<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
10-KSB/A
(Dated May 4, 1998)
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Calendar Year Ended December 31, 1997
Commission File Number: 0-9969
CENTURY INDUSTRIES, INC.
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(Exact name of Registrant as specified in its charter)
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<S> <C>
District of Columbia 54-1666769
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
45034 Underwood Lane
Sterling, Va. 20166
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (703) 471-7606.
Securities registered pursuant to Section 12 (b) of the Act: Common Stock, par
value $.001 per share
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<S> <C>
Name of each exchange on
Title of each class which registered
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Century Industries, Inc. Class A common Philadelphia Stock Exchange-PHLX
Century Industries, Inc. Class B common Philadelphia Stock Exchange-PHLX
</TABLE>
Securities registered pursuant to Section 12 (g) of the Act: Common
Stock, par value $.001 per share
<TABLE>
<S> <C>
Name of each exchange on
Title of each class which registered
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Century Industries, inc. Class A Common NASDAQ Bulletin Board
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
<TABLE>
<S> <C>
(1) Yes X No ____
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(2) Yes X No ____
----
</TABLE>
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B, and no disclosure will be contained in any amendment to
this Form 10-KSB. X
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Issuer's consolidated revenues for 1997 were $ 14,862,366.
The aggregate market value of the 5,038,816 common voting shares of Class
A and Class B stock held by non-affiliates based upon sales of the Company's
shares within the 60 days prior to December 31, 1997 at the average of the
bid/asked of $2.50 was $12,709,540. The total Class A common voting shares
outstanding at December 31, 1997 were 3,373,000 and the total Class B common
voting shares outstanding at December 31, 1997 were 4,173,000 for a total
outstanding of all classes of 7,546,000 shares outstanding.
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PART I
Item 1. Description of Business
Century Industries, Inc. (Holding Company)
The application for incorporation of Century Industries, Inc. ("the Company")
was filed in the District of Columbia on a de facto basis in December, 1992,
and the certificate of incorporation was issued in March, 1993. The company was
formed to acquire Century Steel Products, Inc. ("CSP") as its principal
subsidiary.
On April 22, 1993 the Company completed a statutory merger with its subsidiary,
Alpha Energy & Gold, Ltd. ("Alpha"), a Securities and Exchange Commission fully
reporting 12 (g) company listed on the NASDAQ Bulletin Board. This transaction
has been accounted for as a statutory merger, with the Company as the survivor.
The Company additionally acquired U.S. Insurance Brokers, Inc. ("USIB") in
1995, and DC Partners, Ltd. and its wholly owned subsidiary, Scibal Associates,
Inc., in 1996. The Company acquired USIB 1,000,000 shares of convertible
preferred stock convertible to 1,000,000 shares of Class A common stock of the
Company, and acquired DCP/Scibal for $1,700,000 cash, 820,000 shares of Class A
stock a warrant for 727,273 shares of Class B stock and a warrant for 50,000
shares of Class A stock exercisable at $1.25 per share. The cash for the DCP
acquisition was provided through a privately placed Regulation D convertible
preferred stock offering of the Company's USIB subsidiary, convertible to Class
B common shares of the Company. The Company has exchanged Class B shares for
that convertible preferred stock.
The Company's affiliate, USIB Holdings LP, subsequently exchanged during 1997 a
20% interest in the Partnership with David Scibal, the original shareholder of
DCP/Scibal, for his 727,273 Class B warrants. The Company's subsidiary, USIB,
is the General Partner of USIB Holdings LP.
The Company's Class A shares were listed on the Philadelphia Stock Exchange in
October, 1997, and the Company promptly filed a Form 10-SB covering the
Company's Class B shares which were to be exchanged with the USIB private
preferred shareholders. Upon the effective date of the Form 10-SB filing, the
Company exchanged its Class B common shares for the convertible preferred
shares of its USIB subsidiary in order to provide exchange listed shares to the
private USIB shareholders. Consistent with that exchange, the Company retained
two NASD member firms to assist the Class B shareholders with the sale of their
shares.
The Company essentially functions as a public holding company for its operating
subsidiaries, without any operations of its own, other than obligations to pay
its legal, accounting, and stock transfer agent expenses, and provide
acquisition and shareholder related record keeping responsibilities and
concomitant incurred costs on behalf of its subsidiaries, which are defrayed
through management fees charged to its subsidiaries. These functions and
responsibilities are generally associated with the Company's fully reporting
and disclosure requirements.
Other Equity Line Limited Partnership Investments in Non Consolidated Limited
Partnerships
The Company has an investment in the Roc Shores/Century Industries Limited
Partnership, a District of Columbia Limited Partnership, wherein the Company's
interest is 45%. The partnership was formed in 1997 to purchase and own
Century (Overseas) Insurance Co., S.A., a Dominican Republic captive insurance
company, which purchase has been effected. The insurance captive has appointed
US Insurance Brokers, Inc. as its Managing General Agent for the USA. The
General Partner is Roc Shores Investments, Ltd. The captive insurance company
is presently in its development stage.
The Company's subsidiary, Century Steel Products, Inc., has a 45% interest in
the Partnership Management Corporation/Century Steel Products Limited
Partnership, formed between Century Steel Products and Bainbridge Construction
Co., a Class A licensed Virginia general contractor. Partnership Management
Corp. is the General Partner. The partnership is constructing a private School
in Springfield, Virginia, using Century Steel's products. The partnership has
leased office and warehouse space from Century Steel. The partnership had
revenues exceeding $220,000 for the 4th quarter 1997.
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These investments are not significant in that they represent less than 10% of
the Company's or its applicable subsidiary's assets and any share of the
limited partnership income therefrom presently represents less than 10% of the
Company's revenues.
A detailed description of the business of the subsidiaries is as follows:
Century Steel Products, Inc.
The Company's steel fabricating subsidiary was founded in Sterling, Va., at its
present address in 1979, in the vicinity of Dulles Airport. Additional
equipment was purchased over subsequent periods from the sale of privately
placed shares to four shareholders and from profits. In 1989 CSP repurchased
all but 16% of CSP's shares, which are owned by one shareholder, a partner in
Superior Steel Co., which shares an industrial building with CSP and buys CSP
steel products.
In 1992 CSP began bidding on several "site installation fabrication projects",
and business again began to increase. Heretofore CSP was a supplier of steel
products to subcontractors who bid those projects. In this instance CSP seized
the opportunity to become the subcontractor as well as the fabricator, to gain
an additional profit margin. The demand for fabricated steel product has
remained strong.
Products and Markets
Century Steel Products, Inc. ("CSP") is primarily engaged in fabricating
(manufacturing) and selling various specialty steel products. CSP's steel
products are used in the public utilities, automotive, railway equipment,
commercial and residential building industries. U.S. Government contractors
also use CSP's products in the metro D.C. area. The Company numbers public
utilities and Fortune 500 General Contractors among its customer base. Those
products consist of pre engineered parts fabricated from design criteria
supplied by the CSP's customers.
CSP's markets are the commercial and residential construction industries, and
"warehouse" miscellaneous industries such as EPA mandated products (under
ground steel tank accessories), military training devices (bomb shelters and
flight simulators), stadium bleachers, and concrete block pallets.
Sales and Distribution
CSP markets its products and services, both domestically and internationally,
through its own direct in house marketing sales department.
CSP's primary marketing area is east of the Mississippi River. Distribution is
facilitated via interstate trucking; therefore, markets west of the Mississippi
are not freight cost effective.
Warehouse steel products for the various industries are generally sold on
demand rather than through contractual arrangements. Fabricated "fabricate
and install" products are sold through contracts executed after CSP 's bid has
been accepted.
Other steel products are sold to general contractors and installed by CSP on
construction projects, through contractual arrangements.
Competition and Economic Conditions
Much of the CSP's business is directly related to the commercial and
residential construction industry.
CSP's products are sold in highly competitive markets, and its sales and
earnings can be affected by changes in competitive prices, fluctuations in the
level of activity in major markets or economic conditions in general. CSP is in
a geographical region where steel markets have not been as dramatically
affected during the recent recession as other regions.
CSP's competitors offer a wide range of specialty steel products. No single
competitor dominates the product line or market for the Company's products, and
customers consistently shop for price and delivery dates.
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CSP is very competitive in price, service and has always been known for the
quality of its products.
Raw Materials
The majority of raw materials used by CSP are manufactured by all of the large
producing domestic steel mills. The steel is purchased directly from mills,
stocking warehouses and/or brokers.
CSP has no principal supplier, per se, and is not dependent on one or few
suppliers, since standard grade steel is available through literally hundreds
of suppliers.
Management does not anticipate significant price increases for its raw
materials resulting from supply shortages or other causes. Cost increases
historically have been passed on in the form of higher prices. There can be no
assurance that such cost increases will always result in corresponding price
increases.
Customer Base
CSP is not dependent on any major or a few major customers; all purchase orders
received are the result of a bidding process. CSP's success in being the lowest
bidder on a consistent basis with several major contractors has created a
substantial repeat business. There has been no dependency as such on any major
supplier(s).
Government Regulations
Management believes that CSP is in compliance with all applicable federal,
state and local laws and regulations. CSP is not engaged in the discharge of
any materials into the environment, and is not subject to any existing or
probable government regulations other than the normal OSHA in plant
regulations. No government approval is needed for its principal products or
operations.
Research and Development
CSP has not spent any funds on R&D in the past two years, other than specific
research required in connection with the fabrication of a customer's order.
This is generally limited to detailed drawings, or a search for a particular
grade, size or quality of steel raw material.
Manufacturing and Quality Control
Steel is purchased by weight, therefore CSP operates its own 100,000 lb. state
certified in ground truck scale which accords CSP precise control over the cost
of its purchases. CSP further operates a 60,000 lb. overhead crane, which
allows CSP to purchase steel coils directly from the mills. This enables large
single tonnages of steel to be purchased from mills at discount volume prices.
A central element of CSP's competitive strategy in fabricating steel
products is a highly integrated manufacturing operation. This process begins
with leveling steel coils, at weights in excess of 30 tons (60,000 lbs.) to
specific customer length requirements. This steel can then be relocated within
the plant by one of seven overhead cranes to the shearing stations. At CSP's
facility, steel up to 3/4" of an inch thick can be precision cut to smaller
component shapes, within .0625" precision tolerances of a customer's
requirements. The steel will then be moved to one of the press stations, where
operations vary from simple cold forming at 90 degree angles, to the
utilization of a 650 ton press for multi hole locations and intricate forming
to varying degrees. Finally, material can be painted and loaded for delivery.
Fabricated steel products which are to be produced for subcontracted projects
first require the making of detailed drawings which are extrapolated from the
general architectural blueprints. Once the detailed drawings are approved for
fabrication by the architect and Chief Engineer, CSP can begin fabrication.
CSP exercises quality control over each step of the fabrication process. Each
product undergoes numerous quality control checks during cutting, bending,
welding, drilling and painting. Finished products are subjected to further
testing.
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Employees
CSP employs approximately 40 persons. CSP is a merit shop (non union), and as
such is not vulnerable to union demands or the possibility of strike. In an
industry plagued with high employee turnover, management is proud of the fact
that the average length of employment of CSP personnel is 10 years, and that
employee loyalty is substantial.
Operating Risks and Insurance
CSP maintains public liability, property damage and occupational workmen's
compensation accident policies. Although in the opinion of management the
limits of its insurance coverage against the inherent risks of its business and
a catastrophic incident are in accordance with industry practice, such
insurance may not be adequate to protect CSP against liability or losses
accruing from all the consequences of any catastrophic incident. The occurrence
of an event not fully covered by insurance and a determination of liability
for the consequent loss of damage could result in substantial losses to CSP and
have a material adverse effect upon its financial condition and results of
operations.
Effects of Environmental Laws
The federal and state environmental laws have not affected CSP. CSP is however
regulated by OSHA, and CSP is in full compliance with all OSHA inspections.
Limited Partnership Investment
In 1997 CSP acquired a 45% profit sharing interest in the Partnership
Management Corporation/Century Steel Products Limited Partnership in the
District of Columbia. Partnership Management Corporation is the General
Partner, and its affiliate, Bainbridge Construction Co., Inc., a Class A
licensed Virginia General Contractor is the other Limited Partner. The LP
commenced the construction of the Accotink School in the 3rd quarter 1997, and
realized revenues exceeding $200,000 during the 4th quarter. CSP leases office
and warehouse space to the Partnership Management/Century Steel, LP at its
premises, and CSP has sold its equity in its fabrication equipment to this
limited partnership and leased it back for its own production runs. CSP's
investment is less than 10% of its assets, and is therefore insignificant.
U.S. Insurance Brokers, Inc. (USIB)
In 1995 the Company acquired U.S. Insurance Brokers, Inc. ("USIB") located in
Washington, DC. USIB merged with DC Partners, Ltd. (DCP) In the 4th quarter of
1997, with USIB surviving as the owner of Scibal Associates, Inc., DCP's
subsidiary. USIB is, on its own, a development stage company which (I) plans to
market all lines of insurance to members and employees of national membership
based associations, and (2) plans to act as the Managing General Agency for a
new casualty insurance company to be owned by the Company and formed in the
State of Florida to participate in the Florida Joint Underwriting Association
homeowner TakeOut Program.
Products and Markets
USIB is a full service insurance agent/broker formed in the District of
Columbia in 1995 to provide life, health, auto and homeowners insurance to
members of national associations. To date, those plans have yet to materialize.
USIB is actively seeking to provide coverage for individual lumber dealers, and
various environmental groups/associations.
USIB has formed Limited Partnerships with its national association partners, in
order that USIB as the General Partner can share the profits earned through
insurance sales with its association Limited partners on insurance sold to
their members.
The insurance sales of USIB are still in the development stage. It has obtained
its marketing agreements, agency appointments by insurers, hardware and
software, and has retained operating personnel. It has generated a small
amount of sales, and is in the process of implementing its sales programs. The
implementation for the NLBMDA includes obtaining lower program rates for the
members and employees from national insurance carriers, and preparing
competitive quotes for members which request them.
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Sales and Distribution
The associations will advertise USIB's products to their members through
newsletters and direct mail. The members will call an "800" number at USIB to
obtain insurance quotes. When the member purchases insurance, the policies will
be issued by the insurance carriers, and all direct billing is performed by the
carriers. The carriers then pay USIB a pre arranged commission.
Customer Base
USIB's present potential customer base through the Korean American Grocers
Association ("KAGRO") and the National Lumber and Building Material Dealers
Association ("NLBMDA") is 375,000 members and their employees.
Business Regulation
The insurance industry is highly regulated. All agencies must be licensed in
every state where they solicit insurance sales, and each agent soliciting for
the agency must be licensed in each state where he or she solicits on behalf of
the agency. On association group term life insurance sales, master policies are
utilized and certificates of insurance are issued to members. Health insurance
is sold by licensed life agents. Many states require the posting of a bond by
casualty agents. USIB is a licensed life and casualty broker in the District of
Columbia, and its agents are licensed in the District of Columbia and several
other states.
Employees
USIB hires its agents as independent contractors on a commission basis, as is
standard in the insurance agency industry. Underwriting, bookkeeping, legal
and accounting and other services are performed by consultants and outside
professionals. USIB has no statutory employees.
Quality Control
Once a customer receives an acceptable quote, the customer will send in his or
her premium, and the coverage is bound through the issuance of a binder. The
premium is remitted to the insurance carrier. Both the agent and carrier keep
comparable records. There is very little margin for error, due to each agent
being licensed and bonded.
Operating Risks
USIB's marketing agreements with its limited partner associations are effective
initially for 5 year periods, and are renewable upon agreement by the parties.
Errors and Omissions policies are in place, covering fraud, inadvertent
mistakes, and potential liability from customer lawsuits. No assurance is ever
given with respect to premium sales, which are based on the rates and benefits
provided by the various insurance carriers. Carriers traditionally raise rates
when claims exceed acceptable standards. If risk management practices did not
effectively minimize claims, and the carriers raised rates beyond competitive
marketplace levels, business would inevitably dwindle.
General
USIB is a general insurance agent. As part of its ordinary course of business,
USIB enters into agency agreements with life, health, and property and casualty
insurance companies to sell insurance policies. Under the agency agreements,
the unaffiliated insurance companies will pay USIB commissions for policies
sold. These agency agreements allow USIB to initiate and maintain
relationships with customers and to continue these relationships following
termination of the agency agreements. USIB is a licensed and regulated
insurance agent in the District of Columbia, and is in the application process
of being licensed and regulated as an insurance agent and broker in 46 other
states.
USIB was formed to sell, as an insurance agent, all lines of life, health and
casualty insurance products to members of various trade associations, credit
unions and other membership based organizations (the
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"Associations"). USIB's business plan is to make all consumer lines of
insurance coverage available to National Association members at the lowest
rates available in the country on a nationwide basis.
USIB will also act as the Managing General Agent for the Company's proposed new
Florida casualty insurance company.
USIB's 1998 Additional Business Plan
Century Industries has entered into 2 Letters of Intent with an NASD member
firm, the first of which offers a Private Placement of $7,000,000 of preferred
stock, and in the second instance a public offering of $12-$15,000,000 of
preferred stock. The proceeds of the Private Placement are earmarked for the
capitalization of a new Florida Insurance Company, which will take advantage of
the Florida Joint Underwriting Association's HomeOwners TakeOut Program
described elsewhere herein. USIB will be the Managing General Agency (MGA) for
the new Florida insurance subsidiary.
The $40,000,000 first year revenue projections for the new Florida insurance
subsidiary provide for a $2,000,000 service fee for USIB as the MGA. USIB will
facilitate the liaison and agency plant supervision for the Florida insurance
agents providing the sales for the Florida insurance subsidiary. USIB will also
be responsible for cross marketing the sale of other insurance products to the
Florida home owners it will already be insuring. These products will include
automobile and accident & health insurance.
USIB, organized in April 1995 under the laws of the District of Columbia, has
its principal executive offices at 1155 Connecticut Ave., N.W., Suite 300,
Washington, D.C., 20036 and its telephone number is (202) 965-6555. It has
administrative offices at 11708 Bowman Green Drive, Reston, Virginia 20190.
Business Operations
Since its inception, USIB's primary business operations have consisted of
negotiations with various insurance companies for the purpose of establishing
agency relationships with such insurance companies, and have also consisted of
negotiations with various Associations for the purpose of establishing and
entering into partnership arrangements with such Associations. The Associations
must review the partnership documents, and the Associations' membership
demographics must be presented to the various insurance carriers for loss
projection actuarial workups. In many instances, insurers file various rate
reductions on an ad hoc basis for various Associations, a process which is
permitted in most states only for Association members.
Competition
USIB believes that its competition is from insurance carriers rather than other
insurance agents. Insurance companies have historically reserved the right,
with their agents, to write Association insurance business on a direct basis.
The insurance companies market the coverage to Association members themselves
through telephone and direct mail campaigns, with very little interaction from
the Associations. USIB believes that few insurers have well organized
Association marketing programs.
Individual insurers can only market their own individual life, health or
automobile/homeowner products one at a time, rather than providing a
"supermarket" of life/health/casualty products. Life insurance companies are
chartered and licensed to write life and health insurance products; and
casualty companies are chartered and licensed to write automobile/homeowners
insurance products. Life insurers do not write automobile insurance policies,
nor do automobile companies write life insurance policies. These insurers
seldom cooperate with one another.
Facilities
USIB's downtown corporate service offices are located in a facility leased by
the Company in Washington, D.C. USIB shares administrative space with the
Company at 11708 Bowman Green Drive, Reston, VA. USIB believes that its
current corporate offices and administrative space are sufficient for its
present needs, as it will provide space for 10 agents and administrative
personnel.
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The insurance departments also require that the various insurance carriers
represented by USIB appoint USIB with the various state insurance departments.
All insurance agents are regulated by the states, rather than the federal
government. State regulation provides for licensing of insurance agents, the
setting of rates and commissions, and insurance company and agency/agent
conduct and practices. To date, USIB is corporately and individually licensed
to do business in Virginia, Maryland, North Carolina, Wisconsin and Tennessee.
USIB Holdings, LP
USIB Holdings LP was formed in 1997 for the purpose of acting as an insurance
holding entity for the acquisition of Reinsurance Corporation of America (RCA)
and/or the formation of the new proposed Florida insurance subsidiary which
management plans to have participate in the State's JUA Homeowners TakeOut
Program.
This entity was formed as a Limited Partnership, with USIB as its General
Partner, in order that the Company could, through this entity, utilize David
Scibal's 727,273 Class B warrants, which he contributed as capital to the LP,
as consideration for the go forward business plan as capital. Mr. Scibal, in
effect, was willing to participate in the go forward profits as a 20% investor
rather than exercise and sell the Class B shares underlying his warrant based
upon his demand registration rights which originally attached to his warrants.
It is standard practice in the insurance industry today to operate an insurance
holding entity when owning an insurance company subsidiary, as legislation
enacted through various states and codified through the administrative
regulations of the NAIC (National Association of Insurance Commissioners) has
provided for such formations and the application of those rules in practice has
proven favorable to the industry.
The limited partnership will also provide favorable tax advantages to the
Company in that earnings upstreamed to the holding entity by the proposed
insurance company can be upstreamed to the Company without being taxed in the
holding entity (USIB Holdings, LP) prior to being booked as consolidated income
by the parent holding company, Century Industries, Inc.
The USIB Holdings, LP is being managed and operated by USIB as its General
Partner, and thus the information regarding USIB as explained herein will again
satisfy most of the informational requirements of the USIB Holdings, LP.
Property/casualty Industry Overview
The property/casualty insurance business is comprised of about 3,900 individual
insurance companies operating in a highly competitive environment. Although
about 900 of those companies write most of the business, no single company or
group has more than 15% of the market, and the 10 largest companies account for
less than 45% of the market. The industry employs over 600,000 persons in
company headquarters, and also over 650,000 persons are engaged in agency or
brokerage operations. USIB is part of this latter group. As such, it is a
member of a very large industry sector offering almost unlimited growth
potential.
The Insurance Services Office, Inc. ("ISO"), an industry research organization,
through its Fast Track Monitoring System and other analysis operations, has
demonstrated that a given year's premium production is primarily a function of
two trends; the rate of increase in the Gross National Product (ISO Report; As
Gross National Product (GNP) increased, premiums increased at a greater rate")
and the impact of the current underwriting cycle.
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Over the past twenty five years the findings of the ISO have generally held
true. In particular, in periods of strong economic activity the growth in
premium production has greatly exceeded the growth in GNP. In weaker economies
its has even lagged the GNP growth rate. Focusing on the mid-1970's and
mid-1980's, when there was strong economic climates, this tendency is
illustrated as follows:
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YEAR PREMIUM % INCREASE GNP % INCREASE
($ MIL) ($ BIL)
<S> <C> <C> <C> <C>
1970 $ 32,578 12.3% $ 1,107 5.2%
1975 49,605 11.0% 1,599 8.5%
1980 95,702 6.1% 2,742 8.8%
1985 144,860 22.2% 4,054 6.6%
1990 218,100 4.4% 5,524 5.3%
1993 241,691 5.9%
</TABLE>
The concept of the existence and impact of underwriting cycles in the
property/casualty business is firmly accepted after many decades of experience.
The cycles generally last somewhere between 5 and 10 years. They are measured
by the industry's combined loss ratios (claims plus expenses, as a percent of
premiums). Briefly, in a competitive industry: prices tend to drop as
individual companies fill their appetites for market share; companies then
generate insufficient net income as prices reach a "trough"; prices tend to
rise until a "peak" is reached; at this point market share drops for those
companies having the higher prices; in order to restore market share prices are
reduced and another cycle is triggered.
The industry entered a trough in 1987, which became a peak in 1992 which is
still persisting mid way between a peak and a trough. This is a favorable
condition for USIB, as it can offer reduced rates to its client association
members, through its major insurance carriers. The peak factor, combined with
the "mainstream" geographical demographics of the Association members which are
not located in or near inner cities in 46 states, should produce low combined
ratios for casualty insurers There is no concentration of members in "multi
peril" states, nor in coastal areas where earthquakes and hurricanes are
potentially prevalent.
Insurance Agency/Brokerage Revenue
The top ten publicly traded insurance brokerage organizations are listed below,
as information about them is readily obtainable. Their statistics clarify the
large volume numbers associated with Program Insurance Contracts, and are
indicative of the state of the industry.
<TABLE>
<CAPTION>
Market
Revenue Value P/E P/B ROE
Company 1993 (1993) 1993 1993 1993
- ------- ---- ------ ---- ---- ----
($mil)
<S> <C> <C> <C> <C> <C>
Accordia $ 258 $ 364 12.8 1.98 17.8%
Alexander &
Alexander 1,300 892 NK 3.23 8.7%
Blanch, E.W. 62 318 20.2 4.95 25.5%
A.J. Gallagher 318 494 19.5 5.05 28.6%
Hilb, Regal &
Hamilton 135 172 20.7 2.54 15.7%
Marsh &
McLennan 3,200 6,291 18.0 4.42 27.0%
Willis Coroon 1,500 959 25.7 .98 NA
</TABLE>
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Outlook
Net premiums written by the property/casualty insurance industry in 1993 were
$242 billion. Of that total about 50% was personal lines coverage. Of that $120
billion, $85 billion (over 70%) was written by agencies, as opposed to direct
writers i.e. GEICO.
U.S. Insurance Brokers, Inc. and its wholly owned subsidiary,
Scibal Associates, Inc.
In 1996 USIB acquired DC Partners, Ltd. (DCP), in Somers Point, NJ. Scibal
Associates, Inc., (Scibal) the wholly owned subsidiary, is a third party
insurance claims administrator (TPA) , adjusting and settling claims for both
insurance companies and self insured companies and institutions. Scibal adjusts
in excess of $80,000,000 of claims annually. USIB merged with DCP in 1997, with
USIB surviving as Scibal's parent company.
Products and Markets
Scibal has been in business for 45 years, and specializes in workers
compensation and all phases of commercial liability claims administration. In
administering these programs, Scibal offers its customers a full range of
services, including claims adjusting and administration, risk management as
well as the full complement of reporting required for both program management
by the customer as well as for regulatory compliance.
Workers Compensation and liability payments total in the tens of billions each
year, and the number of entities which are self insuring and administering this
aspect of their operations continues to grow. With its dual IBM AS 400 computer
systems running internally developed proprietary claims administration and
reporting software, Scibal is well positioned to add new customers.
Customer Base
The customer base of Scibal Associates consists of municipal and other
government-related entities, primarily in New Jersey, as well as an expanding
base of national and regional industrial, retail and service corporations. A
representative list of Scibal's clients includes Temple University, Masco
Corporation, Sequa Corporation, Burlington Coat Factory Warehouse Corporation,
Sentinel Real Estate and the Jacksonville Jaguars football team organization.
Scibal has one customer whose billings comprise approximately 23% of total
revenue. The balance of Scibal's customers are comprised of clients of long
standing, no one of which is significant to the company. After year end, 1997,
Scibal's largest customer moved a portion of their contract, comprising
approximately $800,000 in revenue. However, this also eliminated significant
servicing costs, so the impact on net income, if any, is not material. Being a
service provider, there is no dependence on any major supplier.
Sales and Distribution
Sales are conducted primarily through its CEO, David Scibal. Mr. Scibal
generates sales through both personal contact and referrals from existing
customers, as well as through extensive contacts with both insurance companies
and brokers.
Competition and Economic Conditions
While competition in the claims administration industry is substantial, it has
evolved in the 90's into an industry where the administrator must be hardware
and software intensive. The software must be developed internally and becomes
extremely proprietary. Scibal has the capacity to produce excellent and
"cutting edge" claims administration software and is very competitive with
other TPAs. Additionally, it has its 44 year track record of performance and
integrity in its operations and results on behalf of its clients, and is
approved to handle imprest funds for its clients.
Scibal has an experienced staff of computer programmers. These programmers are
continuously improving and enhancing the proprietary claims handling software.
Additionally, there is an effort underway at the company to
-10-
<PAGE> 11
write the "next generation" of software, which will take advantage of Internet
access, electronic claims reporting, and data warehousing for its customers.
The new system will enable the company to better leverage its adjusters against
case loads, which will lead to higher profit margins while maintaining
competitive pricing. The features and functionality offered are singular, which
should provide Scibal with a substantial sales advantage in the near future.
Business Regulations
Management believes that Scibal is in compliance with all applicable federal,
state and local laws and regulations. No federal government approval is needed
for its principal services, although various states require registration and
licensing of insurance services providers. Scibal is in compliance with all
such local requirements.
Research and Development
Scibal has an experienced staff of computer programmers. These programmers are
continuously improving and enhancing the proprietary claims handling software.
Additionally, there is an effort underway at the company to write the "next
generation" of software, which will take advantage of Internet access,
electronic claims reporting, and data warehousing for its customers. The new
system will enable the company to better leverage its adjusters against case
loads, which will lead to higher profit margins while maintaining competitive
pricing. The features and functionality offered are singular, which should
provide Scibal with a substantial sales advantage in the near future.
Employees
Scibal employs approximately 120 persons. None of the employees are represented
by labor unions so the company is not vulnerable to union demands or the threat
of a strike. Employee turnover is at a rate consistent with or lower than the
industry average, with a majority of the employees having been with the company
for more than three years.
Operating Risks and Insurance
Scibal maintains substantial public liability, property damage, workers'
compensation, employee fidelity and errors and omissions insurance. Insurance
levels are not only maintained at the levels deemed prudent by management, but
also meet the conservative requirements of its customers.
USIB Holdings Limited Partnership
The USIB Holdings Limited Partnership was formed in 1997 to act as an insurance
holding limited partnership for the acquisition of Reinsurance Corporation of
America, and/or to form a new Florida casualty insurance company so as to
participate in the State of Florida Joint Underwriting Association (JUA)
Homeowners TakeOut Program. USIB is the General Partner and David Scibal is a
Limited Partner. The limited partnership was capitalized through the capital
contribution of David Scibal's 727,273 Class B warrants, valued at $1,192,000,
received as consideration from the sale of Scibal Associates to the Company,
and a capital contribution of $808,000 by the Company. The $808,000 was
subsequently invested by the LP into Scibal Associates, Inc. The Company is
obligated to make the further contributions to the Limited Partnership required
to finance the future acquisitions, through the sale of securities.
The transaction was non-dilutive in that Management can now either cancel the
Class B warrants originally issued to Mr. Scibal, or apply them to future Class
B stock issuances used as consideration for funds which may be applied to the
Company's growth.
Mr. Scibal will participate to the extent of 20% of any future limited
partnership profits, and the Company will receive 80%. However, Mr. Scibal's
equity ownership is limited to 1% and the Company retained 99%.
Other Equity Line Limited Partnership Investments
The Company has an investment in the Roc Shores/Century Industries, Inc.
Limited Partnership, a District of Columbia Limited Partnership, wherein its
interest is 45%. This LP was formed in 1997 to purchase and own Century
(Overseas) Insurance Co., S.A., a Dominican Republic captive insurance company,
which purchase has been
-11-
<PAGE> 12
effected. The insurance captive has appointed U.S. Insurance Brokers, Inc. as
its Managing General Agent for the USA. The General Partner is Roc Shores
Investments, Ltd. The insurance company is presently in its development stage.
The Company's subsidiary, Century Steel Products, Inc., has a 45% interest in
the Partnership Management Corporation/Century Steel Products Limited
Partnership, formed between Century Steel and Bainbridge Construction Co.,
Inc., a Class A licensed Virginia General Contractor. Partnership Management
Corporation is the General Partner. The LP is constructing the Accotink School
in Springfield, VA, using Century Steel's products. The LP has leased office
and warehouse space from Century Steel. Century Steel has sold its equity in
its heavy equipment to the LP and has leased its necessary production capacity
back. The LP had revenues exceeding $220,000 for the 4th quarter 1997.
These investments are not significant in that they represent less than 10% of
the Company's assets and any share of the limited partnership income therefrom
represents less than 10% of the Company's revenues.
ITEM 2. DESCRIPTION OF PROPERTY
CSP Plant Facility
CSP operates a reasonably new, clean 50,000 sq. ft. facility at Sterling
Industrial Park in Sterling, Va. The premises are leased from the BMH&G Limited
Partnership. There is substantial parking, and the facility is in a somewhat
rural area adjacent to the Town of Sterling, providing a pleasant working area.
Management believes that CSP's plant facility, including its manufacturing
machinery and equipment, are adequately maintained and suitable for their
intended uses.
USIB Office Facilities
USIB operates its offices at 1155 Connecticut Ave. N.W. Suite 300, Washington,
DC, 20036, and 11708 Bowman Green Drive, Reston, VA 20190. Management believes
that USIB's facilities are suitable and adequate for their intended uses.
Scibal operates its leased headquarters offices at 23 Mays Landing Road, Somers
Point, NJ. DCP also has leased field offices in Edison, NJ, Philadelphia, PA,
Detroit, MI, Richmond, VA and Jacksonville, FL. Management believes that DCP's
facilities are suitable and adequate for their intended uses.
ITEM 3. LEGAL PROCEEDINGS
Century Industries has no pending litigation.
CSP has no pending litigation.
USIB has no pending litigation.
USIB Holdings LP has no pending litigation.
Scibal Associates, Inc. has no pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company timely mailed its information statement to all shareholders of
record through its transfer agent, advising them of the date and place for the
annual meeting.
The Company held its annual meeting on December 29, 1997, and the directors,
Ted L. Schwartzbeck, Joel Gundersheimer, David Scibal, Jay Pignatello and
Joseph DeAlessandro were elected for the coming year.
The shareholders also ratified and approved a) the possible acquisition of
Reinsurance Corporation of America Insurance Company (RCA) or a viable
substitute, b) the formation and capitalization of a Florida insurance
subsidiary to participate in the Florida JUA homeowners TakeOut Program, c) an
amendment to the Company's Charter providing for the authorization of
2,500,000 Senior Callable Convertible Preferred shares and further
-12-
<PAGE> 13
ratification of the issuance of up to 2,500,000 of those shares to finance the
RCA and/or Florida insurance subsidiary. There were 2,840,000 affirmative votes
in favor of the acquisition out of 3,372,680 Class A voting shares outstanding
at that date. No negative votes were cast.
Part II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's shares trade on the Philadelphia Stock Exchange under
symbols CII.A and CII.B. The range of bid/asked information for the Company's
common voting shares for each quarter of the last two years, as reported by the
Philadelphia Stock Exchange and the NASDAQ OTC:BB are as follows:
<TABLE>
<CAPTION>
Bid Asked Bid Asked
------------ ------------
<S> <C> <C> <C> <C> <C>
1st Qtr 1997 2.75 3.25 1st Qtr 1996 .50 .65
2nd Qtr 1997 2.75 3.35 2nd Qtr 1996 1.00 1.25
3rd Qtr 1997 2.75 3.25 3rd Qtr 1996 1.75 2.00
4th Qtr 1997 1.75 3.00 4th Qtr 1996 3.00 3.25
</TABLE>
There are approximately 1124 stockholders who own the Class A shares, and
There are approximately 287 stockholders who own the Class B shares.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION.
PLAN OF OPERATION
The Company has sufficient cash to sustain its operations for the next 12
months. Its operating subsidiaries, CSP and USIB/Scibal are profitable.
CSP's and Scibal's management teams expect to increase their revenues and
earnings substantially in 1997; USIB has been able to reverse its development
stage losses in 1996 through its merger with DCP and through Scibal's
consolidated revenues and earnings in 1997. Management continues to believe
that the relatively small amount of its development stage investment in USIB
compared to the potential earnings available is a sound one.
The Company's focus for 1998 is its formation and capitalization of a new
Florida insurance company to take advantage of the State of Florida JUA home
owners insurance TakeOut Program.
The USIB Holdings LP subsequently invested an additional $808,000 into Scibal
Associates as additional capitalization. These proceeds funded an additional
$600,000 capital infusion into Century Steel Products, Inc., in order to
finance its increased sales for 1997. These proceeds also provided the $300,000
which the Company invested in the Roc Shores/Century Industries LP, in order
that the USIB subsidiary would have the USA marketing rights for Century
(Overseas) Insurance Company. S.A. and the Company would additionally share in
45% of the LP's projected profits. The Company also expended funds to cover
its legal, auditing and compliance expenses, and USIB's development expenses,
as well as listing costs for the Philadelphia Stock Exchange.
The Company further expended the costs associated with the retention of
investment bankers and investor relations firms to profile the Company's
shares, and the listing costs associated with having its securities approved
for listing on the Philadelphia Stock Exchange. The Company filed a Form 10-SB
covering its Class B shares which was declared effective by the S.E.C. in
October, 1997, and subsequently entered into agreements with two NASD member
firms to assist its Class B shareholders with the sale of their shares pursuant
to Rule 144.
On March 5, 1998, the Company entered into two Letters of Intent with an NASD
member firm. The first letter of intent covers a $7,000,000 private placement
of Senior Callable Convertible Preferred shares, the proceeds of which are
earmarked to fund the formation and capitalization of the proposed new Florida
insurance company.
-13-
<PAGE> 14
The second letter of intent covers a public offering of an additional
$12,000,000 to $15,000,000 of Senior Callable Convertible Preferred shares, the
proceeds of which are generally to be used for further insurance related
acquisitions.
Management projects that the proposed Florida insurance company will earn
substantial revenues of its own, while providing Scibal Associates with
additional claims adjustment revenues, and USIB with service fees as the
insurance company's Managing General Agent.
The proposed Florida insurance company is projected to have first year revenues
of $40,000,000, and first year's earnings are projected at $3,800,000,
exclusive of the revenues and profits it is expected to generate for both
Scibal Associates and USIB. Sixteen insurance companies have participated in
The Florida JUA Program to date, and claims have averaged 25% of net premiums
after reinsurance costs.
The Company intends to organize Century Property and Casualty Insurance Company
(the "Insurance Company") under Florida law as a multiple line property and
casualty insurer licensed in the State of Florida. The Company will use
approximately $5.3 million of the proceeds of this Offering to provide the
capital and surplus which the Insurance Company will need in order to be able
to participate in the Market Takeout Program of the Florida Residential
Property and Casualty Joint Underwriting Association (the "JUA").
The JUA was established by the Florida Legislature in 1992 as a temporary
measure to provide homeowners' insurance coverage for individuals who could not
obtain such coverage from private carriers by reason of the impact that
Hurricane Andrew had on the private insurance market. However, instead of
serving as a temporary source of emergency insurance coverage, as originally
intended, the JUA has become a significant provider of original and renewal
insurance coverage for Florida homeowners.
The proposed Florida insurance company's initial business operations will
consist of providing property and casualty insurance coverage through
homeowners insurance policies that are acquired from the JUA. The Company
anticipates that the proposed Florida insurance company will acquire between
30,000 and 60,000 policies from the JUA within the first year of the proposed
Florida insurance company's operations, representing approximately $40,000,000
in annual renewal premiums. The Company further anticipates that the proposed
Florida insurance company will offer homeowners' property and casualty
insurance in Florida in the voluntary insurance market through independent
agents. The earnings of the proposed Florida insurance company from policy
premiums will be supplemented by the generation of investment income from
investment policies adopted by the proposed Florida insurance company's Board
of Directors. Principal investment goals will be to maintain safety and
liquidity, enhance equity values and achieve an increased rate of return
consistent with Florida's regulatory requirements.
The Company expects to rely on the use of reinsurance to limit the amount of
risk retained under its policies and to increase its ability to write
additional risk. The Company's intention is to limit the exposure and
therefore protect its capital, even in the event of catastrophic occurrences,
through reinsurance agreements that transfer the risk of loss in excess of
$1,000,000.
The property and casualty reinsurance industry is subject to the same market
condition as the direct property and casualty insurance market. Today there is
an over capacity of limits, with very competitive rates. The required
(catastrophe) limits would probably be $75,000,000 excess of $1,000,000
retention, with individual policies written a fifty-fifty quota share basis.
The Company's research has revealed that, in the absence of a major
catastrophe, homeowners' insurance claims in Florida have been averaging
approximately 25% of net premium annually, or approximately $4,400,000 on
$20,000,000 of net premium. Prior to the occurrence of hurricane Andrew in
1994, many insurance companies maintained very concentrated coverage exposures
in Monroe, Dade, Broward and Palm Beach Counties in Florida. After hurricane
Andrew, many insurers chose not to write homeowners' insurance in Florida.
Florida ultimately implemented the JUA program to cover the resulting shortfall
in coverage availability. The JUA is now providing to all insurers who qualify,
an opportunity to "depopulate" the JUA Pool a pro rata cross section of
state-wide risks in all zip codes, so that no insurer will have a concentration
in the above-mentioned counties.
-14-
<PAGE> 15
The Company's actuarial projections indicate that, if another Andrew-force
hurricane occurs, the proposed Florida insurance company's losses will be
capped at $5,000,000 on each tranche of $40,000,000 in premium. By reason of
the fact that the proposed Florida insurance company will have initial capital
and surplus of approximately $5,300,000, it will receive, pursuant to the
regulations which govern the JUA program, a "Surplus Bonus" of $3,700,000.
Accordingly, the proposed Florida insurance company will have aggregate capital
and surplus of approximately $10,000,000.
The proposed Florida insurance company expects to receive a minimum bonus
payment of approximately $3,700,000.00 based on a portfolio of more than 30,000
to 60,000 policies. Bonus payments must be held in escrow for three years,
during which time the funds can be utilized for statutory reserves, but may
otherwise only be used for certain prescribed purposes, such as payment of
claims. After the three-year period, the Insurance Company will have
unrestricted use of the bonus payment funds. Additionally, the Insurance
Company will have investment income from the bonus payments, which will be made
available at the end of the three years.
The proposed Florida insurance company's initial business operations will
consist of providing property and casualty insurance coverage through
homeowners insurance policies that are acquired from the JUA. The Company
anticipates that the proposed Florida insurance company will acquire between
30,000 and 60,000 policies from the JUA within the first year of the proposed
Florida insurance company's operations. The Company further anticipates that
the Insurance Company will offer homeowners' property and casualty insurance in
Florida in the voluntary insurance market through independent agents. The
earnings of the proposed Florida insurance company from policy premiums will be
supplemented by the generation of investment income from investment policies
adopted by the proposed Florida insurance company's Board of Directors.
Principal investment goals will be to maintain safety and liquidity, enhance
equity values and achieve an increased rate of return consistent with Florida's
regulatory requirements.
The Company has entered into an agreement with Joseph P. DeAlessandro, a
Director of the Company, to manage the new Florida insurance company as a full
service manager. Mr. DeAlessandro is presently the CEO of European American
Group, and its subsidiaries, Rutgers Insurance Co., and Kentucky National
Insurance Co. He was formerly a Senior Executive with Gulf Insurance Co.,
Travelers Insurance Co., and American International Group (AIG). He serves on
the Board of Directors of Smith Barney Trust Co., and the New Jersey Insurance
Advisory Board.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Century Industries, Inc. in Consolidation
Historically the Company has grown by acquisition. Its consolidated assets have
increased from $7,528,448 in 1996, to $9,443,047 in 1997, a 25% increase.
Consolidated capital has increased from $3,125,124 in 1996, to $4,846,891 in
1997, a 55% increase. Its revenues for 1997 have increased to $14,862,366 from
$4,349,026 at 12-31-96, which is a 242% increase (the audited numbers at
12-31-96 contained herein only include 47 days of revenue, expense and earnings
for 1996, as the acquisition of DCP and its former subsidiary Scibal was
completed on 11-13-96.). The operating subsidiaries, CSP and USIB/Scibal were
profitable, as discussed below, and any operating losses were attributable to
the maintenance costs of USIB and the Parent Company. The substantial increases
in assets, capital and revenues shown herein have resulted from the acquisition
of Scibal. The audited operating income (loss) for each subsidiary is broken
down as follows:
<TABLE>
<CAPTION>
Steel Products USIB Claims Parent Total
-------------- ----- ------ ------ -----
<S> <C> <C> <C> <C> <C>
Revenues $ 4,572,796 300,000 9,989,570 14,862,366
Operating Income
(Loss) $ 175,207 (310,694) 719,880 (178,022) 406,371
Identifiable
Assets $ 1,111,389 3,127,193 4,484,443 720,022 9,443,047
</TABLE>
-15-
<PAGE> 16
Gross profit increased from $1,466,077 in 1996 to $6,270,517 in 1997, an
increase of 328%. Consolidated operating costs increased from $2,180,362 in
1996 to $5,864,146 in 1997, a 169% increase. Consolidated operating income from
operations increased from ($714,285) in 1996 to $406,371 in 1997, an increase
of $1,120,656. The consolidated loss from operations before taxes and
extraordinary items was ($688,746) in 1996, as opposed to a consolidated loss
of ($103,263) in 1997 an increase in earnings of $585,483. Earnings per share
was a loss of ($.04) in 1997, as opposed to the loss per share of ($.15) in
1996, an increase in net earnings of $.11 per share.
The Company and its subsidiaries have sufficient cash on hand and liquidity
from the cash flow of their accounts receivable to continue to grow their
operations. The Company has provided Century Steel Products with in excess of
$600,000 used as operating capital during 1997, so as to increase CSP's
revenues to over $4,500,000 for 1997, a 71% increase over CSP's revenues of
$2,676,306 during 1996.
The Company further invested $808,000 into Scibal Associates through the USIB
Holdings LP as operating capital, which served to increase the Scibal
Associates operating income.
Century Steel Products, Inc.
CSP's cost of goods increased from $1,964,963 at year end 1996, to $3,703,641
in 1997,and the open account debt to suppliers increased from $431,959 at year
end 1996 to $772,219 at year end 1997.
Sales increased 71% from 1996 sales of $2,676,306 to $4,572,796 in 1997.
Gross profits before administrative costs increased from $711,343 in 1996 to
$869,155 in 1997, an increase of 22%. Administrative costs increased from
$596,232 in 1996 to $693,948 in 1997.
Net income from operations of CSP in 1996 was $89,782 and $159,879 in 1997.
Operating income grew $85,425 from $89,782 in 1996 to $175,207 in 1997, an
increase of 95%.
It is noted that CSP's revenues increased substantially during 1997, but due to
the need to increase labor costs to increase sales volume, and due to the
increase in unearned receivables concomitant therewith, the profits have not
yet been realized. Many projects are still in process and can not be invoiced
until they reach substantial completion.
CSP entered into a Limited Partnership with Bainbridge Construction Co, Inc.
and Partnership Management Corporation during 1997. Bainbridge is a Class A
licensed Virginia general contractor. The partnership began the construction
of a private school in Springfield, Virginia, and realized revenues in excess
of $200,000 for the 4th quarter of 1997. CSP has a 45% interest in the
partnership. Should the school project reach its projections for 1998, the
partnership would have revenues exceeding $1,000,000 and CSP would realize a
substantial profit. However, such projections are contingent upon the
developers granting the partnership the further stages of construction as they
progress.
The following Management's Discussion of Financial Condition and Results of
Operations of Century Steel Products, Inc. is a comparison of the three months
ended December 31, 1996 to the three months ended December 31, 1997.
CENTURY STEEL PRODUCTS HISTORICAL DATA FOR THREE MONTHS ENDED DECEMBER 31,
1997.
CSP's sales of $1,261,697 for the fourth quarter of 1997 were $671,091 greater
than the fourth quarter sales of $590,606 in 1996, an increase of 114%.
Operating expenses for the last three months of 1997 totaled $241,655,
representing an increase of $107,657, or 80% from the $133,998 of expenses for
the three months ended December 31, 1996.
CSP's current assets to current liabilities ratio is 1.2 to 1 at year end, with
current liabilities being $303,624 less than current assets.
-16-
<PAGE> 17
Results of Operations
CSP's increased fourth quarter revenues reflected CSP's difficulties in
purchasing steel in sufficient quantities and at competitive prices so as to
fill all sales orders, at any reasonable profit.
Raw material steel and labor costs were 7% less for 1996 on an annualized basis
than the year of 1997. In 1996 material and labor costs amounted to 74% of the
annual revenues. In 1997 this factor was 81%. This factor contributed
substantially to the Company's fourth quarter losses in 1997, despite greater
revenues.
Forward Looking Information
The following graph indicates Management's projections of the growth of steel
division operations since sufficient capital for the purchase of raw materials
has been made available by the parent company:
<TABLE>
<CAPTION>
Year Revenues Projected Earnings
------ ------------- -------------------
<S> <C> <C>
1998 5,000,000 500,000
1999 5,500,000 550,000
2000 6,000,000 600,000
2001 6,500,000 650,000
</TABLE>
U.S. Insurance Brokers, Inc.
(Development Stage)
USIB's operations are still at the developmental stage. However, USIB acquired
DC Partners, Ltd. (DCP) during 1996 in conjunction with Century Industries,
Inc. USIB has now merged with DCP, and now functions as the parent company of
Scibal Associates. USIB has the potential of acting as a full service Managing
General Agent with its own claims administration division.
USIB lost ($397,885) for the year 1996, as development stage losses. USIB had
income of $8,290 in 1997, before consolidation with Scibal Associates, its
wholly owned subsidiary.
USIB's wholly owned subsidiary,
Scibal Associates, Inc.
The following audited income statement comparisons are based upon audited
fiscal years ending December 31 1997 and 1996. Since the Company acquired DCP
effective 11-13-96, the Company only consolidated DCP's audited income
statement for the final 47 days of 1996 in the financial statements included
herein.
Scibal's cost of services provided decreased from $5,654,685 at year end 1996
to $4,888,208 at year end 1997, and the open account debt to suppliers
decreased from $1,190,007 at year end 1996 to $919,817 at year end 1997.
Revenues decreased from 1996 revenues of $10,718,163 to $9,989,570 in 1997.
Gross profits before administrative costs decreased from $5,362,044 in 1996 to
$5,101,362 in 1997. Administrative costs decreased from $4,613,698 in 1996 to
$4,381,481 in 1997.
Net income in fiscal 1996 was $174,156. Net income for 1997 was $215,606.
Operating income increased from ($83,843) to $719,881.
The following Management's Discussion of Financial Condition and Results of
operations of Scibal Associates, Inc. is a comparison of the three months ended
fiscal December 31, 1997 to the three months ended December 31, 1996.
SCIBAL ASSOCIATES' HISTORICAL DATA FOR THREE MONTHS ENDED DECEMBER 31, 1997.
Scibal's sales of $2,073,830 for the fourth quarter of 1997 were $435,250 less
than the fourth quarter sales of $2,509,080 in 1996.
-17-
<PAGE> 18
Operating expenses for the last three months of 1997 totaled $1,044,826
representing a decrease of $252,034 from the $1,296,860 of expenses for the
three months ended December 31, 1996.
Scibal's current assets to current liabilities ratio is .6 to 1 at December 31,
1997, with current liabilities being $1,196,746 more than current assets.
Results of Operations
In 1996 labor costs amounted to 54% of the annual revenues. In 1997 this factor
was 53%. This factor had no effect on annual operating income.
Forward Looking Information
The following table represents DCP's prior four years revenues and operating
income:
<TABLE>
<CAPTION>
Year 1996 1995 1994 1993
- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $10,718,163 10,253,410 9,305,519 7,749,501
Operating Income 748,076 125,126 347,546 239,138
</TABLE>
The following table illustrates DCP management's financial projections for
the years 1998-2000:
<TABLE>
<CAPTION>
Revenues 1998 1999 2000
- -------- ---- ---- ----
<S> <C> <C> <C>
Claims handling services $ 9,000,000 10,000,000 12,000,000
Direct Costs:
- ------------
Adjuster salaries &
benefits 3,299,886 3,666,540 4,399,848
TPA fees 540,000 600,000 720,000
Communications 163,800 182,000 218,400
------------ ---------- ----------
Total Direct Costs 4,003,686 5,551,460 6,661,752
Gross Profit 6,066,901 6,817,720 7,983,035
% of Revenues 56 % 56 % 56 %
Indirect Costs:
- --------------
SG&A Salaries & benefits 2,351,345 2,312,605 2,775,126
Other SG&A 1,986,210 2,206,900 2,648,280
------------ ---------- ----------
Total SG&A 4,337,555 4,519,505 5,423,406
Operating Income 658,760 1,031,955 1,238,346
Non operating revenue
(expense) (43,406) (24,612) -0-
Net income before taxes 615,354 1,007,343 1,238,346
============ ========== ==========
% of Revenues 6.84% 10.07% 10.32%
</TABLE>
-18-
<PAGE> 19
PART II
ITEM 7. FINANCIAL STATEMENTS
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Consolidated Financial Statements
For The Years Ended December 31, 1997 and 1996
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
CONTENTS
<TABLE>
<S> <C>
Independent Auditors' Report of Correa Berger & Associate, CPA's, P.L.L.C F-2
Consolidated Balance Sheets - December 31, 1997 and 1996 F-3 - F-4
Consolidated Statements of Operations for the Years Ended December 31, 1997
and 1996 F-5
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1997 and 1996 F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and
1996 F-7 - F-8
Notes to Financial Statements F-9 - F-20
</TABLE>
- 19 -
F-1
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
Board of Directors
Century Industries, Inc.
Sterling, Virginia
We have audited the accompanying consolidated balance sheets of Century
Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These 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 also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Century
Industries, Inc., and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for treasury stock transactions. This change has been
accounted for as a correction of an error and prior years' financial statements
have been restated.
CORREA BERGER & ASSOCIATE, CPA'S, P.L.L.C
New York, New York
May 4, 1998
F-2
<PAGE> 21
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS 1997 1996
- -------------- ---- ----
<S> <C> <C>
Cash and Cash Equivalents $ 282,009 $ 382,548
Accounts Receivable-Trade (Net of allowance for doubtful
accounts of $120,000 in 1997 and $43,000 in 1996) 1,907,446 1,263,910
Inventory 256,695 138,955
Marketable Securities 106,952 99,180
Other Current Assets 572,462 476,588
----------- -----------
TOTAL CURRENT ASSETS 3,125,564 2,361,181
----------- -----------
PROPERTY AND EQUIPMENT
Software and Computer Equipment 1,997,743 1,329,710
Furniture and Fixtures 779,941 1,009,376
Machinery and Equipment 15,875 548,230
Transportation Equipment 215,429 192,190
Leasehold Improvements 151,878 139,296
----------- -----------
3,160,866 3,218,802
Less: Accumulated Depreciation (1,083,443) (1,400,022)
----------- -----------
NET PROPERTY AND EQUIPMENT 2,077,423 1,818,780
----------- -----------
OTHER ASSETS
Investments 991,842 368,542
Deferred Offering Costs 376,686 160,262
Deferred Acquisition Costs 349,980 305,000
Security Deposits 106,779 56,144
Goodwill (Net of accumulated amortization of $120,709
in 1997 and $31,605 in 1996) 1,949,035 2,038,139
Due from Related Parties 128,422 223,091
Other Assets 337,316 197,309
----------- -----------
TOTAL OTHER ASSETS 4,240,060 3,348,487
----------- -----------
TOTAL ASSETS $ 9,443,047 $ 7,528,448
=========== ===========
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE> 22
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable- Trade $ 1,732,486 $ 1,650,270
Current Maturities- Long Term Debt 260,267 243,569
Capital Lease Obligations 90,385 146,806
Notes Payable 125,000 200,000
Advances from Stockholders 179,601 200,000
Accrued Expenses 1,442,004 920,616
Dividends Payable 16,389 97,950
----------- -----------
TOTAL CURRENT LIABILITIES 3,846,132 3,459,211
LONG TERM NOTES PAYABLE, LESS CURRENT PORTION 555,926 763,452
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION 155,848 154,850
----------- -----------
TOTAL LIABILITIES 4,557,906 4,377,513
----------- -----------
MINORITY INTEREST 38,250 25,811
----------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock, Convertible, $.001 par value, 1,200,000 shares
authorized, 1,000,000 issued and outstanding 1,000 1,000
Common Stock, Class A, $.001 par value, 25,000,000 shares
authorized, 3,373,000 and 3,096,000 issued 3,373 3,096
Common Stock, Class B, $.001 par value, 25,000,000 shares
authorized, 4,173,000 and 3,000,000 issued and outstanding 4,173 3,000
Additional Paid in Capital 6,917,089 4,555,099
Retained Deficit (1,216,189) (964,271)
----------- -----------
5,709,446 3,597,924
Less: Class A common stock in treasury, 269,202 and 131,965
shares in 1997 and 1996, respectively (862,555) (472,800)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 4,846,891 3,125,124
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,443,047 $ 7,528,448
=========== ===========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 23
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Sales $ 14,862,366 $ 4,349,026
Cost of sales 8,591,849 2,882,949
------------ ------------
GROSS PROFIT ON SALES 6,270,517 1,466,077
------------ ------------
Operating Costs
Payroll Expenses 2,437,512 830,587
Professional Fees 464,756 573,683
Auto, Travel and Entertainment 276,680 133,570
Bad Debts 109,761 37,253
Amortization and Depreciation 323,057 80,020
Other 2,252,380 525,249
------------ ------------
Total Operating Costs 5,864,146 2,180,362
------------ ------------
INCOME (LOSS ) FROM OPERATIONS 406,371 (714,285)
------------ ------------
Other Income (Expense)
Gain on Disposition of Assets - 150,000
Interest Expense (112,974) (39,102)
Minority Interest (12,439) (25,811)
Other Income (Expense) - Net (384,221) (59,548)
------------ ------------
Total Other Income(Expense) - Net (509,634) 25,539
------------ ------------
LOSS BEFORE TAXES AND EXTRAORDINARY ITEM (103,263) (688,746)
Income Tax Benefit (37,100) (41,700)
------------ ------------
Loss Before Extraordinary Item (66,163) (647,046)
Extraordinary Item
Debt Restructuring (Net of Income Taxes of $22,500) - 77,500
------------ ------------
NET LOSS $ (66,163) $ (569,546)
============ ============
Preferred Stock Dividends of Subsidiaries (201,980) (169,043)
------------ ------------
Net Loss Available for Common Stockholders $ (268,143) $ (738,589)
------------ ------------
Basic and Diluted Earnings (Loss) Per Share:
Before Extraordinary Item $ (0.04) $ (0.17)
------------ ------------
Extraordinary Item $ - $ .02
------------ ------------
Net Loss $ (0.04) $ (0.15)
------------ ------------
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE> 24
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31,1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK ADDITIONAL PAID-IN
PREFERRED STOCK CLASS A CLASS B CAPITAL
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1995 $ 1,000 $ 1,326 $ - $ 591,750
Issuance of 3,000,000 shares of common stock - - 3,000 2,129,799
Issuance of 450,000 shares of common stock - 450 - 311,550
Exercise of 500,000 common stock warrants - 500 - (500)
Issuance of 820,000 shares of common stock related
to D.C. Partners acquisition - 820 - 1,522,500
Treasury stock, 131,965 shares during 1996
Unrealized gain on marketable securities - - - -
Net loss for 1996 - - - -
Preferred dividends - - - -
------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 1,000 3,096 3,000 4,555,099
Issuance of 277,000 shares of common stock - 277 - 451,221
Issuance of 1,173,000 shares of common stock - - 1,173 1,910,769
Treasury stock, 137,237 shares during 1997
Unrealized gain on marketable securities - - - -
Net loss for 1997 - - - -
Preferred dividends - - - -
------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 $ 1,000 $ 3,373 $ 4,173 $ 6,917,089
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
RETAINED EARNINGS TREASURY TOTAL STOCKHOLDERS'
(DEFICIT) STOCK EQUITY
---------------------------------------------------------
<S> <C> <C> <C>
BALANCE DECEMBER 31, 1995 $ (227,032) $ - $ 367,044
Issuance of 3,000,000 shares of common stock - - 2,132,799
Issuance of 450,000 shares of common stock - - 312,000
Exercise of 500,000 common stock warrants - - -
Issuance of 820,000 shares of common stock related
to D.C. Partners acquisition - - 1,523,320
Treasury stock, 131,965 shares during 1996 (472,800) (472,800)
Unrealized gain on marketable securities 1,350 1,350
Net loss for 1996 (569,546) - (569,546)
Preferred dividends (169,043) - (169,043)
------------------------------------------------------
BALANCE DECEMBER 31, 1996 (964,271) (472,800) 3,125,124
Issuance of 277,000 shares of common stock - - 451,498
Issuance of 1,173,000 shares of common stock - 1,911,942
Treasury stock, 137,237 shares during 1997 (389,755) (389,755)
Unrealized gain on marketable securities 16,225 - 16,225
Net loss for 1997 (66,163) - (66,163)
Preferred dividends (201,980) - (201,980)
------------------------------------------------------
BALANCE DECEMBER 31, 1997 $(1,216,189) $ (862,555) $ 4,846,891
=============== =============== ===============
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE> 25
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 14,212,604 $ 4,355,695
Cash paid to suppliers and employees (14,252,511) (4,961,716)
Interest received 6,226 6,223
Interest paid (112,974) (39,102)
Income taxes paid - (8,700)
------------- -------------
Net cash used for operating activities (146,655) (647,600)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of fixed assets - 150,000
Cash acquired in acquisition - 199,259
Purchase of fixed assets (693,248) (170,375)
Purchase of marketable securities and investments (829,614) (273,259)
Investment in D.C. Partners, Ltd., Inc. - (2,120,786)
------------- -------------
Net cash used for investing activities (1,522,862) (2,215,161)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock 2,102,036 2,953,739
Preferred dividends paid (283,541) (73,043)
Receipts of (payments on) notes (321,251) 42,808
Net advances from affiliates-stockholders 272,812 297,334
------------- -------------
Net cash provided by financing activities 1,770,056 3,220,838
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (100,539) 358,077
------------ ------------
Cash and Cash Equivalents - January 1 $ 382,548 24,471
------------- -------------
CASH AND CASH EQUIVALENTS - DECEMBER 31 $ 282,009 $ 382,548
============= =============
Net loss $ (66,163) $ (569,546)
Issuance of stock in exchange for services - 267,000
Bad debts 109,761 37,253
Amortization and depreciation 323,057 87,900
Gain on sale of assets - (150,000)
Minority Interest 12,439 25,811
(Increase) decrease in accounts receivable (643,536) 12,892
(Increase) decrease in inventory (117,740) 49,531
(Increase) decrease in other current assets and other assets (286,516) (446,582)
Increase (decrease) in accounts payable 82,216) 61,180
Increase (decrease) in dividends payable (81,561) -
Increase (decrease) in accounts payable -affiliate - (100,000)
Increase (decrease) in accrued expenses 521,388 85,761
Increase (decrease) in income taxes payable - (8,800)
------------- -------------
Net cash used for operating activities $ (146,655) $ (647,600)
============= =============
</TABLE>
(continued)
See accompanying notes to financial statements
F-7
<PAGE> 26
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,1997 AND 1996
For the purpose of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
Non-cash investing and financing activities:
During the years ended December 31, 1997 and 1996, the Company recognized an
unrealized gain of $16,225 and $1,350, respectively, on marketable securities
available for sale. In accordance with Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, the investment and retained earnings accounts were increased by
$16,225 and $1,350 for the year ended December 31, 1997 and 1996, respectively.
Dividends of $201,980 and $169,043 were accrued and charged to retained earnings
for the years ended December 31, 1997 and 1996, respectively.
During 1996, 250,000 shares of the Company's common stock were issued as payment
for previously accrued legal fees totaling $45,000. Therefore, accounts payable
was reduced by $45,000 and legal expenses were increased by $167,000 and common
stock and additional paid in capital accounts were increased as a result of this
non-cash transaction. Also, during 1996, 200,000 shares were issued as payment
for consulting services totaling $100,000. Therefore, consulting expenses were
increased by $100,000 and common stock and additional paid in capital accounts
were increased as a result of this non-cash transaction.
Per the November 13, 1996 "Addendum to Plan Agreement of Reorganization and
Capitalization" entered into between Century Industries, Inc. (the Company) and
D.C. Partners, Ltd., Inc. (D.C. Partners), 820,000 shares of the Company's
common stock were issued to D.C. Partners' former shareholders. The Agreement
was further amended to replace the unpaid $2,000,000 remaining with a warrant
for 727,273 shares of the Company's Class B common stock, valued at $2.75 per
share with demand registration rights attached thereto, beginning December 31,
1997. In addition, the majority stockholder received 50,000 warrants for the
Company's class A common stock for his efforts and costs incurred in completing
this transaction. The Company purchased D.C. Partners' net assets of
approximately $900,000, including the cash acquired of approximately $200,000
for a combination of cash and stock totaling $2,585,200. The Company did not
acquire any identifiable intangible assets in conjunction with the purchase of
D.C. Partners.
The Company acquired the following net assets during 1996 for cash and stock:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Accounts Receivable $ 926,000
Marketable securities 307,000
Equipment 1,662,000
Deposits and Other Assets 1,078,000
Goodwill 1,510,000
Accounts Payable and Accrued Expenses (2,446,000)
Long term debt (756,000)
-----------
$ 2,281,000
===========
</TABLE>
See accompanying notes to financial statements
F-8
<PAGE> 27
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,1997 AND 1996
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Century Industries, Inc. (the Company) (CNTI) was incorporated in the District
of Columbia in 1993 and is the parent holding company for its subsidiaries,
Century Steel Products, Inc., Scibal Associates, Inc., U.S. Insurance Brokers,
Inc., and USIB Holdings Limited Partnership.
Century Steel Products, Inc. (CSP), which was incorporated in Virginia in 1979,
and 85% of the stock acquired by the Company in 1993, manufactures and
fabricates steel products used in the construction industry. CSP sells its
services and products nationwide, primarily along the East Coast from its sales
and manufacturing plant located in Sterling, Virginia. CSP grants credit to
customers in the construction industry. Consequently, CSP's ability to collect
the amounts due from customers is affected by economic fluctuations in the
construction industry.
U.S. Auto Owners Coverage Association (USAOCA), was acquired by the Company from
a stockholder-officer of the Company on December 31, 1995 in exchange for
1,000,000 shares of the Company's convertible preferred stock. In May, 1996, the
Board ratified an addendum whereby the acquisition agreement was restructured
and the Company acquired USAOCA through USIB. On October 29, 1996, USAOCA was
merged into a corporation that is an affiliate of a stockholder-officer of the
Company. Such merger included the transfer of USAOCA's net loss carryforwards of
approximately $113,000. There was no consideration received by the Company in
this transaction.
U.S. Insurance Brokers, Inc. (USIB), which was incorporated in the District of
Columbia on April 27, 1995, is a development stage life and casualty insurance
agent which markets full service association life, automobile, homeowner and
health insurance plans, and life insurance company-managed financial products to
various associations and other membership-based organizations.
Scibal Associates, Inc. (Scibal), which is owned by USIB, operates as a third
party claims administrator (TPA) processing a wide range of claim types
including medical, workers' compensation, general liability, product liability,
professional malpractice and other insurance claims for its clients throughout
the United States. Scibal was acquired by USIB during 1996. This acquisition was
accounted for by the purchase method of accounting. (See Note 2 below.)
USIB Holdings Limited Partnership (Holdings), was formed in late 1997 to act as
an insurance holding limited partnership for the acquisition of Reinsurance
Corporation of America, and/or to form a new Florida casualty insurance company
so as to participate in the state of Florida Joint Underwriting Association
Homeowners's Takeout Program. USIB is the General Partner, and David Scibal,
Chairman of the Board of Directors, is a Limited Partner. Holdings was
capitalized through the capital contribution of David Scibal's 727,273 Class B
warrants, valued at $1,192,000, received as consideration from the sale of
Scibal Associates to the Company, and a capital contribution of $808,000 by the
Company. The Company plans to make further contributions to finance future
acquisitions, through the sale of securities. The transaction was non-dilutive
in that management can now either cancel the underlying warrants, or apply them
to the future Class B stock issuances used as consideration for funds which may
be applied to the Company's growth. David Scibal will participate to the extent
of 20% of any future profits, and the Company will receive 80%. However, his
equity ownership is limited to 1% and the Company retained 99%.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-9
<PAGE> 28
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,1997 AND 1996
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Century
Industries, Inc. and its subsidiaries, CSP, USIB, Scibal and Holdings in 1997
and CSP, USIB and Scibal in 1996. The Company owns approximately 85% of CSP's
common stock and 100% of USIB's and Scibal's common stock. All material
intercompany accounts and transactions have been eliminated. Minority interests
in a subsidiary are recognized to the extent that the minority interests in
equity capital are positive. When losses applicable to minority interests exceed
minority interest in equity capital, the excess is charged against the Company's
interest. Subsequent minority interest earnings are credited to the Company to
the extent of minority interest losses previously absorbed. In the year of
acquisition, a subsidiary's income and expenses are included in the consolidated
statement of operations only to the extent of the post-acquisition activity.
Since Scibal was acquired by USIB on November 13, 1996 their results of
operations are included in the consolidated statements of operations for the
year ended December 31, 1996 to the extent of the post acquisition activity.
Scibal's assets and liabilities as of December 31, 1996 are included in the
related balance sheet. See Note 2 below for selected financial statement
disclosures related to the Scibal acquisition.
ACQUISITIONS AND GOODWILL
The consolidated financial statements include the net assets of businesses
purchased and recorded at cost, which was measured by the fair value of
consideration given or net assets received, whichever was more clearly evident,
at the acquisition date. The excess of acquisition costs over the fair value of
net assets acquired has been allocated to and is included in goodwill. Goodwill
is amortized on a straight-line basis over 30 years. Management periodically
reviews the business environment of its aquirees for potential impairment
writedowns through evaluations based on fair values and in relation to the
expected operating performance and future expectations of non discounted cash
flows of the related businesses.
INVENTORY
Inventory consists primarily of raw steel products and is recorded at the lower
of cost or market, using the average cost method.
PROPERTY AND EQUIPMENT
Furniture, equipment and leasehold improvements are stated at cost. For
financial reporting, depreciation and amortization are provided using
straight-line and double-declining balance methods and the following estimated
useful lives:
Software and computer equipment 5-7 YEARS
Furniture and fixtures 5-7 YEARS
Machinery and equipment 7-10 YEARS
Transportation equipment 3-7 YEARS
Leasehold improvements 10-15 YEARS
For income tax purposes, depreciation is computed using the accelerated cost
recovery system and the modified accelerated cost recovery system. Expenditures
for major renewals and betterment that extend the useful lives of property and
equipment are capitalized. Expenditures for maintenance and repairs are charged
to expense as incurred. The cost of property retired or sold and the related
accumulated depreciation are removed from the applicable accounts, and the
resulting gains and losses are reflected in the consolidated statements of
operations.
F-10
<PAGE> 29
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,1997 AND 1996
SOFTWARE COSTS
Pursuant to Statement of Financial Accounting Standards No.86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" issued
by the Financial Accounting Standards Board, Scibal capitalized certain software
development and production costs once technological feasibility had been
achieved. The cost of purchased software is capitalized when related to a
product which has achieved technological feasibility or that has an alternative
future use. Scibal capitalized internal software development costs, related to
new products reaching technological feasibility. At December 31, 1997 and 1996
Scibal capitalized software amounting to approximately $1,094,000 and $780,000,
respectively. Capitalized software development and purchased software costs are
reported at the lower of unamortized costs or net realizable value. Commencing
upon initial product release, these costs will be amortized based on the
straight-line method over the estimated life.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the bases of allowances for doubtful
accounts and accumulated depreciation for financial and income tax reporting.
The deferred tax assets and liabilities represent the future tax return
consequences of those differences which will either be taxable or deductible
when the assets and liabilities are recovered or settled. Deferred taxes also
are recognized for operating losses that are available to offset future federal
and state income taxes. The Company files consolidated income tax returns.
REVENUE RECOGNITION
Steel Products
Revenue is recognized on steel products when the products are shipped to
customers. Revenue is recognized on steel fabrication projects as contract
line-item tasks are completed. Essentially, revenue and profit are recognized as
fabrication on production in progressing to completion. Line item tasks are
generally short-term in nature. Accordingly, expenses are recognized when
incurred. Losses are recognized when reasonable estimates of the amount of loss
can be made. The majority of sales are performed under contracts which are very
specific and have provisions covering termination for non compliance with clear
and specific terms for payments on work performed. No significant cancellations
have ever occurred. The Company periodically reviews the credit, collection and
sales allowance history and status of its customers and provides for potential
losses.
Development Stage Insurance Operations
Commissions from insurance contracts generated by USIB are recognized as
insurance premiums when collected by the insurance carriers.
Claims Administration
Scibal contracts with its clients to process various types of casualty claims.
Generally, the contracts provide that for an agreed upon annual fee, Scibal will
administer up to a specified number of claims. Scibal recognizes this revenue on
a pro rata basis throughout the billing year. If less than the estimated number
of claims is administered, Scibal is entitled to the full amount of the
contract. In the event more claims than estimated are administered, the client
will be billed extra based on a predetermined amount per file, per file type,
per state. Additionally, if a file remains open for more than two years, Scibal
is entitled to an additional fee for the file on a one-time basis. Revenue from
these situations is recognized when the contractual criteria are met. Included
in other current assets is approximately $393,000 and $408,000 at December 31,
1997 and 1996, respectively, related to such "overage billings" captured from an
analysis of claims' work in process. With respect to the earnings process and
the recognition of revenue, the Company has actually processed this overage
claims, however, billing could not be initiated until the end of the contract.
F-11
<PAGE> 30
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,1997 AND 1996
CLAIMS ADMINISTRATION DEPOSITS
As a third party administrator, Scibal clients deposit funds with Scibal to
administer the clients' claims. Scibal places these funds in various cash
accounts set up solely for the purpose of paying that client's claims. The
claims administration deposits are not held in trust and there is no management
of the deposits for income. The claim's administration deposits approximating
$7,000,000 and $4,000,000 at December 31, 1997 and 1996, respectively, are not
included as assets in Scibal's financial statements.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs incurred in connection with the development stage
insurance operations are being capitalized. Operations are expected to commence
in 1998, when these costs will be amortized over a five year period.
CASH
From time to time during the years ended December 31, 1997 and 1996, the Company
maintained cash balances in excess of federally insured limits.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares of common
stock and common stock equivalents outstanding during each period. Earnings per
share are computed using the treasury stock method. The weighted average number
of shares used for the computations of earnings per share approximated 6,200,000
and 4,800,000 for the years ended December 31, 1997 and 1996, respectively.
RECLASSIFICATIONS
Certain items in the December 31, 1996 consolidated financial statements have
been reclassified, where appropriate, to conform with the December 31, 1997
presentation.
2) TREASURY STOCK TRANSACTIONS
During 1997, Scibal and USIB have acquired Class A common stock of the Company.
During 1996, Scibal acquired Class A common stock of the Company. Such shares of
CNTI common stock held by the subsidiaries are recorded in consolidation as
treasury stock and result in a reduction of stockholders' equity.
At December 31, 1996 these shares were included in the balance sheet as
marketable securities. The Company's financial statements for the year ended
December 31, 1996 have been restated to reflect the aforementioned accounting
treatment. This restatement has no effect on net income for the year ended
December 31, 1996. Marketable securities and total stockholders' equity have
been reduced by $472,800 at December 31, 1996.
3) ACQUISITION OF D.C. PARTNERS, LTD., INC.
On June 30, 1996, the Company entered into a "Plan and Agreement of
Reorganization and "Capitalization" (Agreement) through its wholly-owned
subsidiary U.S. Insurance Brokers (USIB), with D.C. Partners, Ltd., Inc. (D C.
Partners). The Agreement called for the acquisition by USIB of D.C. Partners in
two phases. The first phase, which was completed by September 30, 1996, was the
purchase for $700,000 of 49% of the equity in D.C. Partners, Ltd., Inc., as
represented by its Series B Common Stock. The Series B Common Stock, although
representing 49% of the equity in D.C. Partners, had only 4.9% of the total
voting power.
In the second phase of the acquisition, which was originally to be completed by
June 30, 1997, the remaining equity and voting stock in D.C. Partners, Ltd.
Inc., were to be surrendered to the Company in exchange for 820,000 shares of
the voting common stock of the Company plus a cash payment of $3,000,000. On
September 30, 1996, the Agreement was amended and the remaining stock purchased
was accelerated.
F-12
<PAGE> 31
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,1997 AND 1996
On November 13, 1996 the Agreement was further amended to replace the unpaid
$2,000,000 remaining with a warrant for 727,273 shares of the Company's Class B
Common Stock, valued at $ 2.75 per share, with demand registration rights
attached thereto, beginning December 31, 1997. In addition, the majority
stockholder of D.C. Partners received 50,000 options for his efforts and costs
incurred in completing this transaction.
D.C. Partners owned Scibal Associates, Inc. (Scibal) and on December 30, 1997,
D.C. Partners was merged into USIB with Scibal surviving and continuing the
claims administration operations. USIB survived as the parent company of Scibal
and D.C Partners was dissolved as required by the "A" Reorganization
Requirements of the Internal Revenue Code.
PRO FORMA INFORMATION
The following Unaudited pro forma information purports to show the effects on
financial position at of Scibal occurred at the beginning of the period. This
Unaudited pro forma information is based on historical financial position and
results of operations, adjusted for acquisition costs and amortization of
goodwill, and is not necessarily indicative of what the results would have been
had the Company operated
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED 12/31/96 Historical PRO FORMA
(UNAUDITED) Century Scibal(b) Adjustments COMBINED
----------- ------- --------- ----------- --------
<S> <C> <C> <C> <C>
Revenues $ 2,676,306 $ 10,718,163 $ - $ 13,394,469
Cost of sales 1,964,963 5,414,967 - 7,379,930
------------ ------------ ----------------- ------------
Gross Profit 711,343 5,303,196 - 6,014,539
Operating expenses 1,149,456 4,686,316 133,750(a) 5,969,522
Other (income) expense (123,044) 575,342 - 452,298
------------ ------------ ----------------- ------------
Income (loss) before income taxes (315,069) 41,538 (133,750) (407,281)
Income tax provision (benefit) (41,700) 15,000 - (26,700)
------------ ------------ ----------------- ------------
Income (loss) before extraordinary item $ (273,369) $ 26,538 $ (133,750) $ (380,581)
============ ============ ================= ============
</TABLE>
(a) The adjustments to operating expenses include the following items:
Acquisition costs $ 80,000
Goodwill amortization 53,750
--------
$133,750
========
(b) This column includes the accounts of Scibal Associates, Inc. (Scibal),
D.C. Partners' sole and wholly owned subsidiary, which D.C. Partners
acquired in 1996. Scibal's fiscal year-end is September 30th.
Accordingly, the amounts shown represent the year ended September 30,
1996 taken from D.C. Partners and subsidiary audited financial
statements.
At December 31, 1996, assuming the acquisition of D.C. Partners occurred at the
beginning of 1996, the Company's balance sheet would have $44,800 more
accumulated amortization of goodwill, total assets would be $44,800 less and
retained deficit would be $44,800 higher. Tax effects would be minimal, as the
related increases in deferred tax assets would be offset by a deferred tax asset
valuation allowance.
4) SALE OF PREFERRED STOCK
In 1996, USIB authorized an additional 125,000 shares of 12.5% Series A
cumulative preferred stock, convertible to Class B Common Stock of the Company,
at the rate of 40 shares of the Company for one preferred share of USIB. The
Company, simultaneously therewith, constructively issued 3,000,000 Class B
common stock to the Trustee, for the ultimate conversion of USIB convertible
preferred shares at the rate of $40 per share divided by the average quoted
price of the Company's common stock during the offering period (which is
currently estimated to be $2.25).
F-13
<PAGE> 32
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,1997 AND 1996
Proceeds from the sale of USIB's preferred stock were used for the acquisition
of D.C. Partners as well as to support the development stage activities of USIB.
USIB has recorded as deferred offering costs, the expenses incurred in
connection with this stock offering. Such costs will be charged against the
proceeds of the offering when it was completed.
USIB's preferred stock was converted to Class B common stock of the Company in
accordance with, and upon completion of USIB's preferred stock offering. Class B
common stock of the Company has one hundredth (1/100) vote per share, while
Class A common stock has one (1.00) vote per share.
In 1997, the Company issued an additional 1,173,350 Class B common shares.
5) INCOME TAXES
The income tax benefit consists of the following:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Current
Federal $(28,900) $ -
State - -
Deferred (8,200) (41,700)
--------------- ---------------
$(37,100) $ (41,700)
--------------- ---------------
</TABLE>
Deferred tax assets resulted primarily from the Company's net operating tax
losses of approximately $700,000 and $670,000 at December 31, 1997 and 1996,
respectively. The net operating losses are available to offset future taxable
income. The related deferred tax asset of has been reduced by a valuation
allowance. Other deferred tax assets resulted from the tax bases of trade
accounts receivable exceeding their bases for financial reporting by the amount
of the allowance for doubtful accounts, the tax bases of fixed assets exceeding
their bases for financial reporting, and from charitable contributions available
to offset future taxable income. The net operating loss carryforwards will
expire in 2012, and the charitable contribution carryforward will expire in
2000.
Net deferred tax assets consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Total deferred tax liabilities $ - $ -
Total deferred tax assets 220,200 262,000
Total valuation allowance (50,800) (100,800)
----------- ---------
$ 169,400 $ 161,200
=========== =========
</TABLE>
Of the net deferred tax assets at December 31, 1997 and 1996, $45,600 and $9,000
were included in other current assets, and $123,800 and $152,200 were included
as other assets, respectively.
6) RELATED PARTY TRANSACTIONS
During the years ended December 31, 1996 and 1997, the subsidiaries advanced
funds to stockholders-officers of the Company and affiliated parties, and
received related repayments. Such advances are non-interest bearing and have no
specific repayment terms.
For the year ended December 31, 1997 and 1996 an officer of USIB received
approximately $1,200,000 and $700,000, respectively, for services provided as
selling expenses in issuing shares of preferred stock of USIB. Equity was
reduced by this amount as a direct cost of issuing the stock.
F-14
<PAGE> 33
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,1997 AND 1996
Scibal has a minority stock position in a corporation, which owns an office
building. For a portion of both 1997 and 1996 the office building was vacant,
during which time Scibal funded the debt service and maintenance costs of the
property, which has been recorded as a receivable. The property is for sale, and
Scibal feels that its receivable will be collected when it is sold.
The Company incurred $100,000 of consulting fees from an affiliated company in
1994. The fees pertained to an unsuccessful business acquisition attempt and
were included in accounts payable at December 31, 1995. Such debt was forgiven
and cancelled effective December 31, 1996. This item is shown on the
consolidated statements of operations as an extraordinary item related to debt
restructuring in 1996.
LINE OF CREDIT
Scibal maintains a $200,000 credit line with a bank in order to meet seasonal
working capital requirements and other financing needs as they arise.
Short-term borrowings on this line at December 31, 1997 and 1996 totaled
$125,000 and $200,000 respectively, which is due on demand with interest at
prime plus 1%. This line of credit is guaranteed by the Company's Chairman of
the Board of Directors.
7) LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
$500,000 note payable, due in equal monthly payments of $8,333 plus
interest at prime plus 1% for sixty (60) months due through August
2001, secured by all assets of Scibal. $383,362 $ 483,333
$250,000 guidance notes to finance new capital expenditures, due in
equal monthly installments through December 2000, plus interest
at prime plus 1% for thirty-six (36) months, secured by all
assets of Scibal. 203,927 255,783
Scibal has a $27,500 note payable due in monthly installments of
$691 including interest at a rate of 9.5% per annum for forty-eight
(48) months through August 2000. 19,912 25,905
CSP has a note dated July 1995, maturing December 2001. Monthly
payments are required consisting of principal of $4,000 plus
accrued interest at 1.5% over prime. The note is secured by all of
CSP's assets and is guaranteed by a stockholder-officer. 194,000 242,000
CSP has a note dated December 1997, maturing November 2000. Monthly
payments are required consisting of $ 512 including interest
at 11.65%. The note is secured by a transportation vehicle. 14,992 --
------------ -----------
816,193 1,007,021
Less: Current portion 260,267 243,569
------------ -----------
Long term portion $ 555,926 $ 763,452
============ ===========
</TABLE>
F-15
<PAGE> 34
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,1997 AND 1996
Future minimum payments on long-term debt as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998 $ 260,267
1999 248,404
2000 171,423
2001 136,099
--------
$816,193
========
</TABLE>
Interest cost, none of which was capitalized, was approximately $113,000 and
$39,100 for the years ended December 31, 1997 and 1996, respectively.
8) COMMITMENTS AND CONTINGENCIES
Building Leases
The company and its subsidiaries lease office space and transportation vehicles
under various operating leases expiring through October 2002.
Future minimum payments under these leases are as follows:
<TABLE>
<S> <C>
1998 $ 459,120
1999 489,258
2000 514,407
2001 232,685
2002 109,810
----------
$1,805,280
==========
</TABLE>
Net rent expense was approximately $580,500 and $204,100 for the years ended
December 31, 1997 and 1996, respectively.
Obligations Under Capital Leases
The Company is the lessee of equipment under capital leases expiring in May
2000. The assets and liabilities under capital leases are recorded at the
lower of the present value of the minimum lease payments or the fair value of
the asset.
Following is a summary of property held under capital leases:
<TABLE>
<S> <C>
Computer equipment $ 438,739
Less: Accumulated depreciation (180,212)
---------
$258,527
========
</TABLE>
Minimum future lease payments under capital leases for each of the next five
years and in the aggregate are:
<TABLE>
<S> <C>
1998 $108,000
1999 108,000
2000 52,000
----------
Total minimum lease payments 268,000
Less: Amount representing interest (21,767)
----------
Present value of net minimum
lease payments $246,233
==========
</TABLE>
The interest rate on capitalized leases range from 0.0% to 8.5% and is imputed
based on the lower of the incremental borrowing rate at the inception of each
lease or the lessor's implicit rate of return.
Effective January 1, 1997, the Company adopted a key Employee Stock Option Plan
(ESOP). There was no activity in the ESOP since inception.
Scibal has in effect a 401 (k) Plan covering substantially all eligible
employees for the year ended December 31, 1997. Scibal elected not to match
payment of certain before tax contributions made by employees during 1997.
F-16
<PAGE> 35
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,1997 AND 1996
9) MARKETABLE SECURITIES AND OTHER FINANCIAL INSTRUMENTS
All marketable securities are classified as available for sale and are
available to support current operations or to take advantage of other investment
opportunities. These securities are stated at estimated fair value based upon
market quotes. Unrealized gains and losses, net of income taxes, are included in
retained earnings. Realized gains, realized losses and declines in value, judged
to be other than temporary, are included in other income (expense).
The Company's financial instruments include cash, accounts receivable,
marketable securities, accounts payable, accrued expenses and other current
liabilities and long-term debt. The book values of cash, accounts receivable,
marketable securities, accounts payable and accrued expenses and other current
liabilities are representative of their fair values due to the short-term
maturity of these instruments. The book value of the Company's long-term debt is
considered to approximate its fair value, based on current market rates and
conditions.
10) INVESTMENTS
The Company has interests in certain long-term investments, which are carried at
cost. Included in the balance of investments at December 31st is the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Investment in third party administrative Company $ 30,000 $ 45,000
Investment in office building 202,348 198,542
Investment in an insurance related corporation by CSP - 57,500
Investment in an insurance related Joint Venture 683,285 -
Investment in construction Joint Venture by CSP 38,709 -
Other investments 37,500 67,500
-------- --------
$991,842 $368,542
======== ========
</TABLE>
The Company has an investment in the Roc Shores/Century Industries, Inc. Limited
Partnership, a District of Columbia Limited Partnership, wherein its interest is
45%. This Limited Partnership was formed in 1997 to purchase and own Century
(Overseas) Insurance Co., S.A., a Dominican Republican captive insurance
company, which has been effected. The insurance captive has appointed USIB as
its Managing General Agent for North America. The General Partner is Roc Shores
Investments, Ltd. The insurance company is presently in its development stage.
The Company's subsidiary, Century Steel, has a 45% interest in the Partnership
Management Corporation/Century Steel Products Limited Partnership, formed
between Century Steel and Bainbridge Construction Co., Inc., a Class A licensed
Virginia General Contractor. Partnership Management Corporation is the General
Partner. The Limited Partnership is constructing the Accotink School in
Springfield, VA , using Century Steel's products. The Limited Partnership has
leased office and warehouse space from Century Steel. Century Steel has sold its
equity in its heavy equipment to the Limited Partnership and has leased its
necessary production capacity back.
11) DUE FROM RELATED PARTIES
This represents advances made to various related parties. These advances are
non-interest bearing and have no specific repayment terms.
12) ADVANCES FROM STOCKHOLDERS
At December 31, 1997 and 1996, $179,600 and $200,000 were advanced from a
stockholder to Scibal as a loan for working capital purposes with no specific
repayment terms. Such advance is non-interest bearing.
F-17
<PAGE> 36
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,1997 AND 1996
13) MAJOR CUSTOMERS
During 1997, one customer accounted for approximately 16% of revenues. During
1996, two customers accounted for approximately 20% of revenues
14) STOCKHOLDERS' EQUITY
CSP declared dividends to its preferred stockholders in the amount of $7,800 for
the years ended December 31, 1997 and 1996, respectively. At December 31, 1997
and 1996, dividends of $1,950 were accrued but unpaid.
USIB declared dividends to its preferred stockholders in the amount of $194,180
and $161,243 for the years ended December 31, 1997 and 1996, respectively. At
December 31, 1997 and 1996, dividends of $14,440 and $96,000, respectively, were
accrued but unpaid.
Shares of common stock were reserved at December 31, 1997 for the following:
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
Conversion of a warrant for 200,000
shares into Class A common shares 200,000 --
Conversion of a warrant for 50,000
shares into CNTI Class A common 50,000 --
shares
Conversion of 270,834 warrants into
CNTI Class A common shares 270,834 --
Conversion of a warrant for 300,000
shares into CNTI Class B common -- 300,000
shares
Exercise of 727,273 outstanding warrants exercisable
subsequent to December 31, 1997 in conjunction
with D.C. Partners acquisition -- 727,273
Conversion of 500,000 warrants into CNTI Class B
common shares -- 500,000
Conversion of 250,000 warrants into CNTI Class A
common shares 250,000 --
Conversion of 250,000 warrants into CNTI Class A
common shares 250,000 --
--------- ---------
1,020,834 1,527,273
========= =========
</TABLE>
F-18
<PAGE> 37
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,1997 AND 1996
Shares of common stock were reserved at December 31, 1996 for the following:
<TABLE>
<CAPTION>
Class A Class B
<S> <C> <C>
Exercise of 727,273 outstanding warrants exercisable
subsequent to December 31, 1997 in conjunction with
D.C. Partners acquisition -- 727,273
Conversion of 500,000 warrants into CNTI Class B common shares -- 500,000
Conversion of 300,000 warrants into CNTI Class B common shares -- 300,000
Conversion of 50,000 warrants into CNTI Class A common shares 50,000 --
Conversion of 250,000 warrants into CNTI Class A common shares 250,000 --
Conversion of 250,000 warrants into CNTI Class A common shares 250,000 --
Conversion of 270,834 warrants into CNTI Class A common shares 270,834 --
--------- ---------
820,834 1,527,273
========= =========
</TABLE>
15) BUSINESS SEGMENT INFORMATION
Segment information for the years ended December 31, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
Development
I997 Steel Stage Claims Parent Total
---- Products Insurance Processing Company CNTI
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 4,572,796 $ 300,000 $ 9,989,570 $ - $ 14,862,366
Operating
Income (loss) $ 175,207 $ (310,694) $ 719,880 $ (178,022) $ 406,371
Identifiable Assets $ 1,111,389 $ 3,127,193 $ 4,484,443 $ 720,022 $ 9,443,047
- ---------------------------------------------------------------------------------------------------------------------
1996
- ----
Revenues $ 2,676,306 $ - $ 1,672,720 $ - $ 4,349,026
Operating
Income (loss) $ 89,782 $ (397,885) $ (83,843) $ (322,339) $ (714,285)
Identifiable Assets $ 886,478 $ 2,493,862 $ 3,575,565 $ 572,543 $ 7,528,448
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE> 38
CENTURY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,1997 AND 1996
16) SUBSEQUENT EVENTS
The Company entered into two Letters of Intent with a NASD Member Firm on March
5, 1998, the first of which covers the private placement of $7,000,000 of the
Company's $10.00 par value Senior Callable convertible preferred shares, the
proceeds of which are earmarked for the capitalization of the new Florida
casualty insurance company. The second Letter of Intent covers the subsequent
registration of $12,000,000 - $ 15,000,000 of additional Senior Callable $10.00
par value convertible preferred shares, the proceeds of which are generally
intended for additional insurance related acquisitions.
USIB Holdings, L.P, subsumed a registration of the Company's convertible
preferred stock registered with the New York State Department of Law, nunc pro
tunc, ab initio, dated from the original registration effective date. This
subsumation replaces the Company's registration with a registration of USIB
Holdings LP Convertible Units to the Company's Class B common stock at the same
conversion rate.
F-20
<PAGE> 39
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no disagreements with the Company's presently engaged accountants,
Correa, Berger & Associates, CPA's, 67 Wall St., 2nd Floor, New York. NY 10005
who have audited the Registrant, Century Steel Products, Inc. (CSP), U.S.
Insurance Brokers, Inc. (USIB), Scibal Associates, Inc., and USIB Holdings LP.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The Company's Directors, Executive Officers, and their ages are:
<TABLE>
<CAPTION>
Name Position Age
- ---------------- ------------- ---
<S> <C> <C>
David A. Scibal Chairman 44
</TABLE>
Mr. Scibal Mr. Scibal serves as Chairman of the Board of the Company, President
and Chief Executive Officer of Scibal Associates and as Chairman OF USIB. He
began his insurance career in 1970 with Scibal Adjustment Bureau, a family
owned, independent adjusting firm. He founded Scibal Associates in 1984. Mr.
Scibal is a member of the Loss Executives Association, the National Association
of Independent Insurance Adjusters and was Treasurer of the International
Institute of Loss Adjusters. He is listed in "Who's Who in Industry and
Finance", as well as "Who's Who in Insurance".
<TABLE>
<S> <C> <C>
Joel M. Gundersheimer Director 53
</TABLE>
Mr. Gundersheimer was the founder of Century Steel Products, Inc., the
Company's subsidiary, and functioned as its President since 1979 until 1996. He
still functions as a Director of Century Steel Products, Inc.
<TABLE>
<S> <C> <C>
Theodore L. Schwartzbeck Director, President, Treasurer 35
</TABLE>
Mr. Schwartzbeck became President of the Company in 1996. He has served as a
Director since its inception. He has further served as the Executive Vice
President of Century Steel Products, Inc, since 1986, and became its CEO in
1996.
<TABLE>
<S> <C> <C>
Joseph P. DeAlessandro Director 67
</TABLE>
Mr. DeAlessandro began his casualty insurance career in the 1940's. He was
formerly Chairman of Gulf Insurance Company, Atlantic Insurance Company and
Select Insurance Company. He also served as Chairman of the Board of
Brookstone Insurance Company, and served as Vice President of American
International Group, Director and President of National Union Fire Insurance
Company and Executive Vice President and Director of American Home Insurance
Company. Mr. DeAlessandro was also Vice Chairman of American International
Group Specialty Agencies, Inc., and Vice Chairman of American International
Group Political Risk, Inc. He served as President and Director of American
International Group Entertainment, as well as President and Director of
American International Group Global Assistance, Inc.
Presently, Mr. DeAlessandro is President and Chief Executive Officer of Rutgers
Casualty Insurance Company; President and Chief Executive Officer of Kentucky
National Insurance Company; Chairman, President and Chief Executive Officer of
Holly Hill Limited; Chairman, President and Chief Executive Officer of
DeAlessandro and Associates, American European Group, United International
Insurance Company, the Company, and is Director and Chairman of the Executive
Committee of St. Joseph's School.
<TABLE>
<S> <C> <C>
A. Jay Pignatello Director, Vice President, Assistant Secretary 29
</TABLE>
Mr. Pignatello joined the Company in March, 1996 to act as the Director of
Shareholder Relations. He graduated from the University of Pennsylvania in
1992 and subsequently worked as a legal assistant in two major Washington, DC
law firms.
-20-
<PAGE> 40
The above Directors are all elected annually, and Messrs. Schwartzbeck, and
Gundersheimer have served since the inception of the Company in December of
1992. Mr. Scibal has served since 1996. Mr. DeAlessandro and Mr. Pignatello
have served since 1997. All of the Directors were appointed to serve for the
calendar year of 1997 and through 1998 at the 1997 annual meeting. Ted
Schwartzbeck has also served as Vice President of CSP since 1985 and President
of CSP since 1996, and President of USIB since 1995. Mr. Scibal remains as CEO
of Scibal Associates.
ITEM 10. EXECUTIVE COMPENSATION.
Executive Officers, who also serve as Directors of the Company, do not receive
compensation from the Company. Mr. Schwartzbeck receives his compensation as
President and CEO of Century Steel Products, Inc. and Mr. Scibal receives his
compensation as Chief Executive Officer of Scibal Associates, Inc. They do not
receive any compensation as Officers or Directors of the Company. Mr.
Gundersheimer receives his compensation as a Director of CSP. Mr. DeAlessandro
owns his own insurance business.
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Century Industries, Inc.
Name and Restricted All
Position Year Salary Bonus Other($) stock awards Other
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
David Scibal Chairman 1997 -0- -0- -0- -0- -0-
J.M. Gunder 1996 -0- -0- -0- -0- -0- -0-
Ted Beck 1996 -0- -0- -0- -0- -0- -0-
- --------------------------------------------------------------------------------
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
All 5% persons:
Name of Amount of
Beneficial Beneficial
Title of Class Owner Owner Percent of Class
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Common Voting
" " J.M. Gunder 349,501 10 %
" " Ted L. Schwartzbeck 347,167 10 %
" " David Scibal 760,000 22 %
- ------------------------------------------------------------------------------
</TABLE>
Management 5% persons and affiliates/control persons:
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Name of Amount of
Beneficial Beneficial
Title of Class Owner Owner Percent of Class
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Common Voting
" " J.M. Gunder 349,501 10 %
" " Ted L. Schwartzbeck 347,167 10 %
" " Richard Campanaro 58,000 02 %
" " David Scibal 760,000 22 %
" " Steven Scibal 60,000 02 %
- ------------------------------------------------------------------------------
</TABLE>
-21-
<PAGE> 41
- ---------------------------------------------------------------------------
Management Class A warrants:
If the 520,834 outstanding Class A common stock warrants owned by the
Executive Officers and their affiliates were exercised at $.01 per share, the
Company would have 3,893,514 shares outstanding, on a fully diluted basis. The
following share amounts and percentages would then apply:
<TABLE>
<CAPTION>
Name of Amount of
Beneficial Beneficial Common Stock
Title of Class Owner Owner Percent of Class
<S> <C> <C> <C>
Class A Common
" " " J.M. Gunder 484,918 12 %
" " " Ted Beck 482,584 12 %
" " " David Scibal 785,000 20 %
" " " Eric Arlt 200,000 5 %
</TABLE>
If the 1,000,000 outstanding Class A common stock warrants owned by the
USIB Trust* were exercised at $.01, the Company would have 4,893,514 shares
outstanding, on a fully diluted basis. The following share amounts and
percentages would then apply:
<TABLE>
<CAPTION>
Name of Amount of
Beneficial Beneficial Common Stock
Title of Class Owner Owner Percent of Class
<S> <C> <C> <C>
Class A Common
" " " USIB Trust 1,000,000 20 %
" " " J.M. Gunder 484,918 10 %
" " " Ted Beck 482,584 10 %
" " " David Scibal 785,000 16 %
" " " Eric Arlt 200,000 4 %
</TABLE>
_ The USIB Trust cannot exercise their warrants until USIB contributes
$.10 per share to the Company's consolidated earnings.
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Class B Warrants:
If the 300,000 outstanding Class B common stock warrants were issued to
affiliates, (1 vote for each 100 shares) convertible on a 1 for 1 basis, at
various exercise prices from $1.25 - $2.00 per share, the Company would have
4,473,680 Class B shares outstanding, on a fully diluted basis. If the Company
were to convert the 727,273 warrants* originally issued to David Scibal to Class
B shares, the Company would have 5,200,953 Class B shares outstanding, and the
following additional share amounts and percentages would apply:
<TABLE>
<CAPTION>
Name of Amount of
Beneficial Beneficial Common Stock
Title of Class Owner Owner Percentage
<S> <C> <C> <C>
Class B Common
" " " Eric Arlt 300,000 6 %
" " " David Scibal 727,273 14 %
</TABLE>
_ These Class B warrants are now the property of USIB Holdings LP, and
Management intends to apply these warrants towards the ultimate
conversion of certain USIB Holdings convertible LP Units presently
outstanding. These Units are not convertible until 1999.
_ The 300,000 restricted Class B warrants issued to Eric Arlt are
exercisable at prices ranging from $1.25 to $2.00.
- --------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
USIB and David Scibal formed USIB Holdings LP in 1997 to provide a go forward
basis for future acquisitions. David Scibal, the Chairman, contributed the
727,273 Class B warrants he received in consideration for his DCP shares in
1996 as capital, and the Company contributed $808, 000 in cash to the LP. USIB
is the General
-22-
<PAGE> 42
Partner, and Mr. Scibal is a Limited Partner. USIB will receive 80% of all
profits realized in the future, and Mr. Scibal will receive 20%. Mr. Scibal's
Class B warrants were valued at $1,192,000.
The Company has entered into a management agreement with Century Property &
Casualty Management Co., owned by Joseph P. DeAlessandro. The management
company will manage the proposed Florida property and casualty insurance
company the Company plans to form and subsequently capitalize to participate in
the State of Florida JUA Homeowners TakeOut Program described in detail above.
Mr. DeAlessandro is considered as an outside director, and is not a 5%
shareholder of the Company.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
The Registrant did not file any reports on Form 8-K during the last quarter of
the period covered by this Report.
-23-
<PAGE> 43
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Century Industries, Inc.
(Registrant)
<TABLE>
<S> <C>
Date: May 4, 1998 By: \S\ Ted L. Schwartzbeck
------------------------
Ted L. Schwartzbeck
President/CEO/Director/Treasurer
Date: May 4, 1998 By: \S\ David A. Scibal
-------------------
David A. Scibal, Chairman
Date: May 4, 1998 By: \S\ A. Jay Pignatello
------------------
A. Jay Pignatello
Vice President/Director
</TABLE>
-24-
<PAGE> 44
INDEX TO EXHIBITS
The following Exhibits are attached as required by Small Business Issuers:
(l) Underwriting agreement. Not applicable.
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession. Not applicable.
(3) Articles of Incorporation and by-laws. Incorporated by reference through
previously filed 10-K's.
(4) Instruments defining rights of holders. Incorporated by reference through
previously filed 10-K's.
(5) Opinion re legality. Not applicable.
(6) Opinion re liquidation preference. Not applicable.
(7) Opinion re liquidation preference. Not applicable.
(8) Opinion re tax matters. Not applicable.
(9) Voting trust agreement. Not applicable.
(10) Material contracts. Filed as 1996 8-K's.
(11) Statement re computation of per share earnings. See profit & loss income
statement audited financials Item 13 herein.
(12) Statement re computation of ratios. Not applicable.
(13) Annual or quarterly reports, Form 10-Q or quarterly report to security
holders. Not applicable.
(14) Material foreign contracts. Not applicable.
(15) Letter re unaudited interim financial information. Not applicable.
(16) Letter or change in certifying accountant. Not applicable.
(17) Letter re director resignation. Not applicable.
(18) Letter re change in accounting principles. Not applicable.
(19) Report furnished to security holders. Not applicable.
(20) Other documents or statements to security holders. Not applicable.
(21) Subsidiaries of the registrant. Attached as Exhibit (21).
(22) Published report regarding matters submitted to vote of security holders.
Not applicable.
(23) Consents of experts and counsel. Not applicable.
(24) Power of attorney. Not applicable.
(25) Statement of eligibility of trustee. Not applicable.
(26) Invitations for competitive bids. Not applicable.
-25-
<PAGE> 45
(27) Financial data schedule. Not applicable.
(28) Information from reports furnished to State Insurance Authorities. Not
applicable.
(29) Additional Exhibits. Not applicable.
-26-
<PAGE> 1
Exhibit (21).
21. A list of all subsidiaries, the State or other jurisdiction of
incorporation or organization of each, and the names under which the
subsidiaries do business.
<TABLE>
<CAPTION>
Name of State of
subsidiary Incorporation Does business as
- -------------------------------------------------------------------------
<S> <C> <C>
Century Steel
Products, Inc. Virginia Century Steel Products, Inc.
U.S. Insurance Brokers, District of U.S. Insurance Brokers, Inc.
Inc. Columbia
Scibal Associates, Inc. New Jersey Scibal Associates, Inc.
</TABLE>
-27-
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 282,009
<SECURITIES> 106,952
<RECEIVABLES> 1,907,446
<ALLOWANCES> 163,000
<INVENTORY> 256,695
<CURRENT-ASSETS> 3,125,564
<PP&E> 3,160,866
<DEPRECIATION> (1,083,443)
<TOTAL-ASSETS> 9,443,047
<CURRENT-LIABILITIES> 4,557,906
<BONDS> 260,267
0
1,000,000
<COMMON> 7,546,000
<OTHER-SE> 4,846,891
<TOTAL-LIABILITY-AND-EQUITY> 9,443,047
<SALES> 14,862,366
<TOTAL-REVENUES> 14,862,366
<CGS> 8,591,849
<TOTAL-COSTS> 5,864,146
<OTHER-EXPENSES> (509,634)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (103,263)
<INCOME-TAX> (37,100)
<INCOME-CONTINUING> (66,163)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (66,163)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
