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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-25890
INTERNATIONAL ALLIANCE SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2769024
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10055 SWEET VALLEY DRIVE
VALLEY VIEW, OHIO 44125
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (216) 447-9000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant is approximately $150,000,912 million as of March 27, 1997.
The number of outstanding shares of the Registrant's common stock is 34,724,428
shares as of March 25 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of the Registrant's Definitive Proxy
Statement relative to the 1997 Annual Meeting of
Stockholders.
Part IV Portions of previously filed reports and registration
statements.
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INTERNATIONAL ALLIANCE SERVICES, INC.
-------------------------------------
ANNUAL REPORT ON FORM 10-K
--------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
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TABLE OF CONTENTS
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PART I Page
<S> <C> <C>
Items 1 and 2. Business and Properties.......................................................... 2
Item 3. Legal Proceedings................................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders.............................. 17
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters............. 19
Item 6. Selected Consolidated and Combined Historical Financial Data..................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 21
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant............................... 27
Item 11. Executive Compensation........................................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management................... 27
Item 13. Certain Relationships and Related Transactions................................... 27
PART IV
Item 14. Exhibits and Reports on Form 8-K................................................. 27
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THE FOLLOWING TEXT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES
THERETO) APPEARING ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K ("ANNUAL
REPORT"). UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS ANNUAL
REPORT TO "IASI" OR THE "COMPANY" SHALL MEAN INTERNATIONAL ALLIANCE SERVICES,
INC., A DELAWARE CORPORATION, AND ITS OPERATING SUBSIDIARIES.
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
OVERVIEW
IASI is a diversified services company which, acting through its
subsidiaries, provides specialty insurance services, business outsourcing
services and environmental services. In October 1996, IASI completed two
acquisitions (the "Merger Transactions") pursuant to which it acquired, through
a reverse merger, Century Surety Company ("CSC") and its subsidiaries (together
with CSC, the "CSC Group"), which includes three insurance companies, and
Commercial Surety Agency, Inc. d/b/a Century Surety Underwriters ("CSU"), an
insurance agency that markets surety bonds. Through its insurance subsidiaries,
IASI provides specialty insurance and bonding services to small and medium sized
commercial enterprises throughout the United States.
In December 1996, IASI acquired SMR & Co. Business Services ("SMR").
Through SMR, IASI provides a wide range of business outsourcing services,
including information technology consulting, tax return preparation and
compliance, tax planning, business valuation, human resource management,
succession and estate planning, personal financial planning and employee benefit
program design and administration to individuals and small and medium sized
commercial enterprises primarily in Ohio.
In February 1997, IASI signed a non-binding letter of intent and
confidentiality agreement (collectively, the "Letter of Intent") to sell IASI's
environmental services operations. The Letter of Intent also contemplates the
formation of a strategic alliance between IASI and the purchaser whereby IASI
will continue to have access to IASI's environmental resources for the benefit
of its insurance customers after the sale. IASI anticipates that the sale will
be completed by mid-1997. Consummation of the transaction remains subject to the
purchaser's due diligence, the negotiation and execution of definitive
documentation and the receipt of necessary governmental and third party
approvals and consents. Accordingly, there can be no assurance that the
transaction will be consummated. See "- Environmental Services - General."
IASI's strategy is to aggressively grow as a diversified services
company by expanding its recently acquired specialty insurance and business
outsourcing services operations through internal growth and additional
acquisitions in such industries. See "- Business Strategy."
IASI was formed as a Delaware corporation in 1987 under the name Stout
Environmental, Inc. ("Stout"). In 1992, IASI was acquired by Republic
Industries, Inc. (formerly known as Republic Waste Industries, Inc., "RII"). In
April 1995, RII effected a spin-off of its hazardous waste operations through a
distribution of the common stock, $.01 par value per share ("Common Stock"), of
IASI to the stockholders of record of RII (the "Spin-off"). In connection with
the Merger Transactions, in October 1996, IASI changed its name to International
Alliance Services, Inc. from Republic Environmental Systems, Inc. IASI's Common
Stock trades on the Nasdaq National Market ("Nasdaq") under the trading symbol
"IASI." In June 1996, IASI declared and distributed a two-for-one stock split in
the form of a 100% stock dividend ("Stock Split"). All the share numbers and per
share amounts set forth herein reflect the Stock Split.
The principal executive office of IASI is located at 10055 Sweet Valley
Drive, Valley View, Ohio, 44125 and its telephone number is (216) 447-9000.
BUSINESS STRATEGY
IASI's business strategy is to expand its current operations in the
specialty insurance and business outsourcing services areas, and discontinue its
operations in the environmental services area. IASI plans to implement its
business strategy through internal growth and by acquiring and integrating
existing businesses that provide specialty insurance services or business
outsourcing services.
IASI generally targets acquisitions in markets where it will be, or the
prospects are favorable to increase its market share to become, a significant
provider of a comprehensive range of specialty insurance and business
outsourcing services. IASI's strategy is to acquire companies that (i) have
strong and energetic entrepreneurial leadership; (ii) have solid historic and
expected future internal growth; (iii) can add to the level and breadth of
services
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offered by IASI thereby enhancing IASI's competitive advantage over other
specialty insurance and business outsourcing services providers; (iv) have a
strong income stream; and (v) have a strong potential for cross-selling among
IASI's subsidiaries. As opportunities are identified, within or outside such
criteria, IASI may acquire specialty insurance and business outsourcing
operations throughout the United States.
IASI uses internal acquisition teams and its contacts in the specialty
insurance and business outsourcing services industries to identify, evaluate and
acquire businesses in attractive markets. Acquisition candidates are evaluated
by IASI's internal acquisition teams based on a comprehensive process which
includes operational, legal and financial due diligence reviews.
Although management believes that IASI currently has sufficient
resources, including cash on hand, cash flow from operating activities, credit
facilities and access to financial markets to fund current and planned
operations, service any outstanding debt and make certain acquisitions, there
can be no assurance that additional financing will be available on a timely
basis, if at all, or that it will be available on terms acceptable to IASI. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
ACQUISITIONS
RECENT ACQUISITIONS
The following are acquisitions completed since the consummation of the
Merger Transactions in October 1996:
In November 1996, IASI acquired Environmental and Commercial Insurance
Agency, Inc. ("ECI"), a small, privately-held insurance agency, for $1.0 million
in cash and 192,500 shares of Common Stock. ECI markets, through over 100
independent agents, property and casualty insurance surety bonds to
environmental remediation contractors, landfill operators, consultants, and
other small and medium sized companies specializing in environmental businesses
throughout the United States.
In December 1996, IASI completed the acquisition of all of the
outstanding shares of SMR in exchange for 600,000 shares of Common Stock and
warrants to purchase an additional 900,000 shares of Common Stock at an exercise
price of $10.375 per share.
In January 1997, IASI acquired certain of the assets and business of
Midwest Indemnity Corporation ("Midwest"), in exchange for $3.3 million in cash,
407,256 shares of Common Stock and $1.8 million in non-interest bearing notes
payable in installments through December 31, 1998. Midwest markets environmental
and surety bond products throughout the United States through a system of
approximately 100 independent agents and subagents.
In February 1997, IASI acquired Midland Consultants, Inc., a
full-service specialized employment firm, in exchange for $208,000 in cash,
87,500 shares of Common Stock and warrants to purchase an additional 20,000
shares of Common Stock at an exercise price of $11.625 per share.
In March 1997, IASI acquired M&N Risk Management, Inc., M&N
Enterprises, Inc. and Millisor Firmco, Inc. (collectively, the "M&N Companies")
for $1.0 million in cash, 384,600 shares of Common Stock and warrants to
purchase an additional 900,000 shares of Common Stock at an exercise price of
$13.00 per share. The M&N Companies provide third party workers' compensation
administration services.
PENDING ACQUISITIONS
In March 1997, IASI announced the contemplated acquisition of all of
the outstanding capital stock of The Benefits Group Agency, Inc, a full-service
corporate benefits administration company. ("The Benefits Group"), for $2.5
million in cash, 395,000 shares of Common Stock and warrants to purchase an
additional 500,000 shares of Common Stock at an exercise price of $12.50 per
share.
SPECIALTY INSURANCE SERVICES
GENERAL
Through its insurance subsidiaries, IASI provides specialty insurance
and bonding services to small and medium sized commercial enterprises throughout
the United States. The following is a description of the specialty insurance and
bonding services currently offered by IASI.
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OPERATIONS
The products provided by IASI's insurance subsidiaries can be divided
into two categories: commercial lines, which constitutes approximately 85% of
IASI's specialty insurance business, and surety bonds, which constitutes the
other 15% of IASI's specialty insurance business. In addition, IASI employs
reinsurance to limit its exposure on policies and bonds that it has written.
COMMERCIAL LINES. IASI's commercial lines operations consist of
approximately 40 different programs for a wide variety of specialty risk groups.
Largest among these are general liability insurance and related coverages for
small construction contractors; restaurants, bars, and taverns; small commercial
and retail establishments; sun tanning salons; and environmental contractors and
professionals.
Insurance coverages offered to environmental contractors and
professionals, include (i) property and general liability insurance for
remediation action contractors engaged in a full hazard range of clean-ups;
asbestos abatement contractors; underground storage tank removal and remediation
contractors; and solid waste landfill operators; and (ii) errors and omissions
insurance for environmental consultants. In addition IASI conducts a
comprehensive inspection of environmental risks which management believes
enhances its position as a provider of environmental insurance.
IASI's commercial lines business is produced by a network of
approximately 72 agents (with 104 offices) and 28 brokers (with 28 offices).
Subject to strict and detailed written underwriting guidelines regarding pricing
and coverage limitations published by IASI, agents have limited authority to
bind coverage. For casualty coverage, agents may bind and write up to $1.0
million combined single limit of liability for risks other than those on the
list of prohibited classes or on the list for referral to IASI. Policies that
are bound by agents are immediately forwarded to IASI for review and inspection
and IASI reserves the right to make the final underwriting decision based on
IASI's acceptance or rejection of individual risks. Risks outside the written
guidelines must be submitted to IASI for specific approval for underwriting.
Brokers have no underwriting authority and must submit all risks to IASI for
underwriting, quoting, binding and policy insurance.
IASI checks premium ratings on a selective basis to verify that program
rules and rates are being followed. In addition, underwriters perform monthly
reviews of files for renewal risks. Files are reviewed on a selective basis by
policy types, particular risk classes, or individual general agents as loss
experience or changing underwriting practices dictate. In addition to other
underwriting quality control measures, a continuous audit process for each
general agent is maintained. At least once a year, a visit to each agent's
office is arranged to review all of the foregoing areas, as well as premium
production, losses and loss ratio. Management also performs internal
underwriting audits of all underwriters on a regular basis to maintain control
of the underwriting quality and pricing of IASI.
All claims against commercial policies are managed by IASI's claim
departments. Outside adjusters and attorneys are engaged, as necessary, to
supplement IASI's in-house staff and to represent IASI in litigation over
disputed claims. Claims guidelines are in place on all programs. State
regulations and data on unfair claims practices are also provided to the staff
members as necessary and appropriate. IASI's philosophy is to pay valid claims
as expeditiously as possible but to resist firmly what management believes are
unjust and fraudulent claims. In an effort to provide adequate resources to the
claims staff, CSC became a member of the Property Loss Research Bureau and the
Liability Insurance Research Bureau in 1995. IASI also submits claim data to the
index bureaus of the American Services Insurance Group and the Property
Insurance Loss Register.
It is the responsibility of the claims manager to appoint outside
adjusting firms to work on behalf of IASI. These firms, however, are given no
authority to settle any claims without IASI's prior agreement. The internal
adjuster assigned to each individual claim determines, after coverage is
analyzed, whether the claim can be handled in house or should be assigned to an
outside firm.
SURETY BONDING. IASI's surety bonding operations consist of two major
programs: contract surety bonds for smaller construction contractors (with work
programs typically ranging from $250,000 to $10.0 million per year) and bonds
for the solid waste industry, including waste haulers and landfill operators.
Contract surety consists of bonds that government authorities and some
private entities require construction contractors to post to provide assurance
that contract work will be performed timely, to specification, on budget, and
without encumbrance from suppliers or subcontractors who may have lien rights
for non-payment. Contract surety business is underwritten by IASI subject to
authority defined in agency agreements with the insurance companies. The
business is produced by approximately 100 appointed agents, who have limited
authority to bind the companies in accordance with specific guidelines
established by IASI. Because the contract surety business is specialized in
smaller, newer and more difficult accounts, underwriters take collateral,
require contract funds control, and take other risk control measures considered
extraordinary by standard market sureties. In virtually all cases, bond
principals indemnify the surety against loss with their personal as well as
corporate assets.
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Once bonds are issued, IASI continues to review all projects to
determine job progress, bill payment, and other factors. IASI maintains
real-time records of all bonded exposures, amended as appropriate, in an effort
to obtain the most current possible assessment of exposures for each account and
to avoid excessive exposure on any one account. IASI also strives through its
review procedures to provide the companies with the earliest possible notice of
potential difficulty so that claim resources can be brought to bear at the
earliest possible stage in an effort to mitigate losses.
While claims against surety bonds are managed by IASI, outside counsel
are engaged to handle surety defense litigation. In addition, IASI has or has
access to completion capability for finishing bonded work which bonded
principals are unable to prosecute, and pursues recoveries on behalf of the
companies from principals who have defaulted on bond obligations. Such recovery
efforts range from execution on collateral posted by bonded principals to
indemnity litigation to recover surety losses from indemnitors' business and
personal assets. Finally, IASI manages funds control escrow accounts as
specified by the underwriters for particular accounts.
IASI's solid waste bond program, which is national in scope, is
primarily written directly by IASI, and serves bond accounts that are generally
much larger than those handled by IASI's contract surety program. The primary
focus of this program is bonds for landfill closure and post-closure care
required by states in accordance with Subtitle D of the Resource Conservation
and Recovery Act of 1976, as amended ("RCRA"). These bonds are designed to
assure that non-hazardous solid waste landfills will be closed when their
useable airspace is exhausted in accordance with Subtitle D closure requirements
(or such higher standards as individual states may impose) and that the sites
will be maintained in accordance with Subtitle D standards for a period of at
least 30 years after closure. Management believes that this program is one of
only a few landfill bond programs in the United States, although bank letters of
credit and other devices may be used to satisfy Subtitle D financial assurance
requirements. Full implementation of RCRA financial assurance requirements by
the United States Environmental Protection Agency (the "EPA") is not currently
scheduled until after April 1997, although several states have already proceeded
with such implementation, including, most significantly for IASI, Ohio, Kentucky
and Pennsylvania. See "- Regulation." IASI currently writes landfill bonds for
some of the larger solid waste disposal firms in the country. As a companion to
the landfill closure bonds, IASI also writes bonds required of waste haulers to
assure the observance of terms of their contracts with the local communities
from which they collect waste.
To stay abreast of technical and market developments in the surety
industry, certain of IASI's subsidiaries are members of the Surety Association
of America, the National Association of Independent Sureties, National
Association of Surety Bond Producers, the Surety Federation of Ohio, and The
American Surety Association, on which Board of Directors CSC occupies a
position.
REINSURANCE. IASI employs reinsurance to limit its exposure on the
policies and bonds it has written. IASI utilizes several different reinsurance
programs to cover its exposure, including "treaties" that cover all business in
a defined class and "facultative" reinsurance that covers individual risks. IASI
retains from $50,000 to $200,000 of each commercial line risk, depending on the
program. Surety retentions may go as high as $1.0 million or more, but typically
are less than $250,000.
Numerous domestic and international reinsurers support these various
programs in different combinations. Generally, IASI's reinsurers are rated A- or
better by A.M. Best, a leading rating agency of insurance companies and
reinsurers, and demonstrate capital and surplus in excess of $80.0 million
(collectively in excess of $10.0 billion). Cessions are diversified so that
every reinsurance treaty (i.e., excluding facultative arrangements) is supported
by more than one reinsurer and no reinsurer is participating in all of IASI's
reinsurance programs.
MARKETING
IASI's insurance and bonding business is focused on niche insurance and
surety coverages known in the insurance business as "non-standard" or specialty
coverages. These terms refer to risks regarded as higher than standard or normal
risks and to risk groups regarded as too small or too specialized to permit
profitable underwriting by larger, "standard market" insurance companies. In
general, non-standard insurance and bonds are more expensive, and coverage more
limited, because of perceived additional risk associated with this type of
business. IASI attempts to identify and exploit such niches in the non-standard
insurance market where management believes the actual risk is significantly less
than the perceived risk at which the coverage is defined and priced, or where
IASI, because of its smaller size and lower overhead, is able to underwrite
coverages more economically than larger carriers.
Many non-standard insurance products can be marketed on an excess and
surplus lines basis, which means that the carrier is not fully admitted in a
given state but instead satisfies a less restrictive threshold of regulatory
scrutiny, known as "eligibility," to write excess and surplus lines ("E&S"). E&S
eligibility offers much more flexibility than admitted carriers enjoy. For
example, E&S eligibility offers certain marketing advantages, principally,
exemption from rate and form filing requirements that apply to admitted
carriers, which permits E&S carriers to adjust prices and coverages, or to cease
writing altogether. Accordingly, the majority of the non-surety business of IASI
is written on an
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E&S basis. Through certain of its subsidiaries, IASI is admitted in 34 states,
but is eligible to write on an E&S basis in 39 other states plus the District of
Columbia, the most significant of such states being California, Texas and
Florida.
Certain commercial lines products, however, are virtually impossible to
write on an E&S basis because of competitive or regulatory requirements to use
admitted carriers. In order to market these programs, IASI uses its admitted
subsidiaries, thereby reaching a market of 30 states. Management believes that
this strategy of employing both admitted and non-admitted E&S carriers helps to
maximize IASI's flexibility within the insurance regulatory environment in an
effort to market a broad range of products on a profitable basis. IASI also
employs reinsurance arrangements to market certain products in all 50 states.
COMPETITION
Both the commercial lines and the surety industries have been highly
competitive in recent years, resulting in the consolidation of some of the
industries' largest companies. Competition is particularly acute for smaller,
specialty carriers like IASI because the market niches exploited by IASI are
small and can be penetrated by a large carrier that elects to cut prices or
expand coverage. IASI has endured this risk historically by maintaining a high
level of development of new products, such as its environmental coverage and
landfill bonds eschewed by most major carriers. Nevertheless, there can be no
assurance that future development efforts will succeed or that product erosion
from intensifying competition will not outpace development efforts.
CUSTOMERS
IASI provides specialty insurance services to approximately 6,000
clients through a network of nearly 200 agents. IASI attempts to maintain
diversity within its client base to lower its exposure to downturns or
volatility in any particular industry and help insulate IASI to some extent from
general economic cyclicality. All prospective customers are evaluated
individually on the basis of insurability, financial stability and operating
history. No customer individually comprises more than 3.5% of the total
consolidated revenue of IASI.
REGULATION
FEDERAL REGULATION. IASI's specialty insurance operations are
vulnerable to both judicial and legislative law changes. Judicial expansion of
terms of coverage can increase risk coverage beyond levels contemplated in the
underwriting and pricing process. According to industry estimates reported by
A.M. Best, judicial imposition of pollution liability on insurers before the era
of specific pollution exclusions in insurance policies created an estimated $25
billion liability for U.S. insurers and reinsurers that such companies did not
know they were underwriting and for which they received no premium.
At the same time, coverages that are established by statute may be
adversely affected by legislative or administrative changes of law. Most surety
bonds exist because they are required by government agencies. When governments
change the threshold for requiring surety, the market for surety bonds is
directly affected. The repeated postponement by the EPA of deadlines for
compliance with the financial assurance portions of RCRA Subtitle D has
significantly slowed growth of IASI's landfill closure bond program, which was
begun in March 1994 because of the anticipated deadline of April 1994 for
universal compliance. Such compliance currently is not anticipated to be
universally mandated until after April 1997.
STATE REGULATION. The companies of the CSC Group are subject to
regulation and supervision by state insurance regulatory agencies, applicable
generally to each insurance company in its state of incorporation. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Sources of Cash." These regulatory bodies have broad administrative
powers relating to (i) standards of solvency, which must be met on a continuing
basis; (ii) granting and revoking of licenses; (iii) licensing of agents; (iv)
approval of policy forms; (v) maintenance of adequate reserves; (vi) form and
content of financial statements; (vii) types of investments permitted; (viii)
issuance and sale of stock; and (ix) other matters pertaining to insurance.
Each of the CSC Group companies are required to file detailed annual
statements with the respective state regulatory bodies and are subject to
periodic examination by the regulators. The most recent regulatory examination
for CSC was made as of December 31, 1993. The most recent regulatory
examinations of each of Evergreen National Indemnity Company ("Evergreen") and
Continental Heritage Insurance Company ("Continental Heritage"), each
subsidiaries of IASI, were made December 31, 1993 and December 31, 1994.
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BUSINESS OUTSOURCING SERVICES
GENERAL
Through its subsidiary, SMR, IASI provides a wide range of business
outsourcing services. It is IASI's goal to expand the business outsourcing
services offered by IASI into a comprehensive personnel, consulting and
management system that enables IASI to assist its clients with substantially all
business outsourcing matters. The following is a description of the business
outsourcing services currently offered by IASI.
OPERATIONS
IASI provides a comprehensive range of business outsourcing services,
including information technology consulting, tax return preparation and
compliance, tax planning, business valuation, human resource management,
succession and estate planning, personal financial planning and employee benefit
program design and administration services to individuals and small and medium
sized commercial enterprises engaged in a wide variety of businesses. IASI
contracts with its clients based upon the services they require.
INFORMATION TECHNOLOGY CONSULTING. IASI provides a wide range of
information technology services. Such services include developing strategic
technology plans, determining emerging technology capabilities (such as imaging
and the Internet), reviewing operational use of software and hardware, defining
and implementing software and hardware systems to address day-to-day business
challenges and designing and implementing network solutions for clients with
multiple sites.
TAX RETURN PREPARATION AND COMPLIANCE; TAX PLANNING. IASI's tax return
preparation and compliance services include the preparation and review of
federal and state tax returns on behalf of IASI clients. In addition, IASI
offers tax planning services to businesses with the goal of reducing the
client's tax liabilities. Such services include assistance with the choice of
business entity, development of executive compensation plans and employee
benefit and retirement policies, and evaluation of investments.
BUSINESS VALUATION. IASI's business valuation services are designed to
assist a client in determining the precise value of a business or professional
practice, either to avoid tax and regulatory problems or simply to facilitate
organizational change. Such services are required in a variety of contexts,
including litigation, sales, employee stock ownership plans, corporate
recapitalization, succession plans or acquisitions.
Business valuation involves a formalized system of gathering
information to gain an in-depth understanding of a client's business and the
pertinent factors affecting its value. IASI employs a team of Certified
Valuation Analysts to perform such analyses.
HUMAN RESOURCE MANAGEMENT. As part of its human resource management
services, IASI performs organizational development audits and analyses and
organizational structure analyses to provide its clients with solutions to
strengthen both the financial and human resource side of the clients'
businesses. IASI then works with its clients to implement such solutions.
Included in the services provided by IASI is the development of
detailed personnel guides, which set forth a systematic approach to
administering personnel policies and practices including recruiting, discipline
and termination procedures. In addition, IASI will review and revise, if
necessary, personnel policies and employee handbooks or will create customized
handbooks for its clients.
IASI's human resource management services include the recruiting of new
employees. IASI will also perform executive compensation analyses and provide
management with detailed information regarding competitive salaries for a wide
variety of positions throughout the United States.
SUCCESSION AND ESTATE PLANNING. IASI provides business and estate
planning services, as well as assists in the review of estate planning
documents. Such services include the review and analysis of the laws affecting,
and the development of customized plans regarding, the management and succession
of businesses and estates.
PERSONAL FINANCIAL PLANNING. IASI offers financial planning services to
individuals. IASI employs tax and financial planners who assess the individual's
cash flow and tax situation, financial requirements and financial objectives,
and work with the individual to define his or her short and long term financial
goals. IASI's financial planners then work with the individual to develop and
implement plans and methods for achieving the individual's goals.
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EMPLOYEE BENEFIT PROGRAM DESIGN AND ADMINISTRATION. IASI currently
offers small group health care plans and other insurance coverages that its
clients may provide to their employees. Such insurance coverages include group
term life, universal life, accidental death and dismemberment and long-term
disability. IASI works with the client to determine its needs and, in accordance
with such needs, gives the client the opportunity to select from among several
different plan packages or, with the assistance of IASI, design a personalized
package of benefits for the client.
As part of its services, IASI administers the foregoing benefit plans
and is responsible for negotiating the benefits and costs of such plans. IASI
serves as a liaison for the delivery of such services to its client's employees
and monitors and reviews claims for loss control purposes.
In addition, IASI offers to its clients 401(k), profit-sharing, defined
benefit and money purchase plans, as well as administration and consulting
services associated with such plans. IASI also provides support services to
insurance companies who offer retirement plans.
IASI's QuickVal Daily Valuation System ("QuickVal") provides 24-hour
telephone access to qualified retirement plan administration information for
individual participants. QuickVal provides participants with their account
balances and enables participants to change investments at any time.
OTHER BUSINESS OUTSOURCING SERVICES. In addition to the business
outsourcing services described above, IASI also provides the following business
outsourcing services: merger and acquisition analysis; litigation support; cash
flow management; process improvement consulting, including quality management
and strategic services; business management consulting, including communications
consulting, market research and organizational development; and bookkeeping
services.
MARKETING AND CUSTOMERS
IASI's business outsourcing services are sold primarily in Ohio. All
services use common marketing techniques, including direct sales methodologies
with emphasis on referral sources.
None of IASI's major business outsourcing services groups have a single
homogeneous client base. Rather, IASI's clients come from a large variety of
industries and markets. IASI believes that such diversity helps to insulate IASI
from a downturn in a particular industry. In addition, none of IASI's business
outsourcing services are overly sensitive to price change. Nevertheless,
economic conditions among selected clients and groups of clients may have a
temporary impact on the demand for such services.
COMPETITION
The business outsourcing services industry has been highly competitive
in recent years resulting in consolidation and strategic alliances across
industry lines. The principal competitive factors in this industry are service
and price. This is particularly important to small to medium sized providers
because larger providers, or alliances with larger providers, can create service
and price distortions in the market place.
IASI's competitors in the business outsourcing services industry
include independent consulting services companies, divisions of diversified
enterprises and banks.
REGULATION
IASI's provision of business outsourcing services is vulnerable to
legislative changes with respect to its tax advisory, compliance and preparation
services. Legislative changes may expand or contract the types and amounts of
business services that individuals and businesses require.
ENVIRONMENTAL SERVICES
GENERAL
In February, 1997, IASI signed the non-binding Letter of Intent to sell
IASI's environmental services operations. The Letter of Intent also contemplates
the formation of a strategic alliance between IASI and the purchaser whereby
IASI will continue to have access to IASI's environmental resources for the
benefit of its insurance customers after the sale. IASI anticipates that the
sale will be completed by mid-1997. Consummation of the transaction remains
subject to the purchaser's due diligence review, the negotiation and execution
of definitive documentation and the receipt of necessary government and third
party approvals and consents. Accordingly, there can be no assurance, however,
that the transaction will be consummated or, if consummated, that the
transaction will be consummated on the terms set forth herein.
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<PAGE> 10
The following is a description of IASI's environmental services
business as of the date of this Annual Report.
OPERATIONS
IASI's environmental services operations include the operation of its
treatment, storage and disposal facilities ("TSD Facilities"), transportation,
remediation and technical services and related engineering, consulting and
analytical services. IASI currently operates seven hazardous and non-hazardous
TSD Facilities located in the United States and Canada. These TSD Facilities are
serviced by IASI's integrated trucking operations. IASI does not own any
hazardous waste disposal sites. IASI also provides a broad range of related
environmental services including engineering, consulting and analysis,
remediation, groundwater/wastewater services and other technical services.
TSD FACILITIES. IASI provides hazardous and non-hazardous waste
treatment, storage and disposal services through seven commercial hazardous TSD
Facilities located in the United States and Canada. The wastes handled by these
TSD Facilities include substances which are classified as hazardous under
applicable law because of their source of generation, characteristic properties,
specific constituents and other substances subject to federal, provincial and
state environmental regulations.
Treatment, storage and disposal services are typically performed under
service agreements that obligate IASI to accept from its customer waste material
conforming to the specifications set forth in the services agreement. Before
IASI signs a service agreement with a customer, a representative sample of the
waste is analyzed by a laboratory to enable IASI to recommend the best method of
transportation, treatment and disposal. Prior to unloading at IASI's treatment
facility, a representative sample of the delivered waste is tested and analyzed
on site to ensure that it conforms to the customer's waste profile sheet. Once
the wastes are characterized, compatible groups are consolidated to achieve
economies in storage, handling, transportation and ultimate treatment and
disposal.
The operational and permitted capabilities of the seven TSD Facilities
operated by IASI vary extensively with each facility operating under site
specific permit requirements. The seven TSD Facilities in the aggregate have the
ability to process bulk liquids, solids, drums and laboratory-packaged waste
materials. Six of these TSD Facilities have received final hazardous waste
permits (EPA and/or state-issued Part B Permits or Canadian Ministry of the
Environment ("MOE") Permits) from the appropriate regulatory agencies and the
remaining TSD Facility is operating under an interim status permit. See "-
Regulation." IASI expects to obtain the final Part B permit for this facility in
1997. If this Part B permit application is denied, the TSD Facility would be
forced to cease hazardous waste operations and be subject to closure procedures
with respect to such operations. The oil recycling operations that are conducted
at such location would be permitted to continue even if the permit is denied. It
is the opinion of management that the failure to obtain such permit and the
subsequent closure of the facility would not have a material adverse effect on
IASI.
The TSD Facilities have the collective ability to accept virtually all
types of hazardous and non-hazardous wastes, except radioactive materials. Each
TSD Facility is specifically regulated with respect to waste types that are
included in its permits.
The TSD Facilities collectively perform the following treatment and
storage services:
- -- bulking and consolidation for off-site incineration
- -- waste water treatment, including heavy metal precipitation,
carbon absorption, oxidation, reduction,
biological treatment and filtration
- -- low level cyanide destruction
- -- fuels blending
- -- oil recycling
- -- phase separation
- -- PCB storage
- -- solids liquification
- -- stabilization of solid and semi-solid sludges
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IASI currently owns nine TSD Facilities, seven of which are
operational. The following table provides certain information concerning the
operating TSD Facilities owned by IASI. These facilities serve markets in the
northeastern and midwestern United States and southern Ontario regions.
<TABLE>
<CAPTION>
PERMITTED
OPERATING AND STORAGE
TSD FACILITY PERMITTED ACTIVITIES CAPACITIES
------------ -------------------- ----------
<S> <C> <C>
Republic Environmental Part B Permit - hazardous waste Operating capacities - approximately 55
Systems (Pennsylvania), treatment and storage facilities million gallons per year bulk liquid,
Inc., Hatfield, PA; for hazardous and non-hazardous 73,000 tons per year bulk solid, 99,000
(formerly known as Waste solid and liquid waste in bulk, drums per year; storage capacity
Conversion, Inc., "RES drum and lab pack; interim status -approximately 568 drums, 335,000 gallons
(Pennsylvania)") PCB storage bulk liquid, 1,500 cubic yards solid
Republic Environmental Part B application filed in 1986; Operating capacities - approximately 18
Recycling (New Jersey), EPA and NJDEP (defined herein) million gallons per year of bulk waste;
Inc.; Clayton, New Jersey interim status-waste oil blending storage capacity - 2 million gallons
and recycling, fuels blending and
transfer facility
Republic Environmental Part B Permit - bulk solid Operating capacities - approximately
Systems (Cleveland), Inc., hazardous waste treatment and 124,800 tons per year bulk solid, 18,250
Bedford, Ohio; (formerly storage, hazardous and drums per year; storage capacity
Evergreen Environmental non-hazardous drum treatment, -approximately 975 drums and 47,500
Group, Inc., "RES bulk liquids and oils treatment gallons bulk liquid, 1,000 cubic yards
(Cleveland)") and fuels blending solid
Republic Environmental MOE Permit - hazardous waste Operating capacities - approximately 3.4
Systems (Fort Erie) Ltd.; treatment, processing, recovery, million gallons per year bulk liquid,
Fort Erie, Ontario transfer and storage 1,170 tons per year bulk solid, 52,000
drums per year; storage capacity -
approximately 1,300 drums and 65,000
gallons bulk liquid, 120 tons solid
Republic Environmental MOE Permit - hazardous waste Operating capacities - approximately 12.5
Systems (Brantford) Ltd.; treatment, processing, recovery, million gallons per year bulk liquid;
Brantford, Ontario transfer and storage storage capacity - 175,000 gallons bulk
liquid
Republic Environmental MOE Permit - hazardous waste Operating capacities - approximately 2.9
Systems (Pickering) Ltd.; treatment, processing, recovery, million gallons per year bulk or drum
Pickering, Ontario transfer and storage liquid or solid; storage capacity -
110,000 gallons bulk or drum
Republic Environmental MOE Permit - hazardous waste Operating capacities - approximately 3.1
Systems (Brockville) Ltd.; treatment, processing, recovery, million gallons per year bulk liquid,
Brockville, Ontario transfer and storage 24,000 tons per year bulk solid,
approximately 39,000 drums per year;
storage capacity - 3,000 drums and 120,000
gallons bulk liquid
</TABLE>
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IASI also owns TSD Facilities in Farmingdale, New York and Dayton,
Ohio, at which operations terminated in June 1993 and October 1995,
respectively. See "Legal Proceedings - Administrative Proceedings - RES
(Cleveland) and Republic Environmental Systems (Ohio), Inc." and "- Republic
Environmental Systems (New York), Inc."). With respect to the closing of both of
these TSD Facilities, IASI believes that it has accrued the appropriate costs.
During June 1996, the Ohio Environmental Protection Agency (the "Ohio
EPA") approved the expansion of the types of waste managed in IASI's TSD
Facility located in Cleveland, Ohio. The remaining permit revisions are
currently still under review. Management expects final approval of the remaining
permit revisions during 1997.
TRANSPORTATION SERVICES. As an integral part of IASI's treatment,
storage and disposal operations, hazardous and non-hazardous wastes are
collected from customers and transported by IASI to and between its TSD
Facilities for treatment or bulking in preparation for shipment to final
disposal locations. In providing this service, IASI utilizes a variety of
specially designed and constructed tank trucks, vacuum trucks and semi-trailers.
Liquid waste is frequently transported in bulk, but may also be transported in
drums. Heavier sludges or bulk solids are transported in sealed roll-off
containers or sealed gate-dump trailers.
IASI's United States hazardous waste transportation services are
performed primarily by two of IASI's waste services subsidiaries, Republic
Environmental Systems (Transportation Group), Inc. ("RES (Transportation
Group)") and Chem-Freight, Inc. ("Chem-Freight"). RES (Transportation Group) is
located in Hatfield, Pennsylvania and has been operating since 1985.
Chem-Freight is located in Walton Hills, Ohio and has been operating since 1971.
These trucking companies provide a majority of their direct services to IASI's
TSD Facilities. IASI believes that this transportation arrangement ensures
quality control and improved efficiency and helps prevent delays at the TSD
Facilities. Trucking revenues for services provided to third parties, such as
other environmental service companies, waste brokers and waste generators, are
recognized as trucking revenue. Third-party customers of RES (Transportation
Group) and Chem-Freight include general industrial businesses and other waste
management companies. RES (Transportation Group) is licensed to haul in 36
states from the eastern to the midwestern regions of the United States and
Chem-Freight is licensed to haul in the 48 contiguous states.
Most of the transportation services provided to IASI's Canadian TSD
Facilities are performed by one of IASI's subsidiaries, Republic Environmental
Systems (Brockville) Ltd. ("RES (Brockville)"). RES (Brockville) is licensed to
haul in the provinces of Ontario and Quebec in Canada and in the states of
Michigan and New York in the United States.
REMEDIATION. IASI's hazardous waste division provides selected
remediation services through its subsidiary, Republic Environmental Systems
(Technical Services Group), Inc. ("RES (Technical Services)"). RES (Technical
Services) is a full-service environmental remediation contractor specializing in
remedial services, tank cleaning, testing and removal, decontamination/lagoon
closure, excavation and removal of contaminated soils, dewatering, emergency
response, "Superfund" clean-up work and waste sampling. These services are
provided to IASI's TSD Facility customers and others on a competitive bid basis.
When IASI is engaged to perform an entire environmental remediation
project, it will first perform a site or situation assessment which involves
gathering samples from the contaminated site and then analyzing them to
establish or verify the nature and extent of the contaminants. Analysis of
samples is conducted by IASI at its TSD Facilities or by independently-operated
laboratory companies. IASI's engineering and consulting group then develops,
evaluates and presents alternative solutions to remedy the particular situation.
TECHNICAL SERVICES. At IASI's analytical facilities, technicians test
samples provided by customers through the use of comprehensive analytical
procedures to identify and quantify toxic pollutants in virtually every
component of the environment, including, without limitation, drinking water,
surface and groundwater, soil, air, food, industrial effluents and biological
tissues. The laboratory staff evaluates the properties of a given material,
selects appropriate analytical methods, and designs, documents and executes a
laboratory work plan that results in a comprehensive technical report.
IASI also provides environmental consulting services, including
regulatory consulting, RCRA consulting, Environmental Clean-up Responsibility
Act site assessment, remedial action plan preparation, treatment process
technology and system design, waste minimization programs planning and alternate
waste disposal evaluations.
SALES AND MARKETING
IASI's sales and marketing strategy is to provide full-service
environmental management to its customers. IASI targets customers of all sizes
from small quantity generators to large "Fortune 100" companies. Marketing
efforts also target environmental engineers, real estate brokers, potentially
responsible party ("PRP") committees, lawyers, hospitals and waste brokers.
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<PAGE> 13
IASI believes in maintaining a strong foundation of repeat business.
IASI derives its business from a broad base of clientele which management
believes enables IASI to experience stable growth. Marketing efforts focus on
continuing and increasing business with existing customers, as well as
attracting new clients.
COMPETITION
The hazardous waste treatment, storage and disposal industry is highly
competitive and requires substantial amounts of capital. The competition in this
industry includes large national companies such as Clean Harbors, Inc., Laidlaw
Environmental Services, Inc. and Rollins Environmental, Inc., as well as local
TSD Facilities and disposal and treatment companies. IASI environmental services
subsidiaries compete for business on the basis of price and geographic location.
CUSTOMERS
IASI's sales efforts with respect to its environmental services
operations have been directed toward establishing and maintaining business
relationships with businesses in the eastern and midwestern regions of the
United States and Ontario, Canada, which have ongoing requirements for one or
more of IASI's services. No one customer individually comprises more than 5% of
the total consolidated revenue of IASI.
SEASONALITY
IASI's environmental services operations experience seasonal
fluctuations, with higher demand commencing in approximately April of each year
and continuing through October, and lower demand occurring from November through
March. Additionally, IASI's environmental services operations may experience
operational limitations from November through March due to weather conditions in
the northeastern United States and southeastern Ontario. Severe weather
experienced during winter months may adversely affect IASI's results of
operations.
REGULATION
The transportation and disposal of solid and chemical wastes and
rendering of related environmental services are subject to federal, state,
provincial and local requirements which regulate health, safety, the
environment, zoning and land-use. Operating permits are generally required for
TSD Facilities and certain transportation vehicles, and these permits are
subject to revocation, modification and renewal. Federal, state, provincial and
local regulations vary, but generally govern waste management activities
(including final disposal), the location and use of facilities and also impose
restrictions to prohibit or minimize air and water pollution. In addition,
governmental authorities have the power to enforce compliance with these
regulations and to obtain injunctions or impose fines in the case of violations,
including criminal penalties. These regulations are administered by the EPA and
various other federal, state, provincial and local environmental, health and
safety agencies and authorities, including the Occupational Safety and Health
Administration of the United States Department of Labor.
Although IASI strives to conduct its operations in compliance with
applicable laws and regulations, IASI believes that in the existing climate of
heightened legal, political and citizen awareness and concerns, companies in the
hazardous waste and environmental services industry, including IASI, may be
faced with fines and penalties and the need to expend funds for remedial work
and related activities at TSD Facilities. IASI has established a reserve to
cover such fines, penalties and costs which management believes will be
adequate. Further, in connection with the acquisition of certain TSD Facilities,
IASI has been indemnified against certain environmental liabilities. See "Legal
Proceedings." While such amounts expended in the past or anticipated to be
expended in the future have not had and are not expected to have a materially
adverse effect on IASI's financial condition or operations, the possibility
remains that technological, regulatory or enforcement developments, the results
of environmental studies or other factors could materially alter this
expectation and despite such reserves and indemnification obligations, could
adversely affect IASI's operating results.
IASI's operation of TSD Facilities subjects it to certain operating,
monitoring, site maintenance and closure obligations. In order to construct,
expand and operate a TSD Facility, one or more construction or operating
permits, as well as zoning approvals, must be obtained. These operating permits
and zoning approvals are difficult and time-consuming to obtain, and the
issuance of such permits and approvals often is opposed by neighboring
landowners and local and national citizens' groups. Once obtained, the operating
permits may be subject to periodic renewal and are subject to modification and
revocation by the issuing agency. In connection with IASI's acquisition of
existing TSD Facilities, it often may be necessary to expend considerable time,
effort and money to bring the acquired facilities into compliance with
applicable requirements and to obtain the permits and approvals necessary to
increase their capacity. The failure of IASI to renew existing permits or obtain
newly required permits, could adversely affect IASI's operating results. In
addition, IASI's waste transportation operations are subject to evolving and
expanding laws and regulations that may impose additional monitoring, training
and safety requirements.
Governmental authorities have the power to enforce compliance with
regulations and permit conditions and to obtain injunctions or impose fines in
case of violations. Citizens' groups may also bring suit for alleged violations.
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<PAGE> 14
During the ordinary course of its operations, IASI may from time to time receive
citations or notices from such authorities that its operations are not in
compliance with applicable environmental, health or safety regulations. Upon
receipt of such citations or notices, IASI will work with the authorities to
attempt to resolve the issues raised. Failure to correct the problems to the
satisfaction of the authorities could lead to monetary or criminal penalties,
curtailed operations or facility closure any of which could have a material
adverse effect on IASI's operating results.
FEDERAL REGULATION. The following summarizes the primary United States
federal statutes affecting the business of IASI:
(1) THE SOLID WASTE DISPOSAL ACT ("SWDA"), AS AMENDED BY RCRA.
SWDA and its implementing regulations establish a framework for the
regulation of the generation, handling, transportation, treatment,
storage and disposal of hazardous and non-hazardous wastes. They also
require states to develop programs to insure the safe disposal of solid
wastes in sanitary landfills.
Subtitle C of RCRA imposes a variety of regulatory
requirements on a person who is either a "generator" or "transporter"
of hazardous waste, or an "owner" or "operator" of a hazardous waste
treatment, storage or disposal facility. The EPA has issued regulations
under RCRA for hazardous waste generators, transporters, and owners and
operators of TSD Facilities. These regulations impose, among other
requirements, detailed operating, inspection, training and emergency
preparedness and response standards, as well as requirements for
permitting, manifesting, record keeping and reporting, facility
closure, post-closure care and financial assurance. Owners and
operators of TSD Facilities also are subject to stringent corrective
action requirements that can be very expensive. The Hazardous and Solid
Waste Amendment of 1984 mandated that hazardous wastes be treated prior
to land disposal. Owners and operators of TSD Facilities must treat
wastes to meet specified performance-based or technology-based
treatment standards.
(2) THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION,
AND LIABILITY ACT OF 1980, AS AMENDED ("CERCLA"). CERCLA, also known as
"Superfund," among other things, established a regulatory and remedial
program intended to provide for the investigation and the clean-up of
sites from which there is or has been a release or threatened release
of a hazardous substance into the environment. CERCLA's primary
mechanism for remedying such problems is to impose strict liability
(and pursuant to the interpretation of certain courts, joint and
several liability) for clean-up and for damages to natural resources
upon: (a) any person who currently owns or operates the facility or
site; (b) any person who owned or operated the facility or site at the
time of disposal of hazardous substances; (c) any person who by
contract, agreement or otherwise, arranged or accepted for disposal or
treatment (or for transport for disposal or treatment) of the hazardous
substances; and (d) any generator of the hazardous substances. Under
the authority of CERCLA and its implementing regulations, detailed
requirements apply to the manner and degree of remediation of
facilities and sites where hazardous substances have been or are
threatened to be released into the environment. The costs of CERCLA
investigation and clean-up can be substantial.
Among other things, CERCLA authorizes the federal government
either to remediate sites at which hazardous substances were disposed
and have been or are threatened to be released into the environment, or
to order (or offer an opportunity to order) persons potentially liable
for the clean-up of the hazardous substances to do so. Both the
government and the potentially liable party may seek to recover the
cost of clean-up from the responsible class of persons. In addition,
CERCLA requires the EPA to establish a National Priorities List of
sites at which hazardous substances have been or are threatened to be
released and which require investigation or clean-up.
Liability under CERCLA is not dependent upon the intentional
disposal of "hazardous wastes." It can be founded upon the release or
threatened release, even as a result of unintentional and non-negligent
action, of very small amounts of any one of thousands of "hazardous
substances" listed by the EPA, many of which can be found in household
waste. If this is the case, and if there is a release or threatened
release of such substances, IASI could be held liable under CERCLA for
all investigative and remedial costs even if others may also be liable.
CERCLA also authorizes the imposition of a lien in favor of the United
States upon all real property subject to or affected by a remedial
action for all costs for which a party is liable. The ability of IASI
to obtain reimbursement from others for their allocable share of such
costs would be limited by its ability to find other responsible parties
and prove the extent of each of such other parties' responsibility and
by the financial resources of such other parties. The costs of a CERCLA
clean-up can be very expensive. Given the difficulty of obtaining
insurance for environmental impairment liability, such liability could
have a material impact on IASI's business and financial condition. See
"--Liability Insurance and Bonding."
(3) THE FEDERAL WATER POLLUTION CONTROL ACT OF 1972, AS
AMENDED (THE "CLEAN WATER ACT"). The Clean Water Act establishes a
framework for regulating the discharge of pollutants from a variety of
sources, including TSD Facilities, into streams, rivers and other
waters. Whenever point source runoff from IASI's facilities is to be
discharged into surface waters, the Clean Water Act requires IASI to
apply for and obtain discharge permits, conduct sampling and monitoring
and, under certain circumstances, reduce the quantity of pollutants in
those discharges. In 1990, the EPA published new storm water discharge
regulations which
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<PAGE> 15
require a facility to apply for a storm water discharge permit unless
it is covered under a storm water general permit promulgated by the
agency. These storm water discharge regulations also require a permit
for certain construction activities, which may affect IASI's
operations. If a facility discharges wastewater through a sewage system
to a publicly-owned treatment works ("POTW"), the facility must comply
with discharge limits imposed by the POTW. In addition, states may
adopt groundwater protection programs under the Clean Water Act or Safe
Drinking Water Act or independent state authority that could affect TSD
Facilities.
(4) THE CLEAN AIR ACT. The Clean Air Act establishes a
framework for the federal, state and local regulation of the emission
of air pollutants. These regulations may impose emission limitations
and monitoring and reporting requirements on certain of IASI's
operations. The Clean Air Act Amendments, which were enacted into law
at the end of 1990, resulted in the imposition of stringent
requirements on many activities that were previously largely
unregulated, such as emissions of solvents used in small parts
degreasing baths in IASI's vehicle maintenance shops, as well as
imposing more stringent requirements on, among others, motor vehicle
emissions and emissions of hazardous air pollutants.
(5) THE OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970 ("OSHA").
OSHA authorizes the Occupational Safety and Health Administration to
promulgate occupational safety and health standards. Various of these
standards, including standards for notices of hazardous chemicals and
the handling of asbestos, may apply to IASI's operations.
STATE REGULATION. Each state in which IASI operates has its own laws
and regulations governing hazardous and solid waste disposal, water and air
pollution and, in most cases, release and clean-up of hazardous substances and
liability for such matters. The states also have adopted regulations governing
the design, operation, maintenance and closure of TSD Facilities. IASI's
facilities and operations are likely to be subject to many, if not all, of these
types of requirements.
Finally, various states have enacted, are considering enacting or are
considering repealing, laws that restrict the disposal within the state of solid
or hazardous wastes generated outside the state. While laws that overtly
discriminate against out-of-state waste have been found to be unconstitutional,
some laws that are less overtly discriminatory have been upheld in court.
Challenges to other such laws are pending. The outcome of pending litigation and
the likelihood that other such laws will be passed and will survive
constitutional challenge are uncertain. In addition, Congress is currently
considering legislation authorizing states to adopt such restrictions.
CANADIAN REGULATION. IASI's operations in Canada relating to hazardous
waste treatment, recycling and recovery of chemical waste and waste water are
subject to the general business and environmental laws and regulations of
Canada, which are similar in nature to United States laws and regulations. While
IASI believes that its Canadian operations are in substantial compliance with
applicable laws and regulations, IASI is unable to predict the course of
development of such laws and regulations.
LIABILITY INSURANCE AND BONDING
IASI carries commercial general liability insurance, automobile
liability insurance, workers' compensation, pollution legal liability and
employer's liability insurance as required by law in the various states and
provinces in which operations are conducted and umbrella policies to provide
excess limits of liability over the underlying limits contained in the
commercial general liability, automobile liability and employer's liability
policies. The nature of IASI's environmental services operations exposes it to a
significant risk of liability for legal damages arising out of such operations.
See "Legal Proceedings." The majority of IASI's environmental services
operations have environmental liability insurance subject to certain limitations
and exclusions in excess of the limits required by permit regulations; however,
there is no assurance that such limits would be adequate in the event of a major
loss.
From time to time, IASI may be required to post a performance bond or a
bank letter of credit in connection with the operation of TSD Facilities,
certain remediation contracts or certain environmental permits. Bonds issued by
surety companies operate as a financial guarantee of IASI's performance. To
date, IASI has satisfied financial responsibility requirements by making cash
deposits, obtaining bank letters of credit or by obtaining surety bonds.
EMPLOYEES
At December 31, 1996, IASI employed approximately 451 employees, 6 of
whom are party to collective bargaining agreements. IASI considers its
relationships with its employees to be satisfactory.
PROPERTIES
IASI's corporate headquarters are located in Valley View, Ohio in
leased premises. Certain of the property and equipment of IASI are subject to
liens securing payment of portions of the indebtedness of IASI and its
subsidiaries. IASI and its subsidiaries also lease six offices in five states,
as well as one office in Canada, and certain of their equipment. IASI believes
that all of its facilities are sufficient for its needs.
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In addition, IASI operates seven TSD Facilities in the United States
and Canada. For more information regarding these properties, see
"- Environmental Services - Operations."
ITEM 3. LEGAL PROCEEDINGS
ADMINISTRATIVE PROCEEDINGS
RES (CLEVELAND) AND REPUBLIC ENVIRONMENTAL SYSTEMS (OHIO), INC.
In June 1993, RES (Cleveland) received a Complaint and Compliance Order
from the Enforcement Division of EPA Region 5 alleging that the former owners of
RES (Cleveland)'s TSD Facility failed to submit a proper RCRA Facility
Investigation ("RFI") workplan to the EPA on a timely basis and fined RES
(Cleveland). In September 1993, EPA Region 5 granted approval for implementation
of the RFI workplan submitted by RES (Cleveland). In June 1995, RES (Cleveland)
reached an agreement with EPA Region 5 by consent agreement and final order (the
"CAFO") to settle the issues related to the former owners' failure to achieve an
approvable RFI workplan. The CAFO included a fine of $60,000 and required the
meeting of certain stipulations. IASI paid the fine in June 1995 and completed
all required activities stipulated under the CAFO in December 1996, and
submitted a final report to the EPA detailing the results. In 1996, the EPA
accepted and approved the final RFI report. The EPA has requested and approved a
second phase of the RFI workplan which requires additional sample collections.
In addition, RES (Cleveland) was involved in negotiations with the Ohio
EPA to bring RES (Cleveland)'s facility located in Bedford, Ohio into full
compliance with the Ohio EPA regulations and settle a proposed penalty. In
August 1994, RES (Cleveland) reached an agreement by consent order with the Ohio
EPA which included a penalty for $250,000, payable over a three-year period, as
well as meeting certain stipulations. Final payment on the penalty was made in
1996. RES (Cleveland) has provided all of the required deliverables specified in
the consent order to Ohio EPA and is presently awaiting their final approval.
In June 1996, the Ohio Attorney General's Office began enforcement
proceedings against Republic Environmental Systems (Ohio), Inc. (formerly known
as Ecolotec, Inc., "RES (Ohio)") related to several past alleged violations at
the Dayton, Ohio facility, at which IASI ceased operations in September 1995.
Such violations included the failure to construct certain tertiary containment
features at the facility and issues related to the submission of permit
revisions in connection with the facility's groundwater monitoring program. At
this time, both parties have agreed to enter into a mediation agreement to
attempt to settle these matters with a third party mediator.
In addition, RES (Ohio)'s recent groundwater monitoring program results
indicate that past operations at the facility may have potentially affected
groundwater quality. RES (Ohio) is currently investigating the groundwater
further to determine what, if any, corrective measures should be taken.
In October 1996, the Ohio attorney general's office determined that the
Merger Transactions constituted a change of ownership of Ohio EPA permitted
facilities owned by RES (Cleveland) and RES (Ohio). In addition, the Ohio EPA
may determine that the Merger Transactions constitute a modification of such
permits. As a result, Ohio law requires that the change of ownership of the
permitted facilities, as well as the permit modifications, if any, be approved
by the director of the Ohio EPA, based upon the disclosure statements and an
investigative report prepared by the Ohio attorney general's office. IASI
consummated the Merger Transactions prior to receipt of the requisite approval
of the director of the Ohio EPA as permitted by applicable law. During the
approval process, IASI does not anticipate that the operations at such
facilities will be affected. In the event that the director of the Ohio EPA
ultimately disapproves such change of ownership or, if required, such permit
modifications, IASI would be required to effect the negation of the change of
ownership of such facilities. The negation could be accomplished through the
restoration of the original ownership structure of such facilities, the
disposition of the facilities or another means that complies with the
requirements of applicable law.
REPUBLIC ENVIRONMENTAL SYSTEMS (NEW YORK), INC.
In late June 1993, Republic Environmental Systems (New York), Inc.
("RES (New York")) ceased operations at its TSD Facility in Farmingdale, New
York, due to ongoing disputes and negotiations with various regulatory agencies
including the New York Department of Environmental Conservation (the "New York
DEC"), the town of Oyster Bay and Nassau County. In addition, RES (New York)
received from the New York DEC a proposed Summary Order in an Administrative
Action commenced by the New York DEC against the RES (New York) facility,
whereby the New York DEC sought revocation of RES (New York)'s permit to operate
as a TSD Facility. The New York DEC withdrew a previous consent order against
RES (New York), under which RES (New York) had agreed to pay $100,000 for past
alleged violations at the facility and to resolve several administrative permit
issues.
In early 1994, RES (New York) voluntarily ceased operations at its
hazardous waste TSD Facility and discontinued any efforts to pursue its permit
for this facility as a result of the ongoing disputes described above. In
addition, RES (New York) entered into negotiations for a consent order with the
New York DEC which provided for (i)
15
<PAGE> 17
payment of a fine by RES (New York) of $270,000, $170,000 of which will be
suspended upon successful completion of the terms of the consent order, and (ii)
the closure of the facility in accordance with the requirements specified by the
order. RES (New York) has begun closure activities at the facility which it
expects to complete by the end of 1997.
PROCEEDINGS COVERED BY THIRD PARTY INDEMNITY
In connection with the acquisition of Stout, the former stockholders of
Stout (the "Party Stockholders") agreed to indemnify RII, IASI, subsidiaries of
IASI and their respective officers, directors, agents and representatives from
losses associated with, among other things, soil, water and groundwater
contamination occurring prior to RII's acquisition of Stout.
IASI has been identified as a PRP in a number of governmental
investigations and actions relating to waste disposal facilities which may be
subject to remedial action under CERCLA. Proceedings arising under CERCLA
typically involve numerous waste generators and other waste transportation and
disposal companies. Generally, these proceedings are based on allegations that
these entities (or their predecessors) transported hazardous substances to the
facilities in question, in all cases prior to acquisition of Stout by RII. As a
successor to Stout, IASI and RII have become a party to and become potentially
liable in these proceedings to the same extent as Stout. IASI and RII have been
indemnified for all costs and expenses incurred with regard to these proceedings
by Party Stockholders. The Party Stockholders' obligation under the indemnity
was secured by a first lien and perfected security interest covering two million
shares of RII's common stock. During June 1995, Party Stockholders had placed
$7.0 million in an escrow account (the "Party Collateral") in lieu of the two
million shares of RII's stock as security for the remaining indemnification
obligations. IASI is currently paying costs and legal expenses with regard to
these proceedings which are then reimbursed by the Party Stockholders. Pursuant
to agreements with RII, IASI has agreed to assume any and all liabilities of RII
in these proceedings and has accepted assignment from RII of all of its rights
in connection therewith, including, without limitation, RII's rights as
indemnitee and pledgee pursuant to the Party Stockholders indemnification
obligations.
Management believes that the legal and environmental proceedings
covered by the indemnity will be resolved in a manner that will not have a
materially adverse effect on IASI's results of operations or combined financial
position.
The following is a description of proceedings whose claims are covered
by the indemnity obligations of the Party Stockholders.
ADAMS OIL, INC.
In March 1996, IASI and the Party Stockholders entered into an
agreement amending the Merger Agreement and the Settlement Agreement to which
they are parties and voiding the transfer of Adams Oil, Inc. ("Adams Oil") to
IASI. Adams Oil is the owner of a former oil terminal located in Camden, New
Jersey at which there is evidence of contamination. Pursuant to such agreement,
on March 3, 1997, IASI transferred ownership of all of the capital stock of
Adams Oil to the Party Stockholders and released to the Party Stockholders $1.5
million of the Party Collateral. The Party Stockholders have agreed to use the
released Party Collateral to comply with New Jersey Department of Environmental
Protection ("NJDEP") requirements regarding the clean-up of the Camden facility,
including the requirement that the Party Stockholders post $500,000 with the
NJDEP within 30 days after the transfer to secure such clean-up. At such time
that the Party Stockholders post the required $500,000 with the NJDEP, IASI has
agreed to release an additional $500,000 of the Party Collateral to the Party
Stockholders. The Party Stockholders also have agreed to indemnify, defend and
hold harmless IASI, its environmental services subsidiary, Republic
Environmental Systems, Inc., and RII from losses incurred in connection with the
environmental condition of the Camden, New Jersey facility.
REPUBLIC ENVIRONMENTAL SYSTEMS (PENNSYLVANIA), INC.
RES (Pennsylvania) has been named as a PRP in the North Penn Area No. 2
regional groundwater problem involving 56 square miles occupied by hundreds of
industrial companies. The EPA is currently investigating the septic system and
the contamination of groundwater and is considering adding other PRP companies.
The EPA and RES (Pennsylvania) have entered into an administrative order on
consent to investigate and determine: (i) whether or not there is sufficient
evidence to indicate that RES (Pennsylvania) has contributed to the groundwater
problem, and (ii) if RES (Pennsylvania) should participate in a regional
investigation. RES (Pennsylvania) has recently completed the required soil and
groundwater testing, as required under the administrative order, and has
submitted a final report to the EPA. Based on the results of this testing, RES
(Pennsylvania) has requested the EPA to release it from further investigation.
In addition, RES (Pennsylvania) also has been named as a PRP along with
13 other primary defendants for the recovery costs to remediate the Moyers
Landfill Site in eastern Pennsylvania. A company previously known as Waste
Conversion of Delaware, Inc. disposed of materials at Moyers Landfill from 1979
to 1981. This company then sold its assets to RES (Pennsylvania), which was then
owned by Stout. RES (Pennsylvania) is currently in settlement negotiations with
the EPA to limit its exposure in this matter.
16
<PAGE> 18
RES (New York) and RES (Pennsylvania) are parties in a PRP action with
respect to a former IASI Aqua-Tech TSD Facility in South Carolina. There are 180
parties to date. In April 1993, an agreement was reached whereby IASI paid
approximately $360,000 for proposed settlement of certain issues at the
facility, pending the PRP committee's final allocation to the PRPs.
REPUBLIC ENVIRONMENTAL SYSTEMS (NEW YORK), INC.
The New York DEC has alleged that RES (New York) is liable for unpaid
generator fees in the amount of $240,000 plus interest. RES (New York) and other
owners of New York TSD Facilities argue that the state is subjecting them to
excess fees by categorizing them both as a TSD Facility and as an original waste
generator. The central issue of the amount of generator fees owed by RES (New
York) has been stayed pending New York DEC determination of the appropriate
category for RES (New York) and what generator fee it should pay as a result
thereof. This matter will be settled under the consent order being negotiated
for the facility's closure. Payments scheduled under this order will be credited
to settle this matter.
In addition, on March 19, 1992, the New York DEC informed RES (New
York) that it may be a PRP with respect to the Quanta Resources site in Queens,
New York. At present, RES (New York) is awaiting additional information from the
New York DEC in order to assess the extent of its exposure, but believes it is
not material.
GENERAL
IASI is also a party to other administrative proceedings related to its
environmental services operations which have arisen in the ordinary course of
its business. Although it is possible that losses exceeding amounts already
recorded may be incurred upon ultimate resolution of these matters, as well as
the matters described above, management believes that such losses, if any, will
not have a material adverse effect on IASI's business or financial position;
however, unfavorable resolution of each matter individually or in the aggregate
could affect the consolidated results of operations for the quarterly periods in
which they are resolved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of 1996.
17
<PAGE> 19
EXECUTIVE OFFICERS OF IASI
The following table sets forth certain information as of March 28, 1997
regarding the executive officers of IASI. Each executive officer of IASI named
in the following table has been elected to serve until his successor is duly
appointed or elected or until his or her earlier removal or resignation from
office. No arrangement or understanding exists between any executive officer of
IASI and any other person pursuant to which he was selected as an officer.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Michael G. DeGroote 63 Chairman of the Board
Edward F. Feighan 49 Chief Executive Officer, President and Director
Roswell P. Ellis 62 Senior Vice President - Insurance Group
Douglas R. Gowland 55 Senior Vice President - Environmental Operations
and Director
Keith W. Reeves 40 Senior Vice President - Business Services
Gregory J. Skoda 40 Executive Vice President and
Chief Financial Officer
Craig L. Stout 48 Chief Operating Officer and Director
</TABLE>
MICHAEL G. DEGROOTE has served as the Chairman of the Board of IASI
since the Spin-off. Mr. DeGroote also served as President and Chief Executive
Officer of IASI from the Spin-off until the Merger Transactions in October 1996.
Mr. DeGroote has served as Vice Chairman and a director of Republic Industries,
Inc. ("RII") since August 1995. Mr. DeGroote also served as Chairman of the
Board, President and Chief Executive Officer of RII from May 1991 to August 1995
and Senior Chairman of the Board of RII from May 1991 to August 1991. Mr.
DeGroote is a private investor who owned a controlling interest in Laidlaw Inc.,
a Canadian waste services company, from 1959 until he sold his interest to
Canadian Pacific Limited in 1988. Mr. DeGroote also serves as a director of Gulf
Canada Resources, Inc.
EDWARD F. FEIGHAN has served as Chief Executive Officer, President and
a Director of IASI since October 1996. Mr. Feighan is also Vice President of
Alliance Holding Corporation ("Alliance Holding"), a position he has held since
joining Alliance Holding in 1993. From 1983 until 1993, Mr. Feighan served as
the representative from the Ohio 19th Congressional District of the United
States House of Representatives. During his tenure in Congress, Congressman
Feighan served on the Judiciary and the House Foreign Affairs Committee;
Chairman, International Narcotics Control Committee; President, The
Interparliamentary Union; and permanent Representative to the Helsinki
Commission. He currently serves on the board of trustees of the National
Democratic Institute for International Affairs, the Handgun Control Federation
of Ohio, and the Rock and Roll Hall of Fame and Museum.
ROSWELL P. ELLIS has served as the Senior Vice President - Insurance
Group since March 1997. Mr. Ellis serves as Chairman and President of CSC, a
position he has held since 1987, and Chairman of Continental Heritage and
Evergreen, all subsidiaries of IASI.
DOUGLAS R. GOWLAND has served as the Senior Vice President -
Environmental Operations since October 1996 and a Director of IASI. In addition,
Mr. Gowland has served as President of IASI's hazardous waste subsidiaries since
March 1992. From the date of the Spin-off until the Merger Transactions, Mr.
Gowland served as IASI's Executive Vice President and Chief Operating Officer.
From March 1992 until the Spin-off, Mr. Gowland served as President of IASI.
From January 1992 to April 1995, Mr. Gowland served as Vice President -
Hazardous Waste Operations of RII. From March 1991 to January 1992, Mr. Gowland
served as Vice President of DRG Environmental Management, Inc. Prior thereto, he
served as President of Great Lakes Environmental Systems, Ltd.
KEITH W. REEVES has served as the Senior Vice President - Business
Services since March 1997. Mr. Reeves also serves as the President of SMR, a
position of which he has held since December 1996. Mr. Reeves served as Vice
President of SMR from August 1984 until its acquisition by IASI in December
1996. Mr. Reeves is a member of the American Institute of Certified Public
Accountants and the Ohio Society of Certified Public Accountants.
GREGORY J. SKODA has served as the Executive Vice President and Chief
Financial Officer of IASI since December 1996. Mr. Skoda also serves as the Vice
President and Chief Financial Officer of Alliance Holding, a position he has
held since June 1, 1994. Prior to IASI's acquisition of SMR in December 1996,
Mr. Skoda served as President and Chairman of SMR, which Mr. Skoda founded in
1980. Mr. Skoda is an active member of the American Institute of Certified
Public Accountants in the Tax, Employee Benefits, and Management Advisory
Services divisions.
CRAIG L. STOUT has served as Chief Operating Officer and a Director of
IASI since October 1996. Mr. Stout also serves as Chief Operating Officer of
Alliance Holding, a position he has held since the formation of Alliance Holding
in 1987. Prior to the Mergers, Mr. Stout served as President and Chairman of two
other companies which
18
<PAGE> 20
he founded, Contract Operations Planning, Inc., a surety claims management firm,
and Contract Surety Reinsurance Corporation, a reinsurance intermediary for
facultative surety reinsurance. These companies were merged into Alliance
Holding prior to the effective date of the Merger Transactions and their
operations are now conducted by IASI.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
IASI's Common Stock is listed on Nasdaq, which is the principal trading
market for these securities, under the symbol "IASI." The following table sets
forth, for the periods indicated, the high and low sales prices for the Common
Stock as listed on Nasdaq.
<TABLE>
<CAPTION>
COMMON STOCK PRICE
RANGE
----------------------
HIGH LOW
---- ---
<S> <C> <C>
1995
Second Quarter(1)....................... $2 1/4 $1 1/4
Third Quarter........................... $4 $1 13/16
Fourth Quarter.......................... $2 5/16 $1 9/16
1996
First Quarter........................... $1 19/32 $1 1/4
Second Quarter.......................... $20 7/8 $1 7/16
Third Quarter........................... $18 3/4 $4 3/4
Fourth Quarter.......................... $12 3/4 $7 1/2
</TABLE>
(1) Consisted of the period from the date on which the Common Stock was
first listed on Nasdaq, April 27, 1995, through June 30, 1995.
On March 27, 1997, the closing sales price of Common Stock as reported
by Nasdaq was $11.125 per share. The number of record holders of Common Stock as
of March 7, 1997, was 953.
Since the Spin-off, IASI has not declared or paid any dividends on its
Common Stock and the Board of Directors does not currently anticipate paying
dividends on the Common Stock at any time in the foreseeable future. The payment
of future dividends will be determined by IASI's Board of Directors in light of
conditions then existing, including IASI's earnings, financial condition,
capital requirements, restrictions in financing agreements, business conditions
and other factors. The payment of dividends on the Common Stock is presently
prohibited under the terms of IASI's credit facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
19
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data for
IASI and are derived from the historical consolidated and combined financial
statements and notes thereto, which are included elsewhere in this Annual Report
of IASI. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated and combined financial statements of IASI and
the notes thereto, which are included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Premiums earned .......................... $ 27,743 $ 26,962 $ 23,368 $ 17,373 $ 11,534
Net investment income .................... 3,564 3,341 2,477 1,377 1,272
Net realized gains (losses) on investments 1,529 166 80 (91) 210
Other income ............................. 2,933 470 1,385 1,737 269
--------- --------- --------- --------- ---------
Net revenues ............................. $ 35,769 $ 30,939 $ 27,310 $ 20,396 $ 13,285
========= ========= ========= ========= =========
Interest expense ......................... $ 46 -- -- -- --
Other expenses ........................... 4,384 $ 3,157 $ 4,544 $ 3,287 $ 2,039
Income from continuing operations before
income tax expense ..................... 6,062 4,891 4,844 3,485 2,123
Income tax expense ....................... 1,640 1,422 1,344 1,189 751
--------- --------- --------- --------- ---------
Income from continuing operations ........ 4,422 3,469 3,500 2,296 1,372
Loss from discontinued operations ........ (38) -- -- --
--------- --------- --------- --------- ---------
Net income ............................... $ 4,384 $ 3,469 $ 3,500 $ 2,296 $ 1,372
========= ========= ========= ========= =========
Gross written premiums ................... $ 42,888 $ 37,695 $ 37,869 $ 29,992 $ 17,786
Net written premium ...................... 31,149 26,677 27,219 21,173 12,089
Weighted average common and
common share equivalents ............... 32,213 16,956 16,956 16,956 16,956
Earnings per share:
Primary ................................ $ 0.21 $ 0.20 $ 0.20 $ 0.14 $ 0.08
========= ========= ========= ========= =========
Fully diluted .......................... $ 0.16 $ 0.20 $ 0.20 $ 0.14 $ 0.08
========= ========= ========= ========= =========
Loss ratio ............................... 41.3% 39.2% 37.9% 38.0% 34.6%
LAE ratio ................................ 22.5% 16.9% 15.6% 11.6% 11.5%
Expense ratio ............................ 38.0% 39.9% 43.5% 39.7% 48.0%
--------- --------- --------- --------- ---------
Combined ratio ........................... 101.8% 96.0% 97.0% 89.3% 94.1%
========= ========= ========= ========= =========
Invested assets and cash ................. $ 108,523 $ 60,908 $ 57,642 $ 46,670 $ 30,727
Goodwill, net of amortization ............ 6,048 -- -- -- --
Total assets ............................. 167,330 86,735 81,931 68,117 36,926
Loss and loss expense payable ............ 41,099 37,002 34,661 29,528 14,107
Total liabilities ........................ 76,008 59,967 58,100 50,304 23,895
Total Shareholders' equity ............... 91,322 26,768 23,580 18,401 13,031
</TABLE>
20
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is intended to assist in the understanding of
IASI's financial position and results of operations for each of the years ended
December 31, 1996, 1995 and 1994. This discussion should be read in conjunction
with IASI's consolidated and combined financial statements and notes thereto
included herein. In accordance with IASI's intent to sell its environmental
services operations, the results of operations related to such operations have
been reflected as a discontinued operation in IASI's consolidated and combined
financial statements. See "Results of Operations - Discontinued Operations."
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Revenues increased $4.9 million, or 16%, from $30.9 million in 1995
to $35.8 million in 1996 and consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
DOLLAR
1996 1995 CHANGE
------- ------- ------
(in thousands)
<S> <C> <C> <C>
Premiums earned............................................... $27,743 $26,962 $781
Net investment income......................................... 3,564 3,341 223
Net realized gains on investments............................. 1,529 166 1,363
Other income.................................................. 2,933 470 2,463
------- ------- ------
Total revenues................................................ $35,769 $30,939 $4,830
------- ------- ------
</TABLE>
Premiums earned increased approximately $800,000 on an increase of $4.4
million in net written premiums in 1996. Much of the increase in net written
premiums was recorded in the second half of 1996, which directly impacted IASI's
earned premium. On a gross written basis, IASI reported an increase of $5.1
million in 1996, $5.0 million of which was generated through brokerages and
$800,000 of which was generated through general agencies. These increases were
offset by a $1.3 million decline in IASI's remedial action coverages.
IASI reported increases in net investment income of $223,000 and net
realized gains on investments of $1.5 million in 1996. Net investment income
grew 6.7% on invested assets of $68.6 million in 1996. IASI's $1.4 million
increase in net realized gains on investments from $166,000 in 1995 to $1.5
million in 1996 is attributable to the gains realized on the sale of certain
equity investments.
Other income increased $2.5 million in 1996 over 1995 and is
attributable to non-recurring income of $1.1 million from the American Sentinel
settlement, higher commission income of $400,000 and SMR revenues of $600,000
since its acquisition.
Total expenses increased $3.7 million to $29.7 million in 1996 from
$26.0 million in 1995. Such increase was attributable to the change in loss and
loss adjustment expenses ("LAE") of $2.5 million and other expenses of $1.2
million. While losses incurred have increased $844,000, loss development from
prior years increased $1.4 million and primarily relate to property losses,
which were higher than normal. In addition, IASI has experienced increases in
LAE to $6.2 million in 1996 from $4.5 million in 1995. Such increases are
attributable to IASI's business mix, primarily its casualty lines of business,
and to the general litigation climate. The casualty lines of business generally
have higher loss adjustment costs relative to premium dollars. Another factor
affecting this increase is the court ruling in the case of Montrose Chemical
Corporation v. Admiral Insurance Company. The California Supreme Court adopted a
"continuous trigger of coverage" in cases involving continuous and progressive
third party damage claims. Insurance companies are liable for claims occurring
prior to the policy period for claims which continued to progress during the
course of the policy term. The exposure to IASI does not have a residual impact
on loss reserves but does have a direct effect on IASI's loss adjustment
reserving practices due to a higher potential for claims handling and litigation
costs.
Other expenses increased $1.2 million to $4.4 million in 1996 from $3.2
million in 1995 and primarily were affected by the initial consolidation of SMR
in December and other general corporate expenses incurred in the fourth quarter
of 1996. Other costs attributable to IASI's insurance services business improved
slightly to $2.9 million in 1996 from $3.1 million in 1995.
21
<PAGE> 23
Income from continuing operations before taxes increased $1.2 million,
or 23.9%, to $6.1 million in 1996 from $4.9 million in 1995 and net income
increased $915,000, to $4.4 million in 1996 from $3.5 million in 1995 primarily
for the reasons stated above.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
Total revenues increased $3.6 million, or 13% to $30.9 million in 1995
from $27.3 million in 1994. Premiums earned increased $3.6 million to $27.0
million in 1995 from $23.4 million in 1994, while net premiums declined $500,000
to $26.7 million in 1995 from $27.2 million in 1995. The timing of earned
premiums primarily accounted for the increase in total revenues. Timing
differentials reflect the changing mix of products to a substantially greater
concentration in the commercial lines and environmental surety businesses and a
decrease in the private passenger auto physical damage and miscellaneous surety
business. Commercial lines written premiums increased by $1.5 million but were
offset by a reduction in the automotive and miscellaneous surety business
following IASI's decision to withdraw from these markets. Also contributing to
the revenue increase was $864,000 in net investment income during 1995, a 35%
increase over 1994 revenues. Total revenue in 1994 included a gain of $807,000
attributable to the American Sentinel settlement.
Total expenses increased $3.5 million to $26.0 million in 1995 from
$22.5 million in 1994. Such increase was primarily a result of a $2.6 million
increase in loss and LAE. The increase in loss and LAE was a direct result of
increased premium revenue of $3.6 million. Acquisition expenses also increased
$2.3 million in 1995 from 1994. As a percentage of total revenue, total expenses
for 1995 and 1994 were 84% and 82%, respectively.
Primarily for the reasons stated above, 1995 income before income taxes
increased $47,000, or 1%, to $4.9 million in 1995 from $4.8 million in 1994 and
net income decreased $31,000, or 1%, to $3.5 million in 1995 from $3.5 million
in 1994.
BALANCE SHEET SUMMARY
The following tables set forth the key elements of IASI's balance
sheet:
ASSETS:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Total cash and invested assets................................ $108,523 $60,908 $57,642
Premiums receivable........................................... 7,013 4,467 5,201
Other assets.................................................. 51,794 21,360 19,088
-------- ------- -------
Total assets.................................................. $167,330 $86,735 $81,931
-------- ------- -------
</TABLE>
LIABILITIES:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Total liability for loss/LAE.................................. $41,099 $37,002 $34,661
Unearned premium.............................................. 18,637 15,636 15,453
Other liabilities............................................. 16,272 7,329 8,382
------- ------- -------
Total liabilities............................................. $76,008 $59,967 $58,496
------- ------- -------
</TABLE>
CAPITAL AND SURPLUS:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Total shareholders' equity.................................... $91,322 $26,768 $23,580
</TABLE>
22
<PAGE> 24
COMBINED AND OPERATING RATIOS
The combined ratio is the sum of the loss ratio and expense ratio and
is the traditional measure of underwriting performance for insurance companies.
The operating ratio is the combined ratio less the net investment income ratio
(net investment income to net earned premium) excluding realized and unrealized
capital gains and is used to measure overall company performance.
The following table reflects the loss, LAE, expense, combined, net
investment and operation ratios of IASI on a generally accepted accounting
principles ("GAAP") basis for each of the years ended December 31 1996, 1995 and
1994:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Loss ratio.................................................... 41.3 39.2 37.9
LAE ratio..................................................... 22.5 16.9 15.6
Expense ratio................................................. 38.0 39.9 43.5
----- ---- ----
Combined ratio................................................ 101.8 96.0 97.0
Net investment ratio.......................................... 12.9 12.4 10.6
Operating ratio............................................... 88.9 83.6 86.4
</TABLE>
EXPENSES
The expense ratio reflected in the foregoing table is the relationship of
operating costs to net written premiums on a GAAP basis. The statutory ratio
differs from the GAAP ratio as a result of different treatment of acquisition
costs. Expense ratios have been favorably impacted by reinsurance contingencies.
INVESTMENTS AND INVESTMENT INCOME
Investments of IASI are restricted to certain investments permitted by Ohio and
Utah insurance laws. IASI's investment policy has been established by IASI's
investment committee and is reviewed periodically. IASI has retained an
independent professional investment firm to manage its fixed income portion of
the investment portfolio pursuant to the investment policy and strategy.
IASI accounts for its investment securities in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" which was adopted by the Financial
Accounting Standards Board (the "FASB"). Fixed maturity securities that IASI has
the positive intent and ability to hold to maturity are carried at amortized
cost. As IASI's fixed income securities mature, there can be no assurance that
IASI will be able to reinvest in securities with comparable yields. IASI's other
fixed maturity and all equity securities are classified as available-for-sale
and are carried at market value. The unrealized gains and losses as a result of
the valuation is reported as a separate component of shareholders' equity net of
appropriate deferred income taxes. IASI has no investments classified as trading
securities.
The following table sets forth IASI's investment income for each
of the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1996 1995 1994
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Net investment income......................................... $3,564 $3,341 $2,477
Net realized gain on
investments................................................ 1,529 166 80
------ ------ ------
Total investment income....................................... $5,093 $3,507 $2,557
====== ====== ======
Investment yield.............................................. 5.31% 5.56% 4.78%
Net unrealized appreciation
(depreciation) of investments (net of tax)................. $3,696 $3,266 $(1,208)
</TABLE>
23
<PAGE> 25
LIABILITY FOR LOSSES AND LOSS EXPENSES PAYABLE
As of December 31, 1996, the liability for losses and LAE constituted
54% of IASI's consolidated liabilities. IASI has established reserves that
reflect its estimates of the total losses and LAE it will ultimately be required
to pay under insurance and reinsurance policies. Such reserves include losses
that have been reported but not settled and losses that have been incurred but
not reported ("IBNR"). Loss reserves are established on an undiscounted basis
after reductions for deductibles and estimates of salvage subrogation.
For reported losses, IASI establishes reserves on a "case" basis within
the parameters of coverage provided in the related policy. For IBNR losses, IASI
estimates reserves using established actuarial methods. Case and IBNR loss
reserve estimates reflect such variables as past loss experience, social trends
in damage awards, changes in judicial interpretation of legal liability and
policy coverages, and inflation. IASI takes into account not only monetary
increases in the cost of what is insured, but also changes in societal factors
that influence jury verdicts and case law and, in turn, claim costs. IASI's loss
reserves have been certified in accordance with the requirements of the National
Association of Insurance Commissioners.
The consolidated and combined financial statements of IASI include the
estimated liability for unpaid losses and LAE of IASI's insurance operations.
Reserves for unpaid losses covered by insurance policies and bonds consist of
reported losses and IBNR losses. These reserves are determined by claims
personnel and the use of actuarial and statistical procedures and they represent
undiscounted estimates of the ultimate cost of all unpaid losses and LAE through
year end. Although management uses many resources to calculate reserves, a
degree of uncertainty is inherent in all such estimates. Therefore, no precise
method for determining ultimate losses and LAE exist. These estimates are
subject to the effect of future claims settlement trends and are continually
reviewed and adjusted (if necessary) as experience develops and new information
becomes known. Any such adjustments are reflected in current operations.
Activity in the liability for unpaid losses and loss expense is
summarized in the following table:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance at January 1.......................................... $37,002 $34,661 $29,528
Less insurance recoverables................................ (8,914) (9,383) (8,505)
------- ------ -------
Net balance at January 1...................................... $28,088 $25,278 $21,023
------- ------ -------
Incurred related to:
Current year............................................... 17,216 17,297 14,753
Prior years................................................ 408 (2,180) (2,259)
------- ------ -------
Total incurred................................. 17,624 15,117 12,494
------- ------ -------
Paid related to:
Current year............................................... 3,684 5,963 4,269
Prior years................................................ 9,043 6,344 3,970
------- ------ -------
Total paid..................................... 12,727 12,307 8,239
------- ------ -------
Net balance at end of period.................................. 32,985 28,088 25,278
Plus reinsurance recoverables.............................. 8,114 8,914 9,383
------- ------ -------
Balance at end of period...................................... $41,099 37,002 $34,661
======= ====== =======
</TABLE>
ANALYSIS OF LOSS AND LAE DEVELOPMENT
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for losses and
loss expenses................. $2,276 3,484 7,202 8,168 10,428 12,775 14,107 21,023 25,278 28,088 32,985
Cumulative amount of net
liability paid through:
One year later............ 1,262 1,566 2,985 2,404 2,404 2,811 3,026 4,131 6,309 8,785 --
Two years later........... 1,943 2,172 3,876 3,433 4,090 4,894 3,848 7,503 11,161
Three years later......... 2,205 2,623 4,398 4,322 5,239 5,372 4,786 9,346
Four years later.......... 2,482 2,759 4,799 4,984 5,184 6,010 5,119
Five years later.......... 2,562 2,907 5,140 4,880 5,352 6,102
Six years later........... 2,677 2,927 5,147 4,953 5,352
Seven years later......... 2,693 2,935 5,152 4,947
Eight years later......... 2,702 2,935 5,135
Nine years later.......... 2,702 2,917
Ten years later........... 2,700
The retroactively
reestimated net liability
for loss and loss
expenses as of:
One year later............ 2,888 4,277 7,406 8,388 10,674 12,003 12,587 18,910 23,049 28,246 --
Two years later........... 3,375 4,032 7,445 8,504 9,239 10,877 9,829 17,531 22,193
Three years later......... 3,132 4,042 7,419 7,025 8,183 8,419 8,899 16,174
Four years later.......... 3,056 4,028 6,365 6,668 6,631 8,675 7,822
Five years later.......... 3,039 3,420 6,311 5,638 6,320 7,467
Six years later........... 2,849 3,406 5,534 5,243 5,823
Seven years later......... 2,829 3,009 5,308 5,133
Eight years later......... 2,708 2,949 5,230
Nine years later.......... 2,713 2,926
Ten years later........... 2,706
------ ----- ----- ----- ----- ------ ------ ------ ------ ------ ------
Net cumulative redundancy
(deficiency)................ $ (430) 558 1,972 3,035 4,605 5,308 6,285 4,849 3,085 (158) --
====== ===== ===== ===== ===== ====== ====== ====== ====== ====== ======
Gross liability - end of year ...................................................................... $34,661 37,002 41,099
Reinsurance recoverable ............................................................................ 9,383 8,914 8,114
------ ------ ------
Net liability - end of year ........................................................................ 25,278 28,088 32,985
====== ====== ======
</TABLE>
The data set forth in the table above does not reflect the adoption of SFAS
No. 113.
DISCONTINUED OPERATIONS
IASI's results of operations related to its environmental services
operations have been reflected as a discontinued operation in IASI's
consolidated and combined financial statements as a result of IASI's execution
of the non-binding Letter of Intent. See Note 15 to the Consolidated and
Combined Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION
IASI had cash and investments, excluding mortgage loans, of $104.8
million, $57.5 million, and $54.7 million at December 31, 1996, 1995 and 1994,
respectively. The $47.3 million increase from 1995 to 1996 is a result of IASI's
generation of proceeds from stock issuances from exercises of outstanding
options and warrants and the Private
24
<PAGE> 26
Placement (defined herein), profits and additional loss reserves on an
increasing volume of liability coverages which have slower payout patterns than
property coverages.
Net cash provided by operations for the years ended December 31, 1996,
1995, and 1994 was $13.2 million, $3.6 million and $9.7 million, respectively.
These amounts were adequate to meet all of IASI's capital expenditure, operating
and acquisition costs and resulted primarily from earnings and the timing of
reinsurance contingency transactions.
IASI's financing activities provided net cash for the years ended
December 31, 1996, 1995 and 1994 of $35.7 million, $5.6 million and $1.4
million, respectively. During 1996, IASI realized approximately $38.0 million in
cash proceeds from a private placement and from stock issuances, offset in part
by dividends paid to Alliance Holding by CSC and CSU prior to the Merger
Transactions.
SOURCES OF CASH
IASI's principal source of revenue from its specialty insurance
services operations consists of insurance and reinsurance premiums, investment
income, commission and fee income, and proceeds from sales and maturities of
investment securities. Premiums written become premiums earned for financial
statement purposes as the premium is earned incrementally over the term of each
insurance policy and after deducting the amount of premium ceded to reinsurers
pursuant to reinsurance treaties or agreements. The property and liability
operation of IASI generates positive cash flow from operations as a result of
premiums being received in advance of the time when the claim payments are made.
The companies of the CSC Group are subject to regulation and
supervision by state insurance regulatory agencies, applicable generally to each
insurance company in its state of incorporation. Such regulations limit the
amount of dividends or distributions by an insurance company to its
shareholders. If insurance regulators determine that payment of a dividend or
any other payment to an affiliate (such as a payment under a tax allocation
agreement) would, because of the financial condition of the paying insurance
company or otherwise, be detrimental to such insurance company's policyholders
or creditors, the regulators may block payment of such dividend or such other
payment to the affiliates that would otherwise be permitted without prior
approval.
Ohio law limits the payment of dividends to IASI. The maximum dividend
that may be paid without prior approval of the Director of Insurance of the
State of Ohio is limited to the greater of the statutory net income of the
preceding calendar year or 10% of total statutory shareholder's equity as of the
prior December 31. As a result, the maximum dividend CSC may pay to IASI in 1997
without prior approval of the Director of Insurance of the State of Ohio is
approximately $2.6 million.
IASI's principal source of revenue from its business outsourcing
services operation is the collection of fees from professional services rendered
to its clients in the areas of information technology consulting, tax return
preparation and compliance, and business valuations, as well as other areas that
have been previously discussed.
In May 1995, IASI secured a $6.0 million credit facility with a United
States commercial bank to provide IASI with additional liquidity and working
capital. This facility provides for borrowings at the prime lending rate plus
0.5% or adjusted three-month LIBOR rate plus 2.5%, which would be 8.75% and
[7.95%], respectively, at December 31, 1996 and will mature in 1998. Up to $4.5
million of the credit facility is available for the issuance of standby letters
of credit. At December 31, 1996 IASI had issued $2.4 million in standby letters
of credit and had no cash borrowing under the credit facility. The credit
facility contains various affirmative and negative covenants which, among other
things, restrict the payment of dividends and require the maintenance of certain
financial ratios. Borrowings under the credit facility are secured by all of
IASI's United States based assets related to its environmental services
operations.
In December 1996, IASI issued and sold 3,251,888 units of IASI (the
"Units") for $9.00 per Unit (the "Private Placement"). Each Unit consisted of
one share of Common Stock and one warrant to purchase one share of Common Stock
of IASI at an exercise price of $11.00 per share exercisable, in whole or in
part, for a three year period from the date of issuance. The Private Placement
resulted in net proceeds of approximately $27.6 million, after deducting the
placement agent fee and other estimated expenses associated with the Private
Placement.
In addition, MGD Holdings, the Harve A. Ferrill Trust U/A 12/31/69 (the
"Ferrill Trust") and WeeZor I Limited Partnership ("WeeZor"), affiliates of each
of Messrs. Michael G. DeGroote, Chairman of the Board of IASI, Harve A. Ferrill
and Richard C. Rochon, directors of IASI, respectively, have entered into
agreements to purchase an aggregate of 616,611 Units, subject to stockholder
approval. On January 6, 1997, the issuance of such Units was approved by written
consent of the holders of a majority of the outstanding shares of Common Stock.
In accordance with Rule 14c-2 under the Exchange Act, on or about April 1997,
IASI will distribute a Schedule 14C Information Statement (the "Information
Statement") to holders of IASI's Common Stock as of the date of such written
consent. The Information Statement will be used to notify such holders of Common
Stock of the action by written consent approving the issuance of Units to MGD
Holdings, the Ferrill Trust and WeeZor. In accordance with the requirements of
the Exchange Act, the issuance of Units to MGD Holdings and Messrs. Ferrill and
Rochon will close no earlier than
25
<PAGE> 27
20 days following the distribution of the Information Statement to such holders.
Upon the closing of the issuance of such Units, IASI will receive an additional
$5.3 million in proceeds.
USES OF CASH AND LIQUIDITY OUTLOOK
OPERATIONS. IASI's capital expenditures from continuing operations
totaled $286,000, $223,000 and $340,000 for the years ended December 31, 1996,
1995 and 1994, respectively, which included expenditures for fixed assets for
normal replacement, compliance with regulations and market development. During
the year ended December 31, 1996, IASI funded capital expenditures from cash on
hand and operating cash flow. IASI anticipates that during 1997, it will
continue to fund expenditures from operating cash flow supplemented by borrowing
under its revolving credit facility, as necessary. Management believes that IASI
currently has sufficient cash and lines of credit to fund current operations and
expansion thereof.
Cash used in investing activities for the years ended December 31,
1996, 1995 and 1994 primarily came as the result of differences in the purchases
and sales of investments.
IASI is required to establish a reserve for unearned premiums. IASI's
principal costs and factors in determining the level of profit is the difference
between premiums earned and losses, LAE and agent commissions. Loss and LAE
reserves are estimates of what an insurer expects to pay on behalf of claimants.
IASI is required to maintain reserves for payment of estimated losses and LAE
for both reported claims and for IBNR claims. Although the ultimate liability
incurred by IASI may be different from current reserve estimates, management
believes that the reserves are adequate.
IASI believes its cash flow from operations and available financial
resources provide for adequate liquidity to fund existing and anticipated
capital and operational requirements as well as to fund future growth and
expansion. Management is not aware of any current recommendations by regulatory
authorities that, if implemented, could have a material impact on IASI's
liquidity, capital resources and operations.
ACQUISITIONS. IASI's strategy is to aggressively expand its specialty
insurance and business outsourcing services operations through internal growth
and by acquiring and integrating existing businesses. IASI makes its decision to
acquire or invest in businesses based on financial and strategic considerations.
See "Business and Properties -- Business Strategy." Businesses acquired to date
have been accounted for under the purchase method of accounting and,
accordingly, are included in the financial statements from the date of
acquisition.
Management believes that IASI currently has sufficient resources,
including cash on hand, cash flow from operating activities, credit facilities
and access to financial markets to fund current and planned operations, service
any outstanding debt and make certain acquisitions. However, substantial
additional capital may be necessary to fully implement IASI's aggressive
acquisition program. There can be no assurance that additional financing will be
available on a timely basis, if at all, or that it will be available in the
amounts or on terms acceptable to IASI.
STOCK REPURCHASE PROGRAM
In April 1995, IASI's Board of Directors authorized IASI to repurchase
up to 500,000 shares or 4.6% of Common Stock during 1995 as deemed appropriate
by management and authorized an additional repurchase of 500,000 shares or 4.6%
of Common Stock in February 1996. Repurchases were effected at prevailing market
prices from time to time on the open market prior to the negotiation of the
Merger Transactions. The last repurchase was effected by IASI on March 4, 1996
and as of such date IASI had repurchased approximately 695,842 shares of Common
Stock for an aggregate cost of approximately $1,040,000. The repurchased shares
have been retired and the repurchase program has been discontinued.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS
This Annual Report contains various forward-looking statements and
information that are based on management's belief as well as assumptions made
by, and information currently available to, management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"projects," "management believes," "IASI believes" and words or phrases of
similar import. Such statements are subject to certain risks, uncertainties or
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. Among the key factors
that may have a direct bearing on IASI's results of operations and financial
condition are: (i) demand for IASI's services; (ii) IASI's ability to integrate
the operations of acquired businesses; (iii) IASI's ability to expand into new
markets; (iv) the consummation of IASI's disposition of its environmental
services operations; (v) environmental liabilities to which IASI may become
subject in the future which are not covered by an indemnity or insurance; (vi)
the impact of current and future laws and governmental regulations affecting
IASI's operations; (vii) competitive practices in the specialty insurance and
bonding industries; (viii) competitive practices in the reinsurance markets
utilized by IASI; (ix) judicial, legislative, and regulatory changes of law
relating to risks covered by IASI or to the operations of insurance companies in
general; (x) market fluctuations in the values or
26
<PAGE> 28
returns on assets in IASI's investment portfolios; (xi) pricing of IASI
insurance products; and (xii) adverse loss development.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and Supplementary Data required hereunder are
included in this Annual Report as set forth in Item 14(a) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Described in IASI's Form 8-K dated February 19, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information appearing under the caption "Election of Directors" in
IASI's definitive proxy statement (the "Proxy Statement") relating to the 1997
Annual Stockholders Meeting (the "Annual Meeting"), is incorporated herein by
reference. The information regarding executive officers of IASI is contained in
Part I of this Annual Report under a separate item captioned "Executive Officers
of IASI."
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under the caption "Executive Compensation" in
the Proxy Statement relating to the Annual Meeting is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under the captions "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual
Report or incorporated by reference:
1. Financial Statements.
As to financial statements and supplementary information,
reference is made to "Index to Financial Statements" on
page F-1 of this Annual Report.
2. Financial Statement Schedules.
As to financial statement schedules, reference is made to
"Index to Financial Statements" on page F-1 of this Annual
Report.
3. Exhibits.
The following documents are filed as exhibits to this Form 10-K
pursuant to Item 601 Regulation S-K.
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of
IASI (filed as Exhibit 3.1 to IASI's Registration Statement on
Form 10, file no. 0-25890, and incorporated herein by
reference).
3.2* Certificate of Amendment of the Certificate of Incorporation
of IASI dated October 18, 1996.
27
<PAGE> 29
3.3 Amended and Restated Bylaws of IASI (filed as Exhibit 3.2
to IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
4.1 Form of Stock Certificate of Common Stock of IASI (filed
as Exhibit 4.1 to IASI's Registration Statement on Form 10,
file no. 0-25890, and incorporated herein by reference)
4.2 Promissory Note, dated October 18, 1996, in the aggregate
principal amount of $4.0 million issued by IASI payable to
Alliance Holding (filed as Exhibit 99.7 to IASI's Current
Report on Form 8-K dated October 18, 1996, and incorporated
herein by reference).
9.1 Voting Agreement, dated as of October 18, 1996, by and between
MGD Holdings and Alliance Holding (filed as Exhibit 99.6 to
IASI's Current Report on Form 8-K dated October 18, 1996, and
incorporated herein by reference).
10.1 Spin-off Agreement (filed as Exhibit 10.1 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.2 Alternative Dispute Resolution Agreement (filed as
Exhibit 10.2 to IASI's Registration Statement on Form 10, file
no. 0-25890, and incorporated herein by reference)
10.3 Assumption of Liabilities and Indemnification Agreement
(filed as Exhibit 10.3 to IASI's Registration Statement on
Form 10, file no. 0-25890 and incorporated herein by
reference)
10.4 Corporate Services Agreement (filed as Exhibit 10.4 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.5 Employee Benefits Agreement (filed as Exhibit 10.5 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.6 Insurance and Indemnification Agreement (filed as Exhibit
10.6 to IASI's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference)
10.7 Tax Sharing Agreement (filed as Exhibit 10.7 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.8 IASI's Adjustment Plan (filed as Exhibit 10.8 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.9 Form of Warrant to purchase 200,000 shares of IASI's
Common Stock issued to MGD Holdings Ltd. (filed as Exhibit
10.9 to IASI's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference)
10.10 Form of Warrant to purchase 5,000 shares of IASI's Common
Stock issued to Douglas R. Gowland (filed as Exhibit 10.11 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.11 Form of Warrant to purchase 55,000 shares of IASI's Common
Stock issued for Douglas R. Gowland (filed as Exhibit 10.12 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.12 Credit Agreement dated as of May 11, 1995 by and among IASI
and its Subsidiaries, as Borrowers, and CoreStates Bank, N.A.
(filed as Exhibit 10.12 to IASI's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein
by reference)
10.13 Agreement and Plan of Merger by and among IASI, Republic/CSA
Acquisition Corporation, Republic/CSU Acquisition Corporation,
Alliance Holding, CSC and CSU (filed as Appendix I to IASI's
Definitive Schedule 14C Information Statement dated September
23, 1996 and incorporated herein by reference).
10.14 Amendment No. 1 to Agreement and Plan of Merger by and among
IASI, Republic/CSA Acquisition Corporation, Republic/CSU
Acquisition Corporation, Alliance Holding, CSC and CSU (filed
as Appendix IV to IASI's Definitive Schedule 14C Information
Statement dated September 23, 1996 and incorporated herein by
reference).
10.15 Amendment No. 2 to Agreement and Plan of Merger by and among
IASI, Republic/CSA Acquisition Corporation, Republic/CSU
Acquisition Corporation, Alliance Holding, CSC and CSU (filed
as
28
<PAGE> 30
Appendix V to IASI's Definitive Schedule 14C Information
Statement dated September 23, 1996 and incorporated herein by
reference).
10.16 Stock Purchase Agreement by and between IASI and H. Wayne
Huizenga (filed as Appendix II to IASI's Definitive Schedule
14C Information Statement dated September 23, 1996 and
incorporated herein by reference).
10.17 Stock Purchase Agreement by and between IASI and MGD Holdings
(filed as Appendix III to IASI's Definitive Schedule 14C
Information Statement dated September 23, 1996 and
incorporated herein by reference).
10.18* Agreement and Plan of Merger by and among IASI, IASI/SMR
Acquisition Co., SMR and its shareholders dated November 30,
1996.
10.19* Agreement and Plan of Merger by and among IASI, IASI/ECI
Acquisition Co., ECI and its shareholders dated November 5,
1996.
11.1* IASI Earnings per Common Share Data.
21.1* List of Subsidiaries of IASI.
24.1* Consent of KPMG Peat Marwick LLP
99.1 Information Statement (filed as Exhibit 99.1 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
*Indicates documents filed herewith.
(b) Reports on Form 8-K
IASI filed the following Current Reports on Form 8-K during the fourth
quarter of 1996:
Current Report on Form 8-K dated October 18, 1996. Current Report on
Form 8-K dated December 30, 1996.
29
<PAGE> 31
INTERNATIONAL ALLIANCE SERVICES, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report.................................................F-2
Consolidated and Combined Balance Sheets
December 31, 1996 and 1995.............................................F-3
Consolidated and Combined Statements of Income
Years Ended December 31, 1996, 1995 and 1994...........................F-4
Consolidated and Combined Statements of Shareholders' Equity
Years Ended December 31, 1996, 1995 and 1994...........................F-5
Consolidated and Combined Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994...........................F-6
Notes to the Consolidated and Combined Financial
Statements.............................................................F-7
Schedule I - Summary of Investments -- Other Than
Investments in Related Parties, December 31, 1996.....................F-31
Schedule IV - Reinsurance
Years Ended December 31, 1996, 1995 and 1994..........................F-32
Schedule III - Supplementary Insurance Information
For the Years Ended December 31, 1996, 1995 and 1994..................F-33
</TABLE>
F-1
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
----------------------------
BOARD OF DIRECTORS
INTERNATIONAL ALLIANCE SERVICES, INC.
We have audited the accompanying consolidated and combined financial statements
of International Alliance Services, Inc. and Subsidiaries as listed in the
accompanying index on page F-1. In connection with our audits of the
consolidated and combined financial statements, we have also audited the
financial statement schedules as listed in the accompanying index on page F-1.
These consolidated and combined financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated and combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated and combined financial statements referred to
above present fairly, in all material respects, the financial position of
International Alliance Services, Inc. and Subsidiaries at December 31, 1996 and
1995, and the results of their operations, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic consolidated and combined financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
Cleveland, Ohio
March 25, 1997
F-2
<PAGE> 33
<TABLE>
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31, 1996 AND 1995
<CAPTION>
1996 1995
------------- --------------
ASSETS
<S> <C> <C>
Investments (Note 4):
Fixed maturities held to maturity, at amortized cost $ 15,481 $ 15,309
Securities available for sale, at fair value:
Fixed maturities 35,471 33,153
Equity securities 9,213 5,426
Mortgage loans 3,685 3,393
Short-term investments 4,799 843
Other long-term investments - 90
------------- --------------
Total investments 68,649 58,214
Cash and cash equivalents 39,874 2,694
Premiums receivable, less allowance for doubtful
accounts of $284 and $138, respectively 7,013 4,467
Deferred policy acquisition costs (Note 8) 4,345 3,428
Reinsurance recoverables (Note 7) 11,185 12,647
Excess of cost over net assets of businesses
acquired , net of accumulated amortization of $33 (Note 2) 6,048 -
Net assets held for disposal (Note 15) 22,999 -
Other assets 7,217 5,285
------------- --------------
TOTAL ASSETS $ 167,330 $ 86,735
============= ==============
LIABILITIES
Losses and loss expenses payable (Note 6) $ 41,099 $ 37,002
Unearned premiums 18,637 15,636
Note payable and capitalized leases (Note 11) 3,211 47
Income taxes (Note 10) 1,994 1,375
Accrued expenses 5,355 2,672
Other liabilities 5,712 3,235
------------- --------------
TOTAL LIABILITIES 76,008 59,967
------------- --------------
SHAREHOLDERS' EQUITY
Common stock, par value $.01 per share (Note 5)
Authorized - 100,000,000 shares at December 31, 1996;
- 20,000,000 shares at December 31, 1995
Issued and outstanding - 33,764,506 shares at December 31, 1996;
- 14,760,000 shares at December 31, 1995 338 148
Additional paid-in capital 80,446 19,146
Retained earnings 6,842 4,208
Net Unrealized appreciation of investments (net of tax) 3,696 3,266
------------- --------------
TOTAL SHAREHOLDERS' EQUITY 91,322 26,768
------------- --------------
Commitments and contingencies (Note 12)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 167,330 $ 86,735
============= ==============
</TABLE>
See the accompanying notes to the consolidated and combined financial
statements.
F-3
<PAGE> 34
<TABLE>
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(In thousands, except per share data)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<CAPTION>
1996 1995 1994
-------------- ------------- ---------
<S> <C> <C> <C>
Revenues:
Premiums earned (Note 7) $ 27,743 $ 26,962 $ 23,368
Net investment income (Note 4) 3,564 3,341 2,477
Net realized gain on investments (Note 4) 1,529 166 80
Other income 2,933 470 1,385
-------------- ------------- --------------
Net revenues 35,769 30,939 27,310
-------------- ------------- --------------
Expenses:
Losses and loss adjustment expenses (Note 7) 17,624 15,117 12,494
Policy acquisition expenses (Note 8) 7,699 7,774 5,428
Other expenses 4,384 3,157 4,544
-------------- ------------- --------------
Total expenses 29,707 26,048 22,466
-------------- ------------- --------------
Income from continuing operations
before income tax expense 6,062 4,891 4,844
Income tax expense (Note 10) 1,640 1,422 1,344
-------------- ------------- --------------
Income from continuing operations 4,422 3,469 3,500
Loss from discontinued operations
(net of income tax expense of $91) (Note 15) (38) - -
-------------- ------------ -------------
Net income $ 4,384 $ 3,469 $ 3,500
============== ============= ==============
Earnings per common and common share equivalents (Note 3):
Primary:
Income from continuing operations $ 0.21 $ 0.20 $ 0.20
Loss from discontinued operations - - -
------------- ------------- --------------
Net income per share $ 0.21 $ 0.20 $ 0.20
============= ============= ==============
Fully Diluted:
Income from continuing operations $ 0.16 $ 0.20 $ 0.20
Loss from discontinued operations - - -
------------- ------------- --------------
Net income per share $ 0.16 $ 0.20 $ 0.20
============= ============= ==============
Weighted average common and common share
equivalents, primary and fully diluted: 32,213 16,956 16,956
============== ============= ==============
</TABLE>
See the accompanying notes to the consolidated and combined financial
statements.
F-4
<PAGE> 35
<TABLE>
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<CAPTION>
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED APPRECIATION
SHARES STOCK CAPITAL EARNINGS (DEPRECIATION)
------ ----- ------- -------- --------------
<S> <C> <C> <C> <C> <C>
December 31, 1993 14,760,000 $ 148 $ 14,744 $ 3,589 $ (80)
Net income - - - 3,500 -
Pre-merger capital contribution
from parent - - 3,807 - -
Pre-merger dividends paid
to parent - - - (1,000) -
Change in unrealized
appreciation (depreciation) - - - - (1,164)
Cumulative effect of change
in accounting for investments - - - - 36
-------------- ---------- ------------ ----------- -----------
December 31, 1994 14,760,000 148 18,551 6,089 (1,208)
Net income - - - 3,469 -
Pre-merger capital contribution
from parent - - 595 - -
Pre-merger dividends paid
to parent - - - (5,350) -
Change in unrealized
appreciation (depreciation) - - - - 4,474
-------------- ---------- ------------ ----------- -----------
December 31, 1995 14,760,000 148 19,146 4,208 3,266
Net income - - - 4,384 -
Pre-merger capital contribution
from parent - - 595 - -
Pre-merger dividends paid
to parent - - - (1,750) -
Change in unrealized
appreciation (depreciation) - - - - 430
Reverse merger 10,858,158 108 16,136 - -
Stock issuances 7,251,888 73 38,164 - -
Stock options 101,960 1 1,153 - -
Business acquisitions 792,500 8 5,252 - -
-------------- ---------- ------------ ----------- -----------
December 31, 1996 33,764,506 $ 338 $ 80,446 $ 6,842 $ 3,696
============== ========== ============ =========== ===========
</TABLE>
See the accompanying notes to the consolidated and combined financial
statements.
F-5
<PAGE> 36
<TABLE>
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 4,422 $ 3,469 $ 3,500
Adjustments to reconcile net income to net cash
provided by operating activities:
Net loss from discontinued operations (38) - -
Deprecation and amortization 7,969 8,143 5,866
Deferred income taxes (27) (699) 55
Income on participation transaction - - (807)
Cash provided by (used in) changes in assets and liabilities, net of
acquisition:
Premiums receivable, net (915) (62) (348)
Deferred policy acquisition costs (8,616) (7,476) (6,748)
Reinsurance recoverables, net 1,462 (1,671) (1,150)
Other assets (1,540) (527) (313)
Losses and loss expenses payable 4,097 2,341 5,133
Unearned premiums 3,001 183 3,287
Income taxes 646 725 170
Accrued expenses 1,105 533 (82)
Other liabilities 3,292 1,242 1,273
Other, net (1,693) (2,599) (146)
-------- ------- -------
Net cash provided by operating activities 13,165 3,602 9,690
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities, held to maturity (1,318) (269) (1,805)
Purchase of fixed maturities, available for sale (12,408) (9,552) (8,857)
Purchase of equity securities (2,921) (228) (223)
Redemption of fixed maturities, held to maturity 1,000 1,281 2,009
Sale of fixed maturities, available for sale 9,333 7,089 1,155
Sale of equity securities 675 150 201
Increase in mortgage loans (1,275) (1,342) (1,893)
Principal receipts on mortgage loans 983 910 780
Change in short-term investments (3,956) 27 5,968
Business acquisitions, net of cash acquired 912 - 538
Acquisition of property and equipment (286) (223) (340)
-------- ------- -------
Net cash used in investing activities (9,261) (2,157) (2,467)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Pre-merger dividends paid to parent (1,750) (5,350) (1,000)
Repayment of debt (836) (295) (380)
Proceeds from stock issuances 38,237 - -
-------- ------- -------
Net cash provided by (used in) financing activities 35,651 (5,645) (1,380)
-------- ------- -------
Net increase (decrease) in cash and cash equivalents 39,555 (4,200) 5,843
Cash and cash equivalents at beginning of year 2,694 6,894 1,051
-------- ------- -------
Cash and cash equivalents at the end of year:
Continuing operation 39,874 2,694 6,894
Discontinued operations 2,375 - -
-------- ------- -------
Total cash and cash equivalents at end of year $ 42,249 $ 2,694 $ 6,894
======== ======= =======
See the accompanying notes to the consolidated and combined financial
statements.
</TABLE>
F-6
<PAGE> 37
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
International Alliance Services, Inc. and subsidiaries (the "Company") is
a diversified services organization which provides specialty insurance
services and business consulting and management services. The Company
markets its specialty insurance and bonding products and business
services in the United States.
RESI Transaction
----------------
On October 18, 1996, Republic Environmental Services, Inc. ("RESI") issued
(a) an aggregate of 14,760,000 shares of RESI common stock, par value
$0.01 per share ("RESI Common Stock"), (b) warrants to purchase an
aggregate of 4,200,000 additional shares of RESI Common Stock at
exercise prices ranging from $2.625 to $3.875 per share, expiring in
two to four years and (c) a promissory note in principal amount of
$4,000,000 in exchange for the stock of Century Surety Company ("CSC")
and Commercial Surety Agency, Inc. d.b.a. Commercial Surety
Underwriters ("CSU") (together the "Alliance Companies") ("the RESI
Transaction"). The RESI transaction was accounted for as a reverse
merger whereby the Alliance Companies gained a controlling interest in
the stock of RESI. Contemporaneously, RESI changed its name to
International Alliance Services, Inc. On June 24, 1996, the Company
began trading under the symbol "IASI" in anticipation of the name
change.
The consolidated and combined financial statements presented herein are as
follows:
i. Consolidated and Combined Balance Sheets of the Company at
December 31, 1996 and the Alliance Companies at December 31,
1995;
ii. Consolidated Statement of Income for the year ended December
31, 1996 of the Alliance Companies and RESI for the period
October 1, 1996 to December 31, 1996. The Combined Statements
of Income for the years ended December 31, 1995 and 1994 are
of the Alliance Companies;
iii. Consolidated and Combined Statements of Shareholders' Equity
of the Company for the years ended December 31, 1996, 1995
and 1994 reflecting the number of shares received in the RESI
Transaction as if the shares had been issued at January 1,
1994;
iv. Consolidated and Combined Statements of Cash Flows of the
Company for the year ended December 31, 1996, and the
Alliance Companies for the years ended December 31, 1995 and
1994.
The following are significant accounting policies followed by the Company.
Basis of Consolidation
----------------------
The Company's consolidated and combined financial statements include the
accounts of all wholly owned subsidiaries. Significant subsidiaries of
the Company include CSC in continuing operations and RESI in
discontinued operations. All significant intercompany accounts and
transactions have been eliminated.
F-7
<PAGE> 38
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Estimates
--------------------
In preparing the consolidated and combined financial statements,
management is required to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities as of the date of the
consolidated and combined financial statements and the reported amounts
of revenues and expenses for the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near-term relate to the
determination of losses and loss expenses payable, the recoverability
of deferred policy acquisition costs, and the net realizable value of
reinsurance recoverables and net assets held for disposal.
Management believes that the recorded liability for losses and loss
expenses is adequate. While management uses available information to
estimate losses and loss expenses payable, future changes to the
liability may be necessary based on claims experience and changing
claims frequency and severity of conditions. Management also believes
that deferred policy acquisition costs are recoverable, however, future
costs that are associated with the business in the unearned premium
liability could exceed management's estimates, causing the recorded
asset to be unrecoverable in whole or in part. In addition,
management's estimates of amounts recoverable from reinsurers, net of
valuation allowance, are believed to be consistent with the claim
liability, but the actual amounts recoverable could differ from those
estimates. The amounts the Company will ultimately realize from the
sale of the net assets held for disposal could differ from management's
estimates of their realizable value.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents consists of funds held on deposit and short-term
highly liquid investments with an original maturity of three months or
less at the date of purchase. At various times during the year, the
Company had deposits with financial institutions in excess of the
$100,000 federally insured limit.
Excess of Cost over Net Assets of Businesses Acquired
-----------------------------------------------------
The excess of cost over the fair value of net assets of businesses
acquired is being amortized on a straight-line basis over periods
ranging from twenty to twenty-three years. It is the Company's policy
to evaluate the excess of cost over the net assets of businesses
acquired based on an evaluation of such factors as the occurrence of a
significant adverse event or change in the environment in which the
business operates or if the expected future net cash flows,
undiscounted and without interest, would become less than the carrying
amount of the asset. An impairment loss would be recorded in the period
such determination is made based on the fair value of the related
businesses. Amortization expense from continuing operations in 1996 was
$33,000 and $0 in 1995 and 1994, respectively.
Property and Equipment
----------------------
Property and equipment, which is included in other assets in the
consolidated and combined balance sheets, are recorded at cost, less
accumulated depreciation and amortization. The Company uses an
accelerated method of depreciation, which approximates the straight
line depreciation method, over the estimated useful lives of the
assets, which are 5 years.
F-8
<PAGE> 39
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
------------
The Company uses the asset and liability method of accounting for income
taxes. Deferred taxes are determined based on the estimated future tax
effects of differences between the financial accounting and tax bases
of assets and liabilities using the applicable tax laws in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Deferred income tax provisions and
benefits are based on the changes in the deferred tax asset or tax
liability from period to period.
Earnings per Common and Common Share Equivalents
------------------------------------------------
The earnings per common share calculation for the years ended December 31,
1996, 1995 and 1994 was based upon the weighted average number of
common and common share equivalents outstanding and the incremental
number of outstanding common share equivalents computed under the
modified treasury stock method. Because the aggregate number of common
shares obtainable upon exercise of the outstanding options and warrants
exceeded 20% of the number of common shares outstanding, all options
and warrants were assumed to have been exercised and the aggregate
proceeds were applied first, to repurchase outstanding common shares at
the average market price for primary earnings per share and at the
ending market price for fully diluted earnings per share during the
period, but not to exceed 20% of the outstanding shares; second, to
reduce borrowings; and third, to invest the remaining funds in U.S.
government securities or commercial paper. Appropriate recognition
relating to the effect of all interest savings and benefits and the
respective tax effect was applied.
Investments
-----------
The Company adopted the provisions of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities as of January 1, 1994. Fixed
maturity securities that the Company has the positive intent and
ability to hold to maturity are classified as held to maturity and are
stated at amortized cost; other fixed maturity securities and all
equity securities are classified as available for sale and are stated
at fair value, with the unrealized gains and losses, net of deferred
income tax, reported as a separate component of shareholders' equity.
The Company has no investment securities classified as trading.
Pursuant to a Financial Accounting Standards Board Special Report, A
Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities, the Company reassessed the
classification of all its investment securities. Effective December 20,
1995, the Company reclassified certain of its held to maturity
securities to available for sale (see Note 4). Realized gains and
losses on the sale of investments are determined on the basis of
specific security identification and also includes other than temporary
declines, if any. Interest income is recognized on the accrual basis
and dividend income is recognized on the ex-dividend date.
Deferred Policy Acquisition Costs
---------------------------------
Acquisition costs, consisting of commissions, premium taxes and certain
underwriting expenses that vary with and are primarily related to the
production of business, are deferred and amortized ratably over the
policy term. The method used limits the amount to its estimated
realizable value which gives effect to the premium to be earned, the
incurrence of loss and loss expenses and certain other costs expected
to be incurred as premium is earned.
F-9
<PAGE> 40
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options
-------------
The Company accounts for stock option plans under the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees. The Company has adopted the disclosure only provisions
of SFAS No. 123, Accounting for Stock-Based Compensation.
Losses and Loss Expenses Payable
--------------------------------
The liability for losses and loss expenses is provided based upon case
basis estimates for losses reported in respect to direct business;
estimates of unreported losses based on estimated loss experience;
estimates received and supplemental amounts provided relating to
assumed reinsurance; and deduction for estimated salvage and
subrogation recoverable. The liability for loss expenses is established
by estimating future expenses to be incurred in settlement of the
claims provided for in the liability for losses. The liability for
losses and loss expenses is not discounted.
Premium Recognition
-------------------
Premiums are recognized as revenue in proportion to the insurance coverage
provided, which is generally ratable over the terms of the policies.
Unearned premiums are generally computed on the daily pro rata basis
and include amounts relating to assumed reinsurance.
Reinsurance Ceded
-----------------
In accordance with SFAS No. 113, Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts, reinsurance receivables
are accounted for and reported separately as assets, net of valuation
allowance. Amounts recoverable from reinsurers are estimated in a
manner consistent with the claim liability. Contracts not resulting in
the reasonable possibility that the reinsurers may realize a
significant loss from the insurance risk assumed generally do not meet
the conditions for reinsurance accounting and are accounted for as
deposits. Reinsurance premiums ceded and reinsurance recoveries on
claims incurred are deducted from the respective revenue and expense
accounts. The Company is not relieved of its primary obligation in a
reinsurance transaction.
Business Risk
-------------
The following is a description of the most significant risks facing
property and casualty insurers and how the Company mitigates those
risks:
Inadequate Pricing Risk are the risks that the premium charged for
insurance and insurance related products are insufficient to cover the
costs associated with the distribution of such products which include:
claim and loss costs, loss adjustment expenses, acquisition expenses,
and other corporate expenses. The Company utilizes a variety of
actuarial and other qualitative methods to set such levels.
F-10
<PAGE> 41
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Business Risk (Continued)
-------------------------
Adverse Loss Development and Incurred But Not Reported ("IBNR") Risk is
the risk inherent in the handling and settling of claims whose ultimate
costs, which include loss costs, loss adjustment expenses, and other
related expenses, are unknown at the time the claim is presented. An
associated risk relates to claims which have been incurred, but for
which the Company has no knowledge. The Company makes judgments as to
the ultimate costs of presented claims and makes a provision for their
future payment by establishing reserves for existing claims (case
reserves) and for IBNR claims, however, there can be no assurance that
the amounts reserved will be adequate to ultimately make all required
payments.
Legal/Regulatory Risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will occur and create
additional loss costs or expenses not anticipated by the insurer in
pricing its products. That is, regulatory initiatives designed to
reduce insurer profits or new legal theories may create costs for the
insurer beyond those recorded in the financial statements. The Company
is exposed to this risk by writing approximately 26% of its business in
Ohio and surrounding states and 41% in California, thus increasing its
exposure in these particular regions. This risk is reduced by
underwriting and loss adjusting practices that identify and minimize
the adverse impact of this risk.
Credit Risk is the risk that issuers of securities and mortgagors of the
mortgages owned by the Company will default, or other parties,
including reinsurers that owe the Company money, will not pay. The
Company minimizes this risk by adhering to a conservative investment
strategy, by maintaining sound reinsurance and credit and collection
policies, and by providing for any amounts deemed uncollectible.
Interest Rate Risk is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. The Company
mitigates this risk by attempting to match the maturity schedule of its
assets with the expected payouts of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer would
have to sell assets prior to maturity and recognize a gain or loss.
Management believes that the Company's positive cash flow from
investment income and operations will enable the Company to operate
without having to recognize significant losses from the sale of
investments that have an unrealized holding loss as of December 31,
1996.
Reclassifications
-----------------
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
2. ACQUISITIONS
In 1996, the Company made the following acquisitions:
On November 6, 1996, the Company acquired all of the outstanding shares of
Environmental and Commercial Insurance Agency, Inc. ("ECI"), an
insurance agency based in Columbus, Ohio for $1,000,000 in cash and
192,500 shares of the Company's Common Stock. The shares issued are
subject to a six month lock-up restriction.
F-11
<PAGE> 42
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
2. ACQUISITIONS (Continued)
On December 3, 1996, the Company completed the acquisition of SMR & Co.
("SMR"), a business services and consulting firm in Mayfield Village,
Ohio. Under the terms of the acquisition, the Company acquired all of
the outstanding shares of SMR for 600,000 shares of the Company's
Common Stock and three-year warrants to acquire an additional 900,000
shares at $10.375 per share. Of the 600,000 shares issued, 90,000
shares are subject to a six-month lock-up restriction and 510,000
shares are subject to a two-year lock-up restriction.
These acquisitions have been accounted for by the purchase method of
accounting. The difference of $6,081,000 between the fair value of net
assets acquired and the purchase consideration of $1,000,000 in cash
and $5,260,000 of the Company's Common Stock has been allocated to
goodwill. The assets, liabilities and operating results of these
companies are reflected in the Company's financial statements from
their respective dates of acquisition forward. As a result of the
nature of the assets and liabilities acquired there are no material
identifiable intangible assets or liabilities.
The following data summarizes, on an unaudited pro forma basis, the
combined results of continuing operations of the Company and the
businesses acquired for the two years ended December 31,1996. The pro
forma amounts give effect to appropriate adjustments resulting from the
combination, but are not necessarily indicative of future results of
operations or of what results would have been for the combined
companies (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------- --------------
<S> <C> <C>
Net revenues - pro forma $ 44,900 $ 39,848
============= ==============
Net income - pro forma $ 5,084 $ 3,979
============= ==============
Earnings per common and common
share equivalent - pro forma
- primary $ .24 $ .23
============= ==============
- fully diluted $ .18 $ .23
============= ==============
</TABLE>
3. CALCULATION OF EARNINGS PER COMMON AND COMMON SHARE EQUIVALENTS
Income from continuing operations for the year ended December 31, 1996 was
adjusted to reflect the effect of all interest savings and benefits and
the tax effects under the modified treasury stock method. Modifications
to income were not required for the years ended December 31, 1995 and
1994.
<TABLE>
<CAPTION>
Fully
Primary Diluted
------------- --------------
(in thousands)
<S> <C> <C>
Income from continuing operations $ 4,422 $ 4,422
Interest expense reduction less 34% tax rate 30 30
Interest income less 34% tax rate 2,165 626
------------- --------------
Adjusted income from continuing operations 6,617 5,078
------------- --------------
Loss from discontinued operations (38) (38)
------------- --------------
Adjusted net income $ 6,579 $ 5,040
============= ==============
</TABLE>
F-12
<PAGE> 43
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
3. CALCULATION OF EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENTS
(Continued)
For the three years ended December 31, 1996, the Company computed earnings
per common and common share equivalents under the modified treasury
stock method as follows (in thousands):
<TABLE>
<CAPTION>
Fully
Primary Diluted
------------- --------------
<S> <C> <C>
Weighted common shares - 1996:
Weighted average common shares 17,863 17,863
Additional stock equivalents less 20% limitation
on assumed repurchase 14,350 14,350
------------- --------------
32,213 32,213
============= ==============
Weighted common shares - 1995 and 1994:
Weighted average common shares 14,760 14,760
Additional share equivalents less 20% limitation
on assumed repurchase 2,196 2,196
------------- --------------
16,956 16,956
============= ==============
</TABLE>
During February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, Earnings per Share, which is effective for financial
statements for annual periods ending after December 15, 1997. However,
disclosure of pro forma earnings per share amounts computed using the
provisions of SFAS No. 128 is permissible. The unaudited pro forma
earnings per share of the Company based on SFAS No. 128 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Basic EPS:
Continuing operations $ .25 $ .24 $ .24
Discontinued operations - - -
------------ ------------- -------------
Net income per share $ .25 $ .24 $ .24
============ ============= =============
Diluted EPS from:
Continuing operations $ .18 $ .24 $ .24
Discontinued operations - - -
------------ ------------- -------------
Net income per share $ .18 $ .24 $ .24
============ ============= =============
</TABLE>
F-13
<PAGE> 44
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
4. INVESTMENTS
The amortized cost and estimated fair value of fixed maturities held to
maturity at December 31, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 6,136 $ 28 $ (65) $ 6,099
Corporate securities 8,850 18 (96) 8,772
Mortgage-backed securities 495 10 - 505
--------------- ------------- ------------- ----------------
Totals $ 15,481 $ 56 $ (161) $ 15,376
=============== ============= ============= ================
The amortized cost and estimated fair value of securities available for
sale at December 31, 1996 were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- ----------------
Fixed Maturities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 16,067 $ 224 $ (93) $ 16,198
Corporate securities 10,962 87 (66) 10,983
Mortgage-backed securities 8,092 207 (9) 8,290
--------------- ------------- ------------- ----------------
35,121 518 (168) 35,471
Equity securities 4,349 5,022 (158) 9,213
--------------- ------------- ------------- ----------------
Totals $ 39,470 $ 5,540 $ (326) $ 44,684
=============== ============= ============= ================
</TABLE>
Expected maturities will differ from contractual maturities because the
issuers may have the right to call or prepay obligations with or
without call or prepayment penalties. The amortized cost and estimated
fair value of fixed maturities held to maturity at December 31, 1996,
by contractual maturity, were as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
--------------- ----------------
<S> <C> <C>
Due in one year or less $ 1,633 $ 1,626
Due after one year through five years 12,921 12,811
Due after five years through ten years 356 347
Due after ten years 76 87
--------------- ----------------
14,986 14,871
Mortgage-backed securities 495 505
--------------- ----------------
$ 15,481 $ 15,376
=============== ================
</TABLE>
F-14
<PAGE> 45
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
4. INVESTMENTS (Continued)
The amortized cost and estimated fair value of fixed maturities available
for sale at December 31, 1996, by contractual maturity, were as follows
(in thousands):
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
--------------- ----------------
<S> <C> <C>
Due in one year or less $ 1,182 $ 1,182
Due after one year through five years 21,904 21,969
Due after five years through ten years 3,701 3,795
Due after ten years 242 235
--------------- ----------------
27,029 27,181
Mortgage-backed securities 8,092 8,290
--------------- ----------------
$ 35,121 $ 35,471
=============== ================
</TABLE>
The amortized cost and estimated fair value of fixed maturities held to
maturity at December 31, 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 6,159 $ 81 $ (9) $ 6,231
Corporate securities 8,654 27 (62) 8,619
Mortgage-backed securities 496 18 - 514
--------------- ------------- ------------- ---------------
Totals $ 15,309 $ 126 $ (71) $ 15,364
=============== ============= ============= ===============
</TABLE>
The amortized cost and estimated fair value of securities available for
sale at December 31, 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 6,522 $ 303 $ (7) $ 6,818
Obligations of states and political
subdivisions 8,339 167 (3) 8,503
Corporate securities 14,990 439 (15) 15,414
Mortgage-backed securities 2,244 174 - 2,418
--------------- ------------- ------------ ----------------
32,095 1,083 (25) 33,153
Equity securities 1,999 3,589 (162) 5,426
--------------- ------------- ------------ ----------------
$ 34,094 $ 4,672 $ (187) $ 38,579
=============== ============= ============ ================
</TABLE>
On December 20, 1995, the Company reclassified a portion of their held to
maturity securities to available for sale. The amortized cost and
estimated fair value of the securities reclassified were $5,733,000 and
$5,897,000, respectively, as of the date of reclassification.
F-15
<PAGE> 46
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
<TABLE>
4. INVESTMENTS (Continued)
Net investment income was comprised of the following for the years ended
December 31 as follows (in thousands):
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Interest $ 3,652 $ 3,455 $ 2,588
Dividends 142 96 96
------- ------- -------
Total investment income 3,794 3,551 2,684
Less: Investment expense (230) (210) (207)
------- ------- -------
Net investment income $ 3,564 $ 3,341 $ 2,477
======= ======= =======
Realized gains and losses on investments for the years ended December 31 are as follows (in thousands):
1996 1995 1994
------- ------- -------
Realized gains:
Available for sale:
Fixed maturities $ 117 $ 114 $ -
Equity securities 1,381 9 146
Other 125 73 -
------- ------- -------
Total realized gains 1,623 196 146
------- ------- -------
Realized losses:
Available for sale:
Fixed maturities 32 27 42
Equity securities 35 3 24
Other 27 - -
------- ------- -------
Total realized losses 94 30 66
------- ------- -------
Net realized gains on investments $ 1,529 $ 166 $ 80
======= ======= =======
The change in net unrealized appreciation (depreciation) of investments is summarized as follows (in thousands):
1996 1995 1994
------- ------- -------
Available for sale:
Fixed maturities $ (709) $ 2,147 $(1,088)
Equity securities 1,437 3,583 (76)
------- ------- -------
$ 728 $ 5,730 $(1,164)
======= ======= =======
The components of unrealized appreciation (depreciation) on securities available for sale at December 31 were as follows
(in thousands):
1996 1995 1994
------- ------- -------
Gross unrealized appreciation (depreciation) $ 5,214 $ 4,485 $(1,208)
Deferred income tax (1,518) (1,219) -
------- ------- -------
Net unrealized appreciation (depreciation) $ 3,696 $ 3,266 $(1,208)
======= ======= =======
</TABLE>
F-16
<PAGE> 47
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
4. INVESTMENTS (Continued)
Fixed maturities held to maturity and certificates of deposit with a
carrying value of approximately $8,939,000 and $8,909,000 at December
31, 1996 and December 31, 1995, respectively, were on deposit with
regulatory authorities as required by law. At December 31, 1996 and
1995 all mortgage loans were secured by properties in the states of
California, Michigan and Ohio.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents, short-term investments and premiums receivable:
The carrying amounts reported in the consolidated and combined balance
sheets for these instruments are at cost, which approximates fair
value.
Investment securities: Fair values for investments in fixed maturities are
based on quoted market prices, where available. For fixed maturities
not actively traded, fair values are estimated using values obtained
from independent pricing services. The fair values for equity
securities are based on quoted market prices. Fair values for fixed
maturities available for sale and equity securities are recognized in
the consolidated and combined balance sheets.
Mortgage loans: The carrying amounts reported in the consolidated and
combined balance sheets are the aggregate unpaid balance of the loans,
which approximates fair value.
5. COMMON STOCK
The Company's authorized common stock consists of 100,000,000 (20,000,000
at December 31, 1995) shares of common stock, par value $0.01 per
share. The holders of the Company's Common Stock are entitled to one
vote for each share held on all matters voted on by shareholders. On
January 22, 1997, the Company completed the registration of 32,126,076
shares of common stock (the "Shares") of which up to 17,925,888 are
issuable upon exercise of outstanding warrants. The Shares were
registered under the Securities Act of 1933 on behalf of certain
selling shareholders in order to permit the public or private sale or
other public or private distribution of the Shares. Accordingly, the
Company will not receive any proceeds for these Shares.
On October 18, 1996, the Company issued 4,000,000 shares of the Company's
Common Stock and warrants to purchase an additional 12,000,000 shares
of the Company's Common Stock at exercise prices ranging from $2.625 to
$3.875 per share, expiring in two to four years, for an aggregate
purchase price of $10,500,000.
In December 1996, the Company completed a private placement in which the
Company offered 3,251,888 units (the "Units") to qualified investors at
an aggregate purchase price of $9.00 per Unit. Each Unit consisted of
one share of common stock and one warrant to purchase one share of
common stock at an exercise price of $11.00 per share, exercisable for
a three year period from the date of issuance. The Company realized net
proceeds of $ 27,737,000.
F-17
<PAGE> 48
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
5. COMMON STOCK (Continued)
Prior to the RESI Transaction, certain options were granted to employees,
directors and affiliates of RESI's former parent company. When RESI was
spun-off in April 1995 (the "Distribution Date"), optionees received
options to acquire RESI Common Stock at the ratio of one RESI option
for each five options under the former parent's 1990 and 1991 Stock
Option plans. The outstanding options at the Distribution Date and the
RESI options granted with respect thereto are stapled and are only
exercisable if exercised together. Unvested options held and unvested
RESI options granted, vest in accordance with the original vesting
schedule as long as the optionee is employed by the former parent, RESI
or their affiliates. Options granted under these plans expire ten years
from the date of grant, and vest over varying periods. The option price
is based on the fair market value of the common shares on the date of
grant.
RESI agreed to issue to holders of unexpired warrants of its former
parent, additional RESI warrants to acquire shares of RESI's Common
Stock equal to one fifth of the number of shares available. At the
Distribution Date, RESI adjusted the per share exercise price of the
RESI warrants to reflect the effect of the distribution on the market
prices of RESI and its former parent's common stock. These warrants are
designated as stapled warrants and expire at various dates through May
2003. In connection with the RESI Transaction, the holders of these
warrants are able to exercise under the original terms of the warrants
and will receive Company stock. At December 31, 1996 and 1995, there
were outstanding unexercised warrants to acquire 434,000 and 622,000
shares of the Company's Common Stock, respectively. During 1996,
188,000 RESI warrants were exercised at $3.60 with no cancellations. In
1995, 250,000 RESI warrants were exercised ranging in price from $1.08
to $5.10 with no cancellations.
Under the Company's 1995 Employee Stock Option Plan, a maximum of 500,000
options may be awarded. Such options are granted at no less than fair
market value at the date of grant, become exercisable in increments of
20% over a five-year vesting period and expire ten years from the date
of grant. In the event of a change of control, as defined in the plan,
all outstanding employee options shall become immediately exercisable
and the prescribed time limits for exercise will run from such vesting.
Information relating to the above stock option plans is summarized below:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Outstanding at beginning of year 190,200 -
Granted at Distribution Date - 420,400
Granted (a) 230,000 31,000
Exercised (b) (101,960) (257,800)
Expired or canceled (1,168) (3,400)
------------- ------------
Outstanding at end of year (c) 317,072 190,200
------------- ------------
Exercisable at end of year (d) 22,320 70,000
============= ============
Available for future grant at the
end of year (e) 273,000 502,000
============= ============
(a) Options were granted at average costs of $2.31 and $1.50 in 1996 and
1995, respectively.
(b) Options were exercised at prices ranging from $1.08 to $3.60 and
averaging $3.43 in 1996 and $1.08 to $5.80 and averaging $5.07 in
1995.
(c) Prices for options outstanding at December 31, 1996 ranged from $1.08
to $4.10 and averaged $2.11 with expiration dates ranging from May
1997 to May 2006. Prices for options outstanding at December 31, 1995,
ranged from $1.08 to $5.80 and averaged $2.25 with expiration dates
ranging from May 1996 to May 2004.
(d) Options exercisable at December 31, 1996 and 1995 averaged $2.18 and
$3.15, respectively
(e) Includes stapled options and options relating to the Company's 1995
Employee Stock Option Plan.
</TABLE>
F-18
<PAGE> 49
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
5. COMMON STOCK (Continued)
The Company is currently seeking shareholder approval with regards to the
1996 Employee Stock Option Plan. Under the 1996 Employee Stock Option
Plan, the Company will reserve 1,000,000 shares of Company Common
Stock. The options awarded will be subject to a 20% incremental vesting
schedule over a five-year period commencing from the date of grant. The
options will be awarded at a price not less than fair market value at
the time of the award and will expire six years from the date of grant.
Subject to shareholder approval, 251,000 options were granted on
December 26, 1996 at a cost of $11.00. Shareholders will also vote on
grants to non-employee directors of 150,000 options granted under the
1996 Employee Stock Option Plan, exercisable immediately, with a five
year expiration term from the date of grant. The price of these options
is $11.00 for 100,000 of the options and $12.00 for the remaining
50,000.
Had the cost of stock option plans been determined based on the provision
of SFAS No. 123, the Company's net income and earnings per share pro
forma amounts would be as follows (in thousands):
<TABLE>
<CAPTION>
As Reported Pro Forma
(unaudited)
Primary Fully Diluted Primary Fully Diluted
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
1996
Adjusted net income (1) $ 6,579 $ 5,040 $ 6,553 $ 5,014
============== ============= ============= ============
Net income per common share $ .21 $ .16 $ .20 $ .16
============= ============= ============= ============
1995
Net income $ 3,469 $ 3,469 $ 3,468 $ 3,468
============= ============= ============= ============
Net income per common share $ .20 $ .20 $ .20 $ .20
============= ============= ============= ============
(1) See Note 3
</TABLE>
The above results may not be representative of the effects of SFAS No. 123
on net income for future years.
The Company applied the Black-Scholes option-pricing model to determine
the fair value of each option granted in 1996 and 1995. Below is a
summary of the assumptions used in the calculation:
Dividend Yield 0%
Expected Volatility 35%
Risk-free interest rate 6.01%, 6.03% and 6.21%
Expected option life 3.75 years
The stock options issued to key employees in 1996 were assumed to vest at
a rate of 100%.
F-19
<PAGE> 50
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
6. LIABILITY FOR UNPAID LOSSES AND LOSS EXPENSES
Activity in the liability for unpaid losses and loss expenses is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- ---------
<S> <C> <C> <C>
Balance at January 1 $ 37,002 $ 34,661 $ 29,528
Less: Reinsurance recoverables, net (8,914) (9,383) (8,505)
-------------- ------------- --------------
Net balance at January 1 28,088 25,278 21,023
-------------- ------------- --------------
Incurred related to:
Current year 17,216 17,297 14,753
Prior years 408 (2,180) (2,259)
-------------- ------------- --------------
Total incurred 17,624 15,117 12,494
-------------- ------------- --------------
Paid related to:
Current year 3,684 5,963 4,269
Prior years 9,043 6,344 3,970
-------------- ------------- --------------
Total paid 12,727 12,307 8,239
-------------- ------------- --------------
Net balance at December 31 32,985 28,088 25,278
Plus: reinsurance recoverables, net 8,114 8,914 9,383
-------------- ------------- --------------
Balance at December 31 $ 41,099 $ 37,002 $ 34,661
============== ============= ==============
</TABLE>
In 1995 and 1994, the Company experienced lower than anticipated ultimate
losses on prior years due primarily to a reduction in claims severity
from that assumed in establishing the liability for losses and loss
expenses payable. The Company's environmental exposure from continuing
operations relates primarily to its coverage of remediation related
risks, thus management believes the Company's exposure to historic
pollution situations is minimal. The Company's non-insurance
environmental exposure from discontinued operations is discussed in
Note 15.
7. REINSURANCE
In the ordinary course of business, the Company assumes and cedes
reinsurance with other insurers and reinsurers. These arrangements
provide the Company with a greater diversification of business and
generally limit the maximum net loss potential on large risks. Excess
of loss reinsurance contracts in effect through December 31, 1996,
generally protect against individual property and casualty losses over
$200,000 and contract surety and miscellaneous bond losses over
$500,000. In addition to the excess of loss contract in effect for
contract surety business, a 50% quota share contract on the first
$500,000 in losses is in effect. Asbestos abatement, lead abatement,
environmental consultants professional liability and remedial action
contractors business is 75% ceded on a quota share basis to reinsurers.
Catastrophe coverage is also maintained.
F-20
<PAGE> 51
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
7. REINSURANCE (Continued)
<TABLE>
<CAPTION>
The impact of reinsurance is as follows (in thousands):
1996 1995 1994
-------------- ------------- --------------
<S> <C> <C> <C>
Premiums written:
Direct $ 42,420 $ 36,278 $ 37,127
Assumed 468 1,417 742
Ceded (11,739) (11,018) (10,650)
-------------- ------------- --------------
Net $ 31,149 $ 26,677 $ 27,219
============== ============= ==============
Premiums earned:
Direct $ 39,388 $ 36,005 $ 34,255
Assumed 591 1,507 414
Ceded (12,236) (10,550) (11,301)
-------------- ------------- --------------
Net $ 27,743 $ 26,962 $ 23,368
============== ============= ==============
Losses and loss expense incurred:
Direct $ 18,618 $ 16,342 $ 15,088
Assumed 210 1,223 (65)
Ceded (1,204) (2,448) (2,529)
-------------- ------------- --------------
Net $ 17,624 $ 15,117 $ 12,494
============== ============= ==============
</TABLE>
The reinsurance payables were $2,869,000, $2,259,000 and $2,056,000 at
December 31, 1996, 1995 and 1994, respectively.
Reinsurance recoverables were comprised of the following as of December 31
(in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- --------------
<S> <C> <C> <C>
Receivables on unpaid losses and loss expenses $ 8,113 $ 8,914 $ 9,383
Receivables on ceding commissions and other 2,703 2,892 1,026
Receivables on paid losses and expenses 369 841 478
-------------- ------------- --------------
$ 11,185 $ 12,647 $ 10,887
============== ============= ==============
</TABLE>
The Company evaluates the financial condition of its reinsurers and
establishes a valuation allowance as reinsurance receivables are deemed
uncollectible. During 1996, the majority of ceded amounts were ceded to
Republic Western Insurance Company and Reliance Insurance Company. The
Company monitors concentrations of risks arising from similar
geographic regions or activities to minimize its exposure to
significant losses from catastrophic events.
F-21
<PAGE> 52
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
8. DEFERRED POLICY ACQUISITION COSTS
At December 31, 1996 changes in deferred policy acquisition costs were as
follows (in thousands):
<TABLE>
1996 1995 1994
-------------- ------------- --------------
<S> <C> <C> <C>
Balance, beginning of year $ 3,428 $ 3,726 $ 2,406
Policy acquisition costs deferred 8,616 7,476 6,748
Amortized to expense during the year (7,699) (7,774) (5,428)
-------------- ------------- --------------
Balance, end of year $ 4,345 $ 3,428 $ 3,726
============== ============= ==============
</TABLE>
9. STATUTORY SURPLUS AND DIVIDEND RESTRICTION
Ohio law limits the payment of dividends by a company to its parent. The
maximum dividend that may be paid without prior approval of the
Director of Insurance is limited to the greater of the statutory net
income of the preceding calendar year or 10% of total statutory surplus
as of the prior December 31.
The consolidated and combined financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP"). The
Company's insurance subsidiaries have filed annual financial statements
with the Ohio Department of Insurance and Utah Department of Insurance,
respectively, and are prepared on the basis of accounting practices
prescribed by such regulatory authorities, which differ from GAAP.
Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners
("NAIC"), as well as state laws, regulations and general administrative
rules. Permitted statutory accounting practices encompass all
accounting practices not prescribed. All material transactions recorded
by the Company's insurance subsidiaries are in accordance with
prescribed practices.
In December 1993, the NAIC adopted the property and casualty Risk-Based
Capital ("RBC") formula. This model act requires every property and
casualty insurer to calculate its total adjusted capital and RBC
requirement, and provides for an insurance commissioner to intervene if
the insurer experiences financial difficulty. The model act became law
in Ohio in March 1996, and in Utah in April 1996, states where certain
subsidiaries of the Company are domiciled. The RBC formula includes
components for asset risk, liability risk, interest rate exposure and
other factors. The Company's insurance subsidiaries exceeded all
required RBC levels for December 31, 1996 and 1995.
CSC's statutory net income for the three years ended December 31, 1996,
was $1,916,000, $3,681,000 and $1,804,000, respectively, and the
statutory capital and surplus was $25,954,000, $22,034,000 and
$20,123,000, respectively.
F-22
<PAGE> 53
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
10. INCOME TAXES
A summary of income tax expense (benefit) included in the Consolidated
and Combined Statements of Income is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- -----------
<S> <C> <C> <C>
Continuing operations
Current:
Federal $ 1,654 $ 2,121 $ 1,289
State and Local 13 - -
-------------- ------------- -------------
1,667 2,121 1,289
Deferred:
Federal (27) (699) 55
-------------- ------------- -------------
Total continuing operations 1,640 1,422 1,344
Discontinued operations 91 - -
-------------- ------------- -------------
$ 1,731 $ 1,422 $ 1,344
============== ============= =============
</TABLE>
The provision for income taxes attributable to earnings from continuing
operations differed from the amount obtained by applying the federal
statutory income tax rate to income from continuing operations before
income taxes, as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Tax at statutory rate (34%) $ 2,061 $ 1,663 $ 1,647
Change in valuation allowance (589) (169) 434
Tax exempt interest and dividends
received deduction (33) (106) (123)
Nontaxable income on participation
transaction - - (274)
Change in estimated liabilities 196 - -
Other, net 5 34 (340)
-------------- ------------- -------------
Provision for income tax from continuing
operations $ 1,640 $ 1,422 $ 1,344
============== ============= =============
Effective income tax rate 27.1% 29.1% 27.7%
============== ============= =============
</TABLE>
F-23
<PAGE> 54
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
10. INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------------- -----------
<S> <C> <C>
Deferred tax assets:
--------------------
Loss expenses payable discounting $ 2,176 $ 1,957
Net operating loss carryforwards 1,136 1,235
Unearned premiums not deductible 1,105 1,063
Other deferred tax assets 151 143
-------------- -------------
Total gross deferred tax assets 4,568 4,398
Less: valuation allowance (1,379) (1,968)
-------------- -------------
Net deferred tax assets 3,189 2,430
-------------- -------------
Deferred tax liabilities:
-------------------------
Unrealized appreciation on investments 1,518 1,219
Deferred policy acquisition costs 1,477 1,165
Reinsurance recoverable 302 -
Other deferred tax liabilities 219 99
-------------- -------------
Total gross deferred tax liabilities 3,516 2,483
-------------- -------------
Net deferred tax liability, included in income
taxes in the consolidated and combined
balance sheets $ 327 $ 53
============== =============
Net deferred tax liability attributable to
discontinued operations, included in net
assets held for disposal $ 1,340 $ -
============== =============
</TABLE>
The company had net operating loss ("NOL") carryforwards of approximately
$3,300,000 and $3,600,000 at December 31, 1996 and 1995, respectively,
from the separate return years of Evergreen National Indemnity
Corporation ("ENIC"). These losses are subject to limitations regarding
the offset of the company's future taxable income and will begin to
expire in 2007.
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
The Company determines a valuation allowance based on their analysis of
amounts available in the statutory carryback period, consideration of
future deductible amounts, and assessment of ENIC's separate company
profitability. The Company has established valuation allowances for
portions of ENIC's NOL carryforwards and other deferred tax assets. The
net change in the valuation allowance for the years ended December 31,
1996 and 1995 was a decrease of $589,000 and $169,000, respectively.
Even though the Company has had taxable income over the last several
years, significant income in some instances has been attributable to
non-recurring transactions and thus there is no assurance that the
Company will remain profitable in future years. However, during 1996,
ENIC obtained all licenses necessary to fully operate, commenced
underwriting insurance, and reported two consecutive years of
profitability. As a result, management determined that a portion of the
valuation allowance related to ENIC's NOL carryforwards was no longer
required. Otherwise, the Company maintains a policy of recognizing
other deferred tax assets recoverable in the carryback period and does
not consider future taxable income in excess.
F-24
<PAGE> 55
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
11. SHORT-TERM BORROWINGS, NOTE PAYABLE AND CAPITALIZED LEASES
Short-Term Borrowings
---------------------
The Company secured a $6,000,000 credit facility used for additional
working capital and other funding needs. Up to $4,500,000 of the credit
facility is available for the issuance of standby letters of credit. At
December 31, 1996, the Company had issued $2,400,000 in standby letters
of credit. The unused portion of the facility is available for cash
borrowings. There were no cash borrowings under the credit facility
during 1996 and 1995.
The credit facility provides for the maintenance of certain restrictive
covenants including, among others, minimum working capital levels,
maintaining current and fixed charges ratios and a predetermined level
of interest coverage. The Company is also restricted from making any
dividend payments and incurring additional debt. This facility is
collateralized by certain Company assets.
Note Payable and Capitalized Leases
-----------------------------------
Note payable and capitalized leases, consists of the following (in
thousands):
<TABLE>
<CAPTION>
December 31
--------------------------------
1996 1995
------------- --------------
<S> <C> <C>
Promissory note payable to a shareholder in quarterly installments of
$400,000 plus interest, based on 3 month LIBOR (5.51% at December 31,
1996) compounded daily, through December 15, 1999 $ 3,200 $ -
Capitalized leases, secured by equipment, payable
monthly through 1997 11 47
------------- --------------
$ 3,211 $ 47
============= ==============
</TABLE>
At December 31, 1996, aggregate maturities of note payable and capitalized
leases, were as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1997 $ 1,611
1998 1,600
-------------
$ 3,211
=============
</TABLE>
Management believes that the carrying amounts of short-term borrowings,
note payable and capitalized leases recorded at December 31, 1996 were
not impaired and approximate fair values.
F-25
<PAGE> 56
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
----------------
The Company leases certain of its premises and equipment under various
operating lease agreements. At December 31, 1996, future minimum rental
commitments becoming payable under all operating leases from continuing
operations are as follows (in thousands):
YEARS ENDING
DECEMBER 31,
------------
1997 $ 1,277
1998 1,202
1999 583
2000 563
2001 563
Thereafter 2,793
-------------
$ 6,981
=============
Total rental expense incurred under operating leases was $454,000,
$411,000 and $331,000 in 1996, 1995 and 1994, respectively.
Other
-----
In the ordinary course of business, the Company is a defendant in various
lawsuits. In the opinion of management, the effects, if any, of such
lawsuits are not expected to be material to the Company's results of
operations or financial position.
The Company has profit sharing plans covering substantially all of its
employees. Participating employees may elect to contribute, on a tax
deferred basis, a portion of their compensation, in accordance with
Section 401(k) of the Internal Revenue Code. Employer contributions
made to the plan for 1996, 1995 and 1994, amounted to $240,000,
$141,000 and $111,000, respectively.
13. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company recorded the acquisition of RESI as a non-cash transaction
consisting of a $4,000,000 promissory note and recapitalization of
shareholders' equity of $16,244,000. Additionally, during 1996, the
Company acquired, in exchange for 792,500 shares of its common stock,
and other consideration, 100% of SMR and ECI, which were also recorded
as non-cash transactions.
F-26
<PAGE> 57
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
13. SUPPLEMENTAL CASH FLOW DISCLOSURES (Continued)
In December 1994, ENIC participated in a transaction whereby ENIC obtained
an agreed upon amount of net assets of an unrelated party as
consideration in completing the sale and the related settlements of
debt of two unrelated parties. The transaction included a contingent
receivable of up to $2,900,000 due ENIC from the unrelated party. Based
on the performance of the insurance operations sold, it was determined
that $807,000 and $1,150,000 be recognized as revenue during 1994 and
1996, respectively. ENIC does not have any future obligations with
respect to the insurance operations under the terms of the transaction
agreements.
<TABLE>
<CAPTION>
CASH PAID DURING THE YEAR FOR:
1996 1995 1994
-------------- ------------- --------------
<S> <C> <C> <C>
INTEREST $ 60 $ 216 $ 469
============== ============= =============
INCOME TAXES $ 1,290 $ 128 $ 64
============== ============= =============
</TABLE>
14. RELATED PARTIES
In October 1996, the Company's Chairman purchased 1,900,000 shares of
common stock, and warrants to purchase an additional 5,700,000 shares
of common stock at exercise prices ranging from $2.625 to $3.875 per
share, for an aggregate price of $4,988,000. Additionally, the Chairman
held warrants to purchase 240,000 shares of common stock at $3.60 per
share
The Company's Chief Financial Officer ("CFO") was a one-third owner of
SMR. Among the liabilities assumed in connection with the SMR
acquisition is a deferred compensation arrangement to which the CFO is
entitled to receive 40% of the collections from the acquired
receivables of SMR. In addition, in connection with the SMR
transaction, the CFO received 195,600 shares of common stock and
293,400 warrants to purchase additional shares of common stock at an
exercise price of $10.375. The office building utilized by SMR is
leased under a ten-year lease from a partnership in which the CFO is
indirectly, a one-third owner.
The Company has issued six $500,000 bonds covering certain loans obtained
by an unrelated party, maturing from 1996 and 2002. Collateral for
these bonds includes the personal indemnification of an indirect
shareholder of the Company.
The Company's investment portfolios include loans to business
organizations associated with a relative of a shareholder of the
Company, which aggregate $2,900,000. These loans provide for interest
payments only until maturity, which range from December 31, 1997
through April 30, 1999.
The stock of ECI, which was acquired by the Company, was 45% owned by the
spouse of an officer of a subsidiary of the Company.
F-27
<PAGE> 58
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
15. SUBSEQUENT EVENTS
In February 1997, the Company signed a letter of intent to sell the
Company's Environmental Services business. The sale is subject to a
definitive agreement and various governmental and regulatory approvals.
The Company anticipates that the sale will be completed during 1997 and
will realize the net carrying value of the net assets held for
disposal.
In accordance with the Company's intent to sell the environmental services
business, the related results of operations have been reflected in the
Company's results of operations as a discontinued operation for the
year ended December 31, 1996. Included in discontinued operations is
the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Revenues $ 9,202
=============
Income before taxes $ 53
Income tax provision 91
-------------
Net loss $ (38)
=============
Net assets of the discontinued operations at December 31, 1996 consists of
(in thousands):
Cash $ 2,375
Accounts receivable, net 7,218
Property, plant and equipment, net 20,598
Excess of cost over net assets of businesses acquired, net 3,305
Other assets 1,074
Accounts payable (3,959)
Accrued environmental costs (3,203)
Accrued expenses and other liabilities (4,409)
-------------
$ 22,999
=============
</TABLE>
Accruals for investigatory and remediation costs are recorded when it is
probable that a liability has been incurred and the amount of loss can
be reasonably estimated. Accrued costs include investigative,
administrative, legal and remediation costs associated with site
clean-up. Environmental compliance costs including maintenance,
monitoring and similar costs are expensed as incurred.
F-28
<PAGE> 59
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
15. SUBSEQUENT EVENTS (Continued)
The measurement of environmental liabilities is based on an evaluation of
currently available facts with respect to each individual site and
considers factors such as existing technology, presently enacted laws
and regulations, and prior experience in remediation of contaminated
sites. While the current law potentially imposes joint and several
liability upon each party at any Superfund site, the Company's
contribution to clean up these sites is expected to be limited, given
the number of other companies which have also been named as potentially
responsible parties, the volumes of waste involved, and that most of
these matters are indemnified by the previous owners of certain RESI
facilities. A reasonable basis for apportionment of costs among
responsible parties is determined and the likelihood of contribution by
other parties is established. If it is considered probable that the
Company will only have to pay its expected share of the total site
cleanup, the liability reflects the Company's expected share. In
determining the probability of contribution, the Company considers the
solvency of the parties, whether responsibility is being disputed, the
terms of any existing agreements, and experience to date regarding
similar matters. These liabilities do not take into account any claims
for recoveries from insurance or third parties and are not discounted.
As assessments and remediation progress at individual sites, these
liabilities are reviewed periodically and adjusted to reflect
additional technical and legal information which becomes available.
Actual costs to be incurred at identified sites in future periods may
vary from the estimates, given inherent uncertainties in evaluating
environmental exposures. The Company believes it has sufficiently
reserved for all costs of remediation.
On January 7, 1997, the Company completed the acquisition of the assets
and business of Midwest Indemnity Corporation ("Midwest") located in
Skokie, Illinois for a total cost of approximately $9,900,000,
consisting of 407,256 shares of restricted common stock, $3,250,000 in
cash and $1,750,000 in non-interest bearing notes. Midwest markets
environmental and surety bond products throughout the United States
through a distribution system of agents and subagents.
On February 24, the Company completed the acquisition of Midland
Consultants, Inc. ("Midland"), located in Brooklyn, Ohio, for 87,500
shares of restricted common stock, $208,000 in cash and warrants to
purchase 20,000 shares of common stock at an exercise price of $11.625
per share exercisable through January 31, 2000. Midland provides
specialized employment services.
On March 3, 1997, the Company consummated its acquisition of M&N Risk
Management, Inc. and M&N Enterprises, Inc. (the "M&N Companies") and
MFC, Inc. of Cleveland, Ohio for 384,600 shares of restricted common
stock, $1,000,000 cash and 900,000 warrants at $13 per share
exercisable until March 3, 2000. The M&N Companies provide employers
with a turn-key approach to integrate workers' compensation actuarial
analysis and underwriting capabilities with claims administration.
On March 3, 1997, the Company announced it had entered into an agreement
to acquire The Benefits Group Agency, Inc. ("The Benefits Group"),
located in Cleveland, Ohio, for 395,000 shares of restricted common
stock, $2,500,000 in cash and 500,000 warrants to purchase common stock
at $12.50 per share over a three year period. The transaction is
subject to a definitive agreement and is expected to close by March 31,
1997. The Benefits Group is a full-service corporate benefits
administration company.
F-29
<PAGE> 60
<TABLE>
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
16. UNAUDITED QUARTERLY FINANCIAL DATA
Quarterly financial data are summarized as follows (amounts in thousands,
except per share amounts):
<CAPTION>
1996 March 31, June 30, September 30, December 31,
--------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 9,320 $ 7,346 $ 9,389 $ 9,714
============== ============= ============= ==============
Income from continuing operations $ 655 $ 771 $ 839 $ 2,157
Loss from discontinued operation - - - (38)
-------------- ------------- ------------- --------------
Net income $ 655 $ 771 $ 839 $ 2,119
============== ============= ============= ==============
Earnings per common share:
Primary -
Continuing operations $ .04 $ .04 $ .05 $ .08
Discontinued operations - - - -
-------------- ------------- ------------- --------------
Net income per share $ .04 $ .04 $ .05 $ .08
============== ============= ============= ==============
Earnings per common share:
Fully Diluted -
Continuing operations $ .04 $ .04 $ .04 $ .04
Discontinued operations - - - -
-------------- ------------- ------------- --------------
Net income per share $ .04 $ .04 $ .04 $ .04
============== ============= ============= ==============
Weighted average common and
common share equivalents, primary
and fully diluted: 16,956 16,956 16,956 32,213
============== ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
1995 March 31, June 30, September 30, December 31,
-------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 7,971 $ 8,309 $ 6,496 $ 8,163
============== ============= ============= =============
Net income (loss) $ 508 $ (220) $ 101 $ 3,080
============== ============= ============= =============
Earnings per common share:
Primary $ .03 $ (.01) $ .01 $ .17
============== ============= ============= =============
Fully diluted $ .03 $ (.01) $ .01 $ .17
============== ============= ============= =============
Weighted average common and
common share equivalents, primary
and fully diluted: 16,956 16,956 16,956 16,956
============== ============= ============= =============
</TABLE>
The increase in net income in the fourth quarter of 1996 and 1995 are a
result of the Company's historical policy of engaging an independent
actuary to calculate the loss reserves at year end and settling the
Company's reinsurance treaties in the fourth quarter. For future
periods, this analysis will be completed by management on a
quarterly basis.
F-30
<PAGE> 61
INTERNATIONAL ALLIANCE SERVICES, INC.
SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
(In thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
-------- -------- -------- -----------
AMOUNT AT
WHICH SHOWN
IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
------------------ ---- ----- -------------
<S> <C> <C> <C>
Fixed maturities--held to maturity:
Bonds:
U.S. government and government
agencies and authorities $ 6,136 $ 6,099 $ 6,136
States, municipalities and
political subdivisions -- -- --
Corporate securities 8,850 8,772 8,850
Mortgage-backed securities 495 505 495
Fixed maturities--available for sale:
Bonds:
U.S. government and government
agencies and authorities 16,067 16,198 16,198
Corporate securities 10,962 10,983 10,983
Mortgage-backed securities 8,092 8,290 8,290
------- ------- -------
Total fixed maturities 50,602 50,847 50,952
------- ------- -------
Equity securities:
Common stock:
Public utilities 209 189 189
Banks, trust and insurance
companies 225 252 252
Industrial, miscellaneous and
all other 1,178 6,014 6,014
Nonredeemable preferred stocks 2,737 2,758 2,758
------- ------- -------
TOTAL EQUITY SECURITIES 4,349 9,213 9,213
------- ------- -------
Mortgage loans 3,685 3,685
Short-term investments 4,799 4,799
------- -------
Total investments $63,435 $68,649
======= =======
</TABLE>
See accompanying Independent Auditors' Report
F-31
<PAGE> 62
INTERNATIONAL ALLIANCE SERVICES, INC.
SCHEDULE IV--REINSURANCE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------- -------- -------- -------- --------
PERCENTAGE
CEDED TO ASSUMED FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------- --------- ------------ ------ ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Property--Casualty Earned
Premiums $39,388 $12,236 $591 $27,743 2.13%
Year ended December 31, 1995
Property--Casualty Earned
Premiums $36,005 $10,550 $1,507 $26,962 5.59%
Year ended December 31, 1994
Property--Casualty Earned
Premiums $34,255 $11,301 $ 414 $23,368 1.77%
</TABLE>
See accompanying Independent Auditors' Report
F-32
<PAGE> 63
INTERNATIONAL ALLIANCE SERVICES, INC.
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
-------- -------- -------- -------- -------- -------- --------
FUTURE POLICY
DEFERRED BENEFITS, LOSSES OTHER POLICY
POLICY CLAIMS AND CLAIMS AND NET
ACQUISITION LOSS UNEARNED BENEFITS PREMIUM INVESTMENT
SEGMENT COST EXPENSES PREMIUMS PAYABLES REVENUE INCOME
------- ---- -------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Year Ended:
December 31, 1996 $4,345 $41,099 $18,637 N/A $27,743 $3,564
December 31, 1995 $3,428 $37,002 $15,636 N/A $26,962 $3,341
December 31, 1994 $3,725 $34,661 $15,453 N/A $23,368 $2,477
</TABLE>
<TABLE>
COLUMN H COLUMN I COLUMN J COLUMN K
-------- -------- -------- --------
AMORTIZATION OTHER DIRECT
LOSSES AND OF DEFERRED POLICY OPERATING PREMIUMS
LOSS EXPENSES ACQUISITION COSTS EXPENSES WRITTEN
------------- ----------------- --------- --------
<S> <C> <C> <C> <C>
Year Ended:
December 31, 1996 $17,624 $7,699 $4,384 $42,420
December 31, 1995 $15,117 $7,774 $3,157 $36,278
December 31, 1994 $12,494 $5,428 $4,544 $37,127
</TABLE>
See accompanying Independent Auditor's Report
F-33
<PAGE> 64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, IASI has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL ALLIANCE SERVICES, INC.
(Registrant)
By: /s/ Edward F. Feighan
------------------------------
Edward F. Feighan
Chief Executive Officer
and President
March 31, 1997
KNOW ALL MEN BY THESE PRESENTS that each person whose signature
appears below on this Annual Report hereby constitutes and appoints Edward F.
Feighan, Gregory J. Skoda and Craig L. Stout, and each of them, with full power
to act without the other, his true and lawful attorney-in-fact and agent, with
full power of substitution for him and his name, place and stead, in any and all
capacities (until revoked in writing), to sign any and all amendments to this
Annual Report of International Alliance Services, Inc. and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each said attorneys-in-fact
and agents, full power and authority to do and perform each and every act and
thing requisite and necessary fully to all intents and purposes as he might or
could do in person, thereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this Annual Report has been signed below the following persons on
behalf of International Alliance Services, Inc. and in the capacities and on the
dates indicated.
<TABLE>
<S> <C>
/s/ Michael G. DeGroote
- ------------------------------------ -----------------------------------------
Michael G. DeGroote Harve A. Ferrill
Chairman of the Board and Director Director
March 31, 1997
/s/ Edward F. Feighan /s/ Douglas R. Gowland
- ------------------------------------ -----------------------------------------
Edward F. Feighan Douglas R. Gowland
Chief Executive Officer, President Vice President - Environmental Operations
and Director (Principal Executive Officer) and Director
March 31, 1997 March 31, 1997
/s/ Hugh P. Lowenstein /s/ Richard C. Rochon
- ------------------------------------ -----------------------------------------
Hugh P. Lowenstein Richard C. Rochon
Director Director
March 31, 1997 March 31, 1997
/s/ Gregory J. Skoda /s/ Craig L. Stout
- ------------------------------------ -----------------------------------------
Gregory J. Skoda Craig L. Stout
Executive Vice President and Chief Operating Officer
Chief Financial Officer and Director
(Principal Financial and Accounting Officer) March 31, 1997
March 31, 1997
</TABLE>
<PAGE> 65
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of
IASI (filed as Exhibit 3.1 to IASI's Registration Statement on
Form 10, file no. 0-25890, and incorporated herein by
reference).
3.2* Certificate of Amendment of the Certificate of Incorporation
of IASI dated October 18, 1996.
3.3 Amended and Restated Bylaws of IASI (filed as Exhibit 3.2
to IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
4.1 Form of Stock Certificate of Common Stock of IASI (filed
as Exhibit 4.1 to IASI's Registration Statement on Form 10,
file no. 0-25890, and incorporated herein by reference)
4.2 Promissory Note, dated October 18, 1996, in the aggregate
principal amount of $4.0 million issued by IASI payable to
Alliance Holding (filed as Exhibit 99.7 to IASI's Current
Report on Form 8-K dated October 18, 1996, and incorporated
herein by reference).
9.1 Voting Agreement, dated as of October 18, 1996, by and between
MGD Holdings and Alliance Holding (filed as Exhibit 99.6 to
IASI's Current Report on Form 8-K dated October 18, 1996, and
incorporated herein by reference).
10.1 Spin-off Agreement (filed as Exhibit 10.1 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.2 Alternative Dispute Resolution Agreement (filed as
Exhibit 10.2 to IASI's Registration Statement on Form 10, file
no. 0-25890, and incorporated herein by reference)
10.3 Assumption of Liabilities and Indemnification Agreement
(filed as Exhibit 10.3 to IASI's Registration Statement on
Form 10, file no. 0-25890 and incorporated herein by
reference)
10.4 Corporate Services Agreement (filed as Exhibit 10.4 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.5 Employee Benefits Agreement (filed as Exhibit 10.5 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.6 Insurance and Indemnification Agreement (filed as Exhibit
10.6 to IASI's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference)
10.7 Tax Sharing Agreement (filed as Exhibit 10.7 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.8 IASI's Adjustment Plan (filed as Exhibit 10.8 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.9 Form of Warrant to purchase 200,000 shares of IASI's
Common Stock issued to MGD Holdings Ltd. (filed as Exhibit
10.9 to IASI's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference)
10.10 Form of Warrant to purchase 5,000 shares of IASI's Common
Stock issued to Douglas R. Gowland (filed as Exhibit 10.11 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
<PAGE> 66
10.11 Form of Warrant to purchase 55,000 shares of IASI's Common
Stock issued for Douglas R. Gowland (filed as Exhibit 10.12 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.12 Credit Agreement dated as of May 11, 1995 by and among IASI
and its Subsidiaries, as Borrowers, and CoreStates Bank, N.A.
(filed as Exhibit 10.12 to IASI's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein
by reference)
10.13 Agreement and Plan of Merger by and among IASI, Republic/CSA
Acquisition Corporation, Republic/CSU Acquisition Corporation,
Alliance Holding, CSC and CSU (filed as Appendix I to IASI's
Definitive Schedule 14C Information Statement dated September
23, 1996 and incorporated herein by reference).
10.14 Amendment No. 1 to Agreement and Plan of Merger by and among
IASI, Republic/CSA Acquisition Corporation, Republic/CSU
Acquisition Corporation, Alliance Holding, CSC and CSU (filed
as Appendix IV to IASI's Definitive Schedule 14C Information
Statement dated September 23, 1996 and incorporated herein by
reference).
10.15 Amendment No. 2 to Agreement and Plan of Merger by and among
IASI, Republic/CSA Acquisition Corporation, Republic/CSU
Acquisition Corporation, Alliance Holding, CSC and CSU (filed
as
Appendix V to IASI's Definitive Schedule 14C Information
Statement dated September 23, 1996 and incorporated herein by
reference).
10.16 Stock Purchase Agreement by and between IASI and H. Wayne
Huizenga (filed as Appendix II to IASI's Definitive Schedule
14C Information Statement dated September 23, 1996 and
incorporated herein by reference).
10.17 Stock Purchase Agreement by and between IASI and MGD Holdings
(filed as Appendix III to IASI's Definitive Schedule 14C
Information Statement dated September 23, 1996 and
incorporated herein by reference).
10.18* Agreement and Plan of Merger by and among IASI, IASI/SMR
Acquisition Co., SMR and its shareholders dated November 30,
1996.
10.19* Agreement and Plan of Merger by and among IASI, IASI/ECI
Acquisition Co., ECI and its shareholders dated November 5,
1996.
11.1* IASI Earnings per Common Share Data.
21.1* List of Subsidiaries of IASI.
24.1* Consent of KPMG Peat Marwick LLP
99.1 Information Statement (filed as Exhibit 99.1 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
*Indicates documents filed herewith.
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
REPUBLIC ENVIRONMENTAL SYSTEMS, INC.
Republic Environmental Systems, Inc., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), does hereby
certifies as follows:
1. That Article One of the Certificate of Incorporation of the
Corporation is hereby amended and restated in its entirety as
follows:
"ARTICLE ONE
The name of the Corporation is:
International Alliance Services, Inc."
2. That the first paragraph of Article Four of the Certificate of
Incorporation of the Corporation is hereby amended and restated in
its entirety as follows:
"ARTICLE FOUR
The total number of shares of all classes of stock which
this Corporation shall have authority to issue is 100,000,000
shares, consisting of 100,000,000 shares of Common Stock, $.01
par value per share. The aggregate par value of all shares of
all classes of stock that this Corporation has authority to
issue is $1,000,000.00."
3. That said amendments to this Certificate of Amendment to the
Certificate of Incorporation of the Corporation were duly
adopted in accordance with the provisions of Section 242 of
the General Corporation Law of the State of Delaware.
4. That this Certificate of Amendment to the Certificate of
Incorporation shall become effective upon filing with the
Secretary of State of the State of Delaware.
<PAGE> 2
THE UNDERSIGNED, being the Executive Vice President and Chief Operating
Officer of this Corporation, hereby declares and certifies that this
Certificate of Amendment to the Certificate of Incorporation of Republic
Environmental Systems, Inc. is his act and deed and the facts herein stated
are true, and accordingly has hereunto set his hand this 17th day of
October, 1996.
REPUBLIC ENVIRONMENTAL SYSTEMS, INC.
By: /s/ Douglas R. Gowland
____________________________
Douglas R. Gowland,
Executive Vice President and
Chief Operating Officer
<PAGE> 1
EXHIBIT 10.18
AGREEMENT AND PLAN OF MERGER
by and among
INTERNATIONAL ALLIANCE SERVICES, INC.
and
IASI/SMR ACQUISITION CO.
and
SMR & CO. BUSINESS SERVICES
and
ITS SHAREHOLDERS
Dated: November 30, 1996
<PAGE> 2
This Agreement and Plan of Merger (the "Agreement") is entered into as
of this 30 day of November, 1996 by and among International Alliance Services,
Inc., ("I-Alliance"), IASI/SMR Acquisition Co., ("Merger Sub"), SMR & Co.
Business Services, an Ohio corporation ("SMR"), and Gregory J. Skoda ("Skoda"),
Michael L. Minotti ("Minotti"), Keith W. Reeves ("Reeves") and Patrick T. Carney
("Carney"), (the preceding individually a "Shareholder" and collectively
"Shareholders").
WHEREAS, the Shareholders own all of the common stock of SMR, in the
amounts set forth in Exhibit A hereto (collectively the "SMR Shares"); and
WHEREAS, I-Alliance has determined that it wishes to acquire SMR; and
WHEREAS, to consummate such acquisition I-Alliance has formed Merger
Sub into which SMR will be merged with SMR as the surviving corporation; and
WHEREAS, SMR has determined that it wishes to be acquired by
I-Alliance.
Therefore in consideration of the mutual promises contained herein and other
good and valuable consideration the parties agree as follows.
ARTICLE 1
DEFINITIONS
As used herein the following terms will have the meanings set forth:
1.1 "Accrued Shareholder Liability" will mean the obligation of SMR to
the Shareholders, which is shown on the September 30, 1996 Balance Sheet in the
approximate amount of $3,300,000, as such amount is subsequentlt adjusted
pursuant to section 9.2.
1.2 "Actions" will have the meaning set forth in section 4.2.26.
1.3 "Affiliate of the Shareholder" will have the meaning set
forth in section 4.1.4.
1.4 "Benefit Plans" will have the meaning set forth in section
4.2.22(a).
1.5 "Closing" will have the meaning set forth in section 9.1.
1.6 "Closing Date" will have the meaning set forth in section 9.1.
1.7 "Contracts" will have the meaning set forth in section 4.2.20.
1.8 "Current Assets" means the `Total Current Assets' as such
term is used on the September 30, 1996 Balance Sheet.
1.9 "Effective Time" will have the meaning set forth in Article 3.
1.10 "Fixed Assets" will mean the property and equipment, at
cost less accumulated depreciation, shown as `Total Prop. and Equip. Net, as
such term is used on the September 30, 1996 Balance Sheet.
1.11 "Holder" will have the meaning set forth in section 7.3.1.
1.12 "I-Alliance Indemnified Parties" will mean I-Alliance.
1.13 "I-Alliance Shares" will have the meaning set forth in
sections 2.6.1 and Article 7.
1.14 "Issuer" will have the meaning set forth in section 7.3.1.
1.15 "Law" will mean any federal, state or local law, statute,
ordinance, regulation of directive.
1.16 "Leasehold Interests" will have the meaning set forth in
section 4.2.13.
1.17 "Liabilities" will have the meaning set forth in section
4.2.25.
1.18 "Liens" will mean any lien, mortgage, claim, charge, security
interest, encumbrance, restriction or limitation.
1.19 "Losses" will mean any and all expenses, losses, costs,
deficiencies, liabilities and damages including, but not limited to legal and
professional fees and expenses suffered or incurred in any manner including
investigation and defense of claims.
1.20 "Merger" will have the meaning set forth in section 2.1.
1.21 "OGCL" will mean the Ohio General Corporation Law.
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1.22 "Permits" will have the meaning set forth in section 4.2.19.
1.23 "Person" will mean any natural person, corporation, partnership,
trust, incorporated or unincorporated association, joint venture, joint stock
company, government (or any agency or political subdivision thereof) or other
entity of any kind.
1.24 "Receipts" will have the meaning set forth in section 8.7.
1.25 "Receivable" will mean all of SMR's receivables of any kind as of
the Effective Time, as well as (i) all receivables arising out of work in
process as of the close of business on November 30, 1996, (ii) all receivables
previously written off as uncollectible by SMR to the extent actually collected
after the Effective Time, and (iii) all receivables to the extent they comprise
the allowance for doubtful accounts as stated on the September 30, 1996 Balance
Sheet.
1.26 "Registrable Securities" will have the meaning set forth in
section 7.3.7.
1.27 "Registration Expenses" will have the meaning set forth in
section 7.3.5.
1.28 "Returns" will have the meaning set forth in section 4.2.17.
1.29 "SEC Documents" will have the meaning set forth in section
5.5.
1.30 "September 30, 1996 Balance Sheet" will have the meaning set
forth in section 4.2.4.
1.31 "Registration Statement" will have the meaning set forth in
section 7.3.2.
1.32 "Surviving Corporation" will have the meaning set forth in
section 2.1.
1.33 "Taxes" will have the meaning set forth in section 4.2.17.
1.34 "To the best of knowledge" (i) when used with an individual
will mean the actual knowledge of such individual and (ii) when used with an
entity will mean the personal knowledge of any officer, director, shareholder
or most senior manager below officer level of the organization responsible for
the types of matter referenced by that phrase.
1.35 "Total Liabilities" will mean `Total Liabilities' as such term is
used on the September 30, 1996 Balance Sheet, consisting of total current
liabilities and total long term liabilities.
1.36 "Uncollectible" will mean that with respect to any Receivable (i)
the debtor has had a bankruptcy or insolvency proceeding commenced, (ii) the
debtor has discontinued operations and declared it cannot pay its obligations;
or (iii) the receivable is not paid within six months after first billed.
ARTICLE 2
MERGER
2.1 The Merger Subject to the terms and conditions of this Agreement
and in accordance with the Ohio General Corporation Law (the "OGCL") at the
Effective Time the Merger Sub will be merged with and into SMR (the "Merger")
and the separate existence of Merger Sub will cease and SMR will continue as the
surviving corporation (the "Surviving Corporation").
2.2 Effect of the Merger. The Merger will have the effect set
forth in Section 1701.82 of the OGCL.
2.3 Certificate of Incorporation and Code of Regulations. At the
Effective Time, the Articles of Incorporation and the Code of Regulations of SMR
prior to the Effective Time, including all amendments thereto made prior to the
Effective Time, will be and continue to be the Articles of Incorporation and
Code of Regulations of the Surviving Corporation.
2.4 Directors. Each person serving as a director of SMR prior to the
Effective Time will tender a letter of resignation effective as of the Effective
Time. Those persons set forth in Schedule 2.4 will become the initial directors
of the Surviving Corporation, each to hold office in accordance with the
Articles of Incorporation until his or her respective successor is duly elected
or appointed and qualified or until their earlier death, resignation or removal.
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2.5 Officers. Each person serving as an officer of SMR prior to the
Effective Time will become the initial officers of the Surviving Corporation,
each to hold office in accordance with the Articles of Incorporation until his
or her respective successor is duly elected or appointed and qualified or until
their earlier death, resignation or removal.
2.6 Conversion of Securities. At the Effective Time, by virtue
of the Merger and without any action on the part of the parties or the holders
of any of the respective securities:
2.6.1 All shares of SMR common stock, no par value per share,
issued and outstanding immediately prior to the Effective Time (the
"SMR Shares") will be converted into the right to receive (i) in the
aggregate Six Hundred Thousand (600,000) shares of I-Alliance common
stock (the " I-Alliance Shares") as described in Article 7, which will
be delivered to each Shareholder in the number of shares set forth
opposite such Shareholder's name on Schedule 2.6, and (ii) warrants to
purchase in the aggregate Nine Hundred Thousand (900,000) shares of
I-Alliance common stock at a purchase price of $10.375 per share,
exercisable in whole or in part at time and from time to time from the
Closing Date until 6:00 p.m. EST on the date three years from the
Closing Date, (the "Warrants"), in such form and with such terms as are
set forth in Exhibit B, which Warrants will be delivered to each
Shareholder in the number of warrants set forth opposite such
Shareholder's name on Schedule 2.6.
2.6.2 Each share of SMR common stock held in the treasury of
SMR will automatically be canceled and retired without any conversion
thereof.
2.6.3 Each share of Merger Sub common stock, no par value per
share, issued and outstanding immediately prior to the Effective Time
will be automatically converted into one share of common stock of the
Surviving Corporation.
2.7 Assumption of Liabilities.Surviving Corporation will execute an
assumption of liabilities of SMR substantially in the form set forth in Exhibit
C.
ARTICLE 3
CONSUMMATION OF MERGER
The Closing will take place on the Closing Date at the offices of
I-Alliance, 10055 Sweet Valley Drive, Valley View, OH 44125 or such other place
as the parties may agree. At the time of the Closing, the parties will cause the
Merger to be consummated by filing the Certificate of Merger with the Secretary
of State of Ohio, in such form as required by and executed in accordance with
the OGCL. The date and time of such filing will be the Effective Time.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF SMR AND SHAREHOLDERS
4.1 Warranties and Representations of Shareholders. Each Shareholder,
severally, represents and warrants to I-Alliance and Merger Sub that:
4.1.1 Authority. The Shareholder has the right, power,
authority and legal capacity to enter into and perform such
Shareholder's obligations under this Agreement and to consummate the
transactions contemplated hereby to be performed by such Shareholder.
This Agreement has been, and each other document ancillary to this
Agreement to which a Shareholder is a party will be at the Closing,
duly executed and delivered by such Shareholder and constitute, or will
when delivered, constitute, the legal, valid and binding obligations of
such Shareholder, enforceable against such Shareholder, in accordance
with their respective terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium, and other similar laws and
equitable principles relating to or limiting creditors' rights
generally.
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4.1.2 Title to the SMR Shares. The Shareholder owns, of record
and beneficially, all of the SMR Shares set forth opposite such
Shareholder's name on Exhibit A hereto, free and clear of all Liens,
taxes, security interests, options, warrants and restrictions on
transfer.
4.1.3 No Brokers. The Shareholder has not employed any broker
or finder or incurred any liability for any brokerage fees, commissions
or finders' fees in connection with the transactions contemplated
hereby for which SMR or I-Alliance may be responsible.
4.1.4 Affiliated Transactions. Except as specifically set
forth (including dollar amounts) on Schedule 4.1.4 as of the date
hereof, neither the Shareholder nor any Affiliate of the Shareholder
(as defined below) is indebted to, or is a creditor of, or a guarantor
of any obligation of, or a party to any contract, agreement, license,
option, commitment or other arrangement, written or oral, express or
implied, with SMR. For purposes of this Section, an "Affiliate of the
Shareholder" means any employee, officer or director of the
Shareholder, any spouse or family member (including in-laws) of the
Shareholder, or any corporation or other entity in which such
Shareholder (or spouse or family member) has an equity or ownership
interest exceeding twenty percent (in the aggregate) or for all
Shareholders (and Affiliate) exceeding in the aggregate fifty percent.
4.2 Warranties and Representations of SMR and Shareholders.
Shareholders, severally, and Shareholders jointly with SMR hereby represent
and warrant to I-Alliance and Merger Sub that:
4.2.1 Organization. SMR is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Ohio with full power and authority to own, lease and operate its
properties and to carry on its business as now being and as heretofore
conducted.
4.2.2 Authority. The execution, delivery and performance by
SMR of this Agreement and the consummation of the transactions
contemplated by this Agreement have been duly authorized by all
necessary corporate action by SMR. This Agreement has been, and each
other document ancillary to this Agreement to which SMR is a party will
be at the Closing, duly executed and delivered by SMR and constitute,
or will when delivered, constitute, the legal, valid and binding
obligations of SMR, enforceable against SMR, in accordance with their
respective terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium, and other similar laws and equitable
principles relating to or limiting creditors' rights generally. This
Agreement, the Merger and other transactions contemplated hereby have
been approved and adopted by the board of directors and the holders of
a majority of the voting power of the shares of the capital stock of
SMR entitled to vote thereon in accordance with the Articles of
Incorporation and Code of Regulations and the applicable Law.
4.2.3 Capitalization. The authorized capital stock of SMR
consists of 750 shares of common stock, without par value, of which the
SMR Shares constitute all of the shares outstanding. The SMR Shares
have been duly authorized and are validly issued, fully paid and
nonassessable, and there are no outstanding rights, subscriptions,
warrants, calls, options or other agreements or commitments of any kind
or character to purchase or otherwise to acquire from SMR any of its
unissued shares of capital stock or any other security of SMR in favor
of any Person.
4.2.4 Financial Statements. Attached hereto as Schedule 4.2.4
are true and correct copies of the (a) internally prepared balance
sheet of SMR as at September 30, 1996 (the "September 30, 1996 Balance
Sheet") and the related statement of income of SMR for the eight months
then ended and (b) the internally prepared balance sheet of SMR as of
January 31, 1996 together with the internally prepared statement of
income of SMR for the twelve months then ended. I-Alliance has been
furnished with the internally prepared balance sheets of SMR as of
January 31, 1995 and the internally prepared related statement of
income for the fiscal year then ended. All of such financial statements
(the "Financial Statements"), are true and correct, are in accordance
with the internal books and records of SMR, and consistent with past
practices, fairly present the financial condition and results of
operations of SMR as at the respective dates and for the respective
periods covered thereby and were prepared in conformity with generally
accepted accounting principles (other than the requirements with
respect to `notes to financial statements') consistently applied over
the periods referenced and from period to period.
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4.2.5 Absence of Changes. Since September 30, 1996, SMR has
carried on its business in the ordinary course, and there has not been
any material adverse change in its business condition (financial or
otherwise), results of operations or liabilities.
4.2.6 Net Worth. At November 30, 1996 the Total Liabilities of
SMR, other than Accrued Shareholder Liability, do not exceed the sum of
(i) the stated value (computed on the same basis as the September 30,
1996 Balance Sheet) of the Fixed Assets plus (ii) the difference
between the stated value of Current Assets and the Accrued Shareholder
Liability.
4.2.7 No Subsidiaries. Except as set forth in Schedule 4.2.7,
SMR has no subsidiaries.
4.2.8 Articles of Incorporation, Code of Regulations,
Corporate Records and Committees. The copies of the
Articles of Incorporation and Code of Regulations of SMR
heretofore delivered to I-Alliance are correct and complete, to the
extent of their existence. The stock transfer, minute books and
corporate records of SMR which have been made available to I-Alliance
are correct and complete, to the extent of their existence, and
constitute the only written records and minutes of the meetings,
proceedings, and other actions of the shareholders and the Board of
Directors of SMR from the date of its organization to the date hereof,
there being no committees of its Board of Directors.
4.2.9 No Consent. Except as set forth on Schedule 4.2.9, no
material consent, order, license, approval or authorization of, or
exemption by, or registration or declaration or filing with, any
governmental authority, bureau or agency, and no consent or approval of
any other Person, is required to be obtained or made in connection with
the sale of the SMR Shares.
4.2.10 No Breach. Except as set forth on Schedule 4.2.10, the
performance of this Agreement will not (i) violate any material
provision of the Articles of Incorporation or Code of Regulations of
SMR; (ii) violate, conflict with or result in the breach or termination
of, or constitute an amendment to, or otherwise give any Person the
right to terminate, or constitute (or with notice or lapse of time or
both would constitute) a default (by way of substitution, novation or
otherwise) under the terms of, any material contract, mortgage, lease,
bond, indenture, agreement, franchise or other instrument or obligation
to which SMR is a party or by which SMR or any of its respective assets
or properties are bound or affected; (iii) result in the creation of
any material Liens upon the properties or assets of SMR pursuant to the
terms of any contract, mortgage, lease, bond, indenture, agreement,
franchise or other instrument or obligation; (iv) materially violate
any judgment, order, injunction, decree or award of any court,
arbitrator, administrative agency or governmental or regulatory body
against, or binding upon, SMR or any of its securities, properties,
assets or business; (v) constitute a material violation by SMR of any
statute, law, rule or regulation of any jurisdiction as such statute,
law, rule or regulation relates to SMR or to any of its securities,
properties, assets or business; or (vi) materially violate any Permit.
4.2.11 Accounts Receivable. The accounts receivable and
unbilled work in process of SMR reflected on the September 30, 1996
Balance Sheet are actual and bona fide accounts receivable and unbilled
work in process which arose in the ordinary and usual course of SMR's
business, represent valid obligations due to SMR, are collectible in
the aggregate recorded amounts thereof on the books of SMR and will be
fully collected in the ordinary course, except to the extent reflected
in the allowance for doubtful accounts.
4.2.12 Other Tangible Property. SMR has good and marketable
title to all of the assets reflected on its books and records and on
the September 30, 1996 Balance Sheet, free and clear of all Liens,
other than those set forth on Schedule 4.2.12. To the best knowledge of
SMR and Shareholders the owned tangible personal property material to
the business of SMR are in good operating condition and repair,
ordinary wear and tear excepted.
4.2.13 Leasehold Interests. SMR has a good and valid leasehold
interest in all personal property which is leased to be used in the
business of SMR (the "Leasehold Interests"). All Leasehold Interests
are used and operated in compliance and conformity with all lease
agreements creating such Leasehold Interest, except to the extent that
the failure so to conform would not materially affect the lease. SMR
has not been notified in writing of any claim that there is under any
Leasehold Interest, any existing material default (including, but not
limited to any payment default or event of material default or event
that would with the passage of time or the giving of notice constitute
such material default) and to the best knowledge of Shareholders and
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SMR, SMR is not in material default. All personal property under lease
agreements are not subject to any charges for excessive usage or wear
and tear (or would not be subject to such charges if the current rate
of usage continued for the remainder of the term).
4.2.14 Real Property. SMR does not own any real property.
Schedule 4.2.14 sets forth a true and correct list of all leases,
subleases or other agreements under which SMR is lessee or lessor of
any real property or has any interest in real property and, except as
set forth in Schedule 4.2.14, there are no rights or options held by
SMR, or any contractual obligations on its part, to purchase or
otherwise acquire (including by way of lease or sublease) any interest
in or use of any real property, nor any rights or options granted by
SMR, or any contractual obligations entered into by it, to sell or
otherwise dispose of (including by way of lease or sublease) any
interest in or use of any real property. All such leases, subleases and
other agreements grant the leasehold estates or other interests they
purport to grant with the right to quiet possession, are in full force
and effect and constitute legal, valid and binding obligations of the
respective parties hereto, with no existing or claimed default or event
of default or event which with notice or lapse of time or both would
constitute a default or event of default by SMR by any other party
thereto, which would materially and adversely affect SMR. To the best
knowledge of SMR and Shareholders, SMR is not in violation of any
material building, zoning, health, safety, environmental or other law,
rule or regulation and no notice from any Person has been served upon
SMR claiming any such violation.
4.2.15 Assets. The assets described in section 4.2.12 and the
leaseholds described in sections 4.2.13 and 4.2.14 constitute all of
the material assets and properties used by and necessary for the
operation of SMR, as of the date of the Effective Time (except for
items disposed of in the ordinary course of business).
4.2.16 Intellectual Property. Except as listed on Schedule
4.2.16, no person has made or to the knowledge of SMR overtly
threatened in writing to make any claim that the operation of SMR is in
violation or infringement of any patent, patent licenses, trade name,
trade mark, service mark, copyright, software license, know-how or
other proprietary or trade rights of any third party. Except as listed
on Schedule 4.2.16, SMR owns or has the right to use any trademarks,
trade names, trade secrets, computer software, patents, inventions,
processes, copyrights, or other intellectual property (or applications
therefor) which are materially used in the conduct of its business.
4.2.17 Tax Matters. SMR has timely filed all federal, state,
county and local tax returns, estimates and reports (collectively,
"Returns") required to be filed by it through the date hereof, copies
of which have been made available to I-Alliance for their inspection
and review, which Returns accurately reflect the taxes due for the
periods indicated; and SMR has paid in full all income, gross receipts,
value added, excise, property, franchise, sales, use, employment,
payroll and other taxes of any kind whatsoever (collectively, "Taxes")
shown to be due by such Returns. The liabilities, if any, for Taxes
accrued for operations of SMR from the date of the end of the period
for which the last return for such Tax was filed through September 30,
1996 are reflected on the September 30, 1996 Balance Sheet. There is no
unassessed deficiency for Taxes proposed or (to the best knowledge of
SMR and Shareholders ) threatened against SMR, and no taxing authority
has raised any issue with respect to SMR which, if adversely
determined, would result in a material liability for any Tax. There are
not in force any extensions with respect to the dates on which any
Return was or is due to be filed by SMR or any waivers or agreements by
SMR for the extension of time for the assessment or payment of any
Taxes. SMR has not been, and currently is not being, audited by any
federal, state or local tax authority.
4.2.18 Compliance with Laws. To the best knowledge of SMR and
Shareholders, SMR is not in violation of any applicable law, rule or
regulation, the violation of which could materially and adversely
affect the assets, properties, liabilities, business, results of
operations, or condition (financial or otherwise) of SMR.
4.2.19 Permits. Except as set forth on Schedule 4.2.19, SMR
(including, without limitation, its employees) has duly obtained and
holds in full force and effect all consents, authorizations, permits,
licenses, orders or approvals of, and has made all declarations and
filings with, all federal, state or local governmental or regulatory
bodies that are material or necessary in or to the conduct of its
business (collectively, the "Permits"); all of the Permits were duly
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obtained and are in full force and effect; no violations are or have
been recorded in respect of any such Permit and no proceeding is
pending or, to the best knowledge of SMR and Shareholders, threatened
to revoke, deny or limit any such Permit.
4.2.20 Contracts and Agreements. Schedule 4.2.20 lists and
briefly describes all written or oral contracts, agreements, leases,
mortgages and commitments, which exceed $10,000 in annual payments or
receipts, and to which SMR is a party or by which it may be bound,
including, without limitation, all management agreements, joint venture
agreements, leases, guarantees and indemnifications, employment and
consulting agreements and instruments of indebtedness (collectively,
"Contracts"), true and correct copies of which have been made available
to I-Alliance for its inspection and review. All Contracts constitute
legal, valid and binding obligations of SMR and are in full force and
effect on the date hereof, and SMR has paid in full amounts due
thereunder which are due and payable and is not in default under any of
them nor, to the best knowledge of SMR or Shareholders, is any other
party to any such contract or other agreement in default thereunder,
nor, to the best knowledge of SMR or Shareholders, does any condition
exist that with notice or lapse of time or both would constitute a
default or event of default thereunder by SMR or by any other Person.
Except as set forth in Schedule 4.2.9, no Contract requires the consent
or approval of a third party in connection with the Merger.
4.2.21 Employee Relations. SMR is not a party to any
collective bargaining agreement or any negotiations for such an
agreement. SMR has not experienced in the last five years any strike,
grievance or unfair labor practice claim, suit or administrative
proceeding. Except as set forth in Schedule 4.2.21, SMR is not party to
any material obligation with respect to any employment contract with a
term of one year or more. To the best knowledge of SMR and
Shareholders, SMR has complied in all material respects with any Law
relating to employment, civil rights and equal employment
opportunities.
4.2.22 Employee Benefits. (a) Schedule 4.2.22 contains a list
of all pension, retirement, savings, disability, medical, dental or
other health plans, life insurance (including any individual life
insurance policy as to which SMR makes premium payments whether or not
SMR is the owner, beneficiary or both of such policy) or other death
benefit plans, profit sharing, deferred compensation, stock option,
bonus or other incentive plans, vacation benefit plans, severance
plans, or other employee benefit plans or arrangements (whether written
or arising from custom), ("Benefit Plans) in which the employees of SMR
participate, and SMR has no other employee pension benefit plan as
defined in Section 3(2) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or any employee welfare benefit plan as
defined in Section 3(1) of ERISA.
(b) To the best knowledge of SMR and Shareholders, SMR has in
all material respects complied with the requirements of the Benefit
Plans and with all Law applicable thereto. There are no actions, suits
claims or disputes related to the Benefit Plans. To the best knowledge
of SMR and Shareholders, no prohibited transactions in connection with
any Benefit Plan have occurred.
4.2.23 Employee Compensation. SMR has made available to
I-Alliance for its inspection and review the permanent files of all
the employees of SMR, together with payroll information pertinent to
such employees.
4.2.24 Insurance. Schedule 4.2.24 lists all policies of
property, theft, fire, liability, workers' compensation, title,
professional liability or life insurance or reinsurance or any other
insurance owned or maintained by SMR or in which SMR is a named insured
or on which SMR is paying any premiums. All such policies, are in full
force and effect at the date hereof, and each of the insured parties
thereunder is not in default with respect to any provision contained in
any such insurance policy nor failed to give any notice or present any
claim thereunder in due and timely fashion. Schedule 4.2.24 sets forth
a summary of the claims history for SMR under such policies since
January 1, 1993 and, except as set forth on Schedule 4.2.24, there are
no claims outstanding under any such policies.
4.2.25 Liabilities. To the best knowledge of SMR and
Shareholders, there are no material liabilities or obligations of SMR
except (i) those accrued, reflected or otherwise provided for on the
September 30, 1996 Balance Sheet, (ii) those listed on Schedule 4.2.25,
or (iii) those arising in the ordinary course of business after
September 30, 1996.
4.2.26 Actions and Proceedings. Except as provided on Schedule
4.2.26, there are no claims, actions, suits, arbitrations, proceedings,
investigations or inquiries, whether at law or in equity and whether or
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not before any court, private body or group, governmental department,
commission, board, agency or instrumentally (collectively "Actions"),
pending or to the best knowledge of SMR or Shareholders, threatened
against SMR or any of its assets, whether or not fully or partially
covered by insurance, or which would give rise to any right of
indemnification by any Person from SMR, and there are no outstanding
orders, writs, injunctions, awards, sentences or decrees of any court,
private body or group, governmental department, commission, board,
agency or instrumentality against involving or affecting SMR.
4.2.27 Bank Accounts, Guarantees and Powers. Schedule 4.2.27
sets forth (i) a list of all accounts and deposit boxes maintained by
SMR at any bank or other financial institution and the names of the
person authorized to effect transactions in such accounts, to borrow
pursuant to such resolutions and with access to such boxes; (ii) all
agreements or commitments of SMR guaranteeing the payment of money or
the performance of other contracts by any third persons; and (iii) the
names of all persons, firms, associations, corporations, or business
organizations holding general or special powers of attorney from SMR
together with a summary of the terms thereof.
4.2.28 Absence of Changes. Except as set forth in Schedule
4.2.28, since September 30, 1996, SMR has carried on its business in
the ordinary course, and there has not been:
4.2.28.1 any material adverse change in its business condition
(financial or otherwise), results of operations or
liabilities;
4.2.28.2 any pending or, to the best knowledge of SMR and
Shareholders, threatened amendment, modification, or
termination of any agreement, license or permit which is
material to its business;
4.2.28.3 any disposition or acquisition of any of its assets
or properties other than in the ordinary course;
4.2.28.4 any damage, destruction or other casualty loss
(whether or not covered by insurance) adversely
affecting or that could reasonably be expected to adversely
affect its business or assets; or
4.2.28.5 except in the ordinary course, any material
obligation or liability incurred.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF I-ALLIANCE
I-Alliance represents and warrants to the Shareholders and SMR that:
5.1 Organization. I-Alliance is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, has full
power and authority to own, lease and operate its properties and to carry on its
business as now being and as heretofore conducted by it, and is duly qualified
or otherwise authorized as a foreign corporation to transact business and is in
good standing in each jurisdiction in which it is required to be so qualified or
authorized.
5.2 Authority. This Agreement has been duly authorized, executed and
delivered by I-Alliance and is the valid and binding agreement of I-Alliance
enforceable against I-Alliance in accordance with its terms. This Agreement has
been, and each other document ancillary to this Agreement to which I-Alliance is
a party will be at the Closing, duly executed and delivered by I-Alliance and
constitute, or will when delivered, constitute, the legal, valid and binding
obligations of I-Alliance, enforceable against I-Alliance, in accordance with
their respective terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium, and other similar laws and equitable principles
relating to or limiting creditors' rights generally. This Agreement, the Merger
and other transactions contemplated hereby have been approved and adopted by the
board of directors and the holders of a majority voting power of the shares of
the capital stock of I-Alliance entitled to vote thereon in accordance with the
Articles of Incorporation and Code of Regulations and the applicable Law.
5.3 The I-Alliance Shares. The I-Alliance Shares being delivered
pursuant to this Agreement are validly issued, fully paid and non-assessable.
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5.4 No Breach. The authorization, execution, delivery and performance
of this Agreement by I-Alliance will not violate any provision of its
certificate of incorporation or by-laws or violate, conflict with or result in
the breach or termination of, or otherwise give any Person the right to
terminate, any agreement to which it is a party.
5.5 Documents Delivered. I-Alliance has delivered to Shareholders
I-Alliance's Annual Report on Form 10-K for the fiscal year ended December 31,
1995, its Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996,
June 30, 1996, and September 30, 1996, its Information Statement to Stockholders
dated September 23, 1996 and its 8-K dated October 4, 1996, (collectively
the"SEC Documents"). The SEC Documents were true and complete in all material
respects as at their respective dates, did not contain any untrue statement of a
material fact nor omit to state any material fact required to be stated therein
or necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading, and since September
23, 1996, there has not been any material adverse change in I-Alliance's
business condition (financial or otherwise), results of operations or
liabilities, not reflected in the SEC Documents.
ARTICLE 6
CONDITIONS PRECEDENT TO CLOSING
6.1 I-Alliance Conditions Precedent. The obligation of I-Alliance to
close the transactions herein contemplated is subject to the following express
conditions precedent:
6.1.1 Representations and Warranties. The representations and
warranties set forth in Article 4 of this Agreement shall be true and
correct in all material respects at and as of the Closing Date.
6.1.2 Covenants. SMR and Shareholders shall have
performed and complied with all of their covenants under this
Agreement in all material respects through the Closing Date.
6.1.3 Satisfactory Performance. All actions to be taken by SMR
and Shareholders in connection with consummation of the transaction
contemplated hereby and all certificates, instruments, and other
documents required to effect the transactions contemplated hereby have
been completed in a manner which is reasonably satisfactory in form and
substance to I-Alliance.
6.1.4 Continuation of Business. Between September 30 and the
Closing Date, except as otherwise provided herein, SMR will have been
operated in the normal course, consistent with prior practice, and will
not have suffered any damage, destruction, loss or occurrence, whether
covered by insurance or not, which may materially adversely affect the
value of SMR.
6.1.5 Legal Actions. No suit, action, or other proceeding
shall be pending or threatened before any court or governmental agency
seeking to restrain, prohibit or obtain damages or other relief in
connection with this Agreement or the consummation of the transactions
contemplated herein and there shall have been no investigation or
inquiry made or commenced by any governmental agency in connection with
this Agreement or the transactions contemplated herein.
6.1.6 Employment Agreement. Each Shareholder will have signed
and delivered to I-Alliance his commitment, substantially in the form
of Exhibit D attached hereto, to enter into, within ninety days after
the Closing Date, an employment agreement and non competition agreement
on similar terms to those of other officers of I-Alliance.
6.1.7 Legal Limitations on Closing. There shall not be in
effect any statute, rule or regulation which makes it illegal for
I-Alliance to consummate the transactions contemplated herein or any
order, decree of judgment which enjoins I-Alliance from consummating
the transactions contemplated hereby.
6.1.8 Deliveries by the Shareholders. The Shareholders will
have delivered the stock certificates representing the SMR Shares, duly
endorsed for transfer, the written resignations of the directors of SMR
requested by I-Alliance and the Lock-up Agreement contemplated by
Section 7.6.
6.1.9 Deliveries by SMR. SMR will have delivered the minute
book, stock book and stock ledger of SMR, and a good standing
certificate, dated as of a date not more than sixty days prior to the
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date hereof as to the corporate existence and good standing of SMR
certified by the Secretary of State of the State of Ohio.
6.1.10 Waivers. I-Alliance may waive one or more of said
conditions but such waiver shall be effective only if in writing and
signed on behalf of I-Alliance by one of its duly authorized officers
and may be conditioned in any manner I-Alliance sees fit.
6.2 Conditions Precedent to Closing by SMR and Shareholders. The
obligation of SMR and Shareholders to close the transactions herein contemplated
is subject to the following express conditions precedent:
6.2.1 Representations and Warranties. Representations and
warranties set forth in Article 5 of this Agreement shall be true and
correct in all material respects at and as of the Closing Date.
6.2.2 Covenants. I-Alliance will have performed and complied
with all of its covenants under this Agreement in all material respects
through the Closing Date.
6.2.3 Employment Agreement. I-Alliance will have signed and
delivered to each Shareholder its commitment, substantially in the form
of Exhibit D attached hereto, to enter into, within ninety days after
the Closing Date, an employment agreement and non competition agreement
on similar terms to those of other officers of I-Alliance.
6.2.4 Legal Limitations on Closing. There shall not be in
effect any statute, rule or regulation which makes it illegal for
I-Alliance, SMR or the Shareholders to consummate the transactions
contemplated herein or any order, decree or judgment which enjoins SMR
or the Shareholders from consummating the transactions contemplated
hereby.
6.2.5 Legal Actions. No suit, action, or other proceeding
shall be pending or threatened before any court or governmental agency
seeking to restrain, prohibit or obtain damages or other relief in
connection with this Agreement or the consummation of the transactions
contemplated herein and there shall have been no investigation or
inquiry made or commenced by any governmental agency in connection with
this Agreement or the transactions contemplated herein.
6.2.6 Satisfactory Performance. All actions to be taken by
I-Alliance in connection with consummation of the transactions
contemplated hereby and all certificates, instruments, and other
documents required to effect the transactions contemplated hereby have
been completed in a manner which is reasonably satisfactory in form and
substance to SMR and Shareholders.
6.2.7 Waiver. SMR and Shareholders may waive one or more of
the foregoing conditions but such waiver shall only be effective if in
writing and signed by SMR and Shareholders and may be conditioned in
any manner SMR and Shareholders see fit.
6.2.8 Deliveries. The Assumption Agreement of the Surviving
Corporation will have been delivered to SMR and the Shareholders.
ARTICLE 7
I-ALLIANCE SHARES, REGISTRATION AND LOCK-UP
7.1 Legend. Any certificate or certificates representing I-Alliance
Shares will bear the following legend unless and until removal thereof is
permitted pursuant to the terms of this Agreement:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT") OR UNDER ANY APPLICABLE STATE SECURITIES LAW AND MAY
NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT FOR THESE
SHARES OR AN OPINION OF I-ALLIANCE'S COUNSEL THAT REGISTRATION
IS NOT REQUIRED UNDER THE ACT AND THE RULES AND REGULATIONS
PROMULGATED THEREUNDER OR UNDER APPLICABLE STATE SECURITIES
LAWS.
7.2 Examination and Investment Representation. Shareholders, severally,
represent and warrant to I-Alliance that each of them has examined I-Alliance's
Annual Report of Form 10-K for the year ended December 31, 1995, its Quarterly
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Report on Form 10-Q for the quarters ended March 31, 1996, June 30, 1996, and
September 30, 1996, its September 23, 1996 Information Statement to
Stockholders, and its Form 8-K dated October 4, 1996, including the financial
statements contained therein, has had the opportunity to discuss I-Alliance's
operations with its officers and employees, and is acquiring the I-Alliance
Shares for his/her own account for investment within the contemplation of the
Securities Act of 1933, as amended (the "Securities Act") and not with a view to
the transfer or resale thereof, except to the extent otherwise expressly
provided in this Agreement, that he has been advised by his counsel of the legal
implications and effect of the foregoing under the Securities Act and of the
circumstances under which he may dispose of his I-Alliance Shares under the
Securities Act, including the possible limited sale thereof pursuant to Rule 144
under the Securities Act and of the affect of the legending of the certificate
for his I-Alliance Shares with the legend described in Section 7.1.
7.3 Registration Rights. Each Shareholder shall have the following
registration rights with respect to the I-Alliance Shares:
7.3.1 Transfer of Registration Rights. Shareholder may assign
the registration rights with respect to the I-Alliance Shares to any
party or parties to which he may from time to time transfer the
I-Alliance Shares. Upon assignment of any registration rights pursuant
to this Section 7.3, Shareholder shall deliver to the entity issuing
such shares (the "Issuer") a notice of such assignment which includes
the identity and address of any assignee (collectively, Shareholder and
each such subsequent holder is referred to as a "Holder").
7.3.2 Required Registration. Issuer agrees to register
Registrable Securities pursuant to a registration statement on Form
S-3 (the " Registration Statement") as follows:
7.3.2.1 Within four months after the Closing Date,
Issuer will register 90,000 of the Shares;
7.3.2.2 upon demand, the balance of the Registrable
Securities associated with the Shares issued in the
transactions contemplated by this Agreement provided that such
demand may not be made with respect to any such Registrable
Securities until the expiration of twenty months after the
Closing Date; and
7.3.2.3 upon demand, any Registrable Securities
issued in connection with the exercise of the warrants issued
in the transactions contemplated by this Agreement provided
that such demand may not be made with respect to any such
Registrable Securities earlier than four months prior to the
date such Registrable Securities are free from the restriction
on sale described in section 7.6 below.
7.3.3 Timing of Registration. Issuer shall use its best
efforts to cause the Registration Statement to be declared
effective as quickly as practicable after the period of time or
demand described in section 7.3.2 above, and to maintain the
effectiveness of the Registration Statement until such time as Issuer
reasonably determines based on an opinion of counsel that the Holders
will be eligible to sell all of the Registrable Securities then owned
by the Holders without the need for continued registration of the
Shares in the three-month period immediately following the termination
of the effectiveness of the Registration Statement. Issuer's
obligations contained in Section 7.3 shall terminate on the third
anniversary of the Effective Time, provided that if Issuer has not
fulfilled its obligations with respect to any demand made before such
date, its obligations will continue with respect to such demand until
satisfied or registration is no longer required to sell Registrable
Securities covered by such demand.
7.3.4 Registration Procedures. In case of each registration,
qualification or compliance effected by Issuer subject to this Section
7.3, Issuer shall keep Holder advised in writing as to the initiation
of each such registration, qualification and compliance and as to the
completion thereof. In addition, Issuer shall at its own expense:
7.3.4.1 subject to this Section 7.3.4, before filing
a registration or prospectus or any amendment or supplements
thereto, furnish to counsel selected by Holder copies of all
such documents proposed to be filed and the portions of such
documents provided in writing by Holder for use therein,
subject to such Holder's approval, and for which Holder shall
indemnify Issuer;
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7.3.4.2 prepare and file with the SEC such amendments
and supplements to the Registration Statement as may be
necessary to keep the Registration Statement effective and
comply with provisions of the Securities Act with respect to
the disposition of all securities covered thereby during such
period;
7.3.4.3 update, correct, amend and supplement the
Registration Statement as necessary;
7.3.4.4 if such offering is to be underwritten, in
whole or in part, enter into a written agreement in form and
substance reasonably satisfactory to the managing
underwriter and the registering Holder;
7.3.4.5 furnish to Holder such number of
prospectuses, including preliminary prospectuses, and other
documents that are included in the Registration Statement as
Holder may reasonably request from time to time;
7.3.4.6 use its best efforts to register to qualify
such Registrable Securities under such other securities or
blue sky laws of such jurisdictions of the United States as
Holder may request to enable it to consummate the disposition
in such jurisdiction of the Registrable Securities (provided
that Issuer will not be required to qualify generally to do
business in any jurisdiction where it would not otherwise be
required to qualify but for this section 7.3);
7.3.4.7 notify Holder, at any time when the
prospectus included the Registration Statement relating to the
Registrable Securities is required to be delivered under the
Securities Act, of the happening of any event which would
cause such prospectus to contain an untrue statement of a
material fact or omit any fact necessary to make the statement
therein in light of the circumstances under which they are
made not misleading and, at the request of Holder, prepare a
supplement or amendment to such prospectus, so that, as
thereafter delivered to purchasers of such shares, such
prospectus will not contain any untrue statements of a
material fact or omit to state any fact necessary to make the
statements therein in light of the circumstances under which
they are made not misleading;
7.3.4.8 use its best efforts to cause all such
Registrable Securities to be listed on each securities
exchange on which similar securities issued by Issuer are then
listed and obtain all necessary approvals from the exchange or
the National Association of Securities Dealers for trading
thereon; and
7.3.4.9 upon the sale of any Registrable Securities
pursuant to the Registration, remove all restrictive legends
from all certificates or other instruments evidencing such
Registrable Securities (to the extent permitted by the
Securities Act).
7.3.5 Delay and Suspension. If Issuer is aware of any event
which has occurred or which it reasonably expects might occur within
the next ninety days, and such event would cause (or Issuer believes
might cause) the Registration Statement (or any prospectus) to contain
any untrue statements of a material fact or omit to state any fact
necessary to make the statements therein in light of the circumstances
under which they are made not misleading, then notwithstanding any
other provision of this Section 7.3, Issuer upon notice to Holder, may
delay filing any Registration Statement otherwise required hereunder
or may withdraw or suspend for up to ninety days any then pending
Registration Statement. Upon any such delay or suspension no further
demand need be made with respect to those Registrable Securities
subject to such delay or suspension, and the three year period set
forth in section 7.3.3 will be extended with respect to such
Registrable Securities for the period of such delay or suspension.
7.3.6 Expenses. Except as required by law, all expenses
incurred by in complying with this Section 7.3, including but not
limited to, all registration, qualification and filing fees, printing
expenses, fees and disbursements of counsel and accountants for Issuer,
blue sky fees and expenses (including fees and disbursements of counsel
related to all blue sky matters) ("Registration Expenses") incurred in
connection with any registration, qualification or compliance pursuant
this Section 7.3 will be borne by Issuer. All underwriting discounts
and selling commissions and any fees of Holder's own attorneys or other
advisors applicable to a sale incurred in connection with any
registration of Registrable Shares shall be borne by Holder.
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7.3.7 Further Information. If Registrable Securities owned by
Holder are included in any registration, such Holder shall use
reasonable efforts to cooperate with Issuer and shall furnish Issuer
such information regarding itself as Issuer may reasonably request and
as shall be required in connection with any registration, qualification
or compliance referred to in this Agreement.
7.3.8 Definition For purposes of this Section 7.3,
"Registrable Securities" will mean the I-Alliance Shares (and all
I-Alliance shares issued in connection with the Warrants) and all
common stock or other securities issued in respect of such Shares by
way of a stock dividend or stock split or in connection with a
combination or subdivision of shares, recapitalization, merger or
consolidation or reorganization, and any securities issued in respect
of the I-Alliance Shares or Warrants by way of stock dividend or stock
split or in connection with any combination or subdivision of shares,
recapitalization, merger or consolidation or reorganization; provided,
however, as to any particular Registrable Securities, such Registrable
Securities will cease to be subject to this Article when they have been
sold pursuant to an effective registration statement or in a
transaction exempt from the registration and prospectus delivery
requirements of the Securities Act under Section 4(1) thereof so that
all transfer restrictions and restrictive legends with respect thereto
are removed upon the consummation of such sale and the purchaser and
seller receive an opinion of counsel from the seller or the purchaser,
which opinion shall be in form and substance reasonably satisfactory to
the other party and Issuer and their respective counsel, to the effect
that such stock in the hands of the purchaser is freely transferable
without restriction or registration under the Securities Act in any
public or private transaction.
7.4 Indemnity. I-Alliance shall indemnify Shareholders from and against
any and all liabilities to which they may become subject as a result of any
untrue statement or alleged untrue statement of a material fact contained in the
related registration statement, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statement therein not misleading, other than a statement or omission made in
reliance on and consistent with information furnished in writing by the
Shareholders for use in such registration statement, provided, however, that
each Shareholder shall indemnify I-Alliance and the underwriters of any
offering, if any, from and against any and all liabilities to which I-Alliance
may become subject as a result of any untrue statement or alleged untrue
statement of a material fact contained in the related registration statement, or
the omission or alleged omissions to state therein a material fact required to
be stated therein or necessary to make the statement not misleading, but only
insofar as such statement or omission was made in reliance by I-Alliance on and
consistent with information furnished in writing by such Shareholder.
7.5 Documents. I-Alliance shall furnish to Shareholder one copy of the
registration statement and any amendments thereto and such number of copies of
the final prospectus as they may reasonably request, and shall deliver to the
NASDAQ such number of copies of the final prospectus required to comply with the
prospectus delivery requirements and permit the sale of the registered
I-Alliance Shares on such Exchange.
7.6 Lock-Up. Each of the Shareholders agrees (other than to spouses
and children who agree to the terms of this section) that he:
7.6.1 will not sell, transfer, pledge, or otherwise dispose of
the I-Alliance Shares prior to the expiration of a twenty-four month
period following the Closing Date; provided that after the expiration
of six months from the Closing Date, each of the Shareholders may
thereafter sell, transfer or otherwise dispose of, in the aggregate, up
to fifteen (15%) per cent of the I-Alliance Shares such Shareholder
receives.
7.6.2 will not sell, transfer, pledge or otherwise dispose of
Warrants or any shares of I-Alliance common stock acquired as a result
of the exercise of the Warrants prior to the expiration of the thirty
(30) month period following the Closing Date; provided that each of the
Shareholders may sell, transfer or otherwise dispose of Warrants or any
shares of I-Alliance common stock acquired as a result of the exercise
of the Warrants, in the aggregate up to the following percentage of
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the total of such shares that could be acquired upon exercise of the
Warrants, after the end of each period specified (such period
commencing on the Closing Date):
Six months 33%
Eighteen months 66%
7.6.3 will enter into a Lock-Up Agreement in the form set
forth in Exhibit E hereto.
ARTICLE 8
OTHER COVENANTS
8.1 Announcements. Prior to the Closing, none of the parties will make
any public release of information regarding this Agreement or the transactions
contemplated hereto, except that the parties may issue a press release to be
mutually agreed upon, after the execution of this Agreement and the Closing and
as otherwise required by law.
8.2 Conduct of Business. During the period from the date hereof to the
Effective Time, unless I-Alliance consents otherwise in writing (which consent
will not be unreasonably withheld), and except as otherwise provided in this
Agreement or disclosed in the Schedules, SMR will:
8.2.1 conduct the business of SMR only in the ordinary course of
business consistent with past practice except as contemplated
by this Agreement;
8.2.2 use its best efforts preserve the goodwill of those suppliers,
customers and distributors having business relations with SMR;
8.2.3 maintain any insurance coverages as of the date of this
Agreement against loss or damage to the Assets;
8.2.4 not transfer or encumber any of the Assets except for the
transfer in the ordinary course of business;
8.2.5 maintain the Assets in conditions comparable to their current
condition, reasonable wear and tear excepted, except for
Assets sold or consumed during the ordinary course of
business;
8.2.6 not create, incur, assume, or guarantee any indebtedness,
including capitalized lease obligations, either involving more
than ten thousand dollars ($10,000) singly or twenty thousand
($20,000) in the aggregate or for any amount whatsoever
outside the ordinary course of business;
8.2.7 not make capital expenditures or series of related capital
expenditures either involving more than Ten Thousand dollars
($10,000) singly or in the aggregate, or make any capital
investment in, any loan to, or any acquisition of the
securities or assets of any other person or entity or persons
or entities;
8.2.8 not make or pledge to make any charitable contribution
(including for capital or building purposes) in amounts or to
types of organizations not consistent with past practice;
8.2.9 not make any recapitalization, reorganization, merger,
consolidation, reclassification (voting or nonvoting),
dissolution or liquidation of SMR, or sale of a substantial
portion of the assets of SMR outside the ordinary course of
its business;
8.2.10 not pay any bonuses or any other extraordinary compensation
unless the amount thereof has actually been paid or accrued as
a liability of SMR.
8.3 Cooperation. Each party hereto agrees that before and after the
Closing to execute any and all further documents and writings and to perform
such other reasonable actions which may be or become necessary or expedient to
effectuate and carry out this Agreement.
8.4 Tax Matters. It is the intent of the parties that the exchange of
the SMR shares for the I-Alliance Shares be a tax free reorganization under
section 368(a) of the Internal Revenue Code. I-Alliance and Merger Sub will use
all reasonable efforts to consummate the merger in such fashion, but neither
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I-Alliance nor Merger Sub makes any representation as to the tax treatment of
Shareholders or any agreement with respect to refraining from taking any future
action which could adversely affect the tax treatment of this transaction.
Notwithstanding anything in this Agreement to the contrary, the Shareholders
will remain solely liable for any tax consequences to them as a result of the
transactions contemplated by this Agreement.
8.5 Tax Cooperation. After Closing the Surviving Corporation will
coordinate the preparation of all necessary tax returns. Each party agrees
to timely furnish to Surviving Corporation any records and other
information reasonably requested by it in connection therewith.
8.6 Access To Information. SMR will, during ordinary business hours and
upon reasonable notice from I-Alliance, permit I-Alliance and its authorized
representatives to have access to all Assets, to all books, records, accounts,
documents and other materials relating in any way to the business of SMR. SMR
will, as soon as is practicable, furnish to I-Alliance such other information in
possession of SMR, its officers, employees and shareholders with respect to SMR
as I-Alliance may from time to time reasonably request. SMR will otherwise
cooperate in the examination of SMR by I-Alliance.
8.7 Confidentiality.
8.7.1 Any non-public information received by any party hereto
as a result of discussions and investigations pursuant to or in
furtherance of this Agreement or otherwise received prior to the
Closing Date, will be kept confidential by the recipient and will be
used only for the purposes of evaluating the transactions contemplated
herein. The parties may make disclosure information to attorneys,
accountants and advisors provided such parties agree to be bound by the
terms of this section.
8.7.2 SMR will not disclose any confidential information of
its clients to I-Alliance unless such information is directly relevant
to and absolutely necessary for the evaluation of the transactions
contemplated herein. If any such information is disclosed, I-Alliance
or its employees and agents agree that such information will not be
given to any employee or agent who does not have a need to know, will
not be disclosed to any third party whatsoever (unless required by law)
and will not be used for any purpose other than the evaluation of the
transactions contemplated by this Agreement, and will be returned to
SMR upon completion of the Merger.
8.7.3 If this Agreement is terminated for any reason the
parties will promptly return any copies of confidential information to
the person who supplied it.
8.8 Collection of Receivables.Surviving Corporation will use all
reasonable efforts to collect the Receivables and pay down the Accrued
Shareholder Liability, subject to the conditions in this Section 8.8, (the
proceeds of such Receivables collectively the "Receipts").
8.8.1 Surviving Corporation will be entitled to retain 100% of
any Receipts until such Receipts equals the amount, if any, by which
Current Assets less cash exceeds Accrued Shareholder Liability on
November 30, 1996 after any adjustments described in Section 9.2.
8.8.2 Thereafter, Surviving Corporation will remit at the end
of each month, 100% of Receipts to Shareholders until the Accrued
Shareholder Liability is satisfied. Shareholders, within thirty days of
the Closing Date will furnish Surviving Corporation with a schedule of
the proportion of Receipts payable to each Shareholder.
8.8.3 Payments from accounts having both Receivables and post
November 30, 1996 receivables will be applied as designated on the
payment. If no designation is made they will be applied on a first in,
first out basis. If an account disputes the amount of any Receivable,
the disputed amount may be withheld from amounts that would otherwise
be due (on a FIFO basis) as a Receipt until such disputed amount is
paid.
8.8.4 Uncollectibles. At the end of each month after the
Closing Date, the Surviving Corporation will furnish to the
Shareholders a statement of all amounts of Receivables becoming
Uncollectible in the previous month. The amount of such account will be
offset against the amounts owing the Shareholders under the Accrued
Shareholder Liability in the same proportion as is set forth in 8.8.2
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above. The Uncollectible Receivable will be assigned over to the
Shareholders together with all right, title, interest and power to
collect. This section 8.8.4 sets forth the exclusive remedy with
respect to breaches of the warranty on collectibility of Receivables in
section 4.2.11.
8.9 Insurance. The Shareholders will cause to be maintained claims made
errors and omission insurance of the type maintained by SMR prior to Closing
with insurers and in amounts substantially equivalent to those of SMR prior to
Closing covering the financial statement business (and any other business which
will not be conducted by Surviving Corporation) previously conducted by SMR for
at least five years after the Closing Date. If Surviving Corporation is able to
purchase such insurance at an incremental cost less than that which the
Shareholders can cause such insurance to be purchased, Surviving Corporation
will purchase such insurance on the request of Shareholders and be reimbursed
therefor by Shareholders.
ARTICLE 9
CLOSING, CLOSING ADJUSTMENTS AND TERMINATION
9.1 Closing. The closing ("Closing"), i.e. the execution and delivery
of the documents contemplated by this Agreement, will take place at the offices
of I-Alliance, as soon as practical after the date of this agreement, or at such
time as mutually agreed, to take effect as of the close of business on November
30, 1996 (the "Closing Date"). The parties agree that time is of the essence.
I-Alliance will deliver the I-Alliance Shares and the Warrants to the respective
Shareholders within thirty (30) days of the Closing Date.
9.2 Adjustments. As soon as the results are reasonably available, but
in no event longer than sixty days after the Closing Date, a balance sheet will
be prepared for SMR as of November 30,1996. If, on the balance sheet of SMR,
computed as of November 30, 1996 (including current liabilities pro rated to
such date), the Total Liabilities of SMR exceed the sum of (i) Fixed Assets plus
(ii) the Current Assets, then the Accrued Shareholder Liability will be
decreased by the amount of such excess. If the Total Liabilities of SMR are less
than the sum of (i) Fixed Assets plus (ii) the Current Assets, then the Accrued
Shareholder Liability will be increased by the amount of such difference. This
Section sets forth the exclusive remedy with respect to breaches of the Net
Worth warranty set forth in section 4.2.6.
9.3 Termination. This Agreement may be terminated at any time on or
prior to the Effective Time:
9.3.1 by I-Alliance or SMR if any court of competent
jurisdiction issues any order (other than temporary
restraining order) restraining, enjoining or
prohibiting the transactions;
9.3.2 by mutual written agreement of I-Alliance and SMR;
9.3.3 by either I-Alliance or SMR if the Effective Time
will not have occurred on or before December 31,
1996, time being of the essence, provided that the
right to terminate this Agreement pursuant to this
section will not be available to any party whose
failure to fulfill any obligation of this Agreement
has been the cause or resulted in the failure of the
Effective Time to occur on or before such date;
9.3.4 Breach by SMR. By I-Alliance if there has been a
material breach on the part of SMR in its
representations, warranties or covenants set forth
herein, provided however that if such breach is
susceptible to cure, then SMR will have 30 days after
receipt of written notice from I-Alliance, of its
intent to terminate this Agreement, in which to cure
such breach; and
9.3.5 Breach by I-Alliance. By SMR if there has been a
material breach on the part of I-Alliance in its
representations, warranties or covenants set forth
herein, provided however that if such breach is
susceptible to cure, then I-Alliance will have 30
days after receipt of written notice from SMR, of its
intent to terminate this Agreement, in which to cure
such breach.
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9.4 Effect of Termination. If this Agreement is terminated pursuant to
this Article, all obligations of the parties under this Agreement will terminate
(except for this Article and section 8.7), and no party hereto will have any
further liability to the other parties hereto, except that such termination will
be without prejudice to any claim which a party may have against another for
breach of this Agreement that occurred prior to the date of termination.
ARTICLE 10
SURVIVAL, INDEMNIFICATION AND LIMIT OF LIABILITY
10.1 Survival. All of the representations or warranties contained
herein will survive for a period of one year from the Closing Date and will then
expire. Upon the expiration of representations and warranties pursuant to this
section, unless written notice of a claim based on such representations and
warranty specifying in reasonable detail the facts on which the claim is based
will have been delivered to the indemnifying party prior to expiration of such
representation and warranty, such representation and warranty will be of no
further force or effect, as if never made and no action may be brought based on
the same, whether for breach of contract or any other legal theory, except,
however, that claims based on fraud, willful misrepresentation or with respect
to the representations and warranties set forth in Section 4.1.1 may be asserted
at any time within one year after I-Alliance learns of such fraud, willful
misrepresentation or breach.
10.2 Shareholders Indemnity. Except for the representations in sections
4.2.6 and 4.2.11, each Shareholder agrees to indemnify, defend and hold
I-Alliance Indemnified Parties harmless from and against all Losses incurred by
I-Alliance Indemnified Parties resulting from or on account of a breach of any
material representation, warranty or covenant of such Shareholder made in this
Agreement.
10.3 Limit of Liability. No Shareholder will be liable to I-Alliance
under this Agreement for an amount in excess of the sum of the consideration
received by such Shareholder pursuant to this Agreement (exclusive of the
Shareholder Accrued Liability).
10.4 Conditions of Indemnification. The respective obligations and
liabilities of the Indemnifying Parties to the Indemnified Party under this
Article will be subject to the following terms and conditions:
10.4.1 Notice. Within 15 days after receipt of notice of
commencement of any action or the assertion of any claim by a third
party (but in any event at least 10 days preceding the date on which an
answer or other pleading must be served in order to prevent a judgment
by default in favor of the parties asserting the claim), the
Indemnified Parties will give the Indemnifying Party written notice
thereof, together with a copy of such claim, process or other legal
pleading and the Indemnifying Party will have the right to undertake
defense thereof, by representatives of its own choosing, that are
reasonably satisfactory to the Indemnified Party. Notwithstanding the
Indemnifying Parties undertaking of such defense, the Indemnified Party
will have the right to engage its own counsel, at its own expense and
participate in the defense of claims; provided, however that the
Indemnifying Party will retain the right in its sole and absolute
discretion to make all decisions with respect to the defense,
settlement or compromise of such claim, provided that the Indemnifying
Party remains liable for any payments due under any such settlement or
compromise.
10.4.2 Failure to Assume Defense. If the Indemnifying Party by
the 15th day after receipt of notice of such claim (or if earlier by
the 5th day preceding the day on which the answer or other pleading
must be filed in order to prevent judgment by default in favor of the
person asserting such claim), does not elect to defend against such
claim, the Indemnified Party will (upon further notice to Indemnifying
Party) have the right to undertake defense, compromise or settlement of
such claim on behalf of and for the account and risk of the
Indemnifying Party; provided however, that the Indemnified Party will
not settle or compromise such claim without the Indemnifying Parties
consent, which consent will not be unreasonably withheld; and provided
further, that the Indemnifying Party will have the right to assume the
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<PAGE> 19
defense of such claim with counsel of its own choosing at any time
prior to settlement, compromise or final termination thereof.
10.4.3 Cooperation. In connection with any indemnification,
the Indemnified Party will cooperate with all reasonable requests of
the Indemnifying Party, and will be reimbursed all its out of pocket
expenses.
10.5 Shareholders Additional Indemnity. Each Shareholder agrees to
indemnify, defend and hold I-Alliance Indemnified Parties harmless from and
against all Losses incurred by I-Alliance Indemnified Parties resulting from or
on account of any and all federal, state or local income tax or franchise tax
liability of SMR (or on account of SMR) whether in the current or future tax
years, on account of the distribution to the Shareholders of the Accrued
Shareholder Liability to the extent such tax liability is not reflected on the
Financial Statements.
ARTICLE 11
MISCELLANEOUS PROVISIONS
11.1 Amendment and Modification. This Agreement may be amended,
modified and supplemented only by a writing signed by I-Alliance and the
Shareholders.
11.2 Waiver of Compliance. Any failure of I-Alliance or the
Shareholders to comply with any obligation, covenant, agreement or condition
herein contained may only be waived in writing by (i) I-Alliance in the case of
any failure of the Shareholders or (ii) the Shareholders in the case of any
failure of I-Alliance. Such waiver shall be effective only in the specific
instance and for the specific purpose for which made or given.
11.3 Expenses. Each party will pay its own expenses incurred in
connection with this Agreement or any transaction contemplated by this
Agreement. The foregoing shall not be construed as limiting any other rights
which any party may have as a result of misrepresentation of or breach by any
other party.
11.4 Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand, or when mailed by certified or
registered mail (return receipt requested), postage prepaid or when delivered by
fax (evidenced by confirmation of successful transmission), as follows:
A. If to I-Alliance:
International Alliance Services, Inc.
10055 Sweet Valley Drive
Valley View, Ohio 44125
Phone: (216) 447-9000; Fax: (216) 447-9137
Attn: Joseph E. LoConti
With a copy to:
Anne L. Meyers & Associates Co., LPA
2 Summit Park Drive, Ste. 150
Cleveland, Ohio 44131-2553
Phone: (216) 520-4344 Fax: (216) 520-4350
Attn: Anne L. Meyers
or to such other person or place as I-Alliance or I-Alliance shall designate by
notice in the manner provided in this Section 11.4:
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<PAGE> 20
B. If to the Shareholders:
To the Shareholders at their
respective addresses set forth on
Exhibit A
With a copy to:
Robert A. Ranallo, Esq.
SMR & Co. Business Services
6685 Beta Dr.
Mayfield Heights, OH
Phone: 442-8642; Fax 442-5609
or to such other person as the Shareholders shall designate by notice in the
manner provided in this Section 11.4.
11.5 Assignment. This Agreement shall be binding upon and inure to the
benefit of I-Alliance and its successors and assigns, and to the Shareholders
and their respective successors and assigns or heirs, executors, administrators
and personal representatives, as the case may be, but neither this Agreement nor
any of the rights, interests and obligations hereunder shall be assigned by
I-Alliance or any of the Shareholders without the prior written consent of the
other parties.
11.6 Third Parties. This Agreement is not intended to and shall not be
construed to give any Person other than the parties hereto any interest or
rights (including, without limitation, any third party beneficiary rights) with
respect to or in connection with any agreement or provision contained herein or
contemplated hereby.
11.7 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the Ohio, without regard to principles of
conflicts of laws. I-Alliance and the Shareholders hereby irrevocably submit to
the jurisdiction of the courts of the State of Ohio, with venue in Cuyahoga
County, over any dispute arising out of this Agreement and agree that all claims
in respect of such dispute or proceeding shall be heard and determined in such
court. I-Alliance and the Shareholders hereby irrevocably waive, to the fullest
extent permitted by applicable law, any objection which they may have to the
venue of any such dispute brought in such court or any defense of inconvenient
forum for the maintenance of such dispute. I-Alliance and the Shareholders
hereby consent to process being served by them in any suit, action or proceeding
by delivering it in the manner specified by the provisions of Section 11.4 of
this Agreement.
11.8 Severability The invalidity or unenforceability in whole or in
part of any covenant, promise or undertaking, or any section,
subsection, sentence, clause, phrase, word, or any of the
provisions of this Agreement will not affect the validity or
enforceability of the remaining portions of this Agreement. If
for any reason, any provision is determined to be invalid or
in conflict with any existing, or future law or regulation by
a court or agency having valid jurisdiction, such will not
impair the operation or have any other effect upon such other
provisions of this Agreement as may remain otherwise valid,
and the latter will continue to be given full force and effect
and bind the parties hereto.
11.9 Counterparts. This Agreement may be executed in two more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
11.10 Headings. The headings of the sections, schedules and articles of
this Agreement are inserted for the sake of convenience only and shall not
constitute a part hereof.
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<PAGE> 21
11.11 Disclosures. Any disclosure in any Schedule to this Agreement
will be deemed a disclosure for all purposes under this Agreement and shall be
considered a disclosure under all other schedules of this Agreement; provided
information in documents referenced in but not included as part of a schedule
will not be disclosure for purposes of this section. Schedule 4.2.4 will be
updated upon completion of the November 30, 1996 balance sheet.
11.12 Waiver of Conflicts. Each of the parties acknowledge that Gregory
J. Skoda has represented or participated in the management of SMR and I-Alliance
in various capacities, and that SMR has provided financial advice to I-Alliance
and that Skoda has advised SMR and I-Alliance, and SMR has advised I-Alliance
that the economic and financial interests of the parties arising under or
relating to this Agreement are or may be in material conflict. Each party
further acknowledges that they have been advised to seek and consult independent
advice, and has done so to the extent such party deems prudent. Each party
agrees to forever waive any present or future claim of conflict of interest or
other claim or cause of action which they may have as result to the multiple
advice given to the parties by Gregory J. Skoda, or any advice given by SMR to
I-Alliance in the transactions contemplated by this Agreement.
11.13 Entire Agreement. This Agreement, including the schedules and
exhibits, contains the entire understanding of the parties in respect of the
subject matter contained herein and therein and there are no other terms or
conditions, representations or warranties, written or oral, express or implied,
except as set forth herein.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
INTERNATIONAL ALLIANCE SERVICES, INC. IASI/SMR ACQUISITION, INC.
By: ________________________ By: __________________________
Edward F. Feighan, President Craig Stout, President
SMR & CO. BUSINESS SERVICES
By: _______________________
Keith W. Reeves, President
THE SHAREHOLDERS OF SMR
_______________________________ ________________________
Gregory J. Skoda Keith W.Reeves
_______________________________ ________________________
Michael L. Minotti Patrick T. Carney
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<PAGE> 22
EXHIBIT A
Shareholders of SMR
<TABLE>
- ------------------------------ -------------------------------------------- -------------- --------------- ---------
Name Address Shares Warrants %
- ------------------------------ -------------------------------------------- -------------- --------------- ---------
- ------------------------------ -------------------------------------------- -------------- --------------- ---------
<S> <C> <C> <C> <C>
Gregory J. Skoda 195,600 293,400 32.6
- ------------------------------ -------------------------------------------- -------------- --------------- ---------
Michael L. Minotti 189,000 283,500 31.5
- ------------------------------ -------------------------------------------- -------------- --------------- ---------
Keith W. Reeves 185,400 278,100 30.9
- ------------------------------ -------------------------------------------- -------------- --------------- ---------
Patrick T. Carney 30,000 45,000 5.0
- ------------------------------ -------------------------------------------- -------------- --------------- ---------
</TABLE>
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<PAGE> 23
EXHIBITS AND SCHEDULES REQUIRED
PLAN & AGREEMENT OF MERGER
IASI/SMR ACQUISITION COMPANY AND SMR
Exhibit A Shareholders of SMR
Exhibit B Terms of Warrants
Exhibit C Assumption Agreement
Exhibit D Employment Agreement Commitment
Exhibit E Lock-Up Agreement
Schedule 2.4 Initial Directors of Surviving Corporation
Schedule 2.6 Shareholders I-Alliance Shares and Warrants
Schedule 4.1.4 Affiliated Transactions
Schedule 4.2.4 Financial Statements of SMR
Schedule 4.2.7 Subsidiaries of SMR
Schedule 4.2.9 No Consent of Outside Parties
Schedule 4.2.10 No Breach
Schedule 4.2.12 Other Tangible Property
Schedule 4.2.14 Real Property
Schedule 4.2.16 Intellectual Property
Schedule 4.2.19 Permits
Schedule 4.2.20 Contracts and Agreements
Schedule 4.2.21 Employment and Consulting Contracts
Schedule 4.2.22 Employee Benefits
Schedule 4.2.24 Insurance
Schedule 4.2.25 Liabilities
Schedule 4.2.26 Actions and Proceedings
Schedule 4.2.27 Bank Accounts, Guarantees and Powers
Schedule 4.2.28 Absence of Changes
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<PAGE> 1
EXHIBIT 10.19
AGREEMENT AND PLAN OF MERGER
by and among
INTERNATIONAL ALLIANCE SERVICES, INC.
and
IASI/ECI ACQUISITION CO.
and
ENVIRONMENTAL & COMMERCIAL INSURANCE AGENCY, INC.
and
ITS SHAREHOLDERS
Dated: November 5, 1996
<PAGE> 2
This Agreement and Plan of Merger (the "Agreement") is entered into as
of this 5th day of November, 1996 by and among International Alliance Services,
Inc., (" I-Alliance"), IASI/ECI Acquisition Co., ("Merger Sub"), Environmental
and Commercial Agency Inc., ("ECI"), and Christopher Timm ("Timm"), Shirley Sue
Ellis aka Shirley K. Ellis ("Ellis") and Mark Perkins ("Perkins"), (the
preceding individually "Shareholder" and collectively "Shareholders").
WHEREAS, the Shareholders own all of the common stock of ECI, in the
amounts set forth in Exhibit A hereto (collectively the "ECI Shares"); and
WHEREAS, I-Alliance has determined that it wishes to acquire ECI; and
WHEREAS, to consummate such acquisition I-Alliance has formed Merger
Sub into which ECI will be merged with ECI as the surviving corporation; and
WHEREAS, ECI has determined that it wishes to be acquired by
I-Alliance.
Therefore in consideration of the mutual promises contained herein and other
good and valuable consideration the parties agree as follows.
ARTICLE 1
DEFINITIONS
As used herein the following terms will have the meanings set forth:
1.1 "Closing" will have the meaning set forth in section 9.1.
1.2 "Closing Date" will have the meaning set forth in section 9.1.
1.3 "Effective Date" will have the meaning set forth in Article 3.
1.4 "I-Alliance Indemnified Parties" will mean I-Alliance and
I-Alliance's employees, directors, officers, shareholders and
agents.
1.5 "Liens" will mean any lien, mortgage, claim, charge, security
interest, encumbrance, restriction or limitation.
1.6 "Losses" will mean any and all expenses, losses, costs,
deficiencies, liabilities and damages including, but not limited to legal and
professional fees and expenses suffered or incurred in any manner including
investigation and defense of claims.
1.7 "Person" will mean any natural person, corporation, partnership,
trust, incorporated or unincorporated association, joint venture, joint stock
company, government (or any agency or political subdivision thereof) or other
entity of any kind.
ARTICLE 2
MERGER
2.1 The Merger Subject to the terms and conditions of this Agreement
and in accordance with the Ohio General Corporation Law (the "OGCL") at the
Effective Date the Merger Sub will be merged with and into ECI (the "Merger")
and the separate existence of Merger Sub will cease and ECI will continue as the
surviving corporation (the "Surviving Corporation").
2.2 Effect of the Merger. The Merger will have the effect set
forth in Section 1701.82 of the
OGCL.
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<PAGE> 3
2.3 Certificate of Incorporation and Code of Regulations. At the
Effective Date, the Articles of Incorporation and the Code of Regulations of ECI
prior to the Effective Date will be and continue to be the Articles of
Incorporation and Code of Regulations of the Surviving Corporation.
2.4 Directors. Each person serving as a director of ECI prior to the
Effective Date will become the initial directors of the Surviving Corporation,
each to hold office in accordance with the Articles of Incorporation until his
or her respective successor is duly elected or appointed and qualified or until
their earlier death, resignation or removal.
2.5 Officers. Each person serving as an officer of ECI prior to the
Effective Date will become the initial officers of the Surviving Corporation,
each to hold office in accordance with the Article of Incorporation until his or
her respective successor is duly elected or appointed and qualified or until
their earlier death, resignation or removal.
2.6 Conversion of Securities. At the Effective Date, by virtue of
the Merger and without any action on the part of the parties or the holders
of any of the respective securities:
2.6.1 All shares of ECI common stock, issued and outstanding
immediately prior to the Effective Date (the "ECI Shares") will be
converted into the right to receive in the aggregate one hundred ninety
two thousand five hundred (192,500) shares of I-Alliance common stock
(the "I-Alliance Shares") as described in Article 7, which will be
delivered to each Shareholder in the number of shares set forth
opposite such Shareholder's name on Schedule 2.6.
2.6.2 Each share of ECI common stock held in the treasury of
ECI will automatically be canceled and retired without any conversion
thereof.
2.6.3 Each share of Merger Sub common stock, without par
value, issued and outstanding immediately prior to the Effective Date
will be automatically converted into one share of common stock of the
Surviving Corporation.
2.7 Consideration. As additional consideration, I-Alliance will pay, at
the Effective Date, to the holders of all the ECI Shares in the aggregate, One
Million Dollars ($1,000,000), to be allocated equally to each such share, to be
delivered to each Shareholder in the amount set forth opposite such
Shareholder's name on Schedule 2.6.
ARTICLE 3
CONSUMMATION OF MERGER
The Closing will take place on the Closing Date at the offices of
I-Alliance, 10055 Sweet Valley Drive, Valley View, OH 44125 or such other place
as the parties may agree. At the time of the Closing, the parties will cause the
Merger to be consummated by filing a Certificate of Merger with the Secretary of
State of Ohio, in such form as required by and executed in accordance with the
OGCL. The date and time of such filing will be the Effective Date.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF ECI, TIMM AND SHAREHOLDERS
4.1 Warranties and Representations of Shareholders. Each Shareholder,
severally, represents and warrants to I-Alliance and Merger Sub that:
4.1.1 Authority. The Shareholder has the right, power,
authority and legal capacity to enter into and perform such
Shareholder's obligations under this Agreement and to consummate the
transactions contemplated hereby to be performed by such Shareholder,
and this Agreement has been duly executed and delivered by the
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<PAGE> 4
Shareholder and is a valid and binding agreement of the Shareholder
enforceable against such Shareholder in accordance with its terms,
except as may be limited by applicable bankruptcy, insolvency or
similar laws affecting creditors' rights generally or the availability
of equitable remedies.
4.1.2 Title to the ECI Shares. The Shareholder owns, of record
and beneficially, all of the ECI Shares set forth opposite such
Shareholder's name on Exhibit A, hereto free and clear of all Liens.
4.1.3 No Brokers. The Shareholder has not employed any broker
or finder or incurred any liability for any brokerage fees, commissions
or finders' fees in connection with the transactions contemplated
hereby for which ECI or I-Alliance may be responsible.
4.1.4 Affiliated Transactions. Except as specifically set
forth (including dollar amounts) on Schedule 4.1.4 as of the date
hereof, neither the Shareholder nor any Affiliate of the Shareholder
(as defined below) is indebted to, or is a creditor of, or a guarantor
of any obligation of, or a party to any contract, agreement, license,
option, commitment or other arrangement, written or oral, express or
implied, with, ECI except as disclosed on such schedule. For purposes
of this Section, an "Affiliate of the Shareholder" means any employee,
officer or director of the Shareholder, any spouse or family member
(including in-laws) of the Shareholder, or any corporation or other
entity in which such Shareholder has an equity or ownership interest
exceeding five percent.
4.1.5 Representation. Each Shareholder has has been
represented by its own counsel is not relying on or represented by
counsel for I-Alliance.
4.2 Warranties and Representations of ECI and Timm. ECI and Timm
hereby represent and warrant to I-Alliance and Merger Sub that:
4.2.1 Organization. ECI is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Ohio with full power and authority (including any applicable licenses)
to own, lease and operate its properties and to carry on its business
as now being and as heretofore conducted, and is duly qualified or
otherwise authorized as a foreign corporation to transact business and
is in good standing in each jurisdiction in which it is required to be
so qualified or authorized (each of which jurisdictions is set forth on
Schedule 4.2.1).
4.2.2 Authority. The execution, delivery and performance by
ECI of this Agreement and the consummation of the transactions
contemplated by this Agreement, have been duly authorized by all
necessary corporate action by ECI. This Agreement has been, and each
other document ancillary to this Agreement to which ECI is a party will
be at the Closing, duly executed and delivered by ECI and constitute,
or will when delivered, constitute, the legal, valid and binding
obligations of ECI, enforceable against ECI, in accordance with their
respective terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium, and other similar laws and equitable
principles relating to or limiting creditors' rights generally.
4.2.3 Capitalization. The authorized capital stock of ECI
consists of 100 shares of common stock, of which the ECI Shares
constitute all of the shares outstanding (there being no treasury
shares). The ECI Shares have been duly authorized and are validly
issued, fully paid and nonassessable, and there are no outstanding
rights, subscriptions, warrants, calls, preemptive rights, options or
other agreements or commitments of any kind or character to purchase or
otherwise to acquire from ECI any of its unissued shares of capital
stock or any other security of ECI in favor of any Person.
4.2.4 Financial Statements. There have been delivered to
I-Alliance and there are attached hereto as Schedule 4.2.4 true and
correct copies of (a) the balance sheet of ECI as at September 30, 1995
(the "September 30, 1996 Balance Sheet") and the related unaudited
statement of income of ECI for the nine months then ended and (b) the
balance sheet of ECI as at June 30, 1996, together with the unaudited
statement of income of ECI for the six months then ended. I-Alliance
previously has been furnished with the unaudited balance sheets of ECI
as at December 31, 1992, 1993, 1994 and 1995 and the related unaudited
statements of income for each of the years then ended. All of such
financial statements, including the notes thereto, are true and
correct, are in accordance with the books and records of ECI, fairly
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<PAGE> 5
present the financial condition and results of operations of ECI as at
the respective dates and for the respective periods covered thereby and
were prepared in conformity with generally accepted accounting
principles consistently applied.
4.2.5 Absence of Changes. Since September 30, 1996, ECI has
carried on its business in the ordinary course, and there has not been
any material adverse change in its business condition (financial or
otherwise), results of operations or liabilities.
4.2.6 Net Worth. At the Effective Date the net worth of ECI,
computed on the same basis as the September 30, 1996 Balance Sheet
will be One Hundred Fifty Thousand Dollars ($150,000).
4.2.7 No Subsidiaries. Except as setforth on Schedule 4.2.7,
ECI has no subsidiaries.
4.2.8 Articles of Incorporation, Code of Regulations,
Corporate Records and Committees. The copies of the
Articles of Incorporation and Code of Regulations of ECI
heretofore delivered to I-Alliance are correct and complete. The stock
transfer, minute books and corporate records of ECI which have been
made available to I-Alliance are correct and complete and constitute
the only written records and minutes of the meetings, proceedings, and
other actions of the shareholders and the Board of Directors of ECI
from the date of its organization to the date hereof, there being no
committees of its Board of Directors.
4.2.9 No Consent. Except as set forth on Schedule 4.2.9, no
consent, order, license, approval or authorization of, or exemption by,
or registration or declaration or filing with, any governmental
authority, bureau or agency, and no consent or approval of any other
Person, is required to be obtained or made in connection with the sale
of the ECI Shares.
4.2.10 No Breach. Except as set forth on Schedule 4.2.10, the
performance of this Agreement will not (i) violate any provision of the
Articles of Incorporation or Code of Regulations of ECI; (ii) violate,
conflict with or result in the breach or termination of, or constitute
an amendment to, or otherwise give any Person the right to terminate,
or constitute (or with notice or lapse of time or both would
constitute) a default (by way of substitution, novation or otherwise)
under the terms of, any contract, mortgage, lease, bond, indenture,
agreement, franchise or other instrument or obligation to which ECI is
a party or by which ECI or any of its respective assets or properties
are bound or affected; (iii) result in the creation of any Liens" upon
the properties or assets of ECI pursuant to the terms of any contract,
mortgage, lease, bond, indenture, agreement, franchise or other
instrument or obligation; (iv) violate any judgment, order, injunction,
decree or award of any court, arbitrator, administrative agency or
governmental or regulatory body against, or binding upon, ECI or any of
its securities, properties, assets or business; (v) constitute a
violation by ECI of any statute, law, rule or regulation of any
jurisdiction as such statute, law, rule or regulation relates to ECI or
to any of its securities, properties, assets or business; or (vi)
violate any Permit.
4.2.11 Accounts Receivable. The accounts receivable of ECI
reflected on the September 30, 1996 Balance Sheet are actual and bona
fide accounts receivable which arose in the ordinary and usual course
of ECI's business, represent valid obligations due to ECI, are
collectible in the aggregate recorded amounts thereof on the books of
ECI and substantially all of such accounts will be collected by
December 31, 1996. Schedule 4.2.11 sets forth a summary of the terms of
payment (with the aging indicated) of all such accounts receivable at
the date hereof.
4.2.12 Other Tangible Property. ECI has good and marketable
title to all of the assets reflected on its books and records and on
the September 30, 1996 Balance Sheet, free and clear of all Liens,
except for those assets leased by ECI under leases listed on Schedule
4.2.12. The tangible personal properties material to the business of
ECI including, without limitation, ECI's personal computers, are in
good operating condition and repair, ordinary wear and tear excepted.
4.2.13 Real Property. ECI does not own any real property.
Schedule 4.2.13 sets forth a true and correct list of all leases,
subleases or other agreements under which ECI is lessee or lessor of
any real property or has any interest in real property and, except as
set forth in Schedule 4.2.13, there are no rights or options held by
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<PAGE> 6
ECI, or any contractual obligations on its part, to purchase or
otherwise acquire (including by way of lease or sublease) any interest
in or use of any real property, not any rights or options granted by
ECI, or any contractual obligations entered into by it, to sell or
otherwise dispose of (including by way of lease or sublease) any
interest in or use of any real property. All such leases, subleases and
other agreements grant the leasehold estates or other interests they
purport to grant with the right to quiet possession, are in full force
and effect and constitute legal, valid and binding obligations of the
respective parties hereto, with no existing or claimed default or event
of default or event which with notice or lapse of time or both would
constitute a default or event of default by ECI or, to the knowledge of
Timm, by any other party thereto, which would materially and adversely
affect ECI. ECI is not in violation of any building, zoning, health,
safety, environmental or other law, rule or regulation and no notice
from any Person has been served upon ECI claiming any such violation.
4.2.14 Intellectual Property. Except as listed on Schedule
4.2.14, ECI does not own or use any trademarks, trade names, trade
secrets, patents, inventions, processes, copyrights, copyright rights
or other intellectual property rights (or applications therefor), nor
is the use thereof required, in connection with its business.
4.2.15 Tax Matters. ECI has timely filed all federal, state,
county and local tax returns, estimates and reports (collectively,
"Returns") required to be filed by it through the date hereof, copies
of which have been delivered to I-Alliance, which Returns accurately
reflect the taxes due for the periods indicated, and has paid in full
all income, gross receipts, value added, excise, property, franchise,
sales, use, employment, payroll and other taxes of any kind whatsoever
(collectively, "Taxes") shown to be due by such Returns, and adequate
reserves have been established with respect to any liabilities for
Taxes accrued through September 30, 1996 and are reflected on the
September 30, 1996 Balance Sheet and, to the knowledge of Timm, there
is no unassessed deficiency for Taxes proposed or threatened against
ECI, and no taxing authority has raised any issue with respect to ECI
which, if adversely determined, would result in a liability for any Tax
which has not been reserved against on the September 30, 1996 Balance
Sheet, and there are not in force any extensions with respect to the
dates on which any Return was or is due to be filed by ECI or any
waivers or agreements by ECI for the extension of time for the
assessment or payment of any Taxes. ECI has not been, and currently is
not being, audited by any federal, state or local tax authority.
4.2.16 Compliance with Laws. ECI is not in violation of any
applicable law, rule or regulation, the violation of which could
materially and adversely affect the assets, properties, liabilities,
business, results of operations, condition (financial or otherwise) or
prospects of ECI, nor does Timm know of the enactment, promulgation or
adoption of any such law, rule or regulation which is not yet
effective.
4.2.17 Permits. (a) Except as set forth on Schedule 4.2.17(a),
ECI (including, without limitation, its employees) has duly obtained
and holds in full force and effect all consents, authorizations,
permits, licenses, orders or approvals of, and has made all
declarations and filings with, all federal, state or local governmental
or regulatory bodies that are material or necessary in or to the
conduct of its business (collectively, the "Permits"); all of the
Permits were duly obtained and are in full force and effect; no
violations are or have been recorded in respect of any such Permit and
no proceeding is pending or threatened to revoke, deny or limit any
such Permit; and (b) Schedule 4.2.17(b) sets forth a true and complete
list of all local recording agent licenses, surplus lines licenses and
managing general agency licenses issued by any jurisdiction to ECI,
together with the expiration dates thereof.
4.2.18 Contracts and Agreements. Schedule 4.2.18 lists and
briefly describes all written or oral contracts, agreements, leases,
mortgages and commitments to which ECI is a party or by which is may be
bound, including, without limitation, all insurance underwriting
agreements, agency agreements, brokerage agreements, management
agreements, joint venture agreements, leases, guarantees and
indemnifications, employment and consulting agreements and instruments
of indebtedness (collectively, "Contracts"), true and correct copies of
which have been made available to I-Alliance. All Contracts constitute
legal, valid and binding obligations of ECI and, to the knowledge of
Timm, of the other parties thereto and are in full force and effect on
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the date hereof, and ECI has paid in full amounts due thereunder which
are due and payable and is not in default under any of them nor, to the
knowledge of Timm, is any other party to any such contract or other
agreement in default thereunder, nor does any condition exist that with
notice or lapse of time or both would constitute a default or event of
default thereunder by ECI or, to the knowledge of Timm, by any other
Person. Except as set forth in Schedule 4.2.9, no Contract requires the
consent or approval of a third party in connection with the sale of the
ECI Shares.
4.2.19 Employee Benefits. (a) Except as set forth on Schedule
4.2.19, there are no pension, retirement, savings, disability, medical,
dental or other health plans, life insurance (including any individual
life insurance policy as to which ECI makes premium payments whether or
not ECI is the owner, beneficiary or both of such policy) or other
death benefit plans, profit sharing, deferred compensation, stock
option, bonus or other incentive plans, vacation benefit plans,
severance plans, or other employee benefit plans or arrangements
(whether written or arising from custom), and ECI has no employee
pension benefit plan as defined Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or any employee
welfare benefit plan as defined in Section 3(1) of ERISA.
(b) ECI has in all material respects complied with the
requirements to the extent applicable, of the Consolidated Omnibus
Budget Reconciliation Act of 1985 ("COBRA") with respect to the
continuation of employer-provided health benefits following a
"qualifying event" which would otherwise terminate such benefits, as
provided in Section 4980B of the Internal Revenue Code of 1986, as
amended, and applicable regulations and Internal Revenue Service
rulings, notices and other pronouncements.
4.2.20 Insurance. Schedule 4.2.20 lists and provides a summary
description of all policies of property, theft, fire, liability,
workers' compensation, title, professional liability or life insurance
or reinsurance or any other insurance owned or maintained by ECI or in
which ECI is a named insured or on which ECI is paying any premiums.
All such policies are of a type and in amounts of coverage customary in
businesses such as those engaged in by ECI, and except as set forth on
Schedule 4.2.20, are in full force and effect at the date hereof, and
each of the insured parties thereunder is not in default with respect
to any provision contained in any such insurance policy nor failed to
give any notice or present any claim thereunder in due and timely
fashion. Schedule 4.2.20 sets forth a summary of the claims history for
ECI under such policies since January 1, 1993 and, except as set forth
on Schedule 4.2.20, there are no claims outstanding under any such
policies.
4.2.21 Accounts Payable. Except as set forth on Schedule
4.2.21, no accounts payable of ECI have arisen subsequent to September
30, 1996 that exceed $10,000 for any one payee or $100,000 in the
aggregate, other than premiums payable to insurance companies.
4.2.22 Liabilities. There are no material liabilities or
obligations of ECI, either accrued, absolute, contingent or otherwise,
whether or not of a kind required by generally accepted accounting
principles to be set forth on a financial statement ("Liabilities"),
except (a) those accrued, reflected or otherwise provided for on the
September 30, 1996 Balance Sheet and (b) those listed on Schedule
4.2.22.
4.2.23 Actions and Proceedings. Except as provided on Schedule
4.2.23, there are no claims, actions, suite, arbitrations, proceedings,
investigations or inquiries, whether at law or in equity and whether or
not before any court, private body or group, governmental department,
commission, board, agency or instrumentally (collectively "Actions"),
pending or to the knowledge of Timm or Perkins, threatened against,
involving or affecting ECI or any of its assets, whether or not fully
or partially covered by insurance, or which would give rise to any
right of indemnification by any Person from ECI, and there are no
outstanding orders, writs, injunctions, awards, sentences or decrees of
any court, private body or group, governmental department, commission,
board, agency or instrumentality against involving or affecting ECI.
4.2.24 Bank Accounts, Guarantees and Powers. Schedule 4.2.24
sets forth (i) a list of all accounts, borrowing resolutions and
deposit boxes maintained by ECI at any bank or other financial
institution and the names of the person authorized to effect
transactions in such accounts, to borrow pursuant to such resolutions
and with access to such boxes; (ii) all agreements or commitments of
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<PAGE> 8
ECI guaranteeing the payment of money or the performance of other
contracts by any third persons; and (iii) the names of all persons,
firms, associations, corporations, or business organizations holding
general or special powers of attorney from ECI together with a summary
of the terms thereof.
4.2.25 Absence of Changes. Except as set forth in Schedule
4.2.25, since September 30, 1996, ECI has carried on its business in
the ordinary course, and there has not been:
4.2.25.1 any material adverse change in its business condition
(financial or otherwise), results of operations or
liabilities; 4.2.25.2 any pending or threatened amendment,
modification, or termination of any agreement, license or
permit which is material to its business; 4.2.25.3 any
disposition or acquisition of any of its assets or properties
other than in the ordinary course; 4.2.25.4 any damage,
destruction or other casualty loss (whether or not covered by
insurance) adversely affecting or that could reasonably be
expected to adversely affect its business or assets; 4.2.25.5
any increase in the compensation of any of its employees; or
4.2.25.6 except in the ordinary course, any obligation or
liability (whether matured, unmatured, absolute, accrued,
contingent or otherwise) incurred. 4.2.26 Employee Relations.
ECI has not at any time during the last five years had, or, to
the knowledge of Timm, is there now threatened, a strike, picket, work
stoppage, work slowdown, or other labor trouble or dispute, and Timm
has no knowledge of any employee's proposed resignation.
4.2.27 Full Disclosure. All documents, schedules and other
materials delivered or made available by ECI to I-Alliance in
connection with this Agreement and the transactions contemplated hereby
are true and complete in all material respects, and do not, in light of
the circumstances under which the statements contained in the
information so furnished are made, contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements contained therein not false or misleading.
4.2.28 Employee Compensation. Schedule 4.2.28 lists all
employees of ECI, setting forth their respective salaries, whether they
are employed under contract or at will, and the expiration date of each
contract.
4.2.29 Representation. ECI has has been represented by its
own counsel is not relying on or represented by counsel for I-Alliance.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF I-ALLIANCE
I-Alliance represents and warrants to the Shareholders and ECI that:
5.1 Organization. I-Alliance is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, has full
power and authority to own, lease and operate its properties and to carry on its
business as now being and as heretofore conducted by it, and is duly qualified
or otherwise authorized as a foreign corporation to transact business and is in
good standing in each jurisdiction in which it is required to be so qualified or
authorized.
5.2 Authority. This Agreement has been duly authorized, executed and
delivered by I-Alliance and is the valid and bind agreement of I-Alliance
enforceable against I-Alliance in accordance with its terms.
5.3 The I-Alliance Shares. The I-Alliance Shares being delivered
hereby are validly issued, fully paid and non-assessable.
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<PAGE> 9
5.4 No Breach. The authorization, execution, delivery and performance
of this Agreement by I-Alliance will not violate any provision of its
certificate of incorporation or by-laws or violate, conflict with or result in
the breach or termination of, or otherwise give any Person the right to
terminate, any agreement to which it is a party.
5.6 Documents Delivered. I-Alliance has delivered to Shareholders
I-Alliance's Annual Report on Form 10-K for the fiscal year ended December 31,
1995 (the "1995 Form 10-K"), its Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1996 and June 30, 1996, its Information Statement dated
September 23, 1996 (collectively the"SEC Documents"). The SEC Documents were
true and complete in all material respects as at their respective dates, did not
contain any untrue statement of a material fact nor omit to state any material
fact required to be stated therein or necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading, and since September 23, 1996, there has not been any material
adverse change in I-Alliance's business condition (financial or otherwise),
results of operations or liabilities, not reflected in the SEC Documents.
ARTICLE 6
CONDITIONS PRECEDENT TO CLOSING
6.1 I-Alliance Conditions Precedent. The obligation of I-Alliance
to close the transactions herein contemplated is subject to the following
express conditions precedent:
6.1.1 Representations and Warranties. The representations and
warranties set forth in Article 4 of this Agreement shall be true and
correct in all material respects at and as of the Closing Date.
6.1.2 Covenants. ECI and Shareholders shall have performed
and complied with all of their covenants under this Agreement in all
material respects through the Closing Date.
6.1.3 Satisfactory Performance. All actions to be taken by ECI
and Shareholders in connection with consummation of the transaction
contemplated hereby and all certificates, opinions, instruments, and
other documents required to effect the transactions contemplated hereby
have been completed in a manner which is reasonably satisfactory in
form and substance to I-Alliance.
6.1.4 Continuation of Business. Between the date of the
Financial Statements and the Closing Date, ECI will have been operated
in the normal course and will not have suffered any damage,
destruction, loss or occurrence, whether covered by insurance or not,
which may materially adversely affect the value of ECI or its business
prospects.
6.1.5 Legal Actions. No suit, action, or other proceeding
shall be pending or threatened before any court or governmental agency
seeking to restrain, prohibit or obtain damages or other relief in
connection with this Agreement or the consummation of the transactions
contemplate herein and there shall have been no investigation or
inquiry made or commenced by any governmental agency in connection with
this Agreement or the transactions contemplated herein, except that the
foregoing shall not be a condition precedent if ECI and the
Shareholders shall have offered indemnity with respect thereto that is
reasonably satisfactory to I-Alliance .
6.1.6 Legal Limitations on Closing. There shall not be in
effect any statute, rule or regulation which makes it illegal for
I-Alliance to consummate the transactions contemplated herein or any
order, decree of judgment which enjoins I-Alliance from consummating
the transactions contemplated hereby, except that any such order,
decree or judgment shall not be a condition precedent if ECI and
Shareholders shall have offered indemnity with respect thereto that is
reasonably satisfactory to I-Alliance.
6.1.7 Deliveries by the Shareholders. The Shareholders will
have delivered the stock certificates representing the ECI Shares, duly
endorsed for transfer.
6.1.8 Deliveries by ECI. ECI will have delivered the minute
book, stock book and stock ledger of ECI, and a good standing
certificate, dated as of a date not more than fourteen (14) days prior
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to the date hereof as to the corporate existence and good standing of
ECI certified by the Secretary of State of the State of Ohio.
6.1.9 Waivers. I-Alliance may waive one or more of said
conditions but such waiver shall be effective only if in writing and
signed on behalf of I-Alliance by one of its duly authorized officers
and may be conditioned in any manner I-Alliance sees fit.
6.2 Conditions Precedent to Closing by ECI and Shareholders. The
obligation of ECI and Shareholders to close the transactions herein contemplated
is subject to the following express conditions precedent:
6.2.1 Representations and Warranties. Representations and
warranties set forth in Article 5 of this Agreement shall be true and
correct in all material respects at and as of the Closing Date.
6.2.2 Covenants. I-Alliance will have performed and complied
with all of its covenants under this Agreement in all material respects
through the Closing Date.
6.2.3 Legal Limitations on Closing. There shall not be in
effect any statute, rule or regulation which makes it illegal for
I-Alliance, ECI or the Shareholders to consummate the transactions
contemplated herein or any order, decree or judgment which enjoins ECI
or the Shareholders from consummating the transactions contemplated
hereby, except that any such order, decree or judgment shall not be a
condition precedent if I-Alliance shall have offered indemnity with
respect thereto that is reasonably satisfactory to ECI and
Shareholders.
6.2.4 Legal Actions. No suit, action, or other proceeding
shall be pending or threatened before any court or governmental agency
seeking to restrain, prohibit or obtain damages or other relief in
connection with this Agreement or the consummation of the transactions
contemplate herein and there shall have been no investigation or
inquiry made or commenced by any governmental agency in connection with
this Agreement or the transactions contemplated herein, except that the
foregoing shall not be a condition precedent if I-Alliance shall have
offered indemnity with respect thereto that is reasonably satisfactory
to ECI and the Shareholders.
6.2.5 Satisfactory Performance. All actions to be taken by
I-Alliance in connection with consummation of the transactions
contemplated hereby and all certificates, opinions, instruments, and
other documents required to effect the transactions contemplated hereby
have been completed in a manner which is reasonably satisfactory in
form and substance to ECI and Shareholders.
6.2.6 Waiver. ECI and Shareholders may waive one or more of
the foregoing conditions but such waiver shall only be effective if in
writing and signed by ECI and Shareholders and may be conditioned in
any manner ECI and Shareholders see fit.
ARTICLE 7
I-ALLIANCE SHARES
7.1 Legend. Any certificate or certificates representing I-Alliance
Shares will bear the following legend unless and until removal thereof is
permitted pursuant to the terms of this Agreement:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT") OR UNDER ANY APPLICABLE STATE SECURITIES LAW AND MAY
NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT FOR THESE
SHARES OR AN OPINION OF I-ALLIANCE'S COUNSEL THAT REGISTRATION
IS NOT REQUIRED UNDER THE ACT AND THE RULES AND REGULATIONS
PROMULGATED THEREUNDER OR UNDER APPLICABLE STATE SECURITIES
LAWS.
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7.2 Examination and Investment Representation. Shareholders, severally,
represent and warrant to I-Alliance that each of them has examined I-Alliance's
Annual Report on Form 10-K for the year ended December 31, 1995, its Quarterly
Report on Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996, and
its Information Statement dated September 23, 1996, including the financial
statements contained therein, has had the opportunity to discuss I-Alliance's
operations with its officers and employees, and is acquiring the I-Alliance
Shares for his/her own account for investment within the contemplation of the
Securities Act of 1933, as amended (the "Securities Act") and not with a view to
the transfer or resale thereof, except to the extent otherwise expressly
provided in this Agreement, that he has been advised by his counsel of the legal
implications and effect of the foregoing under the Securities Act and of the
circumstances under which he may dispose of his I-Alliance Shares under the
Securities Act, including the possible limited sale thereof pursuant to Rule 144
under the Securities Act and of the affect of the legending of the certificate
for his I-Alliance Shares with the legend described in Section 7.1.
7.3 Registration Rights. Each Shareholder shall have the following
registration rights with respect to the I-Alliance Shares:
7.3.1 Transfer of Registration Rights. Shareholder may assign
the registrations rights with respect to the I-Alliance Shares to any
party or parties to which he may from time to time transfer the
I-Alliance Shares. Upon assignment of any registration rights pursuant
to this Section 7.3, Shareholder shall deliver to the transfer agent
for I-Alliance, a notice of such assignment which includes the identity
and address of any assignee (collectively, Shareholder and each such
subsequent holder is referred to as a "Holder").
7.3.2 Required Registration. As promptly as practicable after
the Closing, I-Alliance agrees to register all of the Registrable
Securities (as hereinafter defined) pursuant to a registration
statement on Form S-3 (the "Shelf Registration Statement"). I-Alliance
shall use its best efforts to cause the Shelf Registration Statement to
be declared effective as quickly as practicable and to maintain the
effectiveness of the Shelf Registration Statement until such time as
I-Alliance reasonably determines based on an opinion of counsel that
the Holders will be eligible to sell all of the Registrable Securities
then owned by the Holders without the need for continued registration
of the Shares in the three-month period immediately following the
termination of the effectiveness of the Shelf Registration Statement.
I-Alliance's obligations contained in this Section 7.3 shall terminate
on the third anniversary of the Effective Date.
7.3.3 Registration Procedures. In case of each registration,
qualification or compliance effected by I-Alliance subject to this
Section 7.3, I-Alliance shall keep Holder advised in writing as to the
initiation of each such registration, qualification and compliance and
as to the completion thereof. In addition, I-Alliance shall at its own
expense:
7.3.3.1 subject to this Section 7.3, before filing a
registration or prospectus or any amendment or supplements
thereto, furnish to counsel selected by Holder copies of all
such documents proposed to be filed and the portions of such
documents provided in writing by Holder for use therein,
subject to such Holder's approval, and for which Holder shall
indemnify I-Alliance;
7.3.3.2 prepare and file with the SEC such amendments
and supplements to the Shelf Registration Statement as may be
necessary to keep the Shelf Registration Statement effective
and comply with provisions of the Securities Act with respect
to the disposition of all securities covered thereby during
such period;
7.3.3.3 update, correct, amend and supplement the
Shelf Registration Statement as necessary;
7.3.3.4 if such offering is to be underwritten, in
whole or in part, enter into a written agreement in form and
substance reasonably satisfactory to the managing underwriter
and the registering Holder;
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7.3.3.5 furnish to Holder such number of
prospectuses, including preliminary prospectuses, and other
documents that are included in the Shelf Registration
Statement as Holder may reasonably request from time to time;
7.3.3.6 use its best efforts to register to qualify
such Registrable Securities under such other securities or
blue sky laws of such jurisdictions of the United States as
Holder may request to enable it to consummate the disposition
in such jurisdiction of the Registrable Securities (provided
that I-Alliance will not be required to (A) qualify generally
to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Article I, or
(B) consent to general service of process in any such
jurisdiction);
7.3.3.7 notify Holder, at any time when the
prospectus included the Shelf Registration Statement relating
to the Registrable Securities is required to be delivered
under the Securities Act, of the happening of any event which
would cause such prospectus to contain an untrue statement of
a material fact or omit any fact necessary to make the
statement therein in light of the circumstances under which
they are made not misleading and, at the request of Holder,
prepare a supplement or amendment to such prospectus, so that,
as thereafter delivered to purchasers of such shares, such
prospectus will not contain any untrue statements of a
material fact or omit to state any fact necessary to make the
statements therein in light of the circumstances under which
they are made not misleading;
7.3.3.8 use its best efforts to cause all such
Registrable Securities to be listed on each securities
exchange or national market on which similar securities issued
by I-Alliance are then listed and obtain all necessary
approvals from such exchange or national market for trading
thereon;
7.3.3.9 provide a transfer agent and registrar for
all such Registrable Securities not late than the effective
date of the Shelf Registration; and
7.3.3.10 upon the sale of any Registrable Securities
pursuant to the Shelf
Registration, remove all restrictive legends from all
certificates or other instruments evidencing such Registrable
Securities (to the extent permitted by the Securities Act).
7.3.4 Delay and Suspension. If Issuer is aware of any event
which has occurred or which it reasonably expects might occur
within the next ninety days, andsuch event would cause (or Issuer
believes might cause) the Shelf Registration Statement (or any
prospectus) to contain any untrue statements of a material fact or
omit to state any fact necessary to make the statements therein in
light of the circumstances under which they are made not misleading,
then notwithstanding any other provision of this Section 7.3, Issuer
upon notice to Holder, may delay filing any Shelf Registration
Statement otherwise required hereunder or may withdraw or suspend for
up to ninety days any then pending Shelf Registration Statement.
7.3.5 Expenses. Except as required by law, all expenses
incurred by in complying with this Section 7.3, including but not
limited to, all registration, qualification and filing fees, printing
expenses, fees and disbursements of counsel and accountants for
I-Alliance, blue sky fees and expenses (including fees and
disbursements of counsel related to all blue sky matters)
("Registration Expenses") incurred in connection with any registration,
qualification or compliance pursuant this Section 7.3 shall be borne by
I-Alliance. All underwriting discounts and selling commissions and any
fees of Holder's own attorneys or other advisors applicable to a sale
incurred in connection with any registration of I-Alliance Shares and
the legal fees of Holder shall be borne by Holder.
7.3.6 Further Information. If Registrable Securities owned by
Holder are included in any registration, such Holder shall use
reasonable efforts to cooperate with I-Alliance and shall furnish
I-Alliance such information regarding itself as I-Alliance may
reasonably request and as shall be required in connection with any
registration, qualification or compliance referred to in this
Agreement.
7.3.7 Definition For purposes of this Section 7.3,
"Registrable Securities" will mean the I-Alliance Shares and all common
stock or other securities issued in respect of such Shares by way of a
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stock dividend or stock split or in connection with a combination or
subdivision of shares, recapitalization, merger or consolidation or
reorganization, and any securities issued in respect of the I-Alliance
Shares by way of stock dividend or stock split or in connection with
any combination or subdivision of shares, recapitalization, merger or
consolidation or reorganization; provided, however, as to any
particular Registrable Securities, such Registrable Securities will
cease to be subject to this Article when they have been sold pursuant
to an effective registration statement or in a transaction exempt from
the registration and prospectus delivery requirements of the Securities
Act under Section 4(1) thereof so that all transfer restrictions and
restrictive legends with respect thereto are removed upon the
consummation of such sale and the purchaser and seller receive an
opinion of counsel from the seller or the purchaser, which opinion
shall be in form and substance reasonably satisfactory to the other
party and I-Alliance and their respective counsel, to the effect that
such stock in the hands of the purchase is freely transferable without
restriction or registration under the Securities Act in any public or
private transaction.
7.4 Indemnity. I-Alliance shall indemnify Shareholders from and against
any and all liabilities to which they may become subject as a result of any
untrue statement or alleged untrue statement of a material fact contained in the
related registration statement, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statement therein not misleading, other than a statement or omission made in
reliance on and consistent with information furnished in writing by the
Shareholders for use in such registration statement, provided, however, that
each Shareholder shall indemnify I-Alliance, and the underwriters of the
offering, if any, from and against any and all liabilities to which I-Alliance
may become subject as a result of any untrue statement or alleged untrue
statement of a material fact contained in the related registration statement, or
the omission or alleged omissions to state therein a material fact required to
be stated therein or necessary to make the statement not misleading, but only
insofar as such statement or omission was made in reliance by I-Alliance on and
consistent with information furnished in writing by such Shareholder.
7.5 Documents. I-Alliance shall furnish to Shareholder one copy of the
registration statement and any amendments thereto and such number of copies of
the final prospectus as they may reasonably request, and shall deliver to the
exchanges or NASDAQ (where listed) such number of copies of the final prospectus
required to comply with the prospectus delivery requirements and permit the sale
of the registered I-Alliance Shares on such exchange or national market.
ARTICLE 8
OTHER COVENANTS
8.1 Announcements. Prior to the Closing, none of the parties will make
any public release of information regarding this Agreement or the transactions
contemplated hereto, except that I-Alliance may issue press release after the
execution of this Agreement and the Closing and as otherwise required by law.
8.2 Conduct of Business. During the period from the date hereof to the
Effective Date, unless I-Alliance consents otherwise in writing (which consent
will not be unreasonably withheld), ECI will conduct the business of ECI only in
the ordinary course of business consistent with past practice except as
contemplated by this Agreement.
8.3 Cooperation. Each party hereto agrees that before and after the
Closing to execute any and all further documents and writings and to perform
such other reasonable actions which may be or become necessary or expedient to
effectuate and carry out this Agreement.
8.4 Tax Matters. It is the intent of the parties that the exchange of
the ECI shares for the I-Alliance Shares be a tax free exchange (except to the
extent of the other considerations received). I-Alliance
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and Merger Sub will use all reasonable efforts to consummate the merger in such
fashion, but neither I-Alliance nor Merger Sub makes any representation as to
the tax treatment of Shareholders or any agreement with respect to refraining
from taking any future action which could adversely affect the tax treatment of
this transaction. Notwithstanding anything in this Agreement to the contrary,
the Shareholders will remain solely liable for any tax consequences to them
as a result of the transactions contemplated by this Agreement.
8.5 Tax Cooperation. After Closing the parties will cooperate with each
other in the preparation of all tax returns, and will provide to such other
parties any records and other information reasonably requested by such party in
connection therewith as well as access to, and cooperation of, the auditors of
such other party.
ARTICLE 9
CLOSING, CLOSING ADJUSTMENTS AND TERMINATION
9.1 Closing. The closing ("Closing"), i.e. the execution and delivery
of the documents contemplated by this Agreement, will take place at the offices
of I-Alliance, as soon as practical after the date of this agreement, provided
that such date will not be after December 27, 1996, or at such time as mutually
agreed (the "Closing Date"). The parties agree that time is of the essence.
9.2 Adjustments. The consideration paid to the Shareholders will be
subject to adjustment at or after the Closing for any increase or decrease in
the Net Worth of ECI at the Effective Date above or below $150,000. The amount
of such adjustment will be promptly paid by I-Alliance to the Shareholders (in
proportion to their interests reflected in Schedule 2.6, or will be immediately
refunded to I-Alliance (or ECI as directed by I-Alliance) by each Shareholder
(in proportion to their interests reflected in Schedule 2.6) upon a demand by
I-Alliance.
9.3 Termination. This Agreement may be terminated at any time
on or prior to the Effective Date:
9.3.1 by I-Alliance or ECI if any court of competent jurisdiction
will issue any order (other than temporary restraining order)
restraining, enjoining or prohibiting the transactions;
9.3.2 by mutual written agreement of I-Alliance and ECI;
9.3.3 by either I-Alliance or ECI if the Effective
Date will not have occurred on or before December
3, 1996, time being of the essence, provided that the right to
terminate this Agreement pursuant to this section will not be
available to any party whose failure to fulfill any obligation
of this Agreement has been the cause or resulted in the
failure of the Effective Date to occur on or before such date;
9.3.4 Breach by ECI. By I-Alliance if there has been a material
breach on the part of ECI in its representations, warranties
or covenants set forth herein, provided however that if such
breach is susceptible to cure, then ECI will have 30 days
after receipt of notice from I-Alliance, of its intent to
terminate this Agreement, in which to cure such breach; and
9.3.5 Breach by I-Alliance. By ECI if there has been a material
breach on the part of I-Alliance in its representations,
warranties or covenants set forth herein, provided however
that if such breach is susceptible to cure, then I-Alliance
will have 30 days after receipt of notice from ECI, of its
intent to terminate this Agreement, in which to cure such
breach.
9.4 Affect of Termination. If this Agreement is terminated pursuant to
this Article, all obligations of the parties under this Agreement will terminate
(except for this Article), and no party hereto will have any further liability
to the other parties hereto, except that such termination will be without
prejudice to any claim which a party may have against another for breach of this
Agreement that occurred prior to the date of termination.
-14-
<PAGE> 15
ARTICLE 10
SURVIVAL, INDEMNIFICATION AND LIMIT OF LIABILITY
10.1 Survival. All of the representations or warranties contained
herein will survive for a period of three years from the Closing Date and will
then expire. Upon the expiration of representations and warranties pursuant to
this section, unless written notice of a claim based on such representations and
warranty specifying in reasonable detail the facts on which the claim is based
will have been delivered to the indemnifying party prior to expiration of such
representation and warranty, such representation and warranty will be of no
further force or effect, as if never made and no action may be brought based on
the same, whether for breach of contract or any other legal theory, except,
however, that claims based on fraud, willful misrepresentation or with respect
to the representations and warranties set forth in Section 4.1.1 may be asserted
at any time within one year after I-Alliance learns of such fraud, willful
misrepresentation or breach.
10.2 Shareholders Indemnity. Each Shareholder agrees to indemnify,
defend and hold I-Alliance Indemnified Parties harmless from and against all
Losses incurred by I-Alliance Indemnified Parties resulting from or on account
of a breach of any representation, warranty or covenant of such Shareholder made
in this Agreement.
10.3 Limit of Liability. No Shareholder will be liable to I-Alliance
under this Agreement (except for and excluding amounts described in Section 10.4
below) for an amount in excess of the consideration received by such Shareholder
pursuant to this Agreement.
10.4 Shareholders Additional Indemnity. Each Shareholder agrees to
indemnify, defend and hold I-Alliance Indemnified Parties harmless from and
against all Losses incurred by I-Alliance Indemnified Parties resulting from or
on account of Indemnified Tax Liability or Errors and Omissions Liability (as
defined below).
For purposes of this Article the following definitions apply:
10.4.1 "Indemnified Tax Liability" will mean any and all
federal, state or local income tax or franchise tax liability of ECI
(or on account of ECI) whether in the current or future tax years, on
account of the distribution to the Shareholders and others of the
Contingent Receivable and or the realization thereof.
10.4.2 "Errors and Omissions Liability" will mean any
liability to ECI due to errors and omissions of its employees and
agents occurring before the Closing Date which has not been disclosed
in the Schedules to this Agreement and whose existence is not a breach
of the representations and warranties contained herein, to the extent
such liability is not reimbursed by insurance coverage maintained by
ECI prior to the Closing Date.
10.4.3 "Contingent Receivable" will mean a certain receivable
for contingent commissions for business written prior to the Closing
which was distributed or otherwise transferred from ECI to its then
shareholders prior to this Agreement.
10.5 Limit of Liability. No Shareholder will be liable to I-Alliance
under Section 10.4 above for an amount in excess of the amount actually received
by (or on behalf of) such Shareholder from its interest in the Contingent
Receivable (plus any remaining interest the Shareholder has therein), provided
that such Shareholder has given I-Alliance as of the Closing a first security
interest in such Contingent Receivable on terms reasonably satisfactory to
I-Alliance.
ARTICLE 11
MISCELLANEOUS PROVISIONS
11.1 Amendment and Modification. This Agreement may be amended,
modified and supplemented only by a writing signed by I-Alliance and the
Shareholders.
-15-
<PAGE> 16
11.2 Waiver of Compliance. Any failure of I-Alliance or the
Shareholders to comply with any obligation, covenant, agreement or condition
herein contained my be expressly waived, in writing only, by (i) I-Alliance in
the case of any failure of the Shareholders or (ii) the Shareholders in the case
of any failure of I-Alliance. Such waiver shall be effective only in the
specific instance and for the specific purpose for which made or given.
11.3 Expenses. Each party will pay its own expenses incurred in
connection with this Agreement or any transaction contemplated by this
Agreement. The foregoing shall not be construed as limiting any other rights
which any party may have as a result of misrepresentation of or breach by any
other party.
11.4 Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand, or when mailed by certified or
registered mail (return receipt requested), postage prepaid or when delivered by
fax (evidenced by confirmation of successful transmission), as follows:
A. If to I-Alliance:
International Alliance Services, Inc.
10055 Sweet Valley Drive
Valley View, Ohio 44125
Phone: (216) 447-9000
Fax: (216) 447-9137
Attn: Joseph E. LoConti
With a copy to:
Anne L. Meyers & Associates Co., LPA
2 Summit Park Drive, Ste. 150
Cleveland, Ohio 44131-2553
Phone: (216) 520-4344
Fax: (216) 520-4350
Attn: Anne L. Meyers
or to such other person or place as I-Alliance or I-Alliance shall designate by
notice in the manner provided in this Section 11.4:
B. If to the Shareholders:
To the Shareholders at their
respective addresses set forth on
Exhibit A
With a copy to:
____________________________
____________________________
____________________________
____________________________
____________________________
-16-
<PAGE> 17
or to such other person as the Shareholders shall designate by notice in the
manner provided in this Section 11.4.
11.5 Assignment. This Agreement shall be binding upon and inure to the
benefit of I-Alliance and its successors and assigns, and to the Shareholders
and their respective successors and assigns or heirs, executors, administrators
and personal representatives, as the case may be, but neither this Agreement nor
any of the rights, interests and obligations hereunder shall be assigned by
I-Alliance or any of the Shareholders without the prior written consent of the
other parties.
11.6 Third Parties. This Agreement is not intended to and shall not be
construed to give any Person other than the parties hereto any interest or
rights (including, without limitation, any third party beneficiary rights) with
respect to or in connection with any agreement or provision contained herein or
contemplated hereby.
11.7 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the Ohio, without regard to principles of
conflicts of laws. I-Alliance and the Shareholders hereby irrevocably submit to
the jurisdiction of the courts of the State of Ohio, with venue in Cuyahoga
County, over any dispute arising out of this Agreement and agree that all claims
in respect of such dispute or proceeding shall be heard and determined in such
court. I-Alliance and the Shareholders hereby irrevocably waive, to the fullest
extent permitted by applicable law, any objection which they may have to the
venue of any such dispute brought in such court or any defense of inconvenient
forum for the maintenance of such dispute. I-Alliance and the Shareholders
hereby consent to process being served by them in any suit, action or proceeding
by delivering it in the manner specified by the provisions of Section 11.4 of
this Agreement.
11.8 Counterparts. This Agreement may be executed in two more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
11.9 Headings. The headings of the sections, schedules and articles of
this Agreement are inserted for the sake of convenience only and shall not
constitute a part hereof.
11.10 Entire Agreement. This Agreement, including the schedules and
exhibits, contains the entire understanding of the parties in respect of the
subject matter contained herein and therein and there are no other terms or
conditions, representations or warranties, written or oral, express or implied,
except as set forth herein.
[Remainder of page left intentionally blank]
-17-
<PAGE> 18
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
INTERNATIONAL ALLIANCE SERVICES, INC.
By: _____________________________________
Joseph E. LoConti, Vice Chairman
IASI/ECI ACQUISITION CO.
By: ______________________________________
Craig L. Stout, President
ENVIRONMENTAL & COMMERCIAL INSURANCE
AGENCY, INC.
By: _____________________________________
Christopher J. Timm, President
SHAREHOLDERS:
____________________________________
Christopher J. Timm
____________________________________
Shirley Sue Ellis
____________________________________
Mark J. Perkins
-18-
<PAGE> 19
LOCK-UP AGREEMENT
This LOCK-UP AGREEMENT (this "Agreement"), dated as of November 30,
1996, is entered into by and between
_____________________________("Stockholder"), and International Alliance
Services, Inc., a Delaware corporation
("I-Alliance").
W I T N E S S E T H:
WHEREAS, contemporaneously with the delivery of this Agreement, SMR &
Co. Business Services, of which Stockholder is a shareholder, and IASI/SMR
Acquisition Co., a wholly-owned subsidiary of I-Alliance, are closing the
transactions contemplated by that certain Agreement and Plan of Merger dated as
of even date herewith (the "Merger Agreement"), providing for, among other
items, the merger of SMR & Co. Business Services with and into IASI/SMR
Acquisition Co. with SMR & Co. Business Services being the surviving corporation
(the "Merger").
WHEREAS, as a condition to the closing of the transactions contemplated
by the Merger Agreement (the "Closing"), Stockholder agrees not to make any
Transfer (defined herein) of (i) the shares (the "Shares") of I-Alliance common
stock, $.01 par value per share ("Shares"), and warrants to purchase shares of
Common Stock (the "Warrants") to be acquired by Stockholder pursuant to the
Merger Agreement and (ii) the shares of Common Stock to be acquired by
Stockholder upon exercise of the Warrants (the "Warrant Shares"), except as
expressly permitted by this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto hereby agree as follows:
1 Restrictions on Transfer. Stockholder hereby agrees that, without the
unanimous consent of the Board of Directors of I-Alliance, it will not, directly
or indirectly sell, assign, transfer, pledge (other than by pledge or other
grant of a security interest if the pledgee agrees in writing to be bound by the
terms of this Agreement) or otherwise dispose of, (collectively, "Transfer"),
the Shares prior to the end of the two-year period following the date hereof;
provided, however, that after the expiration of six months from the date hereof,
Stockholder may thereafter Transfer, in the aggregate, up to fifteen (15%) per
cent of the Shares.
Stockholder hereby agrees that, without the unanimous consent of the Board of
Directors of I-Alliance, it will not Transfer the Warrants or the Warrant Shares
prior to the end of the thirty (30) month period following the date hereof;
provided that (a) after the expiration of six months from the date hereof,
Stockholder may thereafter Transfer Warrants for or Warrant Shares totaling, in
the aggregate, up to thirty three (33%) per cent of the number of Warrant Shares
issuable on the exercise of all the Warrants; and (b) after the expiration of
eighteen (18) months from the date hereof, Stockholder may thereafter Transfer
Warrants for or Warrant Shares totaling (together with any Warrants or Warrant
Shares Transferred pursuant to the preceding subparagraph (a)), in the
aggregate, up to sixty six (66%) per cent of the number of Warrant Shares
issuable on the exercise of all the Warrants.
Notwithstanding the foregoing, Stockholder may Transfer the Shares, Warrants or
Warrant Shares (a) to the spouse or children of such Stockholder, whether
directly or in trust (including pursuant to the uniform gift to minors
provisions) for their sole benefit, provided that the transferee agrees in
writing to be bound by the terms of this Agreement, and provided further that
Stockholder may not disclaim beneficial ownership of such Shares, Warrants or
Warrant Shares for purposes of any filing pursuant to any securities law, or (b)
to a third party making a cash tender or exchange offer in compliance with
Regulations 14D and 14E under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), following the filing with the SEC in compliance with the
-19-
<PAGE> 20
Exchange Act by I-Alliance of a Recommendation Statement on Schedule 14D-9
pursuant to which I-Alliance affirmatively recommends to the I-Alliance
stockholders the acceptance of such cash tender or exchange offer.
2 Miscellaneous
2.1 Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
2.2 Binding Effect and Assignment. This Agreement and all of
the provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but except
as otherwise specifically provided, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by any of
the parties hereto without the prior written consent of the other.
2.3 Amendments and Modification. This Agreement may not be
modified, amended, altered or supplemented except upon the execution and
delivery of a written agreement executed by the parties hereto.
2.4 Specific Performance. The parties hereto acknowledge that
I-Alliance will be irreparably harmed and that there will be no adequate remedy
at law for a violation of any of the covenants or agreements of Stockholder set
forth herein. Therefore, it is agreed that, in addition to any other remedies
which may be available to I-Alliance upon such violation, I-Alliance shall have
the right to enforce such covenants and agreements by specific performance,
injunctive relief or by any other means available to I-Alliance at law or in
equity.
2.5 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and sufficient if delivered in
person, by cable, telecopy, telegram or telex, or sent by mail (registered or
certified mail, postage prepaid, return receipt requested) to the respective
parties as follows:
If to Stockholder:
___________________________________
___________________________________
___________________________________
Attention: ________________________
Telecopy: _________________________
With a copy to:
___________________________________
___________________________________
___________________________________
Attention: ________________________
Telecopy: _________________________
-20-
<PAGE> 21
If to ______:
___________________________________
___________________________________
___________________________________
Attention: ____________________
Telecopy: _________________________
With a copy to:
___________________________________
___________________________________
___________________________________
Attention: ________________________
Telecopy: _________________________
or to such other address any party may have furnished to the other in writing in
accordance herewith, except that notices of change of address shall only be
effective upon receipt.
2.6______Governing Law. This Agreement shall be governed by,
construed and enforced in accordance with the laws of the State of Ohio as
applied to contracts entered into solely between residents of, and to be
performed entirely in, such state.
2.7______Entire Agreement. This Agreement contains the entire
understanding of the parties in respect of the subject matter hereof, and
supersedes all prior negotiations and understandings between the parties with
respect to such subject matters.
2.8______Effect of Headings. The section headings herein are
for convenience only and shall not affect the construction or interpretation of
this Agreement.
2.9______Definitions. All capitalized terms used herein shall
have the meanings defined in the Merger Agreements, unless otherwise defined
herein.
2.10_____Counterparts. This Agreement shall be executed in one
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the date first above written.
"Stockholder"
___________________________________
"I-Alliance"
International Alliance Services, Inc.
By: _____________________________________
Printed Name: ___________________________
Title: ____________________________
-21-
<PAGE> 1
EXHIBIT 11.1
International Alliance Services, Inc.
Earnings per Common Share Data
(Amounts in Thousands)
Net income and common shares used in the calculations of earnings per
common share for the years ended December 31, 1996, 1995, 1994, 1993 and 1992
were computed as follows:
<TABLE>
<CAPTION>
1996(1)(2)
----------
Primary Fully Diluted 1995(1)(2) 1994(1)(2) 1993(1)(2) 1992(1)(2)
------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income:
Income From continuing operations . . . . . . $ 4,422 $ 4,422 $ 3,469 $ 3,500 $ 2,218 $ 1,372
Interest expense reduction, net of tax . . 39 30 - - - -
Interest income, net of tax . . . . . . . . 2,165 626 - - - -
------- ------- ------- ------- ------- -------
$ 6,617 $ 5,078 $ 3,469 $ 3,500 $ 2,218 $ 1,372
(38) (38) - - - -
Loss from discontinued operations ------- ------- ------- ------- ------- -------
Net income applicable to common stock . . . $ 6,579 $ 5,040 $ 3,469 $ 3,500 $ 2,218 $ 1,372
======= ======= ======= ======= ======= =======
Common Shares:
Weighted average common shares . . . . . . 17,863 17,863 14,760 14,760 14,760 14,760
Common stock equivalents . . . . . . . . . 14,350 14,350 2,196 2,196 2,196 2,196
------- ------- ------- ------- ------- -------
32,213 32,213 16,956 16,956 16,956 16,956
======= ======= ======= ======= ======= =======
</TABLE>
- --------------------------
(1) The Company has reflected the shares received in the RESI Transaction as
if the shares had been issued January 1, 1994.
(2) As a result of the significant number of warrants outstanding at December
31, 1996, 1995, 1994, 1993 and 1992, the Company computed weighted average
common shares under the modified treasury stock method.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF
INTERNATIONAL ALLIANCE SERVICES, INC.
(as of December 31, 1996)
Adams Oil, Inc.
American Inspection and Audit Services, Inc.
Century Surety Company
Century Surety Underwriters, Inc. of Indiana
Chem-Freight, Inc.
Commercial Surety Agency, Inc. dba Century Surety Underwriters
Continental Heritage Insurance Company
Contract Operations Planning, Incorporated
Contract Surety Reinsurance Corp.
CSC Insurance Agency, Inc.
Diversified Environmental Resources, Inc.
Environmental & Commercial Insurance Agency, Inc.
Evergreen National Indemnity Company
IASI Management Co.
Keystone Chemical Co.
Palro Environmental Management Systems Ltd.
RES Finance Co.
RES Trademark Co.
Republic Canada, Inc.
Republic Environmental Recycling (New Jersey), Inc.
Republic Environmental Systems, Inc.
Republic Environmental Systems (Brantford) Ltd.
Republic Environmental Systems (Brockville) Ltd.
Republic Environmental Systems (Cleveland), Inc.
Republic Environmental Systems Ltd.
Republic Environmental Systems (Fort Erie) Ltd.
Republic Environmental Systems Management Co.
Republic Environmental Systems (New York), Inc.
Republic Environmental Systems (North Jersey), Inc.
Republic Environmental Systems (Ohio), Inc.
Republic Environmental Systems (Pennsylvania), Inc.
Republic Environmental Systems (Pickering) Ltd.
Republic Environmental Systems (Technical Services Group), Inc.
Republic Environmental Systems (Transportation Group), Inc.
Republic Environmental Systems (Windsor) Ltd.
SMR & Co. Business Services
<PAGE> 1
EXHIBIT 24.1
INDEPENDENT ACCOUNTANTS CONSENT
The Board of Directors
International Alliance Services, Inc.
We consent to incorporation by reference in Amendment No. 2 to the registration
statement (No. 333-15413) on Form S-3 of International Alliance Services, Inc.
of our report dated March 25, 1997, relating to the consolidated and combined
balance sheets of International Alliance Services, Inc. and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated and combined statements
of income, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1996, and all related schedules, which
report appears in the December 31, 1996 annual report on Form 10-K of
International Alliance Services, Inc.
/s/ KPMG Peat Marwick LLP
Cleveland, Ohio
March 28, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000944148
<NAME> INTERNATIONAL ALLIANCE SERVICES
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1994 DEC-31-1993 DEC-31-1992
<PERIOD-START> JAN-01-1996 JAN-01-1995 JAN-01-1994 JAN-01-1993 JAN-01-1992
<PERIOD-END> DEC-31-1996 DEC-31-1995 DEC-31-1994 DEC-31-1993 DEC-31-1992
<DEBT-HELD-FOR-SALE> 35,471 33,153 24,885 0 2,379
<DEBT-CARRYING-VALUE> 15,481 15,309 20,129 35,296 6,648
<DEBT-MARKET-VALUE> 15,376 15,364 18,583 35,557 0
<EQUITIES> 9,213 5,426 1,765 1,657 1,545
<MORTGAGE> 3,685 3,393 2,960 1,548 350
<REAL-ESTATE> 0 0 0 0 0
<TOTAL-INVEST> 68,649 58,214 50,749 45,619 26,114
<CASH> 39,874 2,694 6,893 1,051 4,613
<RECOVER-REINSURE> 11,185<F1><F2> 12,647<F3><F4> 10,888<F5><F6> 10,114 194
<DEFERRED-ACQUISITION> 4,345 3,428 3,725 2,406 1,677
<TOTAL-ASSETS> 167,330 86,735 81,931 68,117 36,926
<POLICY-LOSSES> 41,099 37,002 34,661 29,528 14,107
<UNEARNED-PREMIUMS> 18,637 15,636 15,453 12,166 5,352
<POLICY-OTHER> 0 0 0 0 0
<POLICY-HOLDER-FUNDS> 0 0 0 0 0
<NOTES-PAYABLE> 3,211 47 503 830 897
<COMMON> 338 148 148 148 148
0 0 0 0 0
0 0 0 0 0
<OTHER-SE> 90,984 26,620 23,432 18,253 12,883
<TOTAL-LIABILITY-AND-EQUITY> 167,330 86,735 81,932 68,117 36,926
27,743 26,962 23,368 17,373 11,534
<INVESTMENT-INCOME> 3,564 3,341 2,477 1,377 1,272
<INVESTMENT-GAINS> 1,529 166 80 (91) 210
<OTHER-INCOME> 2,933 470 1,385 1,737 269
<BENEFITS> 17,624 15,117 12,494 8,612 5,773
<UNDERWRITING-AMORTIZATION> 7,699 7,774 5,428 5,012 3,787
<UNDERWRITING-OTHER> 4,384 3,157 4,544 3,287 2,039
<INCOME-PRETAX> 6,062 4,891 4,844 3,485 2,123
<INCOME-TAX> 1,640 1,422 1,344 1,189 751
<INCOME-CONTINUING> 4,422 3,469 3,500 2,296 1,372
<DISCONTINUED> (38) 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 4,384 3,469 3,500 2,296 1,372
<EPS-PRIMARY> 0.21 0.20 0.20 0.14 0.08
<EPS-DILUTED> 0.16 0.20 0.20 0.14 0.08
<RESERVE-OPEN> 37,002 34,661 29,528 14,107 0
<PROVISION-CURRENT> 17,216 17,297 14,753 10,060 0
<PROVISION-PRIOR> 408 (2,180) (2,259) (1,447) 0
<PAYMENTS-CURRENT> 3,684 5,963 4,269 2,823 0
<PAYMENTS-PRIOR> 9,043 6,344 3,970 3,054 0
<RESERVE-CLOSE> 41,099 37,002 34,661 29,528 0
<CUMULATIVE-DEFICIENCY> 0 0 0 0 0
<FN>
<F1>NET REINSURANCE RECOVERABLES JAN 1: 8,914
<F2>NET REINSURANCE RECOVERABLES DEC 31: 8,114
<F3>NET REINSURANCE RECOVERABLES JAN 1: 9,383
<F4>NET REINSURANCE RECOVERABLES DEC 31: 8,914
<F5>NET REINSURANCE RECOVERABLES JAN 1: 8,505
<F6>NET REINSURANCE RECOVERABLES DEC 31: 9,383
</FN>
</TABLE>
