Exhibit 99.1
Cornick Garber Sandler
Certified Public Accountants & Advisors
DE NOVO LEGAL, LLC
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010
Cornick Garber Sandler
Certified Public Accountants & Advisors
Independent Auditors’ Report
De Novo Legal, LLC
New York, New York
We have audited the accompanying consolidated balance sheet of DE NOVO LEGAL, LLC AND SUBSIDIARY as at December 31, 2010 and the related consolidated statements of operations and members’ capital and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of De Novo Legal, LLC and Subsidiary as at December 31, 2010 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles in the United States.
| /s/ Cornick, Garber & Sandler, LLP |
| CERTIFIED PUBLIC ACCOUNTANTS |
New York, New York
March 29, 2011
Cornick, Garber & Sandler, LLP |
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825 Third Avenue, New York, NY 10022-9524 T 212.557.3900 F 212.557.3936 |
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50 Charles Lindbergh Blvd., Uniondale, NY 11553-3600 T 516.542.9030 F 516.542.9035 |
| cgscpa.com |
Cornick Garber Sandler
Certified Public Accountants & Advisors
DE NOVO LEGAL, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2010
ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | 316,989 |
Accounts receivable | 11,627,017 | |
Prepaid taxes | 188,613 | |
Prepaid expenses and other current assets | 910,635 | |
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Total current assets | 13,043,254 | |
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Equipment, furniture and improvements, net of accumulated depreciation | 2,773,657 | |
Due from members | 7,363,281 | |
Other assets | 228,509 | |
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TOTAL | $ | 23,408,701 |
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LIABILITIES |
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Current liabilities: |
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Accounts payable and accrued expenses | $ | 1,451,952 |
Notes payable bank | 5,845,000 | |
Equipment leases payable (current portion) | 829,189 | |
Deferred income taxes | 487,000 | |
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Total current liabilities | 8,613,141 | |
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Deferred rent payable | 58,556 | |
Deferred income taxes | 45,000 | |
Equipment leases payable (less current portion included above) | 723,918 | |
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Total liabilities | 9,440,615 | |
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Commitments and contingencies |
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MEMBERS’ CAPITAL |
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De Novo Legal, LLC | 12,927,397 | |
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Noncontrolling interest in subsidiary | 1,040,689 | |
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Total members’ capital | 13,968,086 | |
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TOTAL | $ | 23,408,701 |
The notes to financial statements are made a part hereof.
Cornick Garber Sandler
Certified Public Accountants & Advisors
DE NOVO LEGAL, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF MEMBERS’ CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2010
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| Noncontrolling |
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| De Novo |
| Interest in |
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| Combined |
| Legal, LLC |
| Subsidiary |
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Members’ capital - January 1, 2010 |
| $ | 9,359,126 |
| $ | 8,915,496 |
| $ | 443,630 |
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Net income |
| 5,808,960 |
| 5,211,901 |
| 597,059 |
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Less: Distributions |
| (1,200,000 | ) | (1,200,000 | ) |
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MEMBERS’ CAPITAL - DECEMBER 31, 2010 |
| $ | 13,968,086 |
| $ | 12,927,397 |
| $ | 1,040,689 |
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The notes to financial statements are made a part hereof.
Cornick Garber Sandler
Certified Public Accountants & Advisors
DE NOVO LEGAL, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2010
Net service revenues |
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| $ | 41,814,905 |
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Direct cost of services |
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| 24,878,283 |
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Gross profit |
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| 16,936,622 |
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Expenses: |
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Salaries |
| $ | 4,761,425 |
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Payroll taxes |
| 388,988 |
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Payroll processing |
| 39,851 |
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Professional fees |
| 719,657 |
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Rent and utilities |
| 1,760,165 |
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Repairs and maintenance |
| 25,838 |
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Depreciation |
| 882,060 |
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Insurance |
| 553,390 |
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Advertising |
| 101,751 |
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Telephone |
| 248,591 |
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Computer expense |
| 201,621 |
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Bad debt expense |
| 293,061 |
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Office expense |
| 143,606 |
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Postage and messenger |
| 16,841 |
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Travel and entertainment |
| 330,546 |
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Bank fees |
| 25,918 |
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Interest |
| 318,626 |
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Contributions |
| 37,890 |
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Dues and subscriptions |
| 10,678 |
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Miscellaneous |
| 11,359 |
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Total expenses |
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| 10,871,862 |
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Income before income taxes and noncontrolling interest in subsidiary |
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| 6,064,760 |
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Income tax expense |
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| 255,800 |
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INCOME BEFORE NONCONTROLLING INTEREST IN SUBSIDIARY |
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| 5,808,960 |
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Less: Net income attributable to noncontrolling interest in subsidiary |
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| (597,059 | ) | ||
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NET INCOME ATTRIBUTABLE TO DE NOVO LEGAL, LLC |
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| $ | 5,211,901 |
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The notes to financial statements are made a part hereof.
Cornick Garber Sandler
Certified Public Accountants & Advisors
DE NOVO LEGAL, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2010
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities: |
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Income before noncontrolling interest in subsidiary |
| $ | 5,808,960 |
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Adjustments to reconcile results of operations to net cash effect of operating activities: |
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Depreciation expense |
| 882,060 |
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Deferred income taxes |
| 170,000 |
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Bad debt expense |
| 293,061 |
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Net change in asset and liability accounts: |
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Accounts receivable |
| (3,561,390 | ) | |
Prepaid expenses and other current assets |
| (67,751 | ) | |
Security deposits |
| (17,896 | ) | |
Accounts payable and accrued expenses |
| 875,949 |
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Deferred rent payable |
| (44,609 | ) | |
Prepaid taxes |
| (293,888 | ) | |
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Net cash provided by operating activities |
| 4,044,496 |
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Cash flows from investing activities: |
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Purchase of fixed assets |
| (423,281 | ) | |
Loans to members |
| (3,875,092 | ) | |
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Net cash used for investing activities |
| (4,298,373 | ) | |
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Cash flows from financing activities: |
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Repayments - capital leases payable |
| (876,629 | ) | |
Distributions to members |
| (1,200,000 | ) | |
Proceeds from bank note payable, net |
| 2,565,000 |
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Net cash provided by financing activities |
| 488,371 |
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NET INCREASE IN CASH |
| 234,494 |
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Cash and cash equivalents - January 1, 2010 |
| 82,495 |
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CASH AND CASH EQUIVALENTS - DECEMBER 31, 2010 |
| $ | 316,989 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the year for: |
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Interest |
| $ | 320,477 |
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Income taxes |
| $ | 342,088 |
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Fixed assets acquired through capital leases |
| $ | 676,494 |
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The notes to financial statements are made a part hereof.
Cornick Garber Sandler
Certified Public Accountants & Advisors
DE NOVO LEGAL, LLC AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
NOTE A - Summary of Significant Accounting Policies
Operations
The consolidated financial statements include the accounts of De Novo Legal, LLC and De Novo Legal Electronic Discovery, LLC, which is 85% owned by De Novo Legal, LLC and 15% owned by an individual member of De Novo Legal, LLC. All significant intercompany transactions and balances have been eliminated in combination.
De Novo Legal, LLC is in the business of providing temporary legal staffing to local and regional law firms and corporations in New York, Atlanta, Houston, San Francisco, Los Angeles, Boston and the District of Columbia.
De Novo Electronic Discovery, LLC is in the business of providing electronic discovery services which include processing and hosting legal data from two co-locations in Hawthorne, New York and San Jose, California.
Three clients represented approximately 50% of revenues and approximately 24% of accounts receivable at December 31, 2010, with the largest client representing approximately 21% and 12% of the respective totals.
Noncontrolling Interest in Subsidiary
The Company presents the 15% interest in De Novo Electronic Discovery, LLC., which is not directly owned by De Novo Legal LLC, in accordance with the provisions of the Financial Accounting Standards Board standard on “Noncontrolling Interests in Consolidated Financial Statements” which requires that the portion of net income attributable to noncontrolling interests for subsidiaries be presented separately as net income (loss) applicable to noncontrolling interests on the consolidated statement of operations, and the portion of the members’ equity of such subsidiaries be presented as noncontrolling interests on the consolidated balance sheet.
Revenue Recognition
Revenue is recognized when the services are performed and there are no significant uncertainties concerning collection of the related receivables. At December 31, 2010, the Company has not recorded revenues of approximately $177,000 related to services performed but whose collectability is contingent on the successful outcome of certain litigation related to a client of one of the Company’s customers which is not scheduled to commence until the Fall of 2011.
(Continued)
Cornick Garber Sandler
Certified Public Accountants & Advisors
DE NOVO LEGAL, LLC AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
NOTE A - Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with maturity of three months or less to be cash equivalents. The Company maintains its cash balances at one financial institution.
Accounts Receivable
The Company extends credit based on a valuation of its clients’ financial condition. Management believes that all accounts at December 31, 2010 are fully collectable. Therefore, no allowance for doubtful accounts is deemed required at December 31, 2010.
Depreciation
Depreciation of equipment, furniture and leasehold improvements is computed on a straight-line basis for financial accounting purposes. Leasehold improvements are amortized over the remaining life of the lease and equipment and furniture are depreciated over their estimated useful life. For income tax purposes, depreciation is computed by accelerated methods.
Advertising
Advertising costs are expensed as incurred. For the year ended December 31, 2010, advertising expense approximated $96,000.
Use of Estimates and Subsequent Events
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company has considered subsequent events occurring through March 29, 2011, the date the financial statements became available for distribution, in evaluating its estimates and in the preparation of its financial statements.
(Continued)
Cornick Garber Sandler
Certified Public Accountants & Advisors
DE NOVO LEGAL, LLC AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
NOTE B - Equipment, Furniture and Improvements
At December 31, 2010, equipment, furniture, computer software and improvements consist of the following:
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| Estimated |
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| Useful Lives |
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Equipment |
| $ | 4,274,392 |
| 5 |
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Furniture |
| 66,428 |
| 7 |
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Leasehold improvements |
| 259,517 |
| 2-4 |
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Computer software |
| 67,563 |
| 3 |
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Total |
| 4,667,900 |
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Accumulated depreciation |
| (1,894,243 | ) |
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Net equipment, furniture and improvements |
| $ | 2,773,657 |
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The above includes equipment under capital leases with a cost of approximately $3,182,000 (Note F).
NOTE C - Income Taxes
The Company is treated in the same manner as a partnership for federal and state income tax purposes but reports its operations on a cash basis for income tax purposes. Under this election, the cash basis taxable earnings or losses of the Company are reportable on the personal income tax returns of the members and any federal and state income taxes thereon are payable by them. However, the Company is subject to New York City, West Virginia, Texas, Georgia and Washington, D.C. unincorporated business taxes and, therefore, records deferred taxes on the difference between accrual basis and cash basis earnings in these jurisdictions. Accordingly, the Company has recorded the following income tax expense for the year ended December 31, 2010:
Currently payable |
| $ | 146,800 |
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Net increase in deferred tax assets |
| 170,000 |
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Total |
| 316,800 |
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Less: Prior years’ net overaccruals |
| (61,000 | ) | |
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Total |
| $ | 255,800 |
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(Continued)
Cornick Garber Sandler
Certified Public Accountants & Advisors
DE NOVO LEGAL, LLC AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
NOTE C - Income Taxes (Continued)
The Company’s federal income tax returns have not been examined by the Treasury Department or local jurisdictions in recent years.
NOTE D - Commitments and Contingencies
Rent
The Company’s principal premises are sublet from an unrelated party to October 31, 2011 at an annual rental of approximately $392,000 plus overtime charges.
In addition, the Company sublets or leases space from unrelated parties in various other locations (Note A).
Certain of the above-mentioned leases have rentals which increase over their term. The rentals under these leases are recorded for financial accounting purposes on a straight-line basis. At December, 31, 2010, future rentals of approximately $59,000 have been reflected as a noncurrent liability in the attached balance sheet. This noncurrent liability for rent payable will be reduced in future years to the extent that the minimum rentals payable in those years exceeds the average net expense recorded on a straight-line basis.
The aggregate minimum rental commitments for premises under lease agreements with noncancelable terms at December 31, 2010 are as follows:
Year ending December 31: |
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2011 |
| $ | 1,493,126 |
2012 |
| 843,978 | |
2013 |
| 77,181 | |
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Total |
| $ | 2,414,285 |
Rent expense was approximately $1,760,000 for the year ended December 31, 2010.
Guaranteed Payments
An employment agreement with the Company’s chief executive officer, who is also a 20% member, provides for a guaranteed minimum annual compensation of $300,000.
(Continued)
Cornick Garber Sandler
Certified Public Accountants & Advisors
DE NOVO LEGAL, LLC AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
NOTE D - Commitments and Contingencies (Continued)
Guaranteed Payments (Continued)
In addition, an employment agreement with a managing director of the Company, who is also a 5% member, and holds the minority interest in De Novo Electronic Discovery, LLC provides for a guaranteed minimum annual compensation of $200,000 and a bonus based on certain results of De Novo Legal, LLC.
Software License Agreement
In December 2010, the Company entered into a software license agreement for a period of three years, commencing January 1, 2011, requiring a minimum annual payment of $680,000 plus monthly fees for usage in excess of stipulated amounts. As at December 31, 2010, the Company has prepaid approximately $535,000 of the fee due under the license agreement.
NOTE E - Bank Loans Payable
Outstanding loans at December 31, 2010 are comprised of borrowings under a $7,000,000 revolving credit agreement which expires on June 30, 2011. Borrowings are limited to eligible accounts receivable and bear interest at various interest rates pegged to either the prime rate or LIBOR as defined at the dates of the various borrowings. The interest rate at December 31, 2010 was 4.25%. The advances are collateralized by the Company’s assets not otherwise pledged. The loans contain a subjective acceleration clause, which allows the bank to call the loans if a material adverse change occurs.
NOTE F - Equipment Leases Payable
The Company leases certain equipment under capital leases, with interest at rates ranging from approximately 1.3 % to 20.6% a year, payable in monthly installments through November 2014. The remaining payments at December 31, 2010 are due as follows:
Year ending December 31: |
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2011 |
| $ | 933,343 |
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2012 |
| 574,402 |
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2013 |
| 160,840 |
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2014 |
| 36,986 |
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Total |
| 1,705,571 |
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Less amount representing interest |
| 152,464 |
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Net |
| $ | 1,553,107 |
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(Continued)
Cornick Garber Sandler
Certified Public Accountants & Advisors
DE NOVO LEGAL, LLC AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
NOTE G - Due From Members
Interest on outstanding loans is being charged at a rate based on the applicable “federal rate” for the year. Interest income for the year ended December 31, 2010 was $22,122. The loans are due not later than December 30, 2013.