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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-22653
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American Risk Management Group, Inc.
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(Name of small business issuer in its charter)
Florida
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(State or other jurisdiction of incorporation or organization)
65-0353816
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(I.R.S. Employer Identification No.)
1900 Corporate Blvd., Suite 400 East, Boca Raton, FL 33431
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number 561-988-2544
Securities registered under Section 12(b) of the Exchange Act:
none not applicable
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(Title of each class) Name of each exchange on which registered
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
Yes [x] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. x]
State issuer's revenues for its most recent fiscal year. $ 4,072,036 from
continuing operations for the 12 months ended June 30, 1999.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. The aggregate market value of the voting stock held by non-affiliates
computed at the closing bid price for which the Company's common stock at
reported on The OTC Bulletin Board August 31, 1999 is approximately $ 2,979,379.
State the number of shares outstanding of each of the issuer's class of
common equity, as of the latest practicable date. As of September 7, 1999, there
are 6,149,751 shares of Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe
them and identify the part of the Form 10-KSB into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) of
the Securities Act of 1933 ("Securities Act").
Transitional Small Business Disclosure Form (check one):
Yes No X
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PART I
ITEM 1. Description of Business
General
American Risk Management Group, Inc., formerly known as Coventry Industries
Corp, and Workforce Systems Corp. (the "Company"), is a Florida corporation
formed on August 17, 1992 to seek acquisition possibilities throughout the
United States and to make acquisitions or enter into other business endeavors to
the extent its limited assets would allow. Pursuant to this strategy, American
Risk has bought and sold several businesses over the last few years. At this
time, our current businesses are PeopleFirst Staffing LLC and Industrial
Fabrication & Repair, Inc. ("IFR"). PeopleFirst functions as an administrative
services organization to provide small-to medium-sized businesses with
comprehensive, fully integrated outsourcing solutions to human resource needs,
including payroll management, workers' compensation risk management, benefits
administration, unemployment services and human resource consulting services. We
completed the acquisition of PeopleFirst on September 7, 1999. IFR provides
machining, welding, specialty design and fabrication for custom applications to
clientele from various industries including paper, steel mills, rock quarry
operations, coal mining applications and bottling facilities. IFR is also an
authorized factory distributor for many of the components used in its business.
Lester Gann, the president of IFR has recently informed us that he is
considering exercising his contractual rights to reacquire IFR in exchange for
his American Risk common stock.
The Company in the process of liquidating the Federal Supply, Inc. and
Federal Fabrication, Inc. subsidiaries (collectively, "Federal"), which has been
losing money in recent periods. The Company expects to realize our basis from
this event.
On September 30, 1998, the Company entered into the exchange agreement with
BSD Healthcare Industries, Inc. ("BSD"), PeopleFirst and PeopleFirst's members.
BSD operated a respiratory therapy and respiratory therapy management business.
Effective July 1, 1999 we sold BSD's business back to Messrs. Rosedale and
Wilheim in exchange for 75,000 shares of our common stock.
PEOPLEFIRST
American Risk acquired PeopleFirst ("PF") to function as an administrative
services organization to provide small-to medium-sized businesses with
comprehensive, fully integrated outsourcing solutions to human resource needs,
including payroll management, workers' compensation risk management, benefits
administration, unemployment services and human resource consulting services.
The services are designed to enable small and medium-sized businesses to
cost-effectively manage and enhance the employment relationship by: (i)
controlling the risks and costs associated with workers' compensation, workplace
safety and employee-related litigation; (ii) providing employees with high
quality health care coverage and related benefits; (iii) managing the
increasingly complex legal and regulatory environment affecting employment; (iv)
providing payroll and human resource administrative services that are reliable,
accurate and delivered in a friendly and caring way; (v) outsourcing
administrative non-core competency responsibilities and (vi) achieving scale
advantages typically available to larger organizations. As of September 7, 1999,
PF serves over 6,000 employees at more than 80 worksites in 22 states, primarily
in the healthcare industry. These employees work for several clients engaged in
various aspects of the health care industry ranging from nursing homes to home
health care operations.
PeopleFirst was established by Messrs. Rosedale and Wilheim in 1998 and
began operations in July 1999. In August 1999, PeopleFirst signed a letter of
intent with CHS Homecare Services, Ltd. ("CHS"), an entity owned by Messrs.
Rosedale and Wilheim; to provide services to approximately 6,300 employees of
CHS. A master agreement has been negotiated. The letter of intent is attached as
Exhibit 10.22 to this document. CHS owns Healthforce, which has been in the home
health care and staffing business for over 10 years. In order to enable
PeopleFirst to deliver a more comprehensive level of services, the majority of
our clients, including CHS, will convert to a more traditional PEO contract
effective January 1, 2000.
A PEO contractually assumes certain administrative, regulatory and
financial employer responsibilities for the worksite employees in a
"co-employment" relationship. PeopleFirst believes its clients benefit from the
PEO's services by:
o improving profitability through lowering or controlling costs associated
with workers' compensation, health insurance, other benefit coverage and
regulatory compliance;
o improving productivity through reducing the time and effort expended by
business owners and executives to deal with the complexities of employment
management, enabling them to focus on their business core competencies and
growth; and
o improving employee satisfaction and performance.
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We help our worksite employers improve job satisfaction and performance of
worksite employees by providing improved health care and related benefits,
delivering training programs and delivering dependable payroll and benefits
administration.
As co-employer of worksite employees, the PEO assumes responsibility for
and manages the risks associated with:
o worksite employee payroll;
o employee-related benefits, such as workers' compensation and health care
insurance coverage; and
o compliance with certain employment-related governmental regulations that
can be effectively managed offsite from the client's business.
The client retains responsibility for supervision and direction of the worksite
employees' services in its business and generally remains responsible for
compliance with other employment-related governmental regulations that are more
closely related to worksite employee supervision. Our service fee to our clients
includes the cost of certain employment-related taxes, workers' compensation
insurance coverage and risk management services, administrative and field
services, wages of worksite employees and the client's portion of health and
retirement benefit plan costs. We also will provide other value-added services
such as temporary staffing, recruiting, training and human resource consulting.
Professional Employer Organization Industry
According to industry analysts, the PEO industry has approximately $22
billion in annual revenues with an historical growth rate over the last five
years of approximately 30% per year. According to the U. S. Small Business
Administration, there are nearly six million businesses in the United States
with fewer than 500 employees, employing over 52 million persons and with $1.2
trillion in aggregate annual payroll. The National Association of Professional
Employer Organizations ("NAPEO") estimates that the PEO industry co-employs
fewer than three million worksite employees, leaving approximately 49 million
employees currently not served by the PEO industry.
The PEO industry is highly fragmented. NAPEO data suggest that there are at
least 2,200 PEOs currently in operation. According to industry analysts, the ten
largest PEOs account for approximately 35% of existing revenues in the industry.
We believe that significant consolidation opportunities exist within the PEO
industry due to increasing industry regulatory complexity and capital
requirements associated with developing larger service delivery infrastructures,
more diversified services and more sophisticated management information systems.
Demand for Services. The PEO industry evolved in the early 1980s in
response to increasing employment and benefit costs, and the complexities of the
legal and regulatory environment for the rapidly expanding small-to medium-sized
business sector. We believe demand for PEO services will continue to increase
as:
o employment-related governmental regulation grows more complex;
o growth continues within the small-to medium-sized business community;
o the need to provide health and retirement benefits in a cost-effective
convenient manner increases; and
o the business and regulatory communities accept and recognize the PEO
industry.
While various service providers, such as payroll processing firms, benefits and
safety consultants and temporary services firms, are available to assist these
businesses with specific tasks, these organizations do not typically provide the
more comprehensive range of services generally offered by PEOs. PEOs enter into
agreements with numerous small-to medium-sized employers, and can therefore,
achieve economies of scale as professional employers and offer benefits packages
and human resource services at a level typically available only to larger
companies, which have greater resources to devote to human resources,
management.
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Effectiveness of Services. According to estimates by the U.S. Small
Business Administration, the management of an average small-to medium-sized
business devotes from 7% to 25% of its time to employee-related matters, leaving
management with less time to focus on core competencies. A National Federation
of Independent Business survey of small businesses in 1996 showed that six of
the top 13 major problem areas for small business are issues that can be
addressed by PEOs. These include (with their rank in importance according to the
survey) cost of health insurance (1), workers' compensation costs (3), Federal
paperwork (7), frequent changes in Federal tax laws (9), finding qualified
employees (11) and state/local paperwork (13). Work-related injuries cost
employers over $53 billion in medical expenses and lost employee productivity
each year, according to industry estimates. A PEO can manage these costs through
effective workers' compensation injury prevention, medical management,
rehabilitation and return to work programs. Employees are typically attracted to
small and medium-sized businesses that provide employees with human resource
benefits and services more characteristic of large employers. An industry
analyst's study indicated that 40% of the companies that outsource services to a
PEO upgraded their employee benefits offerings and one-fourth of those clients
offered health care and other benefits for the first time.
PeopleFirst believes that the market for its clients will primarily consist of
worksites with 10 to 100 employees, because at these levels it generally is not
economical for companies to have in-house human resource capabilities.
PeopleFirst believes that its success will depend on its ability to demonstrate
to potential clients that it offers cost-effective products and the ability to
eliminate unproductive administrative functions.
Strategy
Our strategy is to be a preferred human resources partner in the healthcare
and other areas by leveraging operational excellence, technology and strategic
alliances to achieve market leadership. This strategy is based on our belief
that:
- PEO services will continue to experience growing demand because of the
trend among small-to medium-sized employers to: (i) outsource non-core
competencies; (ii) reduce employee benefit costs; (iii) avoid employee-related
risks and regulatory complexities; and (iv) attract better employees through
improved benefit plans.
- The market for PEO services, based on analyst reports, is more than 95%
unserved and is expected to grow at the rate of 30% per year for the next five
years.
- The PEO industry is highly fragmented with significant consolidation
opportunities for companies with access to capital, larger service delivery
infrastructures, and sophisticated management information systems.
- PEOs typically take a transaction processing approach to their services
and do not emphasize the improved workforce performance characteristics of
satisfied employees.
- In selecting PEO providers, small-to medium-sized businesses will
increase their emphasis on cost-effectiveness, service excellence and breadth of
services provided.
- Employees are attracted to small and medium-sized businesses that provide
employees with human resources services more characteristic of large employers.
- Strategic alliances will enable PEOs to enhance endorsement
opportunities, expand the distribution channel and broaden the service/product
offering.
PeopleFirst intends to actively seek additional acquisitions in order to achieve
economies of scale.
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Services provided by the PEO
The following is a summary of the services traditionally provided by a PEO:
<TABLE>
<CAPTION>
Workers Compensation and Risk Management
<S> <C>
- - Provision of coverage - Negotiation of rates
- - Issuing workers compensation certificates - Administration of claims
- - Maintenance of OSHA logs - Return to work/light duty programs
- - Safety audits/inspections - Maintain claims files
- - Safety training - Develop/implement safety incentive programs
- - Development of client manuals
Health/Benefits
- - Provision of coverage (medical, dental, vision, etc.) - Negotiation of rates
- - COBRA Administration - Provision/administration of Sec 125 program
- - Enrollment/explanation of benefits - Provision/administration of 401k program
- - Other benefits (prepaid legal, credit union, etc)
Human Resources
- - Maintenance of personnel files - I-9 maintenance/compliance
- - Development of client specific policies/procedures - Training
- - Development of employee handbooks - ADA, FMLA, EEOC, ADEA, etc. compliance
- - Development of On Site Supervisor manuals - Unemployment claims administration
- - Requisite on-site postings (min. wage, etc.)
Payroll/Tax Compliance
- - Payroll processing - Quarterly filings
- - Delivery of checks/direct deposit - Annual filings
- - Tax deposits - W-2s, W-4s
- - Certified payrolls - Payroll/labor reporting
- - Garnishments - Child support payments
PEOs have recently started offering additional products and services:
Products
- - General liability insurance - Commercial auto insurance
- - Employment Practices liability insurance - Various health/life/disability "add-ons
- - Bonding
Services
- - HR training - HR testing/profiling
- - Compensation structure/planning - Recruiting
- - Discount club memberships - Travel agency services
</TABLE>
Revenue Sources
The value of a PEO has resided in its ability to deliver cost-effective
products and services as a result of economies of scale and efficiencies of
size. A significant portion of a PEO's profit is derived from the administrative
fee charged to client companies. This fee has ranged historically from 2-6% and
is currently averaging 2-3% of gross payroll, depending on the method of
calculation. Worker compensation and unemployment taxes are the other two
primary profit centers for PEOs with these percentages varying by type of client
and, again, by method of computation. A fourth profit center for some PEOs has
been benefits; by "bundling" its health care charge in an all inclusive
percentage fee, certain PEOs have been able to convert a "pass through" cost to
a profit center.
Workers' Compensation and Health Care Program
Historically, the majority of a PEO's controllable direct costs relate to
workers' compensation benefits and health care. Consequently, our ability to
manage these worksite employee costs will be critical to our success and
profitability. To effectively manage our workers' compensation and health care
costs, we will utilize: (i) careful underwriting and selection of new clients;
(ii) effective workers' compensation injury prevention, medical management,
rehabilitation and return to work techniques; and (iii) the health care services
of CHS and other health care provider networks in key markets.
If an injury occurs, our goal will be to take control of the claim within
24 hours after receipt of the injury report, aggressively medically manage the
injury by coordinating with the worksite employer, employee and provider, and
return the employee to work as early as is safe and feasible. This approach
substantially lowers injury-related costs, particularly the most expensive cost
component, lost workdays.
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When buying health care coverage for its employees, PeopleFirst believes it
will be in a favorable position with insurers, as a result of the participation
of CHS in local market integrated health care delivery systems as well as the
leverage that PeopleFirst's scale provides. We believe that we will be able to
achieve attractive health care rates by forming strategic partnerships with
national and regional providers in each local market.
Manufacturing Division
The Manufacturing Division of the Company currently consists of IFR. For
the fiscal year ended June 30, 1999, the Manufacturing Division accounted for
all of the Company's revenues on a consolidated basis.
As a result of a combination of broad industry experience, top quality
component products, specialized design and custom fabrication capabilities; the
Manufacturing Division is able to market its products and services to a wide
range of industries.
Moreover, while the breadth of its product offering covers a wide range of
specific applications, customers within a single industrial plant often utilize
individual products separately or jointly. As the Manufacturing Division
continues to expand the scope of its operations, through both internal means and
by acquisition, the Company believes that it enhances its position as a one-stop
source for a variety of its customer's needs.
IFR provides machining, welding, specialty design and fabrication for
custom applications to clientele from various industries including wood, lumber
and paper, steel mills, stone and asphalt companies, utilities, excavation
contractors, reclamation operations, electronic and automobile manufacturers,
coal mining applications and bottling facilities.
IFR is also an authorized distributor for a variety of component products,
including engineering and roller chain, conveyor pulleys and idlers, gear and
motor drives, bearings and industrial v-belts from manufacturers such as Webster
Chain, Allied-Locke-Moline, Precision Inc., Superior Idlers, Eurodrvie and
Dunlop. IFR's business and services are marketed through its five sales
representatives. IFR's primary distribution methods include common carrier,
company owned vehicles and recognized package services such as UPS and Federal
Express. A significant portion of IFR's business is generated from its long
standing relationships with clients within the 150 mile radius of Knoxville,
Tennessee including Coca-Cola Co., Pepsico, Kimberly-Clark Corp., American
Limestone, Florida Steel Corp., Vulcan Materials Co., Dixie Cement, Blue Diamond
Coal, TRW-Koyo and Westinghouse. While IFR maintains standard distribution
agreements with its suppliers, the terms of which are customary to its industry,
IFR has no long-term agreements with any supplier. While there can be no
assurances, in the event IFR should be unable to obtain component products from
one or more existing supplier, management of the Company does not foresee any
difficulty in locating one or more alternative suppliers at competitive prices
for the component products used by IFR. No single client accounted for more than
5% of IFR's annual revenues for the fiscal year ended June 30, 1999. Although
IFR does not maintain long term contracts with its customers, and while there
can be no assurances, management of the Company does not anticipate the loss of
any one customer would have a material adverse effect on the business and
operations of the IFR.
Federal was a fabricator and distributor of custom-designed fire sprinkler
systems and components for use in both commercial and residential application.
Its present customer base was located in South Florida. Federal's principal
products included pipe, valves, screwed and grooved fittings, sprinkler head and
hanger materials. Due to the continuing losses incurred by Federal and adverse
market conditions, the Company elected to close down and liquidate Federal on
June 30, 1999. . The Company expects to realize its basis from this event.
Competition
The PEO industry consists of at least 2,200 companies (according to an
estimate by NAPEO), most of which serve a single market or region. According to
industry analysts, the ten largest PEOs account for approximately 35% of the
existing revenues in the industry. PeopleFirst considers its primary competition
to include: (i) traditional in-house human resource departments; (ii) other
PEOs; and (iii) providers of unbundled employment-related services, such as
payroll processing firms, temporary employment firms, commercial insurance
brokers, human resource consultants, workers' compensation insurers, HMOs and
other specialty managed care providers.
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Competition in the highly fragmented PEO industry is generally on a local
or regional basis. Management believes that the primary elements of competition
are quality of service, choice and quality of benefits, reputation and price.
PeopleFirst believes that brand recognition, regulatory expertise, financial
resources, risk management, information technology capability, strategic
alliances, and economies of scale can distinguish a large-scale PEO from the
rest of the industry. PeopleFirst believes that will compete favorably in these
areas.
While IFR competes with numerous fabricators in the East Tennessee area,
management of IFR believes it has limited direct competition as a result of the
comprehensive nature of its services. Within the 150-mile radius of its client
base, IFR is one of a select few fabricators, which offers a full bevy of
services from concept and design to engineering and prototype to custom systems.
There can be no assurances, however, that IFR in fact will maintain a
competitive advantage or that if such competitive advantage exists, IFR will be
able to retain this advantage in the future. There are no assurances that the
employee services or insurance businesses will be able to effectively compete in
their markets.
Government Regulation and Environmental Compliance
PeopleFirst is subject to local, state and Federal regulations, which
include operating, fiscal and licensing requirements. Adding complexity to the
regulatory environment are: (i) uncertainties resulting from the non-traditional
employment relationships created by PEOs; (ii) variations in state regulatory
schemes; and (iii) the ongoing evolution of regulations regarding health care
and workers' compensation.
Many of the Federal and state laws and regulations relating to tax, benefit
and employment matters applicable to employers were enacted prior to the
development of non-traditional employment relationships and, accordingly, do not
specifically address the obligations and responsibilities of PEOs or the
co-employment relationship. PEO services are regulated primarily at the state
level and regulatory requirements regarding the PEO business vary from state to
state, and as we enter new states we will be faced with new regulatory and
licensing environments. We may not be able to satisfy the licensing requirements
or other applicable regulations of any particular state, to provide the full
range of services currently offered or operate profitably within the regulatory
environment of any state in which we do not obtain regulatory approval. If we
cannot obtain required licenses we would have to restrict the services we offer.
New legislation or new interpretations of current licensing and regulatory
requirements could impose operating or licensing requirements that we may not be
able to satisfy or which could materially adversely affect our business.
Additionally, interpretation of legislation or regulation by regulatory agencies
with broad discretionary powers could require us to materially modify our
existing operations in order to comply with applicable regulations.
The application of many laws to our PEO services will depend on whether we
are considered an employer under the relevant statutes and regulations. The
Internal Revenue Service ("IRS") is currently examining this issue. See
"Employee Benefit Plans" below. In addition, from time to time there have been
proposals to enact a statutory definition of employer for certain purposes of
the Code.
Regulation in the health care and workers' compensation fields continues to
evolve. Numerous reform proposals have been the subject of debate at both the
Federal and state government levels. We cannot predict what effect any proposed
reform will have on its business. New legislation resulting in increased health
care or workers' compensation costs, which comprise a significant portion of our
direct costs could damage our business if we are not able to reflect promptly
these increased costs in our service fees.
PEO Licensing Requirements. A critical aspect of the growth of the PEO
industry has been the increasing recognition and acceptance of PEOs by state
authorities. As the concept of PEO services has become more understood by
regulatory authorities, the regulatory environment has begun to shift from one
of skepticism to one of recognition. During the mid-to late-1980s, legitimate
industry participants were challenged to overcome well-publicized failures of
financially unsound and, in some cases, unscrupulous operators.
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While many states do not explicitly regulate PEOs, approximately one-third
have licensing or registration requirements for PEOs and several additional
states are considering adopting regulation. Laws vary from state to state but
generally provide for monitoring the fiscal responsibility of PEOs. State
regulation assists in screening insufficiently capitalized PEO operations,
imposes requirements regarding payment of wages, taxes, benefits and workers'
compensation and resolves issues concerning an employee's status for specific
purposes under applicable state law. Because existing regulations are relatively
new, there is limited interpretive or enforcement guidance available. The
development of additional regulations and interpretation of existing regulations
can be expected to evolve over time.
Federal and State Employment Taxes. We assume the responsibility and
liability for the payment of Federal and state employment taxes with respect to
wages and salaries paid to our employees, including worksite employees. There
are essentially three types of Federal employment tax obligations: (i) income
tax withholding requirements; (ii) social security and Medicare obligations
under FICA; and (iii) unemployment obligations under FUTA. Under the applicable
Code sections, the employer has the obligation to remit the employer portion
and, where applicable, to withhold and remit the employee portion of these
taxes.
To date, the IRS has relied extensively on the common law test of
employment in determining employer status and the resulting liability for
failure to withhold. However, the IRS has formed a Market Segment Study Group
for the stated purpose of examining whether PEOs, such as PeopleFirst, are the
employers of the worksite employees under the Code provisions applicable to
Federal employment taxes and, consequently, whether they are exclusively
responsible for payment of employment taxes on wages and salaries paid to such
employees. Another stated purpose of the Market Segment Study Group is to
determine whether owners of client companies can be employees of PEOs under the
Federal employment tax laws.
IRS officials have reported that the Market Segment Study is near
completion and that the issuance of a tax advice memorandum has been delayed
pending the outcome of legislation proposed by the PEO and other staffing
industries. NAPEO, through coordination with other staffing trade associations,
has introduced a bill known as the Staffing Firm Workers Benefit Act of 1997
("HR 1891"). HR 1891 would establish that the PEO is the employer for the
purposes of tax collection, reporting and remittance. Further HR 1891 would
clarify and establish that a PEO is an employer and can sponsor employee benefit
plans, including defined contribution plans, such as, 401(k) plans. The staffing
industries believe that HR 1891 will become law at some point in the future.
The interpretive uncertainties raised by the Market Segment Study Group may
affect our ability to report employment taxes on our own account rather than for
the accounts of our clients and would increase administrative burdens on our
payroll service function. In addition, while we believe that we can
contractually assume the Client Company's withholding obligations, in the event
we fail to meet these obligations, the Client Company may be held jointly and
severally liable for those obligations.
Employee Benefit Plans. We offer various employee benefit plans to its
worksite employees, including 401(k) plans (a profit-sharing plan with an
employer contribution feature), cafeteria plans, group health plans, group life
insurance plans, group disability insurance plans and employee assistance
programs. Generally, employee benefit plans are subject to provisions of both
the Code and the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). In order to qualify for favorable tax treatment under the Code, the
plans must be established and maintained by an employer for the exclusive
benefit of its employees.
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The Market Segment Study Group established by the IRS is examining whether
PEOs are the employers of worksite employees under Code provisions applicable to
employee benefit plans and consequently able to offer to worksite employees
benefit plans that qualify for favorable tax treatment. The Market Segment Study
Group is also examining whether client company owners are employees of PEOs
under Code provisions applicable to employee benefit plans. We are unable to
predict the actual timing or nature of the findings of the Market Segment Study
Group or the ultimate outcome of conclusions or findings. If the IRS study were
to conclude that a PEO is not an employer of its worksite employees for plan
purposes, worksite employees might not be able to continue to make contributions
to our 401(k) plans or cafeteria plans. We believe that, although unfavorable to
PeopleFirst, a prospective application by the IRS of an adverse conclusion would
not have a material adverse effect on our financial position and results of
operations. If this conclusion were applied retroactively, employees' vested
account balances would become taxable immediately, we would lose our tax
deduction to the extent the contributions were not vested, the plans' trusts
would become taxable trusts and penalties could be assessed. In this case, we
would face the risk of client dissatisfaction as well as potential litigation.
While we believe that a retroactive disqualification is unlikely, we do not know
the ultimate resolution of these issues.
In addition to the employer/employee relationship requirement described
above, pension and profit sharing plans, including our 401(k) plans, must
satisfy certain other requirements under the Code. These other requirements are
generally designed to prevent discrimination in favor of highly compensated
employees to the detriment of non-highly compensated employees with respect to
both the availability of, and the benefits, rights and features offered in,
qualified employee benefit plans. We apply the nondiscrimination requirements of
the Code at both a consolidated and client company level to ensure that its
401(k) plans are in compliance with the requirements of the Code.
Employee pension and welfare benefit plans are also governed by ERISA.
ERISA defines the term employer as "any person acting directly as an employer,
or indirectly in the interest of an employer, in relation to an employee benefit
plan." ERISA defines the term employee as "any individual employed by an
employer." The United States Supreme Court has held that the common law test of
employment must be applied to determine whether an individual is an employee or
an independent contractor under ERISA.
A definitive judicial interpretation of employer in the context of a PEO or
employee leasing arrangement has not been established. If PeopleFirst were found
not to be an employer for ERISA purposes, its plans might not comply with ERISA,
the level of services we could offer may be materially adversely affected, and
our plans might not enjoy the preemption of state laws provided by ERISA and
could be subject to varying state laws and regulations, as well as to claims
based upon state common laws.
Workers' Compensation. Workers' compensation is a state-mandated,
comprehensive insurance program that requires employers to fund or insure
medical expenses, lost wages and other costs resulting from work-related
injuries and illnesses. In exchange for providing workers' compensation coverage
for employees, employers are not subject to litigation by employees for benefits
in excess of those provided by the relevant state statute. In most states, the
extensive benefits coverage (for both medical costs and lost wages) is provided
through the purchase of commercial insurance from private insurance companies,
participation in state-run insurance funds or employer self-insurance. Workers'
compensation benefits and arrangements vary on a state-by-state basis and are
often highly complex. These laws establish the rights of workers to receive
benefits and to appeal benefit denials. Workers' compensation laws also regulate
the methods and procedures that we may employ in its workers' compensation
managed care programs. For example, workers' compensation laws prohibit medical
co-payment and deductible payment by employees. In addition, certain states
restrict employers' rights to direct health care providers and establish maximum
fee levels for treatment of injured workers.
As a creation of state law, workers' compensation is subject to change by
each state's legislature and is influenced by the political processes in each
state. Several states have mandated that employers receive coverage only from
state-operated funds. Florida and other states have adopted legislation
requiring that all workers' compensation injuries be treated through a managed
care program. While such legislation may increase the market for our workers'
compensation managed care services, it may also intensify the competition we
face for these services. In addition, Federal health care reform proposals
include a proposal that may require 24-hour health coverage, in which the
coverage of traditional employer-sponsored health plans is combined with
workers' compensation coverage to provide a single insurance plan for health
problems, whether or not related to work. Incorporating workers' compensation
coverage into conventional health plans may adversely affect the market for our
services and may intensify our competition from HMOs and other health care
providers. Also, because workers' compensation benefits are mandated by law and
are subject to extensive regulation, payers and employers do not have the same
flexibility to alter benefits as they have with other health benefit programs.
Finally, because workers' compensation programs vary from state to state, it is
difficult for payers and multi-state employers to adopt uniform policies to
administer manage and control the costs of benefits.
-8-
<PAGE>
Other Employer-Related Requirements. As an employer, we are subject to a
wide variety of Federal, state and local laws and regulations governing
employer-employee relationships, including the Immigration Reform and Control
Act, the Americans with Disabilities Act, the Family and Medical Leave Act, the
Occupational Safety and Health Act, wage and hour regulations, and comprehensive
local, state and Federal civil rights laws and regulations, including those
prohibiting discrimination and sexual harassment. The definition of employer may
be broadly interpreted under these laws.
Responsibility for complying with various state and Federal laws and
regulations is allocated by agreement between PeopleFirst and its clients, or in
some cases is the shared responsibility of both. Because we act as a co-employer
with the Client Company, it is possible that we could incur a liability for
violations of laws even though we are not contractually or otherwise responsible
for the conduct giving rise to such liability. Our standard client service
agreement generally provides that the client will indemnify us for liability
incurred as a result of an act of negligence of a worksite employee under the
direction and control of the client or to the extent the liability is
attributable to the client's failure to comply with any law or regulation for
which it has specified contractual responsibility. However, we may not be able
to enforce this indemnification and we may ultimately be responsible for
satisfying the liability in question.
Manufacturing
The operations of the Manufacturing Division are not subject to any state
or government regulations at the present time, other than normal and customary
rules and regulations, including environmental regulations, to which most
companies are subject to. There can be no assurances, however, that future
regulations at the state or federal level, if adopted, will not have a material
adverse effect on the operations of the Manufacturing Division.
Proposed Insurance Business
American Risk is seeking to acquire one or more entities to both underwrite
and sell life and health insurance to individuals and companies. American Risk
will offer various insurance products to the employees through voluntary benefit
or payroll deduction programs. We hope to develop a network of company-owned
agencies and independent agents.
Strategy
Our business strategy is to seek growth of our business by
o selectively expanding our product by offering programs such as life and
health insurance and marketing these products and programs through our
distribution network;
o acquiring additional insurance agencies and establishing relationships with
additional independent agents in order to expand our distribution network
to, and market its products and services;
o expanding marketing of insurance products to customers through direct mail,
media advertising and the Internet;
o maintaining a commitment to provide quality service to our insureds and
agents by emphasizing customer service;
o encouraging agents to place a high volume of quality business with us by
providing them with attractive commission structures tied to premium levels
and loss ratios; and
o identifying and reviewing opportunities to acquire insurers.
We are currently exploring various acquisition opportunities, but do not
currently have any understandings, commitments, arrangements or agreements with
respect to any acquisitions.
Insurance
Our proposed insurance subsidiary or its designated employees must be
licensed to act as agents by state regulatory authorities in the states in which
it conducts business. Regulations and licensing laws vary in individual states
and are often complex.
The applicable licensing laws and regulations in all states are subject to
amendment or reinterpretation by state regulatory authorities, and such
authorities are vested in most cases with relatively broad discretion as to the
granting, revocation, suspension and renewal of licenses. The possibility exists
that the Company could be excluded or temporarily suspended from carrying on
some or all of its activities in, or otherwise subjected to penalties by, a
particular state.
-9-
<PAGE>
Employees
As of August 31, 1999, the Company had approximately 30 employees, all of
whom were full time.
Item 2. Description of Property
The Company maintains its principal executive offices in Boca Raton,
Florida of approximately 125 square feet of commercial office space with an
unaffiliated third party on a one-year lease. Federal leases an aggregate of
approximately 38,500 square feet of office/warehouse space in Pompano Beach,
Florida from unaffiliated third parties under leases expiring on September 30,
2001 for an aggregate annual rental of approximately $176,000. Federal subleases
an aggregate of 12,000 square feet to an unaffiliated third party under a
sublease expiring on September 23, 1999, which provides aggregate rental
payments to Federal of approximately $56,400. On June 25, 1999 the Company
entered into a lease termination agreement with the landlord on the Federal
leases whereby, upon payment of all rents due through June 30, 1999 and the
release of the security deposits to the landlord, all further obligations under
the lease would terminate without further liability to the Company. Federal also
had the right to occupy a 4,000 square foot portion of the facility until
September 30, 1999 without additional costs.
Prior to its acquisition by the Company, IFR's principal offices were
located in a 13,500 square foot office/industrial building in Knoxville,
Tennessee which was leased by IFR from Mr. Gann, IFR's President and then sole
shareholder, on an annual basis at a monthly rental of $3,400. Following the
Company's acquisition of IFR, IFR continues to lease this space from Mr. Gann.
In June 1995 the Company, through a wholly owned subsidiary Workforce Properties
Corp., acquired fee simple title to a 35,000 square foot office/industrial
building in Knoxville, Tennessee from an unrelated third party.
This building was encumbered by an existing first mortgage in the original
principal amount of approximately $585,000, with interest at 7 3/4% over the
110-month term, which commenced in June 1993. The first mortgage provided for an
initial monthly payment of $4,800 with a monthly increase of 0.377% during the
term of the mortgage and no pre-payment penalty. The mortgage will be satisfied
in full upon the timely payment of all 110 monthly payments. The Company assumed
the existing first mortgage on the building, with a remaining principal balance
of approximately $390,000 pursuant to the original terms and conditions of the
first mortgage.
In connection with the purchase of the building, the Company assumed
certain obligations to pay past due city and county real estate taxes due on the
property. Prior to such assumption, the Company negotiated an arrangement with
the City of Knoxville for the payment of the past due taxes, which approximated
$110,000 in the aggregate for the years 1990 through 1997, over a period of 36
months by making monthly installments of $2,000 with a balloon due at the end of
the term. The Company also assumed a similar arrangement the prior owner of the
property had negotiated with Knox County for the payment of past due taxes,
which approximated $44,000 for the years 1994 through 1997, over a period of 36
months by making monthly installments of $1,684. On July 2, 1999, the Company
sold the building to Lester and Glenda Gann. Mr. Gann is the President of the
Company's IFR subsidiary. The building was sold for $450,000 plus the assumption
of certain liabilities. A portion of the proceeds from the sale was utilized to
payoff the existing mortgages in full and satisfies all outstanding tax liens on
the property. The Company no longer has any liabilities associated with the
property. The Company now leases the building for its IFR subsidiary from Mr.
Gann on a month to month basis at a cost of approximately $7,500 per month.
The building, which is in good condition, is sufficient for the Company's
present needs and management of the Company believes it is adequately covered by
insurance. All of the leased locations are presently sufficient for the required
purposes and should the Company wish to relocate any office in the future,
management does not believe it would experience any difficulty in locating and
securing alternative office space at a reasonable rate.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
-10-
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Pursuant to the written consent of a majority of the Company's shareholders, the
following actions were approved and became effective on September 7, 1999:
1. STOCK ISSUANCE AND CHANGE OF CONTROL. An aggregate of 5,000,000 shares
of common stock, $0.01 par value, have been issued in connection with the
acquisition of PeopleFirst Staffing, Ltd. and the associated change of control
of the Company.
2. AMENDMENT TO CERTIFICATE OF INCORPORATION.The Company has approved an
amendment to the Articles of Incorporation that increased the number of
authorized shares of preferred stock from 250,000 shares to 5,000,000 shares and
the common stock from 3,125,000 shares to 50,000,000 shares common stock and
changed the name to American Risk Management Group, Inc.
3. ELECTION OF DIRECTORS. Five directors have been elected to the Board of
Directors until the next annual meeting or until their successors have been
qualified;
4. STOCK OPTION PLAN. The 1999 Stock Option Plan has been approved.
5. APPOINTMENT OF ACCOUNTANTS. The Company has appointed JH Cohn LLP as its
auditors for the fiscal year ending June 30, 1999.
-11-
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
On August 26, 1994 American Risk's common stock began trading on the OTC
Bulletin Board. On April 4, 1997, simultaneous with the one for four stock split
of American Risk's common stock, the common stock began trading under the symbol
"WFSY." On November 12, 1997 American Risk's common stock began trading on the
Nasdaq SmallCap Market under the symbol "COVN." On May 7, 1999 the common stock
was delisted from the Nasdaq SmallCap Market and resumed trading on the OTC
Bulletin Board. The following table sets forth the high and low bid prices of
American Risk's common stock as reported on the OTC Bulletin Board for each
quarter from July 1, 1997 through November 11, 1997 and from May 10, 1999
through June 30, 1999. The quotations provided from November 12, 1997 through
May 7, 1999 are as reported on The Nasdaq SmallCap Market(TM), All prices are
adjusted to give effect to the 1-for-8 reverse stock split in March 1999. The
following quotations are over-the-market quotations and, accordingly, reflect
inter-dealer prices, without retail mark-up, markdown or commission and may not
represent actual transactions.
High Bid Low Bid
-------- -------
FISCAL 1998
- -----------
July 1, 1997 through September 30, 1997 38.80 36.32
October 1, 1997 through November 11, 1997 40.00 28.50
November 12, 1997 through December 31, 1997 59.46 32.00
January 1, 1998 through March 31, 1998 44.50 26.50
April 1, 1998 through June 30, 1998 52.50 20.00
FISCAL 1999
- -----------
July 1, 1998 through September 30, 1998 38.00 4.50
October 1, 1998 through December 31, 1998 10.00 3.00
January 1, 1999 through March 31, 1999 7.00 2.00
April 1, 1999 through June 30, 1999 5.375 3.125
On August 31, 1999, the closing bid price for the common stock as reported
on The OTC Bulletin Board was $3.75. As of July 31, 1999, the approximate number
of record holders of American Risk's common stock was 181. We believe that there
are in excess of 900 beneficial holders of American Risk's common stock.
-12-
<PAGE>
Dividend Policy
We have not paid any cash dividends on our common stock since our
inception. We presently intend to retain future earnings, if any, to finance the
expansion of our business and do not anticipate that any cash dividends will be
paid in the foreseeable future. Future dividend policy will depend on our
earnings, capital requirements, expansion plans, financial condition and other
relevant factors.
The Series E Cumulative Non-Participating Preferred Stock was recently
converted into common stock. The Series E Cumulative Non-Participating Preferred
Stock paid annual dividends of $77,000.
The Series F Cumulative Non-Participating Preferred Stock paid annual
dividends of $55,000 prior to its retirement on May 31, 1998. No dividends were
paid on the Series A and Series C Preferred Stock prior to their redemption in
March 1999 at par value. See "Certain Relationships and Related Transactions".
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion regarding the Company and its business and
operations contains "forward-looking statements" within the meaning of Private
Securities Litigation Reform Act 1995. Such statements consist of any statement
other than a recitation of historical fact and can be identified by the use of
forward-looking terminology such as "may," "expect," "anticipate," "estimate" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. The reader is cautioned that all forward-looking statements are
necessarily speculative and there are certain risks and uncertainties that could
cause actual events or results to differ materially from those referred to in
such forward looking statements. The Company does not have a policy of updating
or revising forward-looking statements and thus it should not be assumed that
silence by management of the Company over time means that actual events are
bearing out as estimated in such forward looking statements.
Results of Operations
Year ended June 30, 1999 as compared to year ended June 30, 1998
During the year ended June 30, 1999 consolidated revenues from continuing
operations increased by approximately $122,000 or 3% from approximately
$3,950,000 for the year ended June 30, 1998 to approximately $4,072,000 for the
year ended June 30, 1999. The relatively same level of volume is mainly
attributable to the Company's management decision to concentrate its efforts on
pursuing more profitable lines of businesses.
However, the cost of revenues decreased by approximately $650,000 or 21% from
approximately $3,147,000 for the year ended June 30, 1998 to approximately
$2,497,000 for the year ended June 30, 1999. The primary reason for this
decrease was (1) During the year ended June 30, 1998, the company incurred a
non-cash charge of approximately $477,000 for the write-down of unsalable
inventory, (2) the cost associated with the reduced level of sales, and (3) the
company's decision to concentrate its efforts on increasing profitability and
reducing costs.
As a result of the above the Company's gross profit margin from its continuing
operations increased by approximately 19% from approximately 20% to
approximately 39%.
Operating expenses from continuing operations decreased by approximately
$3,105,000 from approximately $6,366,000 for the year ended June 30, 1998 to
approximately $3,261,000 for the year ended June 30, 1999. Approximately
$2,525,000 of this decrease resulted from common stock being issued for services
of approximately $3,761,000 during the year ended June 30, 1998 as oppose to
only $1,236,000 being issued for services during the year ended June 30, 1999.
Depreciation and Amortization expense, another non-cash item, decreased by
approximately $32,000 from approximately $333,000 for the year ended June 30,
1998 to approximately $301,000 for the year ended June 30, 1999. During the
year ended June 30, 1998, the Company incurred certain other operating costs
which were not incurred during the year ended June 30, 1999 such as (1) the cost
of relocating the Company's principal executive offices from Knoxville,
Tennessee to Boca Raton, Florida and (2) The company's management concentrated
effort to reduce certain of the infrastructure which was built in the prior year
while it pursues more profitable lines of business.
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<PAGE>
The company's other expenses from continuing operations increased by
approximately $2,533,000 from approximately $70,000 for the year ended June 30,
1998 to approximately $2,603,000 for the year ended June 30, 1999. The increase
was primarily caused by non-cash charges incurred during the year ended June 30,
1999 of approximately $1,591,000 for the amortization of debt issue costs and
approximately $885,000 for the estimated loss on the sale of the building which
the Company sold on July 2, 1999.
As a result of all of the above, the Company's loss from continuing operations
decreased by approximately $1,343,000 from approximately $5,633,000 for the year
ended June 30, 1998 to approximately $4,290,000 for the year ended June 30,
1999.
During the year ended June 30, 1999, the Company's board of directors approved
the plan to sell its staffing division, and to abandon the fire sprinkler
segment. In addition, during the year ended June 30, 1998, the company's sold
LPS Acquisition Corp. and certain other related companies. These transactions
have been recorded in the company's financial statements as discontinued
operations for both the years ended June 30, 1999 and 1998 as follows:
<TABLE>
<CAPTION>
Year Staffing Fire Sprinkler Distribution Total
---- ---------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Loss From 1999 $ 609,000 $456,000 -- $1,065,000
Operations 1998 $ 168,000 $947,000 $ 792,000 $1,907,000
Loss On 1999 $ 546,000 $406,000 -- $ 952,000
Disposal 1998 $ 66,000 $1,372,000 $1,438,000
Total 1999 $1,155,000 $862,000 -- $2,017,000
1998 $ 234,000 $947,000 $2,164,000 $3,345,000
</TABLE>
Therefore, the Company incurred a Net Loss of approximately $6,306,000 for the
year ended June 30, 1999 as opposed to $8,978,000 for the year ended June 30,
1998.
Liquidity and Capital Resources
At June 30, 1999, The Company has a working capital deficiency of approximately
$1,908,000 as compared to a working capital balance of approximately $134,000 at
June 30, 1998. The decrease in working capital was attributable to the company
incurring significant losses in its continuing and discontinuing operations
during the years ended June 30, 1999 and 1998. Although a significant portion of
the losses were attributable to non-cash expenditures that were generated from
stock transactions, it is necessary for the Company to raise additional working
capital or to take other action to help its working capital situation for the
operation of PF and any future contemplated acquisitions. The Company believes,
but cannot assure, that it will be able to generate additional resources through
loans, sales, or other issuances of capital stock to related and/or unrelated
parties. The Company cannot provide any assurances that it will be successful in
generating profitable operations on a sustained basis, however, it believes that
it will have sufficient resources to fund its operations through at least June
30, 2000.
In January 1998 the Company completed a private placement of 5% Convertible
Preferred Stock, resulting in gross proceeds of $1,250,000. The Company filed a
proxy statement for a special meeting of shareholders at which the conversion
terms of additional shares of 5% Convertible Preferred Stock would be submitted
for approval by the Company's shareholders; however, no meeting date was set. In
February 1999, the Company and the holder of the Preferred Stock entered into an
agreement pursuant to which the Preferred Stock was exchanged in March 1999 for
(i) $600,000 in cash, (ii) convertible notes aggregating $819,000 with fixed
conversion prices (iii) a non convertible note for $81,000(iv) 31,250 shares of
Common Stock and (v) the cancellation of outstanding warrants.
In March 1999, the Company completed a private placement of Common Stock
and warrants to raise additional funds to fund its plan of operations for the
balance of fiscal 1999 and to pay the above-described payment. The Company
issued 250,000 shares of Common Stock, 1,000,000 Class A Warrants, and 1,000,000
Class B Warrants. The Company received gross proceeds of $1,000,000. The funds
received from the private placement have been utilized.
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<PAGE>
On July 2, 1999, the company completed the transaction in which it sold its
real property in Knoxville, Tennessee for $450,000 plus certain other
liabilities. The proceeds from the sale were utilized to satisfy the debt on the
property as well as other outstanding obligations of the Company.
On September 7, 1999, the company consummated the Exchange agreement with
Peoplefirst LLC and its members whereby it acquired 100% of the equity interest
in Peoplefirst in exchange for 5,000,000 shares of the company's common stock.
As a result of the exchange of equity interests, the former owners of
Peoplefirst acquired an approximate 80% controlling interest in the Company.
Since the acquisition of PeopleFirst LLC resulted in the transfer of an
approximate 80% controlling interest in the Company to the former owners of
PeopleFirst LLC, the acquisition of PeopleFirst LLC will be treated as a
purchase business combination, effective as of September 7, 1999, that will be
accounted for as a reverse acquisition. Therefore, the Consolidated Statement of
Operations in future reports may not be comparable to those included in prior
reports issued by the Company.
Year 2000
The Company is in the process of implementing and executing a Year 2000
assessment with the objective of having all of its significant business systems
functioning properly with respect to the Year 2000 issue before January 1, 2000.
This process includes (1) evaluating our information technology's time and date
dependent code (2) obtaining assurances or warranties from third party vendors
or licensors of material hardware, software, and services that are related to
the delivery of our service and (3) evaluating the need for, and preparing and
implementation, if required, of a contingency plan.
To date, our assessment has determined that our material internally
developed software and systems are Year 2000 compliant and our material
hardware, software, and service vendors have informed us that the products used
are compliant. All material commercial software on which we depend is either
Year 2000 compliant or will be updated to be compliant in the normal course of
business.
We are not currently aware of any operational issues or costs associated
with preparing our systems for the Year 2000. None the less we may experience
material unexpected costs caused by undetected errors or defects in the
technology used in our systems or because of the failure of a material vendor to
be Year 2000 compliant.
Notwithstanding our Year 2000 compliance efforts, the failure of a material
system or vendor, or the internet generally, to be Year 2000 compliant could
harm the operation of our systems or prevent or delay the delivery of our
service being offered, or produce other unforeseen material adverse
consequences.
We are also subject to external Year 2000 related failures or disruptions
that might generally affect industry and commerce, such as utility or
transportation company Year 2000 compliance failures and related service
interruptions. All these factors could materially affect our business, results
of operations and financial condition.
We are in the process of developing a contingency plan to address
situations that may result if we are unable to achieve Year 2000 compliance. The
cost of developing and implementing such a plan, if necessary, is expected to be
complete by the fall of 1999 and its cost is not expected to be material.
Item 7. Financial Statements
The Company's financial statements are contained in pages F-1 through F-32
as follows.
-15-
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The following table sets forth the names, ages and positions held with
respect to each Director and Executive Officer of the
Company.
Name Age Position
- ---- --- --------
Robert Hausman 43 President and Chief Operating Officer
Stephen Rosedale 55 Chairman of the Board
Ronald Wilheim 30 Executive Vice President and Chief
Executive Officer
Steve Wilder (1)(2) 51 Director
Simon Groner (1)(2) 57 Director and Secretary
- -------------------
(1) Member of Compensation Committee
(2) Member of the Audit Committee
Stephen Rosedale was elected a director in August 1999. Mr. Rosedale founded
Communicare Health Services, Inc. in 1978 and since its inception, Mr. Rosedale
has been Chairman of the Board of Directors and Chief Executive Officer.
Communicare owns, operates and manages long term care facilities, home care and
assisted living companies and communities and rehabilitation facilities.
Ronald Wilheim was elected a director in August 1999. Mr. Wilheim has been
Corporate Counsel of CommuniCare since August 1995. Prior to that time, Mr.
Wilheim attended law school at Benjamin Cardozo School of Law in New York.
Robert Hausman was elected President and a Director on June 1, 1997 following
the acquisition of Federal. Mr. Hausman, who was elected Chairman of the Board
in September 1997, also serves on the Board of Directors of each of our
subsidiaries and is a member of the Audit Committee. Mr. Hausman devotes
substantially all of his time and attention to our business. From October 1994
to October 1997, Mr. Hausman was President and Chief Executive Officer of
Federal and since May 1995, Mr. Hausman has also been 25% shareholder of South
Eastern Sound & Communications, Inc., a Boca Raton based sales, service and
installation company of sound and communications systems. From February 1982
until July 1994, Mr. Hausman was a 50% owner and Executive Vice President of
Bedford Weaving Mills; a Bedford, Virginia based specialty textile mill. Bedford
Weaving Mills was acquired by Mr. Hausman and his partner in February 1982 from
Belding Hemingway, Inc.
Simon Groner was elected a director in April 1999. Mr. Groner has been engaged
in the private practice of law in Cincinnati, Ohio since 1976, specializing in
civil and criminal litigation, business law, as well as patent, trademark and
copyright law. Mr. Groner also was an engineer for Sherwin-Williams Chemicals
and Procter & Gamble before he started his law practice.
Steve Wilder was elected a director in August 1999. He has been Vice President,
Treasurer and Chief Financial Officer of CommuniCare Health Services since 1993.
From 1976 to 1993, he was with Arthur Young Company (now Ernst & Young), where
he rose from entry level staff accountant to become an audit partner and leader
of the health care group.
-16-
<PAGE>
Significant Employees
Ralph Fain has been the President of PeopleFirst since December 1998. He has
over 10 years experience in the PEO business. From 1996 to 1997, he was a
regional vice president of Digital Solutions, Inc., a publicly traded staffing
and outsourcing company and from 1995 to 1996 he was president of Link Employer
Services, a multi-location staffing company and PEO. From 1989 to 1994 he was
president of The Laxus Group, a PEO.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and on representations that no other reports
were required, there were no reports required under Section 16(a) ("Section
16(a)") of the Securities Exchange Act of 1934, which were not timely filed
during fiscal 1999, except that: Robert Hausman did not timely file a Form 4
with respect to shares issued pursuant to his management agreement.
Item 10. Executive Compensation
The following table summarizes all compensation accrued by American Risk in
each of the last three fiscal years for American Risk's Chief Executive Officer
and each other executive officers serving as such whose annual compensation
exceeded $100,000. Directors of American Risk do not receive compensation for
serving in such capacity.
Long Term
Annual Compensation Compensation
Name and ----------------------- ------------
Principal Position Year Salary($) Bonus Other Options
- ------------------- ---- --------- ---------- --------- ------------
Robert Hausman, 1999 129,100 0 18,000
President, CEO, and 1998 120,000 0 87,839(1) 938
Director 1997 0 0 0
Lester Gann, 1999 104,000 0 0
Secretary and 1998 100,000 118,125(2) 0 938
Director 1997 96,000 0 0
- -------------------
(1) On July 22, 1998, Mr. Hausman received 2,298 shares of common stock in
accordance with the terms of the Amendment to the Management Agreement
dated November 1, 1997. The fair market value on the date of issuance was
$31.50 resulting in an aggregate value of $72,371. The balance was received
as a car allowance.
(2) On July 22, 1998, Mr. Gann received 3,750 shares of common stock as a
signing bonus in accordance with the terms of his new Employment Agreement
dated May 1, 1998. The fair market value on the date of issuance was $31.50
resulting in an aggregate value of $118,125.
Employment and Management Agreements
Hausman Agreement. On July 1, 1997 American Risk entered into a Management
Agreement with Robert Hausman, President and Chairman of the Board of American
Risk. This agreement was amended November 1, 1997, December 1, 1998 and July 30,
1999. Pursuant to the term of this three year agreement, as amended, Mr. Hausman
is entitled to receive (i) annual base compensation of $131,000, which increases
in years two and three of the agreement by the greater of the percentage
increase of the Consumer Price Index or 6%. Mr. Hausman also receives a car
allowance of $1,500 per month.
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<PAGE>
In the most recent amendment American Risk also agreed to issue Mr. Hausman
50,000 shares of common stock in exchange for his cancellation of all his
outstanding options and his right to receive a bonus equal to 3% of pretax
income.
During the term of the Management Agreement should there be a change of
control of American Risk, as that term is defined in the Management Agreement,
American Risk at its sole option may terminate the Management Agreement upon 30
days prior written notice and thereafter will be obligated to pay Mr. Hausman
the balance of the compensation payable under the Management Agreement had it
not been terminated prior to its expiration, together with an additional sum
equal to two years annual base compensation. Mr. Hausman and American Risk also
agreed not to invoke the "change in control" provisions as a result of the
transactions set forth in the Exchange Agreement.
As of July 30, 1999, Mr. Hausman was owed approximately $400,000 consisting
of accrued salary, accrued dividends on the Series E Preferred Stock and loans
to American Risk. In order to repay such amount as promptly as practicable,
American Risk agreed to issue a note (the "Note") to Mr. Hausman. The Note will
have the following terms: (i) bear interest at 8% per annum, (ii) provide for 24
equal monthly installments of principal and interest that are payable in either
cash or American Risk's common stock at American Risk's option, and (iii)
provide for acceleration upon the termination of the Management Agreement
without cause.
Mr. Hausman and his wife owned 14,375 shares of American Risk's Series E
Preferred Stock (the "Preferred Stock"). In December 1998, Mr. Hausman and
American Risk agreed to exchange the Preferred Stock for 143,750 shares of
common stock, of which 75,000 shares were exchanged simultaneously with the BSD
closing and the remaining 6,875 preferred shares were exchanged in September
1999. Effective on such exchange, Mr. Hausman's management fee was increased by
$77,000, which amount is equal to the dividends on the Preferred Stock. American
Risk agreed to use the net cash proceeds from the sale of certain assets first
to redeem any outstanding Preferred Stock and then to repurchase common stock
from Mr. Hausman at a price of $1.00 per share. American Risk and Mr. Hausman
will agree to facilitate the sale of these shares of common stock and Mr.
Hausman will use these management fee proceeds, proceeds of such sales and from
asset sales to repay principal and interest on Mr. Hausman's loan from Chase
Manhattan Bank in the approximate principal amount of $1,115,000. The management
fee will be reduced pro rata as Mr. Hausman receives funds from American Risk
with respect to the sale of assets or from the sale of common stock and the
interest payments decrease.
Gann Agreement. On May 1, 1998 IFR entered into a new three-year contract
with Mr. Gann providing for an annual base salary of $100,000 with the ability
to receive performance based bonuses at the discretion of the Board of
Directors. In November 1998, this Agreement was amended to extend the term to
November 2001, to accelerate the payment of a bonus of 8,750 shares of common
stock to the closing of the PF transaction, and to issue Mr. Gann 83,125 shares
of common stock in exchange for waiving his right to invoke the change of
control provisions in his agreement that were triggered by the execution of the
Exchange Agreement with BSD and PeopleFirst. Mr. Gann is also entitled to
participate in all benefit programs of IFR as may be made available to other
salaried employees. Mr. Gann's employment agreement contains customary
provisions providing for confidentiality as well as a twelve-month non-compete
following the termination of the agreement. Mr. Gann's employment agreement does
not provide for any severance payments. Mr. Gann's previous employment agreement
provided for a base salary of $96,000. . Mr. Gann, the president of IFR has
recently informed the Company that he intends to exercise his contractual rights
to reacquire IFR in exchange for his American Risk common stock due to the
Company's delisting from Nasdaq. The Company and Mr. Gann have not yet
determined when or if this transaction will occur.
-18-
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
As of September 7, 1999 there were 6,149,751 shares of common stock issued
and outstanding. The following table sets forth, as of the close of business on
September 7, 1999 (a) the name, address and number of shares of each person
known by American Risk to be the beneficial owner of more than 5% of our common
stock and (b) the number of shares owned by each director, each director nominee
and all officers and directors as a group, together with their respective
percentage holdings of such shares before and after the exchange:
Name of Beneficial Owner Number of Shares Percentage of Class
- ------------------------ ---------------- -------------------
Robert Hausman 213,498(1) 3.5%
Steve Wilder 0 0
Simon Groner(3) 0 0
Lester Gann 94,125 1.5%
Stephen Rosedale 3,034,600 49.3%
C/o Communicare Health Services
4700 Ashwood Drive
Cincinnati, Ohio 45241
Ronald Wilheim 2,008,650 32.7%
C/o Communicare Health Services
4700 Ashwood Drive
Cincinnati, Ohio 45241
All Officers and Directors 5,350,873 87.0%
as a Group (five
persons)(1)
- -------------------
(1) Includes 2,498 shares of common stock owned by Barbara Hausman, his spouse,
however, pursuant to Rule 16a-3 of the Securities Exchange Act of 1934, as
amended, Mr. Hausman disclaims beneficial ownership of the shares held by
his wife.
(2) Shares owned by a limited liability company in which Messrs. Rosedale and
Wilheim are the sole members.
-19-
<PAGE>
Item 12. Certain Relationships and Related Transactions
In conjunction with the acquisition of Federal in May 1997, Federal
delivered a promissory note to Robert Hausman, American Risk's president, and
Barbara Hausman, his wife, in the principal amount of $1,079,024. Mr. Hausman
was a 90% shareholder in Federal prior to its acquisition by American Risk. In
October, 1997 Robert Hausman and Barbara Hausman converted the principal and any
accrued but unpaid interest thereon into 14,375 shares of American Risk's Series
E Cumulative Non-Participating Preferred Stock (the "Series E"). The
designations, rights and preferences of the Series E provide (a) for annual
dividends equal to $77,000, (b) full voting rights, share for share, with any
then outstanding common stock as well as with any other class or series of stock
of American Risk having general voting power with the common stock concerning
any matter being voted upon by American Risk's shareholders, (c) is not
convertible into any other class of capital stock of American Risk and (d) is
redeemable at the option of American Risk at a redemption price to be negotiated
by the parties at the time of redemption. Dividends are current. The balance of
the dividends due has been accrued. On July 1, 1998, Federal Supply borrowed
$50,000 from Robert and Barbara Hausman and delivered a one-year promissory note
bearing interest at the rate of 10% per annum. On September 3, 1998, American
Risk borrowed $70,000 from Robert and Barbara Hausman and delivered a one-year
promissory note bearing interest at the rate of 10% per annum. These monies were
utilized for working capital purposes. . In December 1998, Mr. Hausman and
American Risk agreed to exchange the Preferred Stock for 143,750 shares of
common stock, of which 75,000 shares were exchanged simultaneously with the BSD
closing and the remaining 6,875 preferred shares were exchanged in September
1999 prior to the Peoplefirst closing.
In conjunction with the September 1997 acquisition of LPS, Barbara Hausman
and Ronna Newman Rutstein, the wife of C. Lawrence Rutstein, then a director of
American Risk, each received 2,498 shares of American Risk's common stock in
exchange for their interests in LPS. Each of Messrs. Hausman and Rutstein
disclaim beneficial ownership interest in the shares held by their respective
spouses. In August 1997 LPS purchased the assets out of bankruptcy of Kedac,
Inc., an unaffiliated third party, which such assets consisted for substantially
all of the existing operating assets, accounts receivable, furniture and
equipment and general intangibles, including the trade name "Lantana Peat &
Soil" for a total consideration of $190,000 in cash and the assumption of
$750,000 of notes with a financial institution.
In September 1997 American Risk purchased 100% of the issued and
outstanding stock of LPS from its shareholders, who included Mrs. Hausman and
Mrs. Rutstein, in exchange for 33,750 shares of American Risk's restricted
common stock in a private transaction exempt from registration under the Act in
reliance on Section 4(2) thereof.
On May 1, 1998 American Risk determined it would unwind its acquisition of
51% of Regenesis Holdings, Inc. ("Regenesis") acquired from a shareholder of
Regenesis effective January 16, 1998 as the parties involved were unable to
fulfill their obligations under the acquisition agreement. There were no
extraordinary charges associated with the transaction and there was no adverse
effect on American Risk as a result of this transaction. C. Lawrence Rutstein
served as President of Regenesis at the time of the transaction. Robert Hausman
served as a director of Regenesis at the time of the transaction.
On June 29, 1998,American Risk sold its investment in LPS to American
Group, Inc., a Nevada corporation ("American")for a 23.8% ownership in American.
-20-
<PAGE>
In February 1999, American Risk entered into a Settlement Agreement with M.
Shulman & Associates pursuant to which Shulman agreed to waive any future fees,
including those that may be due in connection with the completed BSD
transaction, in exchange for American Risk transferring the 120,000 shares of
American owned by it and the assumption by American Risk of $100,000 of notes
held by Mr. Hausman.
On July 2, 1999, the Company sold the building owned by its Workforce Properties
subsidiary to Lester and Glenda Gann. Mr. Gann is the President of the Company's
IFR subsidiary. The building was sold for $450,000 plus the assumption of
certain liabilities. A portion of the proceeds from the sale was utilized to
payoff the existing mortgages in full and satisfies all outstanding tax liens on
the property. The Company no longer has any liabilities associated with the
property. The Company now leases the building for its IFR subsidiary from Mr.
Gann on a month to month basis at a cost of approximately $7,500 per month.
-21-
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
The following documents are filed as a part of this report or are
incorporated by reference to previous filings, if so indicated:
(a) Exhibits
Exhibit No. Description
- ----------- ------------------------------------------------------------
2.6 Agreement dated as of May 29, 1997 by and between Workforce
Systems Corp. and Robert Hausman and John Murray as Sole
Shareholders of Federal Supply, Inc. and Robert Hausman as
Sole Shareholder of Federal Fabrication, Inc. is
incorporated by reference to the Report on Form 8-K as filed
with the Securities and Exchange Commission on June 4, 1997
2.7 Agreement dated as of May 29, 1998 by and between Coventry
Industries Corp. and American Group, Inc. is incorporated by
reference to the Report on Form 8-K as filed with the
Securities and Exchange Commission on June 30, 1998
2.8 Exchange Agreement among Coventry Industries Corp., BSD
Healthcare Industries, Inc., its shareholders, People First
LLC and its members dated September 30, 1998 is incorporated
By reference to the Report on Form 8-K as filed with the
Securities and Exchange Commission on December 22, 1998
3.1 Articles of Incorporation are hereby incorporated by
reference to the Registration Statement on Form SB-2 as
declared effective by the Securities and Exchange Commission
on January 12, 1993
3.2 Articles of Amendment to the Articles of Incorporation
setting forth the designations, rights and preferences of
the Series B $5.00 Cumulative Convertible Preferred Stock
are hereby incorporated by reference to the Report on Form
8-K as filed with the Securities and Exchange Commission on
July 13, 1994
3.3 Articles of Amendment to the Articles of Incorporation
changing the corporation name are hereby incorporated by
reference to the Report on Form 8-K as filed with the
Securities and Exchange Commission on July 11, 1994
3.4 Articles of Amendment to the Articles of Incorporation
setting forth the designations, rights and preferences of
the Series A and Series C Preferred Stock are hereby
incorporated by reference to the Report on Form 10-QSB for
the quarter ended December 31, 1994
3.5 Articles of Amendment to the Articles of Incorporation
setting forth the designations, rights and preferences of
the Series D Preferred Stock is hereby incorporated by
reference to the Report on Form 10-KSB for the fiscal year
ended June 30, 1996.
-22-
<PAGE>
3.6 Articles of Amendment to the Articles of Incorporation
increased the amount of authorized common stock and setting
forth the redemption provisions of the Series D Preferred
Stock is hereby incorporated by reference to the
Registration Statement on Form SB-2, File No. 333-11169, as
filed with the Securities and Exchange Commission on August
30, 1996, as amended
3.7 Articles of Amendment to the Articles of Incorporation
decreasing the number of authorized common stock and
effecting a one for four stock split of the common stock is
hereby incorporated by reference to the Registration
Statement on Form SB-2, File No. 333-11169, as filed with
the Securities and Exchange Commission on August 30, 1996,
as amended
3.8 By-Laws of the Company are hereby incorporated by reference
to the Registration Statement on Form SB-2 as declared
effective by the Securities and Exchange Commission on
January 12, 1993.
3.9 Articles of Amendment to the Articles of Incorporation
setting forth the designations, rights and preferences of
the Series E Cumulative Non-Participating Preferred Stock
are hereby incorporated by reference to the Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1997.
3.10 Articles of Amendment to the Articles of Incorporation
setting forth the designations, rights and preferences of
the Series F Cumulative Non-Participating Preferred Stock
are hereby incorporated by reference to the Annual Report on
Form 10-QSB for the quarter ended September 30,1997.
3.11 Articles of Amendment to the Articles of Incorporation
Changing the name of the corporation to Coventry Industries
Corp. are hereby incorporated by reference to the Report on
Form 10-QSB for the quarter ended September 30,1997.
3.12 Articles of Amendment to the Articles of Incorporation
setting forth the designations, rights and preferences of
the 5% Series Convertible Preferred Stock are hereby
incorporated by reference to the report on Form 8-K filed
with the Securities and Exchange Commission on January 29,
1998.
3.13 Articles of Amendment to the Articles of Incorporation
decreasing the number of authorized common stock and
effecting a one-for-eight split is hereby incorporated by
reference to the report on form 10-QSB filed with the
Securities & Exchange Commission on 5/17/99.
3.14 Articles of Amendment to the Articles of Incorporation
Changing the name of the Corporation to American Risk
Management Group, Inc, and increasing the number of
authorized common and preferred stock are hereby
incorporated by reference to the report on Form 8-K filed
with the Securities and Exchange Commission on September 20,
1999
-23-
<PAGE>
4.1 Investment Banking Warrant Agreement between Coventry
Industries Corp. and Barron Chase Securities, Inc. is hereby
incorporated by reference to the report on Form 10-QSB for
the quarter ended December 31, 1997.
4.2 Termination and Amendment Agreement dated December 9, 1998
between the Company and Barron Chase Securities, Inc. is
hereby incorporated to the Current Report on Form 8-K filed
December 22, 1998
10.2 Employment Agreement between Industrial Fabrication &
Repair, Inc. and Lester E. Gann is hereby incorporated by
reference to the Registration Statement on Form SB-2, File
No. 333-11169, as filed with the Securities and Exchange
Commission on August 30, 1996, as amended
10.4 Management agreement between Workforce Systems Corp. and
Robert Hausman is hereby incorporated by reference to the
Annual Report on Form 10-KSB for the fiscal year ended June
30, 1997.
10.5 Amended and Restated Consulting Acquisition Management
Agreement between Workforce Systems Corp. and Manny J.
Shulman and Shulman & Associates, Inc. is hereby
incorporated by reference to the registration statement on
Form S-8 as filed with the Securities and Exchange
Commission on September 24, 1997
10.6 Stock Purchase and Sale Agreement dated September 22, 1997
between Workforce Systems Corp., a Florida corporation, and
Darren Apel, Barbara Hausman and Ronna Newman Rutstein, as
shareholders of LPS Acquisition Corp. is incorporated by
reference to the Report on Form 8-K as filed with the
Securities and Exchange Commission on September 22, 1997
10.7 Conversion Agreement dated October 7, 1997 between Workforce
Systems Corp., Federal Supply, Inc. and Robert Hausman and
Barbara Hausman is hereby incorporated by reference to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1997.
10.8 Conversion Agreement dated September 25, 1997 between
Workforce Systems Corp., LPS Acquisition Corp, and Eric and
Adrienne Deckinger is hereby incorporated by reference to
the Company's to the Report on Form 10-QSB for the quarter
ended September 30,1997 as filed with the Securities and
Exchange Commission on November 7, 1997
10.9 Financial Advisory Agreement between Coventry Industries
Corp. and Barron Chase Securities, Inc. is hereby
incorporated by reference to the report on Form 10-QSB for
the quarter ended December 31, 1997 as filed with the
Securities and Exchange Commission on February 23, 1998.
10.10 Employment Agreement between Industrial Fabrication &
Repair, Inc. and Lester E. Gann is hereby attached as an
exhibit to the Report on Form 10-KSB for the fiscal year
ended June 30, 1998.
-24-
<PAGE>
10.11 Amendment to the Management Agreement between Coventry
Industries Corp. and Robert Hausman is hereby attached as an
exhibit to the Report on Form 10-KSB for the fiscal year
ended June 30, 1998.
10.12 Intentionally deleted.
10.13 Amendment dated November 9, 1998 to Employment Agreement
Dated May 1, 1998 Between Industrial Fabrication and Repair,
Coventry Industries Corp., and Lester Gann is hereby
incorporated to the Current Report on Form 8-K filed
December 22, 1998.
10.14 Amendment dated as of December 1, 1998 to Management
Agreement dated July 1, 1997 and amended November 1, 1997
between the Company and Robert Hausman is hereby
incorporated to the Current Report on Form 8-K filed
December 22, 1998.
10.15 Voting Agreement dated December 3, 1998 among Robert
Hausman, Lester Gann, Ronald Wilheim, Stephen Rosedale,
Yucatan Holdings, Connie Steinmetz, Strategic Capital
Holdings, Inc. and Arizona Development Corporation is hereby
incorporated to the Current Report on Form 8-K filed
December 22, 1998.
10.16 Consulting Agreement between the Company and Connie
Steinmetz dated as of November 2, 1998 is hereby
incorporated to the Current Report on Form 8-K filed
December 22, 1998.
10.18 Exchange Agreement dated February 3, 1999 between the
Company and ProFutures Special Equities Fund, L.P. is hereby
incorporated by reference to the report on Form 10-QSB for
the quarter ended December 31, 1998
10.19 Settlement Agreement dated February 4, 1999 among the
Company, M. Shulman & Associates and Robert Hausman is
hereby incorporated by reference to the report on Form
10-QSB for the quarter ended December 31, 1998.
10.20 Amendement dated as of July 30, 1999 to the Management
Agreement dated July 1, 1997 and amended November 1, 1997
and December 1, 1998 between the Company and Robert Hausman.
10.21 Stock Purchase Agreement among BSD Healthcare Industries,
Inc., Coventry Industries Corp., Stephen Rosedale and Ronald
Wilheim is hereby incorporated by reference to the Form
10-SB of the Company's subsidiary BSD Healthcare Industries,
Inc. filed on August 18,1999.
10.22 Letter of intent among PeopleFirst Staffing LLC and CHS
Homecare Services, Ltd is hereby incorporated by reference
to the information statement on Schedule 14C filed with the
Securities and Exchange Commission on September 13, 1999
-25-
<PAGE>
10.23 1999 Stock Option Plan is hereby incorporatedby reference to
the information statement on Schedule 14C filed with the
Securities and Exchange Commission on September 13, 1999
16.3 Letter from Lyle H. Cooper, C.P.A. regarding change in
certifying accountants is hereby incorporated by reference
to the Report on Form 8-K as filed with the Securities and
Exchange Commission on August 6, 1997
16.4 Letter from BDO Seidman, LLP regarding change in certifying
accountants is hereby incorporated by reference to the
Report on Form 8-K as filed with the Securities and Exchange
Commission on August 6, 1997
16.4 Letter from BDO Seidman, LLP advising the Company of its
Decision not to renew their engagement with the company as
its principal auditors is hereby incorporated by reference
to the report on Form 8-K as filed with the Securities and
Exchange Commission on June 5, 1998.
16.6 Letter from BDO Seidman, LLP advising the Company of its
Agreement with statements made in response to Item 4 of Form
8-K for the event that occurred on June 1, 1998 is hereby
incorporated by reference to the report on Form 8-K/A as
filed with the Securities and Exchange Commission on June
17, 1998.
16.7 Letter regarding change in certified accountant from
Sweeney, Gates & Co. is hereby incorporated by reference to
the report on Form 8-K as filed with the Securities and
Exchange Commission on June 30, 1999 . 21 Subsidiaries of
the Registrant
27 Financial Data Schedule
(b) Reports on Form 8-K
During the three months ended June 30, 1999, the Company
filed a Report on Form 8-K with the Securities and Exchange
Commission
1. On May 11, 1999, the Company filed a Report on Form 8-K
disclosing under Item 5 information relating to the
delisting of its common stock from the Nasdaq SmallCap
Market to the OTC Bulletin Board.
2. On June 30, 1999, the Company filed a Report on Form
8-K disclosing under Item 4 information relating to the
change of the Company's auditors from Sweeney, Gates
& Co. to J.H.Cohn LLP.
-26-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Coventry Industries Corp. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN RISK INDUSTRIES CORP.
By: /s/ Robert Hausman
--------------------------------
Robert Hausman, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
New board
Signature Title Date
- -------------------- ------------------- ----------------
/s/ Stephen Rosedale Chairman October 12, 1999
- --------------------
Stephen Rosedale
/s/ Robert Hausman President October 12, 1999
- --------------------
Robert Hausman
/s/ Ronald Wilheim Exec. V.P October 12, 1999
- --------------------
Ronald Wilheim
/s/ Simon Groner Secretary, Director October 12, 1999
- --------------------
Simon Groner
/s/ Steve Wilder Director October 12, 1999
- --------------------
Steve Wilder
-27-
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC.
(Formerly Coventry Industries Corp.)
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
-----------------------------
PAGE
----
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS F-2/5
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999 F-6
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998 F-7
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998 F-8/9
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998 F-10/11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-12/32
* * *
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and Stockholders
American Risk Management Group, Inc.
We have audited the accompanying consolidated balance sheet of AMERICAN RISK
MANAGEMENT GROUP, INC. (formerly Coventry Industries Corp.) AND SUBSIDIARIES as
of June 30, 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Risk Management Group, Inc. and Subsidiaries as of June 30, 1999, and their
results of operations and cash flows for the year then ended, in conformity with
generally accepted accounting principles.
J.H. COHN LLP
Roseland, New Jersey
September 17, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Board of Directors and Stockholders
American Risk Management Group, Inc.
We audited the accompanying consolidated statements of operations, stockholders'
equity and cash flows of American Risk Management Group, Inc. (formerly Coventry
Industries Corp.) and Subsidiaries for the year ended June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to report on these financial statements based on our audit. We
did not audit the financial statements of Industrial Fabrication & Repair, Inc.
and Workforce Properties Corp., wholly-owned subsidiaries, which statements
reflect total assets of 52% as of June 30,1998 and total revenues of 41% for the
year then ended. Those statements were audited by other auditors whose reports
have been furnished to us, and our opinion, insofar as it relates to the amounts
included for Industrial Fabrication & Repair, Inc. and Workforce Properties
Corp., is based solely on the reports of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of American Risk Management Group, Inc. and Subsidiaries for the year
ended June 30, 1998, in conformity with generally accepted accounting
principles.
Sweeney, Gates & Co.
Fort Lauderdale, Florida
September 28, 1998
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Board of Directors
Industrial Fabrication and Repair, Inc.
We have audited the statements of operations, changes in stockholder's equity
and cash flows of Industrial Fabrication and Repair, Inc. for the year ended
June 30, 1998, which are not presented separately herein. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Industrial
Fabrication and Repair, Inc. for the year ended June 30, 1998, in conformity
with generally accepted accounting principles.
Reel & Swafford, PLC
Knoxville, Tennessee
September 11, 1998, except for Note 9
as to which the date is September
30, 1998
F-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Board of Directors
Workforce Properties Corp.
We have audited the statements of operations, changes in stockholder's equity
and cash flows of Workforce Properties Corp. for the year ended June 30, 1998,
which are not presented separately herein. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Workforce
Properties Corp. for the year ended June 30, 1998, in conformity with generally
accepted accounting principles.
Reel & Swafford, PLC
Knoxville, Tennessee
September 11, 1998
F-5
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents $ 15,705
Accounts receivable, net of allowance for doubtful accounts of $4,000 449,106
Inventories 386,062
Net assets of discontinued operations 387,083
Property held for sale 439,644
Other current assets 213,748
-----------
Total current assets 1,891,348
Equipment, net of accumulated depreciation of $522,032 1,045,611
Goodwill, net of accumulated amortization of $286,126 1,098,592
Deferred debt financing costs 1,859,646
Other assets 542,208
-----------
Total $ 6,437,405
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Note payable to bank under revolving credit facility $ 235,000
8% convertible and nonconvertible notes payable 900,000
Notes payable to stockholders and former stockholder 1,078,100
Current portion of long-term debt 312,781
Accounts payable 314,124
Estimated loss on disposal of discontinued operations 546,245
Other current liabilities 412,863
-----------
Total current liabilities 3,799,113
Long-term debt, net of current portion 79,262
-----------
Total liabilities 3,878,375
-----------
Stockholders' equity:
Preferred stock, $.008 par value; Series E; 14,375 shares authorized;
6,875 shares issued and outstanding 55
Common stock, $.008 par value; 3,125,000 shares authorized;
1,093,958 shares issued 8,751
Additional paid-in capital 26,139,820
Unearned compensation and advertising fees (2,311,292)
Accumulated deficit (21,025,179)
Less treasury stock - 75,000 shares of common stock, at cost (253,125)
-----------
Total stockholders' equity 2,559,030
-----------
Total $ 6,437,405
===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues $ 4,072,036 $ 3,950,431
Cost of revenues 2,497,151 3,147,248
----------- -----------
Gross profit 1,574,885 803,183
----------- -----------
Selling, general and administrative expenses 2,959,917 6,032,751
Depreciation and amortization 301,078 333,087
----------- -----------
Totals 3,260,995 6,365,838
----------- -----------
Operating loss (1,686,110) (5,562,655)
----------- -----------
Other expenses:
Interest 1,718,432 69,934
Write-down of property held for sale 885,000
----------- -----------
Totals 2,603,432 69,934
----------- -----------
Loss from continuing operations (4,289,542) (5,632,589)
----------- -----------
Discontinued operations:
Loss from operations (1,064,645) (1,906,619)
Loss on disposal (952,311) (1,438,687)
----------- -----------
Loss from discontinued operations (2,016,956) (3,345,306)
----------- -----------
Net loss (6,306,498) (8,977,895)
Preferred dividend requirements 108,251 114,834
----------- -----------
Net loss applicable to common stock $(6,414,749) $(9,092,729)
=========== ===========
Basic loss per common share:
Loss from continuing operations $(6.07) $(17.17)
Loss from discontinued operations (2.78) (10.20)
------ -------
Net loss $(8.85) $(27.37)
====== =======
Basic weighted average common shares outstanding 725,222 328,018
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30,1999 AND 1998
<TABLE>
<CAPTION>
Preferred Stock
---------------------------------------------------------------------------------------------------
Series A Series C Series E Series F 5% Convertible Common Stock
-------------- --------------- -------------- -------------- -------------- ---------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ------------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1997 4 $ - 3,750 $ 30 244,116 $1,953
Preferred stock issued for:
Purchase of business 9,375 $ 75
Conversion of note payable
to stockholder 14,375 $115
Sale of preferred stock through
private placement 156 $ 1
Preferred stock canceled in
connection with discon-
tinued operations (9,375) (75)
Common stock issued for:
Purchase of business 45,112 361
Professional and other
services, employee
compensation and
other current and pre-
paid costs and expenses 127,982 1,024
Repurchase of common stock (38,111) (305)
Dividends declared
Net loss
- -- ----- ---- ------ ---- - --- --- --- ------- ------
Balance, June 30, 1998 4 $- 3,750 $ 30 14,375 $115 - $ - 156 $ 1 379,099 $3,033
= == ===== ==== ====== ==== = === === === ======= ======
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Unearned
Compensa-
Additional tion and
Paid-in Advertising Accumulated Treasury
Capital Fees Deficit Stock Total
------- ---- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1997 $12,567,700 $(1,916,667) $ (5,517,701) $ 5,135,315
Preferred stock issued for:
Purchase of business 75
Conversion of note payable
to stockholder 1,149,904 1,150,019
Sale of preferred stock through
private placement 1,074,999 1,075,000
Preferred stock canceled in
connection with discon-
tinued operations (75)
Common stock issued for:
Purchase of business 1,831,743 1,832,104
Professional and other
services, employee
compensation and
other current and pre-
paid costs and expenses 4,965,393 (394,625) 4,571,792
Repurchase of common stock (75,918) (76,223)
Dividends declared (114,834) (114,834)
Net loss
(8,977,895) (8,977,895)
----------- ----------- ------------ -----------
Balance, June 30, 1998 $21,513,821 $(2,311,292) $(14,610,430) $ 4,595,278
=========== =========== ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30,1999 AND 1998
<TABLE>
<CAPTION>
Preferred Stock
---------------------------------------------------------------------------------------------------
Series A Series C Series E Series F 5% Convertible Common Stock
-------------- --------------- -------------- -------------- -------------- ---------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ------------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1998 4 $ - 3,750 $ 30 14,375 $115 156 $1 379,099 $3,033
Common stock issued for:
Purchase of business 118,250 946
Professional and other
services, employee
compensation and
other current and pre-
paid costs and expenses 240,359 1,922
Conversion of Series
E preferred stock (7,500) (60) 75,000 600
Purchase and retirement
of preferred stock (4) (3,750) (30) (156) (1) 31,250 250
Effect of issuance of beneficial
conversion rights
Sale of common stock and
warrants through private
placement 250,000 2,000
Repurchase of common
stock
Dividends declared
Net loss
--- --- --- ---- ----- ----- --- ---- ---- --- --------- ------
Balance, June 30, 1999 - $ - - $ - 6,875 $ 55 - $ - - $ - 1,093,958 $8,751
=== === === ==== ===== ===== === ==== ==== === ========= ======
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Unearned
Compensa-
Additional tion and
Paid-in Advertising Accumulated Treasury
Capital Fees Deficit Stock Total
------- ---- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1998 $21,513,821 $(2,311,292) $(14,610,430) $ 4,595,278
Common stock issued for:
Purchase of business 826,804 827,750
Professional and other
services, employee
compensation and
other current and pre-
paid costs and expenses 1,412,538 1,414,460
Conversion of Series
E preferred stock (540)
Purchase and retirement
of preferred stock (1,299,697) (1,299,478)
Effect of issuance of beneficial
conversion rights 2,863,721 2,863,721
Sale of common stock and
warrants through private
placement 823,173 825,173
Repurchase of common
stock $(253,125) (253,125)
Dividends declared (108,251) (108,251)
Net loss
(6,306,498) (6,306,498)
----------- ----------- ------------ --------- -----------
Balance, June 30, 1999 $26,139,820 $(2,311,292) $(21,025,179) $(253,125) $ 2,559,030
=========== =========== ============ ========= ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(6,306,498) $(8,977,895)
Adjustments to reconcile net loss from continuing operations
to net cash used in continuing operations:
Depreciation and amortization 299,338 333,087
Amortization of debt issuance costs 1,590,956
Services, compensation and other expenses paid through
the issuance of common stock 1,235,608 3,760,552
Write-down of inventories 477,052
Write-down of property held for sale 885,000
Other 4,000
Changes in operating assets and liabilities of continuing operations:
Accounts receivable 12,545 (118,880)
Inventories 163,661 368,360
Other current assets (22,873) 39,285
Other assets (58,634) (138,861)
Accounts payable and other current liabilities (63,207) (252,174)
----------- -----------
Net cash used in continuing operations (2,260,104) (4,509,474)
Net cash provided by discontinued operations 1,415,365 3,398,556
----------- -----------
Net cash used in operating activities (844,739) (1,110,918)
----------- -----------
Investing activities - purchases of equipment (20,026) (24,361)
----------- -----------
Financing activities:
Net proceeds from revolving credit loans 235,000
Proceeds from borrowings from stockholders 636,276 9,093
Repayments of borrowings from stockholders (85,000)
Proceeds from issuances of notes payable 120,905
Repayments of notes payable (175,758) (208,560)
Redemption of preferred stock (600,000)
Repurchase of common stock (76,223)
Net proceeds from sale of preferred stock, common stock
and warrants 825,173 1,075,000
Dividends paid (6,417) (66,938)
----------- -----------
Net cash provided by financing activities 829,274 853,277
----------- -----------
Decrease in cash and cash equivalents (35,491) (282,002)
Cash and cash equivalents, beginning of year 51,196 333,198
----------- -----------
Cash and cash equivalents, end of year $ 15,705 $ 51,196
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-10
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Organization:
American Risk Management Group, Inc. ("American Risk" or the
"Parent") was originally incorporated in Florida on August 17,
1992 as Workforce Systems Corp. (the name Workforce Systems
Corp. was changed to Coventry Industries on September 30, 1997
and to American Risk Management Group, Inc. on September 7,
1999). American Risk was organized as a holding company for
the purpose of acquiring other operating businesses and has
acquired and disposed of several businesses since it was
formed. As used herein, the "Company" refers to American Risk
and its subsidiaries.
As of July 1, 1998, the Company operated a Manufacturing
Division and a Staffing Division. The Manufacturing Division
was comprised primarily of four subsidiaries: Industrial
Fabrication & Repair, Inc. ("IFR"), Maintenance Requisition
Order Corp. ("MRO") and Federal Supply, Inc. and Federal
Fabrication, Inc. (collectively, "Federal"). IFR provides
machining, welding, specialty design and fabrication for
custom applications to clientele from various industries. IFR
is also an authorized distributor for a variety of component
products for other manufacturers. MRO was operating as an
industrial supply house for several lines of power
transmissions products. Federal was operating as a fabricator
and distributor of custom-designed fire sprinkler systems and
components for use in both commercial and residential
applications. The Staffing Division was comprised primarily of
the operations of two subsidiaries: Outside Industrial
Services, Inc. ("OIS") and American Industrial Management,
Inc. ("AIM"). The Staffing Division was providing specialized
labor services on a contract basis to businesses in the light
industrial and light manufacturing areas, augmenting the
client's base of permanent employees.
The Company initiated a plan to discontinue and liquidate
Federal's fire sprinkler operations (see Note 4) in June 1999.
The Company also terminated substantially all of the
industrial supply operations of MRO, which were not material,
during 1999. The Company discontinued the staffing operations
of AIM and completed the sale of its assets during 1998 (see
Note 4). The Company also terminated substantially all of the
staffing operations of OIS, which were not material, during
1999. The Company acquired and adopted a plan for the sale of
BSD Healthcare Industries, Inc. and its subsidiaries ("BSD"),
which conducted health care staffing operations, during 1999
(see Notes 3 and 4). The Company acquired and sold LPS
Acquisition Corp. ("LPS"), which was a wholesale distributor
of high quality custom soil mixes, during 1998 (see Notes 3
and 4).
As a result of the acquisitions and dispositions described
above, the Company's continuing operations reflected in the
accompanying consolidated financial statements as of June 30,
1999 and for the years ended June 30, 1999 and 1998 were
comprised of the manufacturing and distribution operations of
IFR.
F-11
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation (concluded):
Organization (concluded):
As further explained in Note 17, subsequent to June 30, 1999,
the Company consummated an agreement whereby it acquired 100%
of the equity interests in PeopleFirst, LLC. ("PF") in
exchange for 5,000,000 shares of the Company's common stock.
PF functions as an administrative services organization that
provides small to medium-sized businesses with outsourcing
solutions to human resources needs. As a result of the
exchange of equity interests, the former owners of PF acquired
approximately 80% of the common stock of the Company.
Basis of presentation:
The Company has incurred significant recurring losses from
continuing and discontinued operations since its inception,
including losses from continuing operations of approximately
$4,290,000 and $5,633,000 and losses from discontinued
operations of approximately $2,017,000 and $3,345,000 in 1999
and 1998, respectively. Net cash used in the operating
activities of continuing operations totaled approximately
$2,260,000 and $4,509,000 in 1999 and 1998, respectively.
Furthermore, the Company had a working capital deficiency of
approximately $1,908,000 and an accumulated deficit of
approximately $21,025,000 at June 30, 1999. In the absence of
the mitigating factors explained below, these matters would
raise substantial doubts about the Company's ability to
continue as a going concern.
Losses from continuing operations included significant
nonrecurring charges from the write-down of property held for
sale and the amortization of the cost of beneficial conversion
rights allocated to deferred debt financing costs in 1999 and
the write-down of inventories in 1998. Such losses also
included significant noncash charges attributable to the
issuance of equity securities to pay for services,
compensation and other expenses in 1999 and 1998. Management
believes, but cannot assure, that during the year ending June
30, 2000 the Company will be able to liquidate certain
unprofitable operations and reduce certain corporate
administrative charges and generate profits and positive cash
flows from the administrative services business the Company
acquired in exchange for common stock subsequent to the end of
1999. The Company obtained cash and reduced debt through the
consummation of the sale in July 1999 of the property it has
been using in its principal manufacturing operations.
Management also believes, but cannot assure, that the Company
will be able to generate additional resources through loans
from, or sales or other issuances of capital stock to, related
and/or unrelated parties. Although management cannot provide
any assurances that the Company will be successful in
generating profitable operations on a sustained basis, it
believes that the Company will have sufficient resources to
fund its operations through at least June 30, 2000.
F-12
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies:
Principles of consolidation:
The accompanying consolidated financial statements include the
accounts of the Parent and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could
differ from those estimates.
Revenue recognition:
Revenues are generally recognized at the time the product is
shipped or the services are provided.
Cash equivalents:
Cash equivalents include all highly liquid debt investments
with a maturity of three months or less when acquired.
Inventories:
Inventories are stated at the lower of cost or market using
the specific identification method.
Property and equipment:
Equipment used in continuing operations is carried at cost.
Depreciation is provided using the straight-line method over
the estimated useful lives of the assets as follows:
Machinery 5-15 years
Automobiles and trucks 5 years
The net carrying value of property held for sale was written
down to fair value (based on an estimate of sales proceeds) at
the time management decided to dispose of the property and
depreciation was discontinued.
Goodwill:
Goodwill, which is comprised of costs in excess of net assets
of acquired businesses, is being amortized on a straight-line
basis over an estimated useful life of 20 years.
F-13
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (continued):
Impairment of long-lived assets:
The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of ("SFAS 121"). Under SFAS 121, impairment losses
on long-lived assets, such as equipment and goodwill, are
recognized when events or changes in circumstances indicate
that the undiscounted cash flows estimated to be generated by
such assets are less than their carrying value and,
accordingly, all or a portion of such carrying value may not
be recoverable. Impairment losses are then measured by
comparing the fair value of assets to their carrying amounts.
Deferred debt financing costs:
Deferred debt financing costs, including beneficial conversion
rights which arose as a result of the exchange of convertible
notes for outstanding shares of preferred stock in 1999 (see
Note 11), are being amortized to interest expense over the
term of the related debt using a constant effective yield
method.
Advertising:
The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations were not
material during the years ended June 30, 1999 and 1998.
Income taxes:
The Company accounts for income taxes pursuant to the asset
and liability method which requires deferred income tax assets
and liabilities to be computed annually for temporary
differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to
the amount expected to be realized. The income tax provision
or credit is the tax payable or refundable for the period plus
or minus the change during the period in deferred tax assets
and liabilities.
Earnings (loss) per share:
The Company presents "basic" earnings (loss) per common share
and, if applicable, "diluted" earnings per common share
pursuant to the provisions of Statement of Financial
Accounting Standards No. 128, Earnings per Share ("SFAS 128").
Basic earnings (loss) per common share is calculated by
dividing net income or loss applicable to common stock by the
weighted average number of common shares outstanding during
each period. The calculation of diluted earnings (loss) per
common share is similar to that of basic earnings per common
share, except that: (i) the denominator is increased to
include the number of additional common shares that would have
been outstanding if all potentially dilutive common shares,
such as those issuable upon the assumed exercise of stock
options and warrants and the conversion of notes or preferred
shares had been issued during the period and (ii) the
numerator is adjusted to eliminate interest on convertible
notes and convertible preferred dividend requirements.
F-14
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (concluded):
Earnings (loss) per share (concluded):
Diluted per share amounts have not been presented in the
accompanying consolidated statements of operations because the
Company had a net loss in 1999 and 1998 and, accordingly, the
effects of the assumed conversion of all of the Company's
outstanding convertible notes and preferred stock, and the
assumed exercise of all of the Company's outstanding stock
options and warrants and the application of the treasury stock
method, would have been anti-dilutive.
On March 22, 1999, the Company effected a 1 for 8 reverse
split. All numbers of preferred and common shares and per
share amounts (including the par value of each class of
capital stock) in the accompanying consolidated financial
statements and these notes have been adjusted for the effects
of the reverse split.
Stock options:
In accordance with the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees
("APB 25"), the Company will recognize compensation costs as a
result of the issuance of stock options to employees based on
the excess, if any, of the fair value of the underlying stock
at the date of grant or award (or at an appropriate subsequent
measurement date) over the amount the employee must pay to
acquire the stock. Therefore, the Company will not be required
to recognize compensation expense as a result of any grants of
stock options to employees at an exercise price that is
equivalent to or greater than fair value. The Company will
also make pro forma disclosures, as required by Statement of
Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), of net income or loss
as if a fair value based method of accounting for stock
options had been applied instead if such amounts differ
materially from the historical amounts.
Recent accounting pronouncements:
The Financial Accounting Standards Board and the Accounting
Standards Executive Committee of the American Institute of
Certified Public Accountants had issued certain accounting
pronouncements as of June 30, 1999 that will become effective
in subsequent periods; however, management of the Company does
not believe that any of those pronouncements would have
significantly affected the Company's financial accounting
measurements or disclosures had they been in effect during the
years ended June 30, 1999 and 1998.
F-15
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Purchase business combinations:
On December 7, 1998, the Company consummated an agreement
whereby it acquired 80.1% of the issued and outstanding shares
of common stock of BSD in exchange for 118,250 shares of the
Company's common stock (or approximately 19.9% of its then
outstanding common shares). BSD did not conduct any operations
of a commercial nature or have any significant activities
until February 1, 1998 when it acquired 100% of the common
stock of two commonly-controlled companies, Respiratory Care
Services, Inc. ("RCSI") and RCS Subacute, Inc. ("Subacute").
BSD operated as a holding company. RCSI operated as a provider
of quality respiratory therapy staff in a variety of health
care settings. Subacute operated as a provider of
credentialed, licensed therapists experienced in all phases of
skilled and subacute respiratory care. These services were
provided primarily to Medicare patients.
The Company was required to account for the acquisition of its
80.1% interest in BSD pursuant to the purchase method of
accounting and, accordingly, the accompanying consolidated
financial statements include the results of operations of BSD
and its subsidiaries only from December 7, 1998, the date of
acquisition. Since management adopted a plan prior to June 30,
1999 to, effectively, discontinue and dispose of all of the
Company's staffing operations, the results of operations of
BSD and its subsidiaries from December 7, 1998 through June
30, 1999 have been reclassified and reflected as discontinued
operations in the accompanying consolidated financial
statements (see Note 4).
The cost of the acquisition of BSD and its subsidiaries was
$953,394, of which $827,750 was the estimated fair value of
the 118,250 shares of common stock issued by the Company to
the former stockholders of BSD at the date of acquisition and
the balance of $125,644 is the amount of the Company's cash
payments for legal, accounting and other costs related to the
purchase. The issuance of the shares of common stock as part
of the consideration for the acquisition of BSD was a noncash
transaction that is not reflected in the accompanying 1999
consolidated statement of cash flows.
Pursuant to the purchase method of accounting, the initial
cost of acquiring BSD and its subsidiaries, which exceeded the
fair value of the net assets acquired by $1,953,086, was
allocated as follows:
Cash and cash equivalents $ -
Goodwill 1,953,086
Other current and noncurrent assets 1,708,920
Line of credit and other current liabilities (1,208,612)
Long-term debt (1,500,000)
-----------
Total cost of acquisition $ 953,394
===========
F-16
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Purchase business combinations (continued):
In connection with the acquisition, the Company agreed to make
additional payments to the former stockholders of RCS based on
the results of operations of RCS during the five year period
that commenced on February 1, 1998. Pursuant to the purchase
method of accounting, such consideration is only accrued and
charged as an additional cost of the acquisition when a
contingent payment becomes due. The Company accrued a
liability of $500,000 as of June 30, 1999 for the contingent
payment due based on RCS's results of operations through
January 31, 1999 and recorded an equivalent amount as
additional goodwill.
On September 22, 1997, the Company acquired 100% of the common
stock of LPS Acquisition Corp. ("LPS") for consideration
comprised of 33,750 shares of the Company's common stock with
a fair market value at the date of acquisition of $1,298,700.
Certain stockholders of LPS (who owned less than a controlling
interest) were also stockholders of and related parties to the
Company.
On August 11, 1997, the stockholders of LPS had purchased the
net assets and the custom soil mix wholesale distribution
operations of Kedac, Inc. (a debtor-in-procession) through the
bankruptcy court by agreeing to pay $190,000 in cash and
assume $750,000 of Kedac, Inc.'s outstanding debt which
comprises the total consideration paid of $940,000 shown in
the table below.
In addition to issuing the 33,750 shares to the LPS
stockholders, the Company agreed to assume the liabilities of
LPS (which had been newly-formed for the purpose of acquiring
the operations of Kedac, Inc.), including the $190,000 due in
connection with the acquisition of Kedac, Inc. referred to
above. The $326,000 of additional liabilities assumed were
fees to related parties.
In addition, the Company issued an option (which was
subsequently exercised) for the purchase of 11,362 shares of
the Company's common stock at $14 per share as payment for
consulting fees in connection with the acquisition. The market
value of the shares underlying the option exceeded the total
option price by $278,135, which was charged to expense.
The Company was required to account for the acquisition of its
100% interest in LPS pursuant to the purchase method of
accounting and, accordingly, the accompanying consolidated
financial statements include the results of operations of LPS
only from September 22, 1997, the date of acquisition. Since
the Company sold LPS and disposed of its wholesale soil
distribution operations on June 28, 1998, the results of
operations of LPS from September 22, 1997 through June 28,
1998 have been reclassified and reflected as discontinued
operations in the accompanying consolidated financial
statements (see Note 4).
F-17
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Purchase business combinations (continued):
The cost of the acquisition of LPS was $2,942,826, of which
$1,676,826 was the estimated fair value of the 45,113 shares
of common stock issued by the Company to the former
stockholders of LPS which was charged to expense (and,
accordingly, included in the loss from discontinued operations
in 1997) and $1,266,000 represented the assumption of debt.
The transaction was recorded at the predecessor's historical
cost as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $ 455,000
Excess cost over net assets acquired by LPS stockholders
(purchased goodwill) 485,000
----------
940,000
Fees to related parties 326,000
----------
Liabilities assumed 1,266,000
----------
Market value of initial acquisition shares to LPS
stockholders 1,298,700
Fees 378,126
----------
Market value of stock issued 1,676,826
----------
Total cost of acquisition $2,942,826
==========
</TABLE>
In addition, in connection with the acquisition of LPS, on
September 25,1997, the Company issued $750,000 of preferred
shares to the prior owner of Kedac, Inc., the predecessor
company, for his assumption of notes payable to financial
institutions. The Company issued 75,000 shares of Series F
cumulative nonparticipating preferred stock with a stated
capital of $10 per share. The Series F preferred stockholder
received approximately $28,400 in annual dividends during
fiscal year 1998. These shares were retired in connection with
the disposition of LPS in May 1998.
The assumption of debt as part of the consideration for the
acquisition of LPS and the issuance of the Series F preferred
shares were noncash transactions that are not reflected in the
accompanying 1998 consolidated statement of cash flows.
F-18
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Purchase business combinations (concluded):
Unaudited pro forma information showing the Company's results
of operations for the years ended June 30, 1999 and 1998
assuming the acquisitions of BSD and LPS had been consummated
at the beginning of each year has not been presented since
such assumption would have no effect on the results of the
Company's continuing operations.
Note 4 - Discontinued operations:
Pursuant to a plan adopted prior to June 30, 1999 to
discontinue and dispose of all of the Company's staffing
operations, the Company's board of directors approved the
disposal of all of BSD's health care staffing operations
through an agreement dated July 1, 1999 for the sale of BSD's
subsidiaries to two of the stockholders of the Company (the
stockholders are also directors and executive officers of the
Company). The Company also terminated substantially all of the
staffing operations of OIS, which were not material, during
1999 and discontinued the staffing operations of AIM and
completed the sale of its assets during 1998. The Company's
board of directors approved a plan to abandon Federal's fire
sprinkler operations in June 1999. The Company also acquired
and sold the wholesale soil mix distribution operations of LPS
during 1998.
Accordingly, the results of the Company's staffing, fire
sprinkler and wholesale distribution operations have been
retroactively reclassified and comprise the loss from
discontinued operations in the accompanying consolidated
statements of operations.
The Company will receive 75,000 shares of its common stock as
the total consideration for the sale of BSD's subsidiaries.
The Company recorded an estimated loss of $546,245 on the
disposal of BSD's staffing operations in 1999 based on
management's estimate as of June 30, 1999 of the carrying
value of the net assets of the subsidiaries that will be
transferred upon the consummation of their sale, net of the
estimated fair market value of the 75,000 shares it will
receive of $253,152 (or $3.375 per share). It also recorded a
loss of $406,066 on the disposal of Federal's fire sprinkler
operations in 1999 based on the carrying value of the net
assets abandoned.
On June 28, 1998 (effective for accounting purposes as of May
31, 1998), the Company sold all of the outstanding common
stock of LPS to American Group, Inc. ("AGI") in exchange for
1,200,000 shares of common stock of AGI (or approximately 24%
of AGI's outstanding common shares) and the return of 75,000
shares of the Company's Series F preferred stock held by AGI,
which represented all of the Series F preferred shares then
outstanding. Concurrently, the Series F preferred shares were
retired.
F-19
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Discontinued operations (continued):
AGI was a newly-formed entity organized to acquire LPS. Based
on the historical operating losses generated by LPS, the
Company did not attribute any value to the shares of AGI it
acquired, and it recorded a loss of $1,372,441 on the disposal
of LPS's distribution operations in 1998 comprised of the
following:
<TABLE>
<CAPTION>
<S> <C>
Write-off of fair value of common stock issued in
connection with the acquisition of LPS (Note 3) $(1,676,826)
Fees related to sale paid to related parties (326,000)
Less excess of liabilities over assets of LPS
assumed by AGI 630,385
-----------
Loss on disposal $(1,372,441)
===========
</TABLE>
The revenues and the loss from all discontinued operations for
the years ended June 30, 1999 and 1998 was comprised as
follows:
<TABLE>
<CAPTION>
1999
---------------------------------------------------
Staffing Fire Sprinkler Totals
-------- -------------- ------
<S> <C> <C> <C>
Revenues $ 2,170,294 $2,411,910 $ 4,582,204
=========== ========== ===========
Loss from operations $ (608,378) $ (456,267) $(1,064,645)
Loss on disposal (546,245) (406,066) (952,311)
----------- ---------- -----------
Loss from discontinued operations $(1,154,623) $ (862,333) $(2,016,956)
=========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------
Distribution Staffing Fire Sprinkler Totals
------------ -------- -------------- ------
<S> <C> <C> <C> <C>
Revenues $ 1,729,928 $ 492,447 $3,427,103 $ 5,649,478
=========== ============ ========== ===========
Loss from operations $ (791,658) $ (167,953) $ (947,008) $(1,906,619)
Loss on disposal (1,372,441) (66,246) - (1,438,687)
----------- ------------ ---------- -----------
Loss from discon-
tinued operations $(2,164,099) $ (234,199) $ (947,008) $(3,345,306)
=========== ============ =========== ===========
</TABLE>
F-20
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Discontinued operations (concluded):
The net assets of discontinued operations reflected in the
accompanying consolidated balance sheet as of June 30, 1999
were comprised as follows:
Current assets:
Accounts to receivable $ 778,001
Other current asserts 106,548
-----------
Total current assets 884,549
Property and equipment 109,708
Goodwill 2,183,560
Other assets 13,417
-----------
Total assets 3,191,234
-----------
Current liabilities:
Accounts payable and accrued expenses 1,579,861
Notes payable 1,224,290
-----------
Total liabilities 2,804,151
-----------
Net assets of discontinued operations $ 387,083
===========
Note 5 - Inventories:
At June 30, 1999, inventories used in continuing operations
consisted of the following:
Raw materials $605,719
Finished goods 313,950
--------
919,669
Noncurrent inventories 533,607
--------
Total $386,062
========
Noncurrent inventories, which are included in other assets,
consisted of finished goods and other supplies not expected to
be utilized by the Company during the year ending June 30,
2000.
Note 6 - Property held for sale:
Property held for sale was comprised of real property used in
IFR's manufacturing and distribution operations that was
subject to a contract for sale to the president of IFR as of
June 30, 1999. The property had been written down to an
estimated net realizable value of $439,644 based on the sales
contract through a charge of $885,000 in the fourth quarter of
1999 that is included in other expenses in the accompanying
consolidated statement of operations. The sale was completed
on July 2, 1999 and portions of the proceeds were used to
satisfy the existing mortgage (see Note 10) and all of the
outstanding tax liens on the property. Concurrent with the
sale of the property, the Company began to lease the property
on a month-to-month basis for approximately $7,500 per month.
F-21
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Equipment:
At June 30, 1999, equipment used in continuing operations
consisted of the following:
Machinery $1,310,655
Automobiles and trucks 206,218
Other 50,770
----------
Total 1,567,643
Less accumulated depreciation and amortization 522,032
----------
Total $1,045,611
==========
Depreciation and amortization expense was $230,795 and
$249,289 in 1999 and 1998, respectively.
Note 8 - Notes payable to stockholders and former stockholder:
Notes payable to stockholders and former stockholder were
comprised as follows at June 30, 1999:
8% notes payable to stockholder due on demand $ 870,000
7.4% note payable to stockholder due on demand 40,000
10% note payable to former stockholder due
on demand 168,100
----------
Total $1,078,100
==========
In 1999, notes payable with aggregate principal balances of
$250,000 were issued to stockholders in noncash transactions
that are not reflected in the accompanying 1999 consolidated
statement of cash flows, of which $72,023 was for the payment
of compensation, $20,227 was for the payment of interest,
$57,750 was for the payment of dividends and $100,000 was for
the payment of amounts paid by a stockholder on behalf of the
Company. In 1998, a note payable with an aggregate principal
balance of $1,150,109 was converted into 14,375 shares of
Series E preferred stock (see Note 15).
Interest expense attributable to notes payable to stockholders
was not material in 1999 and 1998.
F-22
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Revolving line of credit:
During 1999, the Company obtained a $300,000 revolving line of
credit from a bank. At June 30, 1999, borrowings under the
revolving line of credit, which expires on September 30, 1999,
totaled $235,000. Interest is payable monthly at 8.5% on the
outstanding principal balance. Borrowings are limited to 75%
of qualifying accounts receivable and 50% of eligible
inventories and are secured by all of the Company's accounts
receivable, inventories and general intangibles.
Note 10- Long-term debt:
Long-term debt was comprised as follows at June 30, 1999:
Notes payable secured by equipment (A) $170,622
First mortgage note payable secured by property
held for sale (B) 221,421
--------
Total 392,043
Less current portion 312,781
--------
Long-term debt $ 79,262
========
(A) Payable in monthly installments, including interest at
10%, maturing at various dates from August 1999 through
May 2002.
(B) The first mortgage note, which bore interest at 7.75%
and was originally due in installments through July
2003, was prepaid from the proceeds of the sale of the
property that secured the mortgage on July 2, 1999 (see
Note 6).
Principal amounts due under the Company's long-term
obligations in each of the years subsequent to June 30, 1999,
as adjusted for the prepayment of the first mortgage note, are
as follows:
Year Ending
June 30, Amount
----------- --------
2000 $312,781
2001 51,113
2002 28,149
F-23
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - 8% convertible and nonconvertible notes payable:
The 8% convertible notes and the 8% nonconvertible notes
payable (collectively, the "8% Notes") had an aggregate
carrying value of $900,000 at June 30, 1999, of which $819,000
and $81,000 was attributable to the convertible and
nonconvertible notes, respectively. The 8% Notes are due on
demand commencing on the earlier of February 15, 2000 or the
date as of which the Company has received aggregate proceeds
of $1,000,000 from the exercise of warrants sold through the
Company's private placement of units in March 1999 (see Note
15). Convertible notes in the principal amount of $273,000 and
$546,000 can be converted into shares of common stock at $.91
per share and $1.36 per share, respectively, and, accordingly,
a total of 701,471 shares of common stock were reserved for
possible future issuance upon conversion as of June 30, 1999.
However, conversion at any time through March 31, 2000 is
subject to the consent of the investment banking firm that was
the placement agent for the private sale of the units.
The 8% Notes were issued on March 10, 1999 as part of the
consideration for the redemption of shares of preferred stock
(see Note 15). The fair value of the Company's common stock on
that date was $5.25 per share which exceeded the conversion
prices for the convertible notes. Pursuant to interpretations
issued by the staff of the Securities and Exchange Commission,
such excess constitutes a beneficial conversion feature or
right for which the value is measured by the difference
between the aggregate conversion price and the fair value of
the common stock into which the securities are convertible,
multiplied by the number of shares into which the securities
are convertible. Accordingly, the Company recorded beneficial
conversion rights in connection with the issuance of the
convertible notes with a fair value of approximately
$2,864,000, which equaled the excess of the aggregate proceeds
the noteholders would have received if they had converted the
notes and sold the 701,471 shares of common stock for
approximately $3,683,000 based on the fair market value of
$5.25 per share on March 10, 1999 and the aggregate exercise
price of approximately $819,000 for 300,000 shares at $.91 per
share and 401,471 shares at $1.36 per share. The Company also
recorded a corresponding increase in additional paid-in
capital.
The initial value of the beneficial conversion rights was
included in deferred debt financing costs and is being
amortized over the period from the date of the exchange
through March 31, 1999, the date the notes become convertible
without any restrictions by the noteholders. Amortization
totaled $1,591,000 in 1999.
F-24
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12- Commitments and contingencies:
Employment agreement:
The Company has entered into employment agreements with two of
its key executives which obligate the Company to make payments
of approximately $235,000 in 2000 and 2001 and $175,000 in
2002.
Litigation:
In the ordinary course of business, the Company is both a
plaintiff and defendant in various legal proceedings. In the
opinion of management, the resolution of these proceedings
will not have a material adverse effect on the consolidated
financial position or results of operations of the Company in
subsequent years.
Concentrations of credit risk and major customers:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
trade accounts receivable. The Company maintains its cash
balances with major financial institutions that have high
credit ratings. At times, such balances may exceed Federally
insured limits.
The Company generally extends credit to its customers,
substantially all of whom are located in the central United
States. Management of the Company closely monitors the
extension of credit to customers while maintaining allowances
for potential credit losses. During 1999 and 1998, no customer
accounted for more than 10% of the Company's revenues.
Generally, the Company does not have a significant receivable
from any single customer and, accordingly, management does not
believe that the Company was exposed to any significant credit
risk at June 30, 1999.
Note 13- Income taxes:
As of June 30, 1999, the Company had net operating loss
carryforwards of approximately $17,600,000 available to reduce
future Federal taxable income which will expire at various
dates through 2019. The Company had no other material
temporary differences as of that date. Due to the
uncertainties related to, among other things, the changes in
the ownership of the Company, which could subject those loss
carryforwards to substantial annual limitations, and the
extent and timing of its future taxable income, the Company
offset the deferred tax assets attributable to the potential
benefits of approximately $9,000,000 from the utilization of
those net operating loss carryforwards by an equivalent
valuation allowance as of June 30, 1999.
The Company had also offset the potential benefits of
approximately $4,500,000 and $960,000 from net operating loss
carryforwards by equivalent valuation allowances as of June
30, 1998 and 1997, respectively. As a result of the increases
in the valuation allowance of $2,500,000 and $3,540,000 during
1999 and 1998, respectively, no credits for income taxes are
included in the accompanying consolidated statements of
operations.
F-25
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Fair value of financial instruments:
The Company's material financial instruments at June 30, 1999
for which disclosure of estimated fair value is required by
certain accounting standards consisted of cash and cash
equivalents, accounts receivable and accounts payable and
notes payable. In the opinion of management, (i) cash and cash
equivalents, accounts receivable and accounts payable were
carried at values that approximated their fair values because
of their liquidity and/or their short-term maturities and (ii)
notes payable to unrelated parties were carried at values that
approximated their fair values because they had interest rates
that approximated those currently prevailing for financial
instruments with similar characteristics. Because of the
relationship of the Company and its related parties, there is
no practical method that can be used to determine the fair
values of notes payable to related parties.
Note 15 - Stockholders' equity:
On March 22, 1999, the board of directors and the stockholders
of the Company approved the 1-for-8 reverse split, the
increase from $.001 to $.008 per share in the par value of
common stock and each class of preferred stock and the
authorization of the issuance of up to 3,125,000 shares of
common stock and 250,000 shares of preferred stock. Shares of
preferred stock are issuable in such series and bearing such
voting, dividend, conversion, liquidation and rights and
preferences as the board of directors may determine.
As of June 30, 1999, the only shares of preferred stock
outstanding were 6,875 shares of Series E preferred stock
which had a total par and liquidation value of $55. The
Company had originally issued 14,375 shares of Series E
preferred stock on October 7, 1997 in exchange for a note
payable to the Company's principal common stockholder with a
principal balance of $1,150,019. On December 15, 1998, the
Company issued 75,000 common shares in exchange for 7,500
Series E preferred shares. The holders of Series E preferred
shares are entitled to (i) a liquidation preference of $.008
per share, (ii) annual dividends of $77,000 and (iii) voting
rights per share equivalent to those of the Company's common
shares or any other class of shares of capital stock then
outstanding.
In September 1997, the Company issued 9,375 shares of Series F
cumulative nonparticipating preferred stock, par value $.008
per share, and 33,750 shares of common stock to the sellers as
part of the consideration for the acquisition of LPS and
11,362 shares of common stock to consultants for services
related to the acquisition (see Note 3). In June 1998, the
Series F preferred shares were returned to the Company as part
of the consideration for the sale of LPS (see Note 4) and
retired.
On January 16, 1998, the Company sold approximately 156 shares
of 5% convertible preferred stock, par value $.008 per share,
in a private transaction at $8,000 per share and received
proceeds of $1,075,000 net of selling expenses of $175,000.
The shares were reacquired and retired in March 1999 as
further explained below.
F-26
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Stockholders' equity (continued):
On March 10, 1999, the Company redeemed the 4 shares of Series
A preferred stock, the 3,750 shares of Series C preferred
stock and the 1,250 shares of 5% convertible preferred stock
then outstanding and paid accrued dividends on the preferred
shares of $59,896 in exchange for total consideration with a
fair value of $1,625,000 comprised of (i) cash payments of
$600,000, (ii) the issuance of the 8% Notes in the principal
amount of $900,000, of which of $819,000 was attributable to
the 8% convertible notes and $81,000 was attributable to the
8% nonconvertible notes payable (see Note 11) and (iii) the
issuance of a total of 31,250 shares of common stock with a
fair value of $125,000 (or $4.00 per share). The Company
recorded deferred debt financing costs of $140,626 and
increased the par value of common stock and additional paid-in
capital by an equivalent amount in connection with the
issuance of the common stock. The Company also reduced the par
value of preferred stock and additional paid-in capital by
$1,440,104 based on the amount paid in cash and the principal
value of the bonds totaling $1,500,000, less the $59,896
allocated to the reduction of accrued dividends payable. As
further explained in Note 11, the Company also increased
additional paid-in capital by approximately $2,864,000 for the
value of the beneficial conversion rights attributable to the
excess of the fair value of the Company's common stock on that
date over the conversion prices for the convertible notes.
On October 7, 1997, the Company paid $76,223 to repurchase
38,113 shares of common stock and retired the shares.
On December 7, 1998, the Company issued 118,250 shares of
common stock as the consideration for the acquisition of BSD
(see Note 3). The Company has reflected the 75,000 shares of
common stock it will receive as the consideration for the sale
of BSD (see Note 4) as treasury stock as of June 30, 1999.
On March 10, 1999, the Company sold 1,000,000 units through a
private placement at $1.00 per unit and received proceeds of
$825,173 net of selling expenses of $174,827. Each unit
consisted of .25 shares of common stock, 1 Class A warrant and
1 Class B warrant. Accordingly, the Company issued a total of
250,000 shares of common stock, 1,000,000 Class A warrants and
1,000,000 Class B warrants in connection with the private
placement. Each Class A and each Class B warrant will enable
the holder to purchase one share of common stock at $1.50 and
$1.75 per share, respectively, at any time through March 10,
2002. No warrants were exercised during the period from March
10, 1999 to June 30, 1999 and, accordingly, 2,000,000 shares
of common stock were reserved for issuance upon exercise of
warrants as of June 30, 1999.
F-27
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Stockholders' equity (concluded):
The Company issued 240,359 shares of common stock in 1999 with
a fair market value of $1,414,460 and 127,982 shares of common
stock in 1998 with a fair market value of $4,571,792 for
professional and other services, employee compensation and
other current and prepaid costs and expenses. Shares with a
fair value of $394,625 issued in 1998 were for services in
connection with the acquisition of the administrative services
business that was consummated on September 7, 1999 (see Note
17). The amount attributed to the acquisition services was
reflected as unearned compensation and a reduction of
stockholders' equity as of June 30, 1999 and 1998 and will be
included as part of the cost of the acquisition.
During April 1997, the Company agreed to issue stock options
to a consultant in exchange for assistance in the acquisition
of one or more businesses and for advisory services in
connection with other business matters over the five year
period subsequent to the agreement. The options had an
aggregate estimated fair value of approximately $2,125,000, of
which $1,417,000 was attributable to the acquisition services
and $708,000 was attributable to the other advisory services.
The amount attributed to the acquisition services was also
reflected as unearned compensation and a reduction of
stockholders' equity as of June 30, 1999 and 1998 and will be
included as part of the cost of the acquisition of the
administrative services business that was consummated on
September 7, 1999. The amount attributed to the acquisition
services was reflected as prepaid consulting fees which were
being amortized over the five year term of the agreement. The
agreement was terminated in January 1999. Prepaid advisory
fees of approximately $71,000 and $141,000 were amortized in
1999 and 1998, respectively, and the unamortized balance of
approximately $461,000 was written off upon the termination of
the agreement in January 1999.
Prior to fiscal 1998, the Company issued common stock with a
fair market value of $500,000 for the rights to advertise on
network television and radio programs through December 31,
2000. As of June 30, 1999, the Company had not utilized any of
the advertising rights and, accordingly, the initial value of
the rights has been reflected as unearned advertising fees and
a reduction of stockholders' equity as of June 30, 1999 and
1998.
The issuances of preferred stock, common stock, stock options
and notes payable in connection with the purchases of
businesses, the conversion of notes payable, the redemption of
preferred stock and the payments for professional and other
services, employee compensation and other current and prepaid
costs and expenses described above were noncash transactions
and, accordingly, they are not reflected in the accompanying
1999 and 1998 consolidated statements of cash flows.
F-28
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Stock options:
The Company's 1997 Stock Option Plan (the "Plan") provides for
grants of incentive stock options ("ISOs"), nonqualified stock
options ("NSOs") and reload options to the Company's
employees, directors, consultants and advisors for the
purchase of up to 1,000,000 shares of the Company's common
stock. The option price per share for ISOs granted under the
Plan may not be less than the fair market value of a share of
the Company's common stock on the date of grant, provided that
the exercise price of any ISO granted to an employee owning
more than 10% of the outstanding common shares of the Company
may not be less than 110% of the fair market value of the
shares on the date of grant. The option price per share for
NSOs granted under the Plan may not be less than the par value
of the Company's common stock. Options vest and are
exercisable over periods determined by the board of directors
provided that no option may be exercisable more than ten years
from the date of grant.
A summary of the status of the Company's shares subject to
and/or reserved for issuance upon the exercise of incentive
and nonqualified stock options as of June 30, 1999 and 1998
and the changes in stock options outstanding during the years
then ended is presented below:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Weighted Weighted
Shares Average Shares Average
or Exercise or Exercise
Price Price Price Price
----- ----- ----- -----
<S> <C> <C> <C> <C>
Outstanding, at beginning of year 25,938 $10.89
Granted (A) 25,938 17.60 122,450 $15.58
Exercised (96,512) 10.89
Canceled (A) (25,938) 36.02
------- -------
Outstanding, at end of year 25,938 $17.60 25,938 $36.02
======= ====== ======= ======
Options exercisable, at end of
year 25,938 25,938
======= =======
Options available for grant, at
end of year 974,062 974,062
======= =======
Weighted average fair value of
options granted during the year $3.74 $18.53
===== ======
</TABLE>
F-29
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Stock options (continued):
(A) Options granted and canceled include shares subject to
options for which the exercise price was reduced in 1999
as set forth below:
Original Adjusted
Exercise Exercise
Shares Price Prices
------ ----- ------
938 $36.80 $20.00
6,250 32.00 14.00
6,250 32.00 16.00
6,250 40.00 18.00
6,250 40.00 20.00
------
25,938
======
The following table summarizes information about stock options
outstanding at June 30, 1999, all of which were exercisable at
fixed prices:
Options Outstanding
-----------------------------------------------------
Weighted
Average
Years of
Remaining
Exercise Number Contractual
Prices Outstanding Life
------ ----------- ----
$14.00 6,250 4.5
16.00 6,250 4.5
18.00 6,250 4.5
20.00 7,188 4.5
------
$14.00-$20.00 25,938 4.5
============= ====== ===
The weighted average exercise price of the options outstanding
at June 30, 1999 was $17.60.
Since the Company has elected to continue to use the
provisions of APB 25 in accounting for stock options granted
to employees and the exercise prices of all of the options
granted have been equal to or greater than the fair market
value at the dates of grant, no earned or unearned
compensation cost was recognized in the accompanying 1999 and
1998 consolidated financial statements for options granted to
employees.
F-30
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Stock options (concluded):
In the opinion of management, if compensation cost for the
stock options granted by the Company had been determined based
on the fair value of the options at the grant dates under the
provisions of SFAS 123 using the Black-Scholes option-pricing
model and assuming a risk-free interest rate of 6% and
expected dividends of 0% in 1999 and 1998, respectively, and
expected option lives of one year and five years and expected
volatility of 195% and 65% in 1999 and 1998, respectively, the
Company's pro forma net loss applicable to common stock and
pro forma basic net loss per share arising from such
computations would not have differed materially from the
corresponding historical amounts presented in the accompanying
1999 and 1998 consolidated statements of operations.
Note 17 - Subsequent events:
Changes in authorized shares:
On July 30, 1999, the board of directors and a majority of the
Company's stockholders approved an amendment to the Company's
articles of incorporation whereby the number of shares of
preferred stock authorized for issuance increased from 200,000
to 500,000 shares and the number of shares of common stock
authorized for issuance increased from 3,125,000 to 50,000,000
shares.
Acquisition of administrative services business:
As explained in Note 1, the Company consummated an agreement
whereby it acquired 100% of the equity interests in PF in
exchange for 5,000,000 shares of the Company's common stock on
September 7, 1999. As a result of the exchange of equity
interests, the former owners of PF acquired approximately 80%
of the common stock of the Company.
PF functions as an administrative services organization
whereby it provides small to medium-sized businesses with
comprehensive, fully integrated outsourcing solutions to human
resource needs, including payroll management, workers'
compensation risk management, benefits administration,
unemployment services and human resource consulting services.
The services are designed to enable small and medium-sized
businesses to cost-effectively manage and enhance the
employment relationship.
F-31
<PAGE>
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Subsequent events (concluded):
Acquisition of administrative services business (concluded):
Since the acquisition of PF resulted in the transfer of an
approximate 80% controlling interest in the Company to the
former owners of PF, the acquisition of PF by the Company will
be treated as a purchase business combination, effective as of
September 7, 1999, that will be accounted for as a "reverse
acquisition" in which the Company will be the legal acquirer
and PF will be the accounting acquirer. Accordingly, the
assets and liabilities of PF will be accounted for at their
historical carrying values and the assets and liabilities of
the Company will be valued at their fair values as of
September 7, 1999 with the excess of PF's cost over the fair
value of the Company's assets, if any, allocated to goodwill.
In addition, the historical consolidated statements of
operations issued subsequent to September 7, 1999 will include
the consolidated results of operations of PF and the Company
for any portion of the period subsequent to September 7, 1999,
but only the consolidated results of operations of PF for any
portion of the period prior to September 7, 1999; therefore,
the consolidated statements of operations in future reports
may not be comparable to those included in prior reports
issued by the Company.
* * *
F-32
<PAGE>
Exhibit 10.20
THIRD AMENDMENT TO MANAGEMENT AGREEMENT
THIS AMENDMENT TO MANAGEMENT AGREEMENT (this "Agreement") is made and
entered into as of July 30, 1999 (the "Effective Date") between Coventry
Industries Corp., a Florida corporation, whose principal place of business is
1900 Corporate Blvd, Suite 400 East, Boca Raton, Florida 33431 (the "Company"),
and Robert Hausman, an individual whose address is 3785 NW 65th Lane, Boca
Raton, Florida 33496 (the "Manager").
RECITALS
WHEREAS, the Company and Hausman are parties to that certain Management
Agreement dated as of July 1, 1997 and amended as of November 1, 1997 and
December 1, 1998, copies of which are attached hereto as Exhibit A and
incorporated herein by such reference (the "Management Agreement").
WHEREAS, the parties wish to amend certain specific terms of the Management
Agreement as herein after set forth.
NOW, THEREFORE, in consideration of the mutual agreements herein made, the
Company and the Manager do hereby agree as follows:
1. The Executive shall serve as the President of the Company and shall be
responsible for all tasks and activities that are customarily the responsibility
of such officer and all tasks and activities reasonably determined by the Board
of Directors of the Company. The Executive shall continue to serve on the Board
of Directors of the Company or any committee thereof without additional
compensation.
2. Paragraph 3. of the agreement as written in the second amendment shall
be deleted and substituted as follows:
3. Compensation and Benefits. (a) As his sole compensation payable by the
Company under this Agreement, the Manager shall be entitled to receive the
following:
(1) an annual management fee of one hundred thirty one thousand
($131,000) dollars, payable in twelve equal monthly installments, with an
annual incremental increases of the greater of (i) the percentage increase
in the Consumer Price Index, all items, as published by the United States
Department of Labor, since the date of this Agreement (in the case of the
first annual increase) or since the most recent anniversary of the date of
this Agreement (in the case of all subsequent annual increases), or (ii)
six percent (6%) of the previous year's base management fee. This increase
will be effective on January 1st of each year of the management agreement.
(2) a car allowance of $1,500 per month to cover the cost of Manager's
automobile and operating expenses;
(3) to participate in any hospitalization or disability insurance
plans, health programs, pension plans, bonus plans or similar benefits that
may be available to other executives of the Company (including coverage
under any officers and directors liability insurance policy);
-1-
<PAGE>
(4) such other compensation, including, without limitation, bonus
compensation, as may be determined by a majority of the Company's Board of
Directors, in their sole discretion.
(5) as consideration for the elimination of the 3% Net Pre-Tax Income
cash bonus and the stock options granted in the prior agreements, manager
hereby is granted 50,000 shares of the Company's common stock as
compensation for such consideration.
(b) The Manager shall be reimbursed for all reasonable expenses
incurred in the rendering of the services hereunder.
3. Paragraph 5 of the agreement as written in the second amendment
shall be deleted and substituted as follows:
5. Repayment of Loans, Accrued Dividends and Accrued Salary. As of the date
of this Agreement, Manager is owed approximately $400,000 consisting of accrued
salary, accrued dividends, accrued interest and loans to the Company. In order
to repay such amount as promptly as practicable, the Company will issue a note
(the "Note") to Manager. The Note will have the following terms:
(1) bear interest at 8% per annum,
(2) provide for a minimum of 24 equal monthly installments of
principal and interest that are payable in cash commencing August 1st,
1999. The Company, at it's option, may extend repayment of this notes up to
an additional 24 months if the cash flow requirements necessitate such
extension. The notes may be prepaid at any time without penalty.
(3) provide for acceleration upon the termination of this Agreement
without cause.
(4) Provide that if the manager is disabled, dies, is terminated with
cause, or the management agreement is not renewed, that the remaining
balance due on the note will be paid to the manager or manager's successors
or heirs in accordance with the terms outlined in (2) above.
4. Paragraph 6 of the agreement as written in the second amendment
shall be deleted and substituted as follows:
6. Redemption of Preferred Stock. (a) Manager and Manager's wife own
14,375 shares of the Company's Series E Preferred Stock (the
"Preferred Stock"). Manager and the Company have agreed that the
Preferred Stock will be exchanged for 143,750 shares of Common
Stock, of which 75,000 shares has been exchanged in conjunction
with the closing of the BSD transaction and the remaining 68,750
shall be exchanged prior to the closing of the People First
transaction. Effective on such exchange, the Management Fee
payable pursuant to Section 3(1) above will be increased by
$77,000, which amount is equal to the dividends on the Preferred
Stock. The Company and Manager agree to facilitate the sale of
these shares of Common Stock and Manager will use the proceeds of
such sales to repay principal and interest on the Manager's loan
from Chase Manhattan Bank in the approximate principal amount of
$1,115,000 (the "Loan"). The Company agrees that any shortfall
from the sale of stock will be compensated with additional shares
or cash in order to pay off in full the loan from Chase. The
management fee shall be reduced pro rata as Manager receives
funds from the Company with respect to the sale of Common Stock
and the interest payments decrease.
-2-
<PAGE>
5. Manager and the Company agree not to invoke the "change in control"
provisions of Section 4 as a result of the transactions set forth in the
Exchange Agreement dated as of September 30, 1998.
6. Paragraphs 5 through 17 shall be renumbered to be 7 through 19. The
remaining terms and conditions of the Management Agreement remain in full force
and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written in Boca Raton, Florida.
COVENTRY INDUSTRIES CORP.
By: _____________________________
Name:
Title:
MANAGER
----------------------------
Robert L. Hausman
-3-
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