EXHIBIT 99.2
CSM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Consolidated Financial Statements
Consolidated Balance Sheet...................................... Page 1
Consolidated Statement of Operations............................ 2
Consolidated Statement of Stockholders' Equity (Deficit)........ 3
Consolidated Statement of Cash Flows............................ 4
Notes to Consolidated Financial Statements...................... 5
CSM, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, 2005
(Unaudited)
Assets
Current Assets
Cash and cash equivalents $ 2,704,018
Certificates of deposit - restricted (Note 5) 287,258
Accounts receivable 301,668
Prepaid expenses and other assets 552,794
-----------
Total Current Assets 3,845,738
-----------
Property and Equipment (Note 2)
Property and equipment 423,422
Accumulated depreciation (291,568)
-----------
Total Property and Equipment, net 131,854
-----------
Other Assets (Note 3)
Goodwill 1,384,208
Deferred financing costs, net 37,945
-----------
Total Other Assets 1,422,153
-----------
Total Assets $ 5,399,745
===========
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Current maturities of notes payable (Note 4) $ 1,963,524
Accounts payable 1,145,757
Accrued expenses 1,577,445
Health and workers' compensation reserves 1,084,482
Shares subject to mandatory redemption (Note 7) 258,690
Deferred revenue 1,361,332
State income taxes payable 6,175
-----------
Total Current Liabilities 7,397,405
-----------
Long-term Liabilities
Notes payable, less current maturities (Note 4) 50,515
-----------
Total Liabilities 7,447,920
-----------
Stockholders' Equity (Deficit) (Note 7)
Class A common stock, $0.01 par value; 1,500,000 share authorized, 398,691
shares issued and outstanding at December 31, 2004 3,987
Class B common stock, $0.01 par value; 1,000,000 shares authorized, 371,636
shares issued and outstanding at December 31, 2004 3,716
Stock warrants 457,370
Additional paid-in-capital 394,999
Retained deficit (2,908,247)
-----------
Total Stockholders' Equity (Deficit) (2,048,175)
-----------
Total Liabilities and Stockholders' Equity (Deficit) $ 5,399,745
===========
See accompanying notes to unaudited interim consolidated financial statements.
1
CSM, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
For the Three Months Ended March 31, 2005
(Unaudited)
Service Revenue (gross billings of $29,897,534, less worksite
employee payroll cost of $25,600,209) $ 4,297,325
Direct Cost of Services 3,507,342
-----------
Gross Profit 789,983
-----------
Operating Expenses 995,426
-----------
Loss from Operations (205,443)
-----------
Other Income (Expense)
Interest income 57
Loss on disposal of assets (28,521)
Interest expense (55,132)
Guarantee and other financial fees (12,246)
-----------
Total Other Income (Expense) (95,842)
-----------
Net Loss $ (301,285)
===========
See accompanying notes to unaudited interim consolidated financial statements.
2
CSM, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Deficit)
For the Three Months Ended March 31, 2005
(Unaudited)
Common Stock - Class A Common Stock - Class B Stock Warrants Additional
Shares Amount Shares Amount Shares Amount Paid in Capital
------ ------ ------ ------ ------ ------ ---------------
Balance at January 1, 2005 398,961 $ 3,987 371,636 $ 3,716 203,249 $ 457,370 $ 394,999
Net Loss 0 0 0 0 0 0 0
--------- -------- --------- -------- --------- --------- ---------
Balance at March 31, 2005 398,961 $ 3,987 371,636 $ 3,716 203,249 $ 457,370 $ 394,999
========= ======== ========= ======== ========= ========= =========
Total
Retained Shareholders'
Deficit Equity (Deficit)
------- ----------------
Balance at January 1, 2005 $(2,606,962) $(1,746,890)
Net Loss (301,285) (301,285)
----------- -----------
Balance at March 31, 2005 $(2,908,247) $(2,048,175)
=========== ===========
See accompanying notes to unaudited interim consolidated financial statements.
3
CSM, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Three Months Ended March 31, 2005
(Unaudited)
Cash Flows from Operating Activities
Net loss $ (301,285)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 49,443
Loss on disposal of assets 28,521
Decrease in accounts receivable 222,132
Decrease in prepaid expenses and other assets (281,686)
Increase in accounts payable 440,260
Increase in accrued expenses (228,346)
Increase in health and workers' compensation reserves (101,065)
Increase in deferred revenue 1,361,332
-----------
Net cash provided by operating activities 1,189,306
-----------
Cash Flows from Financing Activities
Principal payments on notes payable (10,845)
-----------
Net cash used in financing activities (10,845)
-----------
Net Increase in Cash and Cash Equivalents 1,178,461
Cash and Cash Equivalents, Beginning of Year 1,525,557
-----------
Cash and Cash Equivalents, End of Year $ 2,704,018
===========
Supplemental Cash Flow Disclosures
Interest paid $ 76,507
===========
See accompanying notes to unaudited interim consolidated financial statements.
4
CSM INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2005
(Unaudited)
Note 1 - Nature of Operations and Summary of Significant Accounting Policies:
Nature of Operations
CSM, Inc., a Tennessee corporation (the "Company"), is a professional employer
organization (PEO) headquartered near Nashville, Tennessee. The Company
provides, through client service agreements, comprehensive and integrated human
resource management services to small and medium-sized businesses, substantially
all of which are located in Tennessee and surrounding states, thereby allowing
these businesses to outsource their human resource responsibilities.
The Company provides such services by establishing an employment relationship
with the worksite employees of its clients, contractually assuming substantial
employer responsibilities with respect to worksite employees, and advising its
clients regarding employment practices. While the Company becomes the legal
employer for some purposes, and consequently assumes a level of liability for
the employment practices of its clients, each client remains in operational
control of its respective business. The Company's operations are affected
additionally by government regulations relating to labor, taxes, insurance,
benefits and employment matters. Thus, changes in these matters, unfavorable
interpretation or changes to such regulations, although not known or foreseen by
management at this time, could cause future results of operations to be
materially different from the results reported herein.
Consolidation
The consolidated financial statements include CSM, Inc., and its wholly-owned
subsidiaries, Century II Services, Inc. and Century II Staffing, Inc. Century II
Staffing, Inc., also includes the accounts of its wholly-owned subsidiaries,
Century II Staffing USA, Inc., Century II ASO, Inc., and Century II Tennessee,
Inc. All significant intercompany balances and transactions have been eliminated
in consolidation.
Revenue and Cost Recognition
The Company bills clients under its client service agreements, which include
each worksite employee's gross wages, plus additional charges for employment
related taxes, benefits, workers' compensation insurance, administration and
record keeping, as well as safety, human resources, and regulatory compliance
consultation. All wages, taxes and insurance coverages are provided under the
Company's federal, state, and local or vendor identification numbers. No
identification or recognition is given to the client when these monies are
remitted or calculations are reported. All calculations or amounts the Company
owes the government and its employment insurance vendors are based on the
experience levels and activity of the Company with no consideration to client
detail. There is no direct relationship between what the Company pays versus
what is billed to a client.
5
The Company bills the client its worksite employees' gross wages plus an overall
service fee that includes all components of employment related taxes, employment
benefits insurance, and administration of those items. This service fee is
intended to cover the Company's cost of those items and yield a profit to the
Company. What is paid to the government and vendors is different than what is
charged to the client due to the different methods of calculation as to what the
Company owes those entities versus what the client is charged. The component of
the service fee related to administration varies, in part, according to the size
of the client, the amount and frequency of payroll payments, and the method of
delivery of such payments. The component of the service fee related to workers'
compensation and unemployment insurance is based, in part, on the client's
historical claims experience. All charges by the Company are invoiced along with
each periodic payroll delivered to the client.
The Company reports revenues in accordance with Emerging Issues Task Force
("EITF") No. 99-19, Reporting Revenue Gross as a Principal versus Net as an
Agent. The Company reports revenues on a gross basis, the total amount billed to
clients for service fees which includes health and welfare benefit plan fees,
workers' compensation insurance, unemployment insurance fees, and
employment-related taxes. The Company reports revenues on a gross basis for such
fees because the Company is the primary obligor and deemed to be the principal
in these transactions under EITF No. 99-19. However, the Company reports
revenues on a net basis for the amount billed to clients for worksite employee
salaries and wages. The Company adopted this accounting policy of reporting
revenues net as an agent during 2004. This accounting policy of reporting
revenue net as an agent versus gross as a principal has no effect on gross
profit, loss from operations, or net loss.
The Company accounts for their revenues using the accrual method of accounting.
Under the accrual method of accounting, the Company recognizes their revenues in
the period in which the worksite employee performs work. The Company accrues
revenues for service fees, health and welfare benefit plan fees, workers'
compensation and unemployment insurance fees relating to work performed by
worksite employees but unpaid at the end of each period. The Company accrues
unbilled receivables for payroll taxes, service fees, health and welfare benefit
plan fees, workers' compensation and unemployment insurance fees relating to
work performed by worksite employees but unpaid at the end of each period. In
addition, the related costs of services are accrued as a liability for the same
period. Subsequent to the end of each year, such costs are paid and the related
service fees are billed.
Consistent with its revenue recognition policy, the Company's direct costs do
not include the payroll cost of its worksite employees. The Company's direct
costs associated with its revenue generating activities are comprised of all
other costs related to its worksite employees, such as the employer portion of
payroll-related taxes, employee benefit plan premiums and workers' compensation
insurance costs.
Accounts Receivable
The Company carries its accounts receivable at invoiced amounts less an
allowance for doubtful accounts. On a periodic basis, the Company evaluates its
accounts receivable and establishes an allowance for doubtful accounts, based on
history of past write-offs and collections and current credit conditions.
Management has established an allowance for doubtful accounts of $35,000, as of
March 31, 2005. The Company's policy is not to accrue interest on past due trade
receivables.
6
Property, Equipment, and Depreciation
Property and equipment are carried at cost and include expenditures for new
additions and those which substantially increase the useful lives of existing
assets. Depreciation is computed at various rates by use of the straight-line
method. Depreciable lives range from 3 to 10 years.
Expenditures for normal repairs and maintenance are charged to operations as
incurred. The cost of property or equipment retired or otherwise disposed of and
the related accumulated depreciation are removed from the accounts in the year
of disposal with the resulting gain or loss reflected in earnings or in the cost
of the replacement asset.
The provision for depreciation amounted to $26,675 for the three months ended
March 31, 2005.
Goodwill and Other Intangible Assets
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets". With the adoption of SFAS No. 142,
goodwill and other intangibles with indeterminate lives are no longer amortized
but instead are assessed for impairment at least annually and more frequently as
triggering events may occur. In making this assessment, management relies on a
number of factors including operating results, business plans, economic
projections, anticipated future cash flows, and transactions and market place
data. Any impairment losses determined to exist are recorded in the period the
determination is made. There are inherent uncertainties related to these factors
and management's judgment in applying them to the analysis of any impairment.
Since management's judgment is involved in performing goodwill and other
intangible assets valuation analyses, there is risk that the carrying value of
our goodwill and other intangible assets may be overstated or understated.
Income Taxes
The Company's results of operations are included in a consolidated federal tax
return. The consolidated group has adopted a tax sharing agreement pursuant to
the requirements of SFAS No. 109, "Accounting for Income Taxes", in which each
company within the consolidated group is allocated federal taxes based upon its
taxable income or is due a credit for the utilization of its tax benefits (i.e.,
net operating loss, capital loss, etc.) by other members of the consolidated
group.
Income taxes are provided for the tax effects of transactions reported in the
consolidated financial statements and consist of taxes currently due plus
deferred taxes. Deferred taxes are recognized for the differences between the
basis of assets and liabilities for financial statement and income tax purposes.
Those differences relate primarily to fixed assets (use of different
depreciation methods and lives for financial statement and income tax purposes)
and certain accrued expenses (use of accrual method for financial statement
purposes and cash method for income tax purposes). The deferred tax assets and
liabilities represent the future tax consequences of those differences, which
will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred taxes are also recognized for any operating loss
carryforwards, charitable contribution carryforwards, and tax credit
carryforwards that are available to offset future income taxes.
7
Advertising
The Company charges advertising costs to expense as incurred. Advertising
expenses amounted to $12,115 for the three months ended March 31, 2005.
Cash and Cash Equivalents
For purposes of the Consolidated Statement of Cash Flows, the Company considers
all highly liquid instruments that are purchased within three months or less of
an instruments maturity date to be cash equivalents.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Note 2 - Property and Equipment:
Property and equipment is comprised of the following at March 31, 2005:
Furniture and equipment $ 398,422
Vehicles 25,000
-----------
423,422
Accumulated depreciation 291,568
-----------
Property and Equipment, net $ 131,854
===========
Note 3 - Goodwill and Other Intangible Assets:
The following table sets forth the gross carrying amount and accumulated
amortization of the Company's intangible assets excluding goodwill:
Gross Accumulated
Amount Amortization
----------- ------------
Intangibles subject to amortization:
Debt transaction related costs $ 291,212 $ 258,999
Finance costs 68,779 63,047
----------- ------------
$ 359,991 $ 322,046
=========== ============
Intangible assets amortization expense for the three months ended March 31,
2005, was $22,768.
8
Amortization expense on other intangible assets for future years is as follows:
Period Ending March 31, 2005
----------------------------
2006 $ 37,945
----------
Total Amortization $ 37,945
==========
Note 4 - Notes Payable:
Notes payable is comprised of the following at March 31, 2005:
(1) Note payable to Harbert Management Corp., "Harbert",
interest payable monthly at 13.5% fixed rate, with principal
payable in full August 2005. $1,900,000
(2) Note payable to the former owner of Century II Staffing,
Inc., due in monthly installments of $5,286, including
interest at 10% through January 2007. 105,854
(3) Note payable to an individual, due in monthly
installments of $772, including interest at 7% through
February 2006. Secured by a vehicle. 8,185
----------
2,014,039
Less current maturities (1,963,524)
----------
$ 50,515
==========
Substantially all of the Company's assets are pledged as collateral securing the
note payable to Harbert. The Company is also required to maintain key-man life
insurance on its president, naming the Company as beneficiary by the terms of
its debt agreements to satisfy the Company's indebtedness in the event of the
president's death. In connection with the Harbert financing, the Company also
issued detachable stock warrants to Harbert which are further described in Note
7.
Principal payments due on notes payable outstanding at March 31, 2005, are as
follows:
Period Ending March 31,
-----------------------
2006 $1,963,524
2007 50,515
------------
$2,014,039
============
9
Note 5 - Restricted Certificates of Deposit and Letter of Credit Arrangement:
The Company maintains a letter of credit with a major bank as required by its
workers' compensation carrier. As of March 31, 2005, the Company maintained a
letter of credit of $1,959,500, which is secured by a combination of personal
guarantees of certain stockholders and a restricted certificate of deposit of
approximately $287,000.
Note 6 - Retirement Plan:
The Company maintains a 401(k) savings plan whereby employees can contribute and
defer taxes on compensation contributed to the plan. The Company matches, within
prescribed limits, a percentage of each participant's 401(k) deferrals. The
Company's contributions for the three months ended March 31, 2005, was
approximately $6,000. Leased employees are not included in this amount as these
retirement plan costs are billed through the Company's clients.
Note 7 - Stockholders' Equity:
Common Stock
The Class A common stock carries certain preference rights in the event of a
dividend declared by the Company's Board of Directors or any dissolution,
liquidation, or winding-up of the Company. The Class A and B shares have equal
voting rights. As discussed in Note 14, the Company merged 100% of its common
stock and stock warrants, subsequent to March 31, 2005 with a third party.
Stock Warrants
The Company granted stock warrants of up to 203,249 shares of Class B common
stock in conjunction with the Harbert loan (refer to Note 4). Prior to the
merger subsequent to year-end disclosed in Note 14, the warrants were
exercisable at any time at an exercise price of $.01 per share. The number of
shares associated with the warrants increased if any portion of the debt was
unpaid at certain anniversary dates under the loan agreement and through certain
anti-dilution rights. Harbert had the right to require the Company to purchase
the warrants within 60 days prior to the expiration date for fair market value,
as determined by an independent appraiser. In conjunction with the 203,249
warrants outstanding as of March 31, 2005, the Company recorded a liability in
the amount of $258,690, since these warrants were subject to mandatory
redemption. The original expiration date of the warrants was October 31, 2005.
The warrants were cancelled in conjunction with the merger disclosed in Note 14.
During the three months ended March 31, 2005, the Company paid $12,246 in
guarantee fees to the stockholders for their personal guarantees on the letter
of credit issued on April 30, 2003.
Stock Options
The Company granted stock options to key employees prior to the merger discussed
in Note 14. The options were exercisable only in the event the Company was
liquidated and at a strike price of $2.00. Outstanding stock options at March
31, 2005, were as follows:
Option Number of
Price Units
---------- ----------
Outstanding, January 1, 2005 $ 247,068 123,534
Granted 0 0
Exercised 0 0
---------- ----------
Outstanding, March 31, 2005 $ 247,068 123,534
========== ==========
10
As discussed in Note 14, the options were cancelled in conjunction with the
Company's merger with a third party, subsequent to March 31, 2005.
The Company has adopted only the disclosure provisions of SFAS 123 and SFAS 148,
Accounting for Stock-Based Compensation. It applies APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for plans and does not recognize compensation expense for its
stock-based compensation plan. If the Company had elected to recognize
compensation expense based upon fair value at the grant date for awards under
these plans, consistent with the methodology prescribed by SFAS 123, the effect
on net loss for the three months ended March 31, 2005, would have been
immaterial.
Note 8 - Income Taxes:
The Company has federal and state net operating losses; accordingly, no
provision for federal and state income taxes has been recorded for the three
months ended March 31, 2005. State income tax expense of $6,175 is currently due
at March 31, 2005.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
current and long-term deferred tax assets and long-term deferred tax liabilities
at March 31, 2005, are as follows:
Deferred tax assets, current
Reserves $ 372,640
Interest and compensation 124,615
Allowance for doubtful accounts 11,900
Less: Valuation allowance (509,155)
---------
Net current asset $ 0
=========
Deferred tax assets, long-term
Net operating loss carryforwards $ 846,519
Less: Valuation allowance (664,279)
---------
Long-term asset 182,240
---------
Deferred tax liabilities, long-term
Goodwill amortization (153,000)
Depreciation methods (29,240)
---------
Long-term liability (182,240)
---------
Net long-term asset $ 0
=========
Federal and state net operating loss carryforwards amounted to approximately
$2,200,000 and $2,100,000, respectively at March 31, 2005, and will expire, if
unused, beginning in 2018. The valuation allowance increased $129,870 during the
three months ended March 31, 2005.
11
Note 9 - Operating Lease Commitments:
The Company leases office space under an agreement, which expires in January
2009. In addition to an escalating base monthly rent, the agreement requires the
Company to pay any increase in operating costs, real estate taxes, or utilities
over the base year.
The Company also leases certain office equipment under an agreement that expires
in June 2006.
Rent expense under all agreements amounted to $28,936 for the three months ended
March 31, 2005.
Future minimum commitments under these agreements are as follows at March 31,
2005:
Office
Period Ending March 31, Facilities Equipment
- ----------------------- ----------- ---------
2006 $ 111,230 $ 6,360
2007 114,914 1,590
2008 118,598 0
2009 101,390 0
----------- ---------
$ 446,132 $ 7,950
=========== =========
Note 10 - Self-Funded Health Insurance:
The Company's Employee Benefit Plan provides its employees and their dependents
with comprehensive health care coverage. A portion of that coverage is
self-funded by the Company. Under the insurance policy with the Plan's
underwriter, the Company's self-funded liability is limited for each plan year
to $100,000 per employee, with an aggregate liability limit of approximately
$4,500,000. Those liability limits are adjusted annually. For this purpose, the
plan year runs from July 1 through June 30.
Note 11 - Contingent Liabilities:
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. Management of the Company believes the resolution
of any pending or threatened actions will not have a material effect on the
Company's financial position or results of operations.
Note 12 - Concentration of Credit Risk:
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents, certificates of deposit,
and accounts receivables. The Company places their cash and cash equivalents
with high credit quality institutions. At times, such amounts may be in excess
of the FDIC insured limit. At March 31, 2005, the Company's cash exceeded
federally insured limits by approximately $2,791,276.
The Companies routinely assess the financial strength of its customers and, as a
consequence, believe that their accounts receivable credit risk exposure is
limited.
12
Note 13 - Regulatory Environment:
Employers, in general are regulated by numerous federal and state laws relating
to labor, tax and employment matters. Generally, these laws prohibit
discrimination, mandate safety regulations in the workplace, set minimum wage
rates and regulate employee benefits. Because many of these laws were enacted
prior to the development of non-traditional employment relationships, such as
PEO services, many of these laws do not specifically address the obligations and
responsibilities of non-traditional employers. As a result, interpretive issues
concerning the definition of the term "employer" in various federal and state
laws have arisen pertaining to the employment relationship.
Professional Employer Organizations, individually and through the National
Association of Professional Employer Organizations, have petitioned the numerous
governmental agencies (including the Internal Revenue Service, Department of
Labor and others) for clarification, and in some cases, new regulations specific
to the issues faced by a PEO. The Company believes resolution of these issues
will not have a material impact on the Company's financial position or results
of operations.
Note 14 - Subsequent Event - Business Combination:
Merger with Fortune Diversified Industries, Inc.
- ------------------------------------------------
On April 5, 2005, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with Fortune Diversified Industries, Inc. (FDVI), the
Surviving Corporation. For accounting purposes, the effective date is April 1,
2005. The terms of the Agreement include, among other things, the payment of
approximately $2 Million by FDVI to retire debts (1) and (2) disclosed in Note
4, the payment of approximately $650,000 in cash by FDVI to the stockholders of
the Company, a portion of which shall be held in escrow for payment of certain
tax debts that is likely to be owed by the Company, and the issuance of
1,500,000 contingent shares of FDVI Common Stock to be held in escrow until such
time as the shares may be earned by the stockholders of the Company upon the
achievement of certain financial performance measures. In the event the
1,500,000 shares are earned in future periods, shares of FDVI stock will be
distributed to the Company's stockholders, as defined in the agreement based on
diluted outstanding shares of Company stock at the date of acquisition. Company
stock for purposes of the acquisition is defined as Class A Common Stock, Class
B Common Stock, outstanding Stock Warrants and outstanding Stock Options. As a
result, all stock warrants and stock options discussed in Note 7 were cancelled
at the date of the acquisition.
Prior to the Agreement, there was no material relationship between the Company
and FDVI.
13