acquisitions and after deductions for all annual bonuses to be paid to the
managers in the Northeast Region.
-14-
<PAGE>
SCHEDULE B
----------
<TABLE>
<CAPTION>
Commission Price Structure of
Percentage of Gross Sales National Account
<S> <C>
3.00% Market price
2.50% Discount of 5% to 10% from market price
rate
2.00% Discount of 10% to 15% from market price
rate
1.50% Discount of 15% to 20% from market price
rate
1.00% Discount of 20% to 25% from market price
rate
0.50% Discount of 25% or more from market price
rate
</TABLE>
In certain circumstances, more than one individual may be entitled to
receive commissions based upon sales from a National Account. In such
circumstances, the commissions described above would be shares by the Employee
and the other individuals on such a basis as is determined to be fair by the
Company's Board of Directors. All commissions payable hereunder will be paid in
cash within 45 days of the end of the fiscal year of the Company in which they
are earned.
-15-
<PAGE>
EXHIBIT C DRAFT OF SEPTEMBER 22, 1997
BILL OF SALE,
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS BILL OF SALE, ASSIGNMENT AND ASSUMPTION AGREEMENT (this Bill of Sale")
is entered into effective as of September___, 1997, among REPORTING SERVICES
ASSOCIATES, INC., a Pennsylvania corporation ("Seller"), and LITIGATION
RESOURCES OF AMERICA-NORTHEAST, INC., a New York corporation ("Purchaser").
Purchaser and Seller may be hereinafter sometimes referred to collectively as
the "Parties" or individually as a "Party." All defined terms not otherwise
defined herein shall have the meanings ascribed to them in that certain
Agreement of Purchase and Sale of Assets of even date herewith (the
"Agreement"), executed among Seller, Purchaser and Litigation Resources of
America, Inc., a Texas corporation.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Purchaser has agreed to purchase from Seller, and Seller has
agreed to grant, bargain, sell, convey, transfer, assign and deliver to
Purchaser, the Assets (but not the Excluded Assets); and
WHEREAS, as partial consideration for the sale and assignment of the
Assets, Purchaser has agreed to assume the Assumed Liabilities, on and subject
to the terms and conditions set forth in the Agreement.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, including the delivery to Seller of the Purchase Price,
the receipt and sufficiency of which are hereby acknowledged, Purchaser and
Seller hereby agree as follows:
1. SALE AND ASSIGNMENT. Seller has granted, bargained, sold, conveyed,
transferred, assigned and delivered, and by these presents does grant, bargain,
sell, convey, transfer, assign and deliver unto Purchaser, its successors and
assigns, the Assets. Seller warrants that Seller is the lawful owner in every
respect of all of the Assets and that the Assets are free and clear of any and
all liens, security agreements, encumbrances, claims, demands, and charges of
every kind and character whatsoever other than as previously disclosed in
writing to Purchaser. Seller hereby binds Seller and Seller's successors and
assigns to warrant and defend the title to all of the Assets unto Purchaser and
Purchaser's successors and assigns forever against every person whomsoever
lawfully claiming or to claim the Assets or any part thereof. Purchaser hereby
accepts the conveyance, transfer, assignment and delivery of the Assets.
<PAGE>
2. ASSUMPTION. Subject to the exceptions and exclusions of Section 2.6 of
the Agreement, and otherwise on and subject to the terms and conditions of the
Agreement, Purchaser hereby assumes and agrees to pay and perform the Assumed
Liabilities.
3. FURTHER ACTIONS. Seller hereby consents and agrees to any lawful
action taken by Purchaser in connection with the enforcement of, or the legal
protection of, the Assets, and confers upon Purchaser full right of substitution
in any and all such actions. Seller further covenants and agrees to execute
such further documents and take such additional actions as may reasonably be
requested by Purchaser to vest in Purchaser any and all of the Assets and
otherwise to effectuate the intent of this Bill of Sale. Each of the Parties
shall perform such actions and deliver or cause to be delivered any and all such
documents, instruments and agreements as the other Party may reasonably request
for the purpose of fully and effectively carrying out this Agreement and the
transactions contemplated hereby.
4. GOVERNING LAW; JURISDICTION; VENUE; SERVICE. This Agreement shall be
construed and enforced in accordance with and governed by the laws of the State
of Texas, without regard to conflicts of law principles, and the laws of the
United States applicable in Texas. Venue for any litigation between the Parties
hereto with respect to the subject matter of this Agreement shall be Harris
County, Texas. Each Party hereby irrevocably submits to personal jurisdiction
in Texas. Each Party hereby waives all objections to personal jurisdiction in
Texas and venue in Harris County for purposes of such litigation. Each Party
waives summons or citation and agrees that delivery of a duly filed complaint or
petition as provided in the notice section of this Agreement will suffice as
substitute service of summons or citation.
5. MODIFICATION OF AGREEMENT. This Agreement may be amended or modified
only by written instrument signed by all of the Parties.
6. ENTIRE AGREEMENT; BINDING EFFECT. This Agreement, and the documents,
instruments and agreements executed in connection herewith, set forth the entire
agreement and understanding between the Parties with respect to the subject
matter hereof and thereof. This Agreement shall be binding upon and shall inure
to the benefit of the Parties and their respective successors and assigns.
7. COUNTERPARTS. This Agreement may be executed in multiple counterparts,
each of which shall have the force and effect of an original, and all of which
together shall constitute one and the same agreement.
EXECUTED AND DELIVERED EFFECTIVE as of the date first written above.
2
<PAGE>
PURCHASER:
----------
LITIGATION RESOURCES OF AMERICA-NORTHEAST, INC., a New
York corporation
By:___________________________________________________
Richard O. Looney, President
SELLER:
-------
REPORTING SERVICES ASSOCIATES:
By:___________________________________________________
Lee Goldstein, President
A:\BILL OF SALE1.WPD
3
<PAGE>
EXHIBIT D DRAFT OF SEPTEMBER 22, 1997
---------------------------
[FORM OF SELLER'S INVESTOR REPRESENTATION LETTER]
_________ ___, 1997
Litigation Resources of America, Inc.
Litigation Resources of America -- Northeast, Inc.
1001 Fannin, Suite 650
Houston, Texas 77002
Attn: Mr. Richard O. Looney, President
Re: Investor Representations
Gentlemen:
The purpose of this letter is to evidence certain representations and
warranties to be made with respect to certain matters relating to the
acquisition by Reporting Services Associates, Inc., a Pennsylvania corporation
and/or its sole shareholder, Lee Goldstein, an individual rediding in the State
of Florida (the "Seller") of shares of Common Stock issued by Litigation
Resources of America, Inc., a Texas corporation (the "Company"), having a par
value of one-cent ($0.01) per share (the "Common Stock"), for and in partial
consideration of the sale of certain of the assets of the Seller to Litigation
Resources of America -- Northeast, Inc., a New York corporation ("Buyer"), upon
the terms and conditions set forth herein and in that certain Agreement of
Purchase and Sale of Assets (the "Purchase Agreement"), entered into by and
among the Seller, the sole shareholder of the Seller, the Company, and the
Buyer. The undersigned Seller or shareholder of Seller is sometimes hereinafter
referred to as the "Investor."
The Investor hereby represents and warrants to the Company, the Buyer,
and each of the Company's and the Buyer's officers, directors, shareholders,
agents, attorneys, employees and representatives as follows:
1. Investment Intent. (i) The Common Stock is being acquired solely
for the account of the Seller, for investment and not with a view to or for the
resale, distribution, subdivision or fractionalization thereof, (ii) the Seller
has no contract, understanding, undertaking, agreement or arrangement with any
person to sell, transfer or pledge to any person the Common Stock or any part
thereof, (iii) the Seller has no present plans to enter into any such contract,
undertaking, agreement or arrangement, (iv) the Seller understands the legal
consequences of the foregoing representations and warranties to mean that the
Seller must bear the economic risk of the investment in the Common Stock for an
indefinite period of time, (v) the Investor has such knowledge and experience in
financial and business matters that the Investor is capable of evaluating the
merits and
<PAGE>
Litigations Resources of America, Inc.
Litigations Resources of America -- Northeast, Inc.
__________________ ____, 1997
Page 2
risks of acquiring the Common Stock, and (vi) the Investor acknowledges that the
acquisition of the Common Stock by the Seller involves a high degree of risk
which may result in the loss of the total amount of this investment.
2. No General Solicitation. The Common Stock has been offered to
the Seller without any form of general solicitation or advertising of any type
by or on behalf of the Company or any of its officers, directors, shareholders,
employees, agents, attorneys or representatives.
3. Access to Information. The Seller, and to the extent the
Investor is not the Seller, the Investor, has (i) for a reasonable amount of
time had an opportunity to ask questions and receive answers concerning the
terms and conditions of the issuance of the Common Stock and the proposed
business and affairs of the Company, and is satisfied with the results thereof,
(ii) has been given access, if requested, to all other documents with respect to
the Company or this transaction, as well as to such other information as the
Seller or the Investor has requested, and (iii) has relied solely on
investigations conducted by the Investor in making the decision to acquire the
Common Stock or approve the transactions set forth in the Purchase Agreement.
4. Exemption Status. The Investor understands that the Common Stock
to be sold hereunder are being issued in reliance upon the exemptions from
registration under the Securities Act of 1933, as amended. The Investor
understands that the undersigned, the Company, the Company's officers,
directors, shareholders, employees, agents, attorneys and representatives are
relying on, among other things, the representations and warranties of the
Investor set forth herein in issuing the Common Stock to the Seller.
5. Securities Compliance. The Investor understands and agrees that
(i) no sale, distribution, transfer or other disposition of the Common Stock, or
any portion thereof, can be made by the Seller unless the Common Stock has been
registered under the Securities Act of 1933, as amended, and applicable
securities laws of any other relevant jurisdiction, or exemptions from such
registration are available, as evidenced by an opinion of counsel, satisfactory
to the Company, with respect to the proposed sale, distribution, transfer or
other disposition, and (ii) an appropriate legend will be endorsed on the Common
Stock evidencing such restrictions.
6. Accredited Investor Status. The Investor is an "accredited
investor" within the meaning of Rule 501 of Regulation D promulgated under the
Securities Act.
7. Representations of Natural Persons. If the Investor is a natural
person, the Investor has reached the age of majority in the state in which the
Investor resides, has adequate
<PAGE>
Litigations Resources of America, Inc.
Litigations Resources of America -- Northeast, Inc.
__________________ ____, 1997
Page 3
means of providing for the Investor's current financial needs and contingencies,
is able to bear the substantial economic risks of an investment in the Common
Stock, has no need for liquidity in such investment, and is able to withstand a
complete loss of such investment.
8. Representations of Entities. If Investor is a corporation,
partnership, trust or other entity, (i) it is authorized and qualified to
purchase and hold the Common Stock, (ii) it has not been formed for the purpose
of acquiring the Common Stock, (iii) the person executing this Agreement for and
on behalf of such entity has been duly authorized by such entity to do so, (iv)
it is willing and able to bear the substantial economic risk of an investment in
the Common Stock and has no need for liquidity with respect thereto, and (v) it
is able to withstand a complete loss of its investment.
9. No Governmental Review. The Investor
acknowledges and understands that no federal or state agency has passed on the
fairness of the investment in the Common Stock, nor made any recommendation or
endorsement of the Common Stock, and that there is a significant risk of loss of
all or a portion of the Seller's investment in the Common Stock.
10. State of Residence and Domicile. The Investor
is either (i) a permanent resident of the State of Florida, or (ii) not a
resident or citizen of the United States.
The Investor acknowledges that the Company and the Company's officers,
directors, agents, attorneys and other representatives are relying on the
representations and warranties set forth herein, and would not deliver the
Common Stock to the Seller but for the execution and delivery of this letter by
the Investor.
Very truly yours,
<PAGE>
EXHIBIT E DRAFT AS OF NOVEMBER 6, 1997
----------------------------
STOCK PLEDGE AGREEMENT
----------------------
THIS STOCK PLEDGE AGREEMENT (this "Pledge Agreement") is made
effective as of the ___ day of _____________, 1997, by REPORTING SERVICES
ASSOCIATES, a Pennsylvania corporation ("Pledgor"), and LITIGATION RESOURCES OF
AMERICA -- NORTHEAST, INC., a New York corporation ("Secured Party"). All
capitalized terms contained herein without definition shall have the respective
meanings given to them in that certain Agreement of Purchase and Sale of Assets
dated of even date herewith (the "Purchase Agreement") by and among the Pledgor,
Secured Party, Litigation Resources of America, Inc., a Texas corporation and
the parent company of the Secured Party (the "Parent"), and the stockholder of
the Pledgor.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Pledgor has agreed to sell substantially all of its assets to
Secured Party upon the terms and conditions contained in the Purchase Agreement;
and
WHEREAS, Pledgor has certain obligations under the Purchase Agreement,
including, but not limited to, the obligation of Pledgor to indemnify Secured
Party for any breaches of representations and warranties of Pledgor contained in
the Purchase Agreement; and
WHEREAS, pursuant to the terms of the Purchase Agreement and as partial
consideration for the purchase of the stock of the Company by the Secured Party,
the Pledgor has been issued an aggregate of ________ shares of common stock,
$.01 par value per share (the "Stock"), of Parent; and
WHEREAS, the terms of the Purchase Agreement provide for the Pledgor to
pledge the Stock, whether now owned or hereinafter acquired, to the Secured
Party to partially secure the obligations of Pledgor under the Purchase
Agreement.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
1. Pledge of Stock. Pledgor hereby pledges and grants to Secured Party a
security interest in the Stock, which shall attach immediately upon each
issuance of Stock to all shares of Stock issued to Pledgor in accordance with
the terms of the Purchase Agreement. Immediately upon receipt of any shares of
Stock, Pledgor shall be required to deliver to Secured Party the certificate or
certificates representing the Stock in order that Secured Party might perfect
its security interest therein. The Pledgor and the Secured Party hereby
acknowledge and agree that the value of the Stock ("Agreed Value") shall be
deemed to be (i) the IPO Price if shares are being surrendered hereunder in
order to effect an adjustment in the Purchase Price and (ii) if shares are being
surrendered hereunder for any other reason, the average public trading price of
each share of Stock
-1-
<PAGE>
over the five (5) most recent business days falling prior to the date of
delivery by the Secured Party to the Pledgor of the notice of an event requiring
an Offset, as such term is defined in the Purchase Agreement. Pledgor shall
possess all voting rights pertaining to the Stock, so long as an Event of
Offset, as hereinafter defined, has not occurred, or if an Event of Offset has
allegedly occurred but is being disputed by the parties hereto prior to
submission to arbitration in accordance with Section 10.14 of the Purchase
Agreement, and Secured Party shall have no voting rights that may be presently
or hereafter attributable to the Stock. In addition, so long as an Event of
Offset has not occurred, or if an Event of Offset has allegedly occurred but is
being disputed by the parties hereto prior to submission to arbitration in
accordance with Section 10.14 of the Purchase Agreement, then Pledgor shall have
the right to receive all dividends, if any, on the Stock, and Pledgor shall be
entitled to receive all proceeds upon liquidation of the Stock, if any, as well
as all other rights with respect to the Stock except for the right to transfer
title thereto. Notwithstanding the foregoing, if an Event of Offset has occurred
and (i) has been resolved, either by failure to timely dispute it as required by
Section 10.14 of the Purchase Agreement, by agreement or by arbitration decided
in favor of Secured Party (a "Resolved Event of Offset") or (ii) has been
submitted to arbitration in accordance with Section 10.14 of the Purchase
Agreement which arbitration is still pending or in process (a "Continuing Event
of Offset"), then Secured Party shall have the right to designate a
representative or trustee to vote those shares of Stock covered by or subject to
the Resolved Event of Offset or Continuing Event of Offset (the "Offset
Shares"), to receive all dividends and liquidation proceeds with respect to the
Offset Shares, and to receive all other rights with respect to the Offset
Shares.
2. Representations and Warranties. Pledgor hereby represents, warrants
and covenants to and with Secured Party that:
(a) Pledgor will not, without the written consent of Secured Party,
sell, contract to sell, encumber, or dispose of the Stock or any interest
therein until this Pledge Agreement and all obligations under the Purchase
Agreement have been fully satisfied.
(b) No consent of any party is necessary for the Pledgor to perform
its obligations hereunder, or if any such consent is required, such consent
has been received prior to the execution of this Pledge Agreement.
3. Event of Offset. Each delivery by Secured Party to the Pledgor of a
notice of a claim of offset shall constitute an Event of Offset ("Event of
Offset") under this Pledge Agreement.
4. Remedies.
(a) Upon the occurrence of a Resolved Event of Offset, Secured Party
may, at its option, exercise with reference to the Stock any and all of the
rights and remedies of a secured party under the Uniform Commercial Code as
adopted in the State of Texas and as otherwise granted therein or under any
other applicable law or under any other agreement executed by Pledgor,
including, without limitation, the right and power to sell, at public or
private sale(s), or otherwise dispose of or keep the Stock and any part or
parts thereof, or interest or interests therein owned by Pledgor, in any
manner authorized or permitted under
-2-
<PAGE>
this Pledge Agreement or under the Uniform Commercial Code, and to apply
the proceeds thereof toward payment of any costs and expenses and
attorneys' fees and legal expenses thereby incurred by Secured Party, and
toward payment of the obligations under the Purchase Agreement in such
order or manner as Secured Party may elect. Notwithstanding anything to the
contrary contained herein, the Secured Party shall only foreclose on that
portion of the Stock that is reasonably necessary in the reasonable good
faith judgment of the Secured Party in order to satisfy the amount of the
claim constituting the Resolved Event of Offset. For purposes hereof, the
Agreed Value of the Stock shall be deemed to be the value that the Secured
Party is receiving on the foreclosure of the Stock and Secured Party shall
not be entitled to foreclose on more Stock than is necessary to recover all
of its damages resulting from the Resolved Event of Offset.
(b) Secured Party is hereby granted the right, at its option, after a
Continuing Event of Offset, to transfer at any time to itself or its
nominee the securities or other property hereby pledged, or any part
thereof, and to thereafter exercise all voting rights with respect to such
Stock so transferred and to receive the proceeds, payments, monies, income
or benefits attributable or accruing thereto and to hold the same as
security for the obligations hereby secured, or at Secured Party's
election, to apply such amounts to the obligations, only if due, and in
such order as Secured Party may elect or Secured Party may, at its option,
without transferring such securities or property to its nominee, exercise
all voting rights with respect to the securities pledged hereunder and vote
all or any part of such securities at any regular or special meeting of
shareholders.
(c) Pledgor hereby agrees to cooperate fully with Secured Party in
order to permit Secured Party to sell, at foreclosure or other private
sale, Pledgor's interest in the Stock pledged hereunder as provided in this
Pledge Agreement. Specifically, Pledgor agrees to deliver to Secured Party
the certificate or certificates representing the Stock if Pledgor has
possession at that time, to fully comply with the securities laws of the
United States and of the State of Texas and to take such other action as
may be necessary to permit Secured Party to sell or otherwise transfer the
securities pledged hereunder in compliance with such laws.
5. Termination. This Pledge Agreement shall continue as security for the
payment or satisfaction of the obligations under the Purchase Agreement until
the earliest to occur of (i) termination of this Pledge Agreement by written
notice of the Secured Party to the Pledgor or (ii) the date upon which none of
the representations and warranties of Pledgor contained in the Purchase
Agreement survive and all covenants and obligations of Pledgor under said
Purchase Agreement have been fully and properly performed, or (iii) three (3)
years after the date hereof, provided that Secured Party has not given Pledgor
notice of an Event of Offset which has not been satisfied by Pledgor, or if
there is an Event of Offset, the pledge shall continue only to the extent of the
number of Shares based on the Agreed Value equal to the amount of damages
reasonably expected to be caused by the Event of Offset; provided however, upon
the expiration of one year and three years after the date of this Pledge
Agreement (each a Release Date), the following provisions shall apply: (x) if no
Event of Offset exists on such Release Date, the Secured Party shall release
one-half (1/2) of the number of Shares initially pledged hereunder from the
pledge established hereunder, and the remaining Shares shall remain pledged
under the terms and conditions of this Pledge Agreement;
-3-
<PAGE>
or (y) if an Event of Offset exists, the amount of Damages resulting from such
Event of Offset shall be determined, and on the first and second Release Date,
one-half and all of the remaining Shares, respectively, that have not been
Offset against shall be released from the pledge established hereby and
delivered to the Pledgor and the remaining Shares shall remain pledged under the
terms and conditions of this Pledge Agreement. . If such a Continuing Event of
Offset exists, the pledge shall continue only to the extent of the amount of
Stock (based on the Agreed Value) equal to the amount of Damages claimed in the
Offset Claim or the amount of damages reasonably expected to be caused by the
Event of Offset, as applicable.
6. Release from Pledge. Upon the termination of this Pledge Agreement,
Secured Party shall immediately release its security interest in the Stock. In
addition, Secured Party shall deliver the certificate or certificates
representing the Stock to Pledgor if Secured Party has possession of such
certificates at that time. Upon such occurrence, the security interest of
Secured Party shall automatically terminate and Secured Party shall thereafter
have no interest whatsoever in the Stock.
7. Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given if (and then
two business days after) it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
If to Pledgor: Reporting Services Associates, Inc.
225 South 15/th/ Street
Philadelphia, PA. 19102
Telephone: (215) 735-2332
Telefax: (215) 735-1695
Attn. Lee Goldstein
Copy to: Benjamin S. Ohrenstein
354 West Lancaster Avenue
Suite 212
Haverford, PA. 19041
Telephone: (610) 649-1268
Telefax: (610) 642-6553
If to the
Secured Party: Litigation Resources of America-Northeast, Inc.
c/o Litigation Resources of America, Inc.
650 First City Tower, 1001 Fannin
Houston, Texas 77002
Attn: President
Copy to: Boyer Ewing & Harris Incorporated
Nine Greenway Plaza, Suite 3100
-4-
<PAGE>
Houston, Texas 77046
Attn: John R. Boyer
8. Successors. This Pledge Agreement shall be binding upon, and inure to
the benefit of the parties hereto and their successors and assigns. Any
assignee whatsoever will be bound by the obligations of the assigning party
under this Pledge Agreement, and any assignment shall not diminish the liability
or obligation of the assignor under the terms of this Pledge Agreement unless
otherwise agreed.
9. Severability. In the event that any one or more of the provisions
contained in this Pledge Agreement or in any other instrument referred to
herein, shall, for any reason, be held to be invalid, illegal, or unenforceable
in any respect, such invalidity, illegality, or unenforceability shall not
affect any other provision of this Pledge Agreement or any such other
instrument.
10. Paragraph Headings. The paragraph headings used herein are
descriptive only and shall have no legal force or effect whatsoever.
11. Gender. Whenever the context so requires, the masculine shall include
the feminine and neuter, and the singular shall include the plural and
conversely.
12. Survival of Warranties. All representations, warranties, and
agreements made by the parties in this Pledge Agreement or in any certificates
delivered pursuant hereto will survive the execution date hereof.
13. Applicable Law. This Pledge Agreement shall be construed and
interpreted in accordance with the laws of the United States of America and the
State of Texas, and is intended to be performed in accordance with and as
permitted by such laws.
14. Definitions. All terms and definitions used herein shall have the
same meaning as in the Purchase Agreement unless otherwise indicated.
15. Drafting. The parties hereto acknowledge that each party was actively
involved in the negotiation and drafting of this Pledge Agreement and that no
law or rule of construction shall be raised or used in which the provisions of
this Pledge Agreement shall be construed in favor or against either party hereto
because one is deemed to be the author thereof.
16. Attorneys' Fees. If any litigation is instituted to enforce or
interpret the provisions of this Pledge Agreement or the transactions described
herein, the prevailing party in such action shall be entitled to recover its
reasonable attorneys' fees from the other party hereto.
17. Arbitration. The arbitration provisions contained in Section 10.14 of
the Purchase Agreement shall govern this Pledge Agreement.
-5-
<PAGE>
18. Multiple Counterparts. This Pledge Agreement may be executed in
multiple counterparts each of which shall be deemed an original and all of which
shall constitute one instrument.
-6-
<PAGE>
IN WITNESS WHEREOF, this Pledge Agreement has been executed effective as of
the date first above written.
PLEDGOR:
REPORTING SERVICES ASSOCIATES, INC.
By:________________________________________
Lee Goldstein, President
SECURED PARTY:
LITIGATION RESOURCES OF AMERICA -- NORTHEAST, INC.
By:_____________________________________
Richard O. Looney, President
-7-
<PAGE>
EXHIBIT F DRAFT OF SEPTEMBER 25, 1997
---------------------------
GUARANTY OF PERFORMANCE
-----------------------
THIS GUARANTY OF PERFORMANCE (the "Guaranty") is executed effective the ___
day of __________, 1997, by Lee Goldstein, an individual (the "Guarantor"),
pursuant to the terms of that certain Agreement of Purchase and Sale of Assets
(the "Agreement") entered into effective as of the even date herewith, by and
among Litigation Resources of America -- Northeast, Inc., a New York corporation
("Buyer"), Reporting Services Associates, Inc., a Pennsylvania corporation
("Seller"), Lee Goldstein, an individual ("Goldstein"), and Litigation
Resources of America, Inc., a Texas corporation and the parent company of Buyer
("Parent") (Buyer and the Parent are sometimes hereinafter referred to
collectively as the "LRA Companies"). All defined terms contained herein shall
have the meanings ascribed thereto in the Agreement.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, pursuant to the terms of the Agreement, Buyer shall purchase
substantially all of the Assets of Seller, upon the terms and conditions
contained in the Agreement; and
WHEREAS, Goldstein is the sole shareholder of Seller; and
WHEREAS, Guarantor acknowledges that he is receiving numerous and
substantial benefits from the consummation of the transactions contemplated in
the Agreement, and that he is willing to execute this Guaranty for and in
consideration of such benefits, and in order to induce the LRA Companies to
enter into the Agreement and consummate the transactions contemplated therein;
and
WHEREAS, the LRA Companies would not have executed and consummated the
transactions described in the Agreement but for the agreement of Guarantor to
execute and deliver to the LRA Companies this Guaranty;
NOW, THEREFORE, for and in consideration of the terms and conditions
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by Guarantor, and in order to
induce the LRA Companies to enter into the Agreement and consummate the
transactions contemplated therein, the Guarantor hereby covenants and agrees as
follows:
1. Guarantor hereby absolutely, unconditionally and irrevocably
guarantees the full and punctual payment and performance by the Seller of all of
the obligations, duties, covenants, agreements and conditions provided in the
Agreement to be paid or performed by the Seller thereunder, including without
limitation all indemnification obligations of the Seller set forth in Article
VII of the Agreement.
2. This Guaranty is unconditional and the liability of Guarantor shall be
primary and absolute, in the same manner as if Guarantor were named in and had
signed the Agreement individually as the Seller thereunder. Guarantor agrees
that neither bankruptcy, insolvency, lack of
<PAGE>
capacity nor any other disability or impediment against enforcement of the
liability of the Seller shall in any manner impair or affect Guarantor's
liabilities and obligations hereunder.
3. It shall not be necessary or required in order to maintain and enforce
Guarantor's liability hereunder that demand be made upon the Seller or that
action be commenced or prosecuted against the Seller or that any effort be made
to enforce the liability or responsibility of the Seller for performance of the
Seller's obligations or duties under or in connection with the Agreement, and it
shall not be required that the Seller or any other party liable on the Agreement
be joined in any action brought against Guarantor for enforcement of Guarantor's
liability and responsibility under this Guaranty, or that judgment have
theretofore been obtained against the Seller or any other party liable therefor
or in connection with any such claim.
4. Guarantor agrees that no waiver by the LRA Companies or forbearance or
delay by the LRA Companies in asserting or enforcing any rights or remedies of
either of the LRA Companies or with respect to the Seller or any other party who
may be or become responsible for performance of any of Seller's obligations or
duties shall in any wise affect, impair, or release Guarantor's liability
hereunder.
5. Guarantor expressly waives and agrees that no notice of default by the
Seller or other notice or demand need be given by the LRA Companies to Guarantor
as a condition of maintaining or enforcing Guarantor's liabilities and
obligations under this Guaranty. Likewise, Guarantor agrees that the LRA
Companies' release or subordination of, or failure or delay to enforce or seek
to realize upon, any security now or hereafter held or acquired by the LRA
Companies for performance of any of the obligations or duties of the Seller
under or in connection with the Agreement, or any other action which either of
the LRA Companies may take or fail to take with respect to or against the
Seller, shall not impair, affect, or release Guarantor's liability hereunder.
6. In the event default is made in the prompt payment of amounts due, or
performance of obligations due, under this Guaranty, and the same is placed in
the hands of an attorney for collection or enforcement, or suit is brought on
same, and the same is collected or enforced through any judicial proceeding
whatsoever, then Guarantor agrees and promises to pay all of the attorneys' and
collection fees, costs and expenses incurred by the LRA Companies in enforcing
their rights hereunder.
7. The obligations of Guarantor shall continue in full force and effect
against Guarantor until all of the obligations guaranteed hereunder have been
paid in full, and fully and finally performed. This Guaranty covers any and all
of such obligations, whether presently outstanding or arising subsequent to the
date hereof. This Guaranty is valid and binding upon and enforceable against
Guarantor and the successors and assigns of Guarantor.
8. All rights of the LRA Companies hereunder or otherwise arising under
any documents executed in connection with or as security for the obligations
guaranteed hereby, are separate and cumulative and may be pursued separately,
successively, or concurrently.
2
<PAGE>
9. Notwithstanding any provision of this Guaranty to the contrary, the
liability of Guarantor hereunder shall not exceed the liability which Guarantor
would have under the Agreement if it had signed the Agreement as the Seller
thereunder.
10. This instrument may be amended or modified only by written instrument
signed by Guarantor and the LRA Companies.
11. This instrument sets forth the entire agreement and understanding
between Guarantor and the LRA Companies with respect to the subject matter
hereof, and may be executed in multiple counterparts, each of which shall have
the force and effect of an original, and all of which together shall constitute
one and the same agreement.
THE UNDERSIGNED ACKNOWLEDGES THAT THE EXECUTION OF THIS GUARANTY RESULTS IN
LIABILITY ON THE PART OF THE UNDERSIGNED FOR THE REPAYMENT OF THE DEBTS AND
THE PERFORMANCE OF THE OBLIGATIONS HEREIN DESCRIBED, AND COULD RESULT IN
THE ATTACHMENT OF THE UNDERSIGNED'S ASSETS. THE UNDERSIGNED ACKNOWLEDGES
HAVING RECEIVED THE ADVICE OF LEGAL COUNSEL PRIOR TO EXECUTION OF THIS
DOCUMENT.
IN WITNESS WHEREOF, the undersigned has executed this Guaranty of
Performance effective as of ______________, 1997.
____________________________________
3
<PAGE>
REPORTING SERVICES ASSOCIATES, INC.
225 South 15th Street--22nd Floor
Philadelphia, Pennsylvania 19102
September 15, 1997
VIA FACSIMILE ONLY
Mr. Richard Looney
Chief Executive Officer
Litigation Resources of America, Inc.
1001 Fannin
Suite 650
Houston, Texas 77002
Dear Mr. Looney:
In furtherance of our conversations of earlier today we have agreed to
revise to some extent the two (2) letters which I faxed to you on September 12,
1997. This letter is intended to replace both of those letters, and neither of
those letters shall now be considered viable or of any effect.
A copy of this letter, when executed by you, on behalf of Litigation
Resources of America, Inc. ("LRA"), shall be considered a legally binding
agreement between LRA and Reporting Services Associates, Inc. ("RSA").
This will confirm that the following accurately sets forth the terms and
provisions of the agreement which you and I have negotiated the past few days on
behalf of LRA and RSA:
--In view of the failure of LRA and RSA to execute a Purchase
Agreement and/or other agreements and related instruments prior to
September 1, 1997 as contemplated by the letter of intent dated July 16,
1997 between LRA and RSA, RSA is no longer required to deal exclusively
with LRA regarding the sale of its assets, and that said letter of intent
has been terminated.
--Notwithstanding the termination of the aforesaid letter of intent
and provided that all of the terms and provisions set forth herein are
satisfied (it being agreed that time is of the essence as to the
satisfaction of all such terms and conditions), RSA agrees that as of the
execution date of this letter, it, RSA, again will exclusively deal with
LRA in good faith negotiations regarding the sale of its assets or its
business through the period or periods of time hereinafter.
<PAGE>
Page Two
Mr. Richard Looney
September 15, 1997
--Upon the execution by LRA and RSA of a mutually acceptable definitive
purchase agreement as defined hereinbelow. LRA will pay RSA the sum of Four
Hundred Thousand Dollars ($400,000.00) in cash, or the acceptable equivalent to
RSA. If the closing of the transaction does not take place by the close of
business on January 15, 1998, then RSA, at its option, may elect to extend the
termination date of the said period of time to March 31, 1998; it may do so,
provided that on or before January 15, 1998 it notifies LRA in writing of its
election to do so and, provided further, that within 72 hours of receipt of said
written notice, LRA pays RSA the additional sum of Eighty Seven Thousand Five
Hundred Dollars ($87,500.00) in cash, or the acceptable equivalent to RSA. In
the event the IPO contemplated by the purchase agreement as defined hereinbelow
has not come to fruition by January 15, 1998 and in the further event RSA does
not exercise its option to extend the termination date to March 31, 1998, it,
RSA, shall repay LRA the sum of Two Hundred Thousand Dollars ($200,000.00) on or
before January 16, 1998.
--On or before Noon (C.D.S.T.), Wednesday, September 17, 1997 LRA and
RSA shall execute a mutually acceptable definitive purchase agreement ("Purchase
Agreement") for the sale of RSA's assets or its business and all other
appropriate related agreements and instruments in form and terms similar to
those documents which have been negotiated to date pursuant to the
aforementioned terminated letter of intent dated July 16, 1997, except that no
payments of cash thereunder shall be made to RSA at the time of execution of the
Purchase Agreement but, rather, said payments shall be promptly made to RSA from
the proceeds of the IPO contemplated by the Purchase Agreement, and the payments
to RSA shall consist of cash in the sum of Seven Million Dollars ($7,000,000.00)
and stock with an aggregate value of Two Million Five Hundred Thousand Dollars
($2,500,000.00) at 90% of the IPO price. The payments to RSA pursuant to the
Purchase Agreement shall not be reduced or offset by any payments to RSA for
its agreement to deal exclusively with LRA as set forth hereinabove.
--Lee R. Goldstein, on behalf of RSA, shall have the right and
opportunity to meet with the representatives of LRA, its underwriters,
accountants, and other individuals who are involved in preparing for its IPO,
and to continue to meet with them, observe their preparations, and review their
work products at any and all times during Monday, September 15, 1997 and
Tuesday, September 16, 1997.
<PAGE>
Page Three
Mr. Richard Looney
September 15, 1997
- Within, and no later than three (3) months from the date of
execution of this letter, and at no additional cost to RSA, RSA shall be
provided with full and complete copies of certified audited reports,
including signed appropriate certified opinion letters, prepared by
Coopers & Lybrand, LLP, for the calendar years 1995 and 1996 and for
the twelve (12) months ended June 30, 1997 of the operations of RSA.
- A copy of this letter or its counterpart, duly signed by an
authorized officer of LRA, must be returned to RSA at its offices in
Philadelphia, Pennsylvania, or personally handed to Lee R. Goldstein,
not later than 2:00 P.M. (C.D.S.T.), Tuesday, September 16, 1997.
This Agreement may be executed in two (2) or more counterparts, each of
which shall be deemed to be an original, but all of which shall constitute the
same Agreement.
Very truly yours,
/s/ Lee R. Goldstein
--------------------------------------
LEE R. GOLDSTEIN
President
LRG:lds
Intending to be legally bound hereby, agreed to and accepted by the
undersigned this 16th day of September, 1997.
LITIGATION RESOURCES OF AMERICA, INC.
By: /s/ Richard Looney
----------------------------------
Richard Looney
Chief Executive Officer
<PAGE>
EXHIBIT 10.13
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (the "Agreement"), dated
effective the 1st day of October, 1997 (the "Effective Date"), is entered into
by and among U.S. LEGAL SUPPORT, INC., a Texas corporation ("USLS"), LOONEY &
COMPANY, a Texas corporation (the "Company") and RICHARD O. LOONEY, an
individual residing in the State of Texas (the "Employee"). The Company and
USLS may sometimes hereinafter be referred to collectively as "Employers" or
singularly as "Employer." The Employers and Employee may sometimes hereinafter
be referred to singularly as a "Party" or collectively as the "Parties."
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Litigation Resources of America, Inc., the Company and Employee
entered into that certain employment agreement ("Employment Agreement") dated
January 17, 1997;
WHEREAS, Litigation Resources of America, Inc. changed its name to "U.S.
Legal Support, Inc." effective September 25, 1997;
WHEREAS, the Employee has been the President and Chief Executive Officer of
the Employers under the Employment Agreement since January 17, 1997 and his
knowledge of the affairs of the Company, particularly the court reporting
business in Texas and nationwide, are of great value to the Employers;
WHEREAS, in consideration of the services and knowledge of the Employee and
in consideration of Employee's agreement to an increase in the scope of the
covenant not to compete contained herein, the Company has agreed to increase the
compensation of Employee hereunder;
NOW THEREFORE, for and in consideration of the mutual covenants, promises
and undertakings hereinafter contained, the Parties hereby agree as follows:
1. In the event of the successful consummation of a public offering by
USLS of its securities for cash in an underwritten public offering registered on
the appropriate form with the SEC, then effective 12:01a.m. on the date of such
public offering, the Employment Agreement shall be amended as follows:
A. Section 4(a) of the Employment Agreement is hereby deleted in its
entirety and substituted therefore is the following:
"(a) a salary in the amount of Two Hundred Fifty Thousand and
No/100 Dollars ($250,000.00) per year
<PAGE>
effective as of the date hereof which shall be payable during the
term of this Agreement in accordance with the payroll policies of
the Employers in effect from time to time (but in no event less
frequently than monthly); and,"
B. Section 12(a) of the Employment Agreement is hereby deleted in its
entirety and substituted therefore is the following:
"(a) Employee will not in any capacity or relationship enter
into, engage in, or be connected with any business or business
operation or activity within a fifty (50) mile radius of any
office location then operated by the Employers or their
Affiliates at the time of such termination, which consists in
whole or in part of the Business of the Employers (as defined
hereinafter). For purposes of this Agreement, the "Business of
the Employers" shall be defined as the current business and all
future business of the Employers and their Affiliates, including,
but not limited to, the providing of court reporting, litigation
support services, and legal staffing services; and,"
2. Drafting. Both Parties hereto acknowledge that each Party was
actively involved in the negotiation and drafting of this Agreement and that no
law or rule of construction shall be raised or used in which the provisions of
this Agreement shall be construed in favor or against either Party hereto
because one is deemed to be the author thereof.
3. Employment Agreement. All other terms and conditions contained in the
Employment Agreement shall remain in full force and effect except as otherwise
specifically amended thereby.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date and year first above written.
THE COMPANY:
LOONEY & COMPANY,
a Texas corporation
By: /s/ Richard O. Looney
-----------------------------------
Richard O. Looney, President
-2-
<PAGE>
U.S. LEGAL SUPPORT, INC.,
a Texas corporation
By: /s/ David W. Pfleghar
------------------------------------
David W. Pfleghar
Chief Financial Officer
THE EMPLOYEE:
/s/ Richard O. Looney
---------------------------------------
Richard O. Looney
-3-
<PAGE>
EXHIBIT 10.14
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (the "Agreement"), dated
effective the 1st day of October 1997, is entered into by and among KLEIN, BURY
AND ASSOCIATES, INC., a Florida corporation (the "Company"), MICHAEL KLEIN (the
"Employee") and U.S. LEGAL SUPPORT, INC., a Texas corporation and parent
corporation of the Company (formerly "Litigation Resources of America, Inc.")
("USLS"). The Company, Employee and the USLS may sometimes hereinafter be
referred to singularly as a "Party" or collectively as the "Parties."
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company, Employee, and Litigation Resources of America, Inc.
entered into that certain employment agreement ("Employment Agreement") dated
January 17, 1997;
WHEREAS, Litigation Resources of America, Inc. changed its name to "U.S.
Legal Support, Inc." effective September 25, 1997;
WHEREAS, the Employee has been the President of the Company under the
Employment Agreement since January 17, 1997 and his knowledge of the affairs of
the Company, particularly the court reporting business in Florida and
nationwide, continue to be of great value to the Company and USLS;
WHEREAS, in consideration of the services and knowledge of the Employee and
in consideration of Employee's agreement to an increase in the scope of the
covenant not to compete contained herein, the Company has agreed to increase the
compensation of Employee hereunder.
NOW THEREFORE, for and in consideration of the mutual covenants, promises
and undertakings hereinafter contained, the Parties hereby agree as follows:
1. Section 4(a) of the Employment Agreement is hereby deleted in its
entirety and substituted therefore is the following:
"(a) a salary in the amount of One Hundred Seventy Five Thousand and
No/100 Dollars ($175,000.00) per year effective as of the date hereof
which shall be payable during the term of this Agreement in accordance
with the payroll policies of the Company in effect from time to time
(but in no event less frequently than monthly); and,"
<PAGE>
2. Drafting. Both Parties hereto acknowledge that each Party was
actively involved in the negotiation and drafting of this Agreement and that no
law or rule of construction shall be raised or used in which the provisions of
this Agreement shall be construed in favor or against either Party hereto
because one is deemed to be the author thereof.
3. Employment Agreement. All other terms and conditions contained in the
Employment Agreement shall remain in full force and effect except as otherwise
specifically amended thereby.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date and year first above written.
THE COMPANY:
KLEIN, BURY & ASSOCIATES, INC.,
a Florida corporation
By: /s/ Richard O. Looney
----------------------------------
Richard O. Looney
Chief Executive Officer
U.S. LEGAL SUPPORT, INC.,
a Texas corporation
By: /s/ Richard O. Looney
----------------------------------
Richard O. Looney
Chief Executive Officer
THE EMPLOYEE:
/s/ Michael Klein
----------------------------------------
Michael Klein
-2-
<PAGE>
March 4, 1996
CONFIDENTIAL
- ------------
Mr. Richard Looney
President
Looney & Company
650 First City Tower
1001 Fannin
Houston, Texas 77002
Dear Mr. Looney:
The GulfStar Group, Inc. ("GulfStar") welcomes the opportunity to assist
Looney & Company ("Looney" or the "Company") in the acquisition of the stock of
and/or the substantial portion of the assets of up to three companies that
provide litigation support services similar to those provided by Looney
(individually and collectively hereinafter referred to as the "Acquisition") and
in the private placement of equity financing and/or senior debt financing
("Private Placement") to be used to fund acquisitions, expansion and working
capital. GulfStar anticipates the Private Placement to be for an aggregate
amount of approximately $5 million to $10 million, the amount of which shall be
mutually agreed upon.
Set forth below are (i) the services GulfStar will perform in the course of
this assignment, (ii) the total fees and expenses payable to GulfStar in
exchange for those services and (iii) general terms and conditions of the
engagement.
1. SERVICES TO BE PROVIDED BY GULFSTAR
During the course of the assignment, we will perform the following private
placement services on behalf of the Company:
. GulfStar will assist the Company in determining an appropriate value
and structure for each acquisition.
<PAGE>
Mr. Richard Looney
March 4, 1996
Page 2
. We will also assist the negotiation of the attendant letters of intent
and in the subsequent due diligence process.
. If satisfactory terms are agreed upon, GulfStar will serve as the
Company's financial advisor throughout the process of drafting and
negotiating the necessary definitive purchase agreements.
. With the assistance of Looney, we will prepare a Confidential
Memorandum describing the Company and outlining the desired terms of
the financing.
. Once the Confidential Memorandum has been reviewed and approved by
Looney, we will contact a focused group of institutional investors who
will then receive a copy of the Confidential Memorandum only if they
express preliminary interest in the transaction.
. Subsequent to the initial circulation of the Confidential Memorandum,
GulfStar will arrange for prospective investors to meet with the
Company's management and will solicit preliminary commitments.
. We will assemble an investor group and assist the Company in
negotiating the financing on the most favorable terms available.
. If satisfactory terms are agreed upon, we will serve as the Company's
financial advisor through the process of drafting and executing a
definitive funding agreement and related documents.
. If GulfStar is requested to provide other services (e.g. additional
merger and acquisition advisory services, debt placement services,
etc.) such assignments and fees will be negotiated separately on
mutually agreeable terms.
II. FEE AND EXPENSE ARRANGEMENTS
The professional fees and expense reimbursements payable to GulfStar with
respect to this assignment are set forth below:
. GulfStar shall be paid a retainer of $25,000 ("Retainer Fee") payable
$15,000 in cash upon execution of this agreement and $10,000 upon
execution of a letter of intent to complete the Acquisition. Upon the
successful completion
<PAGE>
Mr. Richard Looney
March 4, 1996
Page 3
of the financing contemplated herein, the Retainer Fee shall be
credited against the Placement Fee (as hereinafter defined).
. GulfStar shall be paid a private placement fee ("Placement Fee") equal
to 3.0% of the principal amount of capital (equity and debt) arranged,
irrespective of the amount funded at closing, provided, however, the
minimum Placement Fee in the event that a Private Placement
transaction closes shall be $150,000. Such fee shall be payable by
Looney only in the event of a successful placement of new capital and
shall be due in cash at closing.
. GulfStar shall be paid a merger and acquisition advisory fee equal to
1.0% of the total amount of consideration paid in each Acquisition
("M&A Advisory Fee"). Such fee shall be payable in cash upon the
successful completion of the Acquisition as contemplated herein.
Notwithstanding anything to the contrary herein, the foregoing M&A
Advisory Fee shall not be payable by the Company in connection with
any transaction involving the sale of the assets or stock of Looney &
Company to an affiliate, or the purchase by Looney & Company of the
assets or stock of an affiliate. For purposes of calculating the M&A
Advisory Fee, consideration is hereby understood to include cash,
stock, long-term debt assumed, earnouts, contingent payments and
seller financing. Notwithstanding anything to the contrary, GulfStar
shall have the right, but not the obligation, to invest up to 100% of
the M&A Advisory Fee in the Company on terms identical to those of the
Private Placement contemplated herein.
. In the event that all or a substantial portion of the assets, stock or
business of the Company is acquired by or merged into another
unaffiliated company (the "Sale"), GulfStar shall be paid a sale
advisory fee equal to 2.0% of the total amount of consideration paid
in such transaction ("Sale Advisory Fee"). For purposes of calculating
the Sale Advisory Fee, consideration is hereby understood to include
cash, stock, long-term debt assumed, earnouts, contingent payments and
seller financing. Such fee shall be payable in cash upon the
successful completion of the Sale as contemplated herein. The
obligation to pay the Sale Advisory Fee shall expire in accordance
with the provisions contained in Section III(B) provided hereinbelow.
<PAGE>
Mr. Richard Looney
March 4, 1996
Page 4
. Upon closing a transaction involving the successful placement of new
capital, GulfStar shall also receive five year warrants to purchase an
amount of the Company's fully-diluted Common Stock equal to [2.5%
multiplied by (100% minus the percentage of the Company sold in the
Private Placement)]. The purchase price of these warrants will be
equal to 110% of the price used for purposes of this transaction. The
terms of such warrants will generally be equivalent to the terms used
in the equity placement contemplated herein.
. GulfStar shall be reimbursed on a monthly basis for our direct out-of-
pocket expenses reasonably incurred in connection with this
assignment, such amount not expected to exceed $10,000 in the
aggregate. In connection with the foregoing, GulfStar shall furnish
the Company written documentation of all out-of-pocket expenses that
it has incurred together with such other information that is
reasonably necessary to satisfy then applicable expense deduction
reporting requirements of the Internal Revenue Service.
III. GENERAL TERMS AND CONDITIONS
A. DEFINITION OF LOONEY & COMPANY
The terms "Looney" and the "Company", as employed herein, are
understood to include Looney & Company and all of its subsidiaries,
and affiliated companies.
B. TERM OF ENGAGEMENT
GulfStar will have the exclusive right, for an initial period of 150
days following the execution date, to serve as Looney's investment
banking representative with respect to the matters set forth herein.
Upon expiration of 150 days, the engagement shall be automatically
extended unless terminated in writing by either GulfStar or Looney.
Further, any entity contacted during the course of this assignment
will be deemed to be an interested party ("Interested Party"). The
Interested Parties will be identified by us in writing upon the
earlier of the termination or successful consummation of this
assignment. Should this assignment be terminated prior to the
completion of the transaction(s) contemplated hereby, and should the
Company subsequently complete such transaction(s) with an Interested
Party within a 12 month period following such termination, then
GulfStar
<PAGE>
Mr. Richard Looney
March 4, 1996
Page 5
shall be due full compensation under II with respect to the
participation of any Interested Parties in such financing.
C. INDEMNIFICATION
Looney agrees to indemnify and hold GulfStar (and each of its
partners, officers and employees) harmless against any losses, claims,
damages or liabilities which GulfStar may be subject to in connection
with services performed in its capacity as advisor as described in
this engagement letter and to periodically reimburse GulfStar for any
legal and other expenses reasonably incurred by GulfStar in connection
with investigating or defending any action or claim in connection
therewith, provided however, that Looney shall not be obligated under
the foregoing indemnity agreement with respect to any loss, claim,
damage or liability (or action in connection therewith) to the extent
that a court of competent jurisdiction shall have determined by final
judgment that such loss, claim, damage or liability resulted from the
willful misfeasance or gross neglect of GulfStar, and provided further
that if Looney assumes the defense of GulfStar then Looney shall not
be obligated to pay any legal fees or expenses thereafter incurred by
GulfStar, so long as there are no conflicting legal defenses or
interests between Looney and GulfStar. Looney shall not be liable for
any action settled without its consent. The indemnification and
reimbursement provided to GulfStar hereunder shall be applicable
whether or not negligence of GulfStar is alleged or proven.
D. LACK OF INDEPENDENT VERIFICATION
During the course of this assignment, GulfStar may rely upon the
opinions of experts (including, but not limited to, independent public
accounting firms) with respect to the accuracy of certain data
provided by Looney. GulfStar will make no effort to independently
verify the accuracy of any expert opinions so relied upon.
E. CONFIDENTIALITY
All non-public information supplied to GulfStar by Looney with respect
to the Company will be held in strict confidence, as we understand
that much of this information is treated as highly confidential by you
and is not normally
<PAGE>
Mr. Richard Looney
March 4, 1996
Page 6
divulged to outside sources.
F. AMENDMENTS
Both parties agree that this document can be modified or amended only
through the written agreement of GulfStar and Looney.
If the foregoing accurately sets forth your understanding of our agreement,
please so indicate by signing, dating and returning one of the enclosed copies
of this letter, while retaining the other copy for your records.
We are delighted to have the opportunity to assist you in this important
matter and we look forward to working with you in the successful completion of
this assignment.
Sincerely,
THE GULFSTAR GROUP, INC.
By: /s/ Daryl R. Swarts
-------------------------------
Daryl R. Swarts
Managing Director
ACCEPTED AND AGREED TO:
LOONEY & COMPANY
By: /s/ Richard O. Looney
---------------------------
Title: CEO
-------------------------
Date: March 4, 1996
--------------------------
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-36575) (i) of our report dated December 15, 1997, which includes an
explanatory paragraph regarding the Company's ability to continue as a going
concern, on our audit of the consolidated financial statements and financial
statement schedules of U.S. Legal Support, Inc., (ii) of our report dated
September 5, 1997, on our audits of the financial statements and financial
statement schedule of Looney & Company, (iii) of our report dated August 15,
1997 of our audits of the financial statements of Klein, Bury & Associates,
(iv) of our report dated September 4, 1997, of our audits of the financial
statements of G&G Court Reporters, (v) of our report dated September 19, 1997,
of our audits of the financial statements of San Francisco Reporting Service,
(vi) of our report dated September 5, 1997, of our audits of the financial
statements of Legal Enterprise, Inc., (vii) of our report dated August 29,
1997, of our audits of the financial statements of Elaine P. Dine, Inc.,
(viii) of our report dated September 5, 1997, of our audits of the financial
statements of Burton House, Inc. d.b.a. Ziskind, Greene, Watanabe, & Nason,
(ix) of our report dated September 5, 1997 of our audits of the financial
statements of Jilio & Associates, (x) of our report dated August 29, 1997,
except as to the information presented in Notes 4 and 6, for which the date is
September 12, 1997, of our audits of the financial statements of Reporting
Service Associates, Inc., (xi) of our report dated August 29, 1997, of our
audits of the financial statements of Kirby A. Kennedy & Associates, (xii) of
our report dated September 19, 1997 of our audits of the financial statements
of Johnson Court Reporting Group, (xiii) of our report dated October 21, 1997,
of our audits of the financial statements of Amicus One Legal Support
Services, Inc., (xiv) of our report dated September 19, 1997 of our audits of
the financial statements of Block Court Reporting, Inc., and (xv) of our
report dated September 22, 1997, of our audits of the financial statements of
Commander Wilson, Inc. We also consent to the references to our firm under the
caption "Experts."
COOPERS & LYBRAND L.L.P.
Houston, Texas
December 17, 1997
