SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 000-22653
American Risk Management Group, Inc.
------------------------------------
(Exact name of small business issuer as specified in its charter)
Florida
-----------------------------
(State or other jurisdiction of incorporation or organization)
65-0353816
----------
(IRS Employer Identification No.)
4700 Ashwood Drive - Suite 200 - Cincinnati, OH 45241
-----------------------------------------------------
(Address of principal executive offices)
513-530-1634
------------
(Issuer's telephone number)
------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes (x) No ( )
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. As of February 29, 2000 the
registrant had issued and outstanding 6,700,168 shares of common stock.
Transitional Small Business Disclosure Format (check one);
Yes ( ) No (x)
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 132,726
Accounts receivable, net of allowance for doubtful accounts 577,052
Inventories 406,075
Other current assets 133,373
------------
Total current assets 1,249,226
Equipment, net of accumulated depreciation 978,356
Goodwill, net of accumulated amortization of $189,679 6,853,643
Deferred debt financing costs 477,930
Other assets 508,558
------------
Total $ 10,067,713
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank under revolving credit facility $ 235,000
8% convertible and nonconvertible notes payable 900,000
Notes payable to stockholders and former stockholder 1,078,100
Current portion of long-term debt 162,461
Accounts payable 333,631
Other current liabilities 628,547
------------
Total current liabilities 3,337,739
Long-term debt, net of current portion 52,137
------------
Total liabilities 3,389,876
------------
Minority interest 1,201,130
------------
Contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none issued --
Common stock, $.001 par value; 50,000,000 shares authorized;
6,473,125 shares issued 6,473
Additional paid-in capital 6,594,344
Accumulated deficit (1,124,110)
------------
Total stockholders' equity 5,476,707
------------
Total $ 10,067,713
============
See Notes to Condensed Consolidated Financial Statements
-2-
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX AND THREE MONTHS ENDED DECEMBER 31, 1999
(Unaudited)
Six Months Three Months
Ended Ended
December 31, 1999 December 31, 1999
----------------- -----------------
Revenues $ 1,786,578 $ 1,405,106
Cost of revenues 1,128,893 899,304
-------------- --------------
Gross profit 657,685 505,802
-------------- --------------
Selling, general and administrative expenses 884,422 611,316
Depreciation and amortization 213,634 153,588
-------------- --------------
Total 1,098,056 764,904
-------------- --------------
Operating loss (440,371) (259,102)
Other expense - interest, including amortization
of beneficial conversion rights of $921,145 964,767 719,521
-------------- --------------
Loss before minority interest (1,405,138) (978,623)
Loss applicable to minority interest 281,028 195,725
-------------- --------------
Net loss (1,124,110) (782,898)
Preferred dividend requirements -- --
-------------- --------------
Net loss applicable to common stock $ (1,124,110) $ (782,898)
-------------- --------------
Basic net loss per common share $(.18) $(.12)
============== ==============
Basic weighted average common shares outstanding 6,239,111 6,263,674
============== ==============
See Notes to Condensed Consolidated Financial Statements.
-3-
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31,1999
(Unaudited)
Common Stock Additional
Members' ------------------- Paid-in Accumulated
Equity Shares Amount Capital Deficit Total
-------- ---------- ------ ---------- ----------- -----
Balance, July 1, 1999 $100 $ 100
Common stock issued in connection with:
Reverse acquisition (100) 6,212,708 $6,213 $6,367,834 6,373,947
Compensation of employees
and payments for other
services 143,750 143 190,169 190,312
Shares issued in settlement of
accrued expenses 116,667 117 36,341 36,458
Net loss (1,124,110) (1,124,110)
------ ---------- ------ ---------- ----------- ----------
Balance, December 31, 1999 $ -- $6,473,125 $6,473 $6,594,344 $(1,124,110) $5,476,707
====== ========== ====== ========== =========== ==========
See Notes to Condensed Consolidated Financial Statements.
-4-
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1999
(Unaudited)
Operating activities:
Net loss $(1,124,110)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 240,683
Amortization of debt issuance costs 921,145
Compensation and other services paid through the issuance of
common stock 190,312
Loss attributable to minority interest (281,028)
Changes in operating assets and liabilities:
Accounts receivable (113,853)
Inventories 100,931
Other current assets 62,745
Other assets (50,440)
Accounts payable and other current liabilities 107,506
-----------
Net cash provided by operating activities 53,891
Investing activities - net cash received as a result of reverse acquisition 76,994
Financing activities:
Capital contribution 100
Net borrowings on long-term debt 1,741
-----------
Net cash provided by financing activities 1,841
-----------
Increase in cash and cash equivalents 132,726
Cash and cash equivalents, beginning of period --
-----------
Cash and cash equivalents, end of period $ 132,726
===========
Supplemental disclosures of cash flow information:
Interest paid $ 19,545
===========
See Notes to Condensed Consolidated Financial Statements.
-5-
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business activities and reverse acquisition:
Business:
American Risk Management Group, Inc. ("American Risk"), a publicly
traded Florida corporation, was formed on August 17, 1992 as a holding company
for the purpose of acquiring other operating businesses, and it has acquired and
disposed of several businesses since it was formed. Prior to the exchange of
shares and business combination in September 1999 further described below,
American Risk's continuing operations were comprised of the manufacturing and
distribution operations of its wholly-owned subsidiary, Industrial Fabrication &
Repair, Inc. ("IFR"). IFR provides machining, welding, specialty design and
fabrication for custom applications to clientele from various industries. IFR is
also an authorized distributor for a variety of component products for other
manufacturers.
PeopleFirst Staffing LLC ("PeopleFirst") was a limited liability
company that was formed in the State of Ohio on October 2, 1998 to function as
an administrative services organization that provides small-to-medium sized
businesses with comprehensive, fully integrated outsourcing solutions to human
resource needs, including payroll management, workers' compensation risk
management, benefits administration, unemployment services and human resource
consulting services. PeopleFirst commenced its administrative services
operations during July 1999.
Reverse acquisition:
On September 7, 1999, American Risk and PeopleFirst consummated certain
transactions pursuant to a Share Exchange Agreement whereby American Risk, which
had, effectively, 1,212,708 shares of common stock outstanding with a par value
of $.001 per share, issued 5,000,000 shares of common stock in exchange for 100%
of the equity interest in PeopleFirst (the "Exchange").
As a result of the Exchange, PeopleFirst became a wholly-owned
subsidiary of American Risk and the former members of PeopleFirst became the
owners of approximately 80%, and the stockholders of American Risk prior to the
Exchange became the owners of approximately 20%, of the 6,212,708 shares of
common stock of American Risk outstanding upon the consummation of the Exchange.
Therefore, the Exchange was treated for accounting purposes as a "purchase
business combination" and a "reverse acquisition" effective as of September 1,
1999 in which American Risk was the legal acquirer and PeopleFirst was the
accounting acquirer.
Accordingly, the assets and liabilities of the accounting acquirer,
PeopleFirst, continued to be accounted for at their historical carrying values
as of September 1, 1999. As further explained in Note 3 herein, the fair value
of the 1,212,708 shares deemed to have been issued to the stockholders of
American Risk prior to the Exchange was included in the total cost of the
acquisition of American Risk, the acquired company, and the total cost was then
allocated to the fair values of the assets and liabilities of American Risk
deemed to have been acquired or assumed and the excess of the cost over the fair
value of the net assets acquired was allocated to goodwill. The accompanying
condensed consolidated statement of operations for the six months ended December
31, 1999 reflects the results of the operations of PeopleFirst from July 1, 1999
and the results of operations of American Risk from September 1, 1999, the date
of acquisition, through December 31, 1999. Since July 1, 1999 was the effective
date of the commencement of PeopleFirst's operations, financial statements for
periods prior to July 1, 1999 have not been presented.
Note 2 - Unaudited interim financial statements:
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial position of
American Risk and its subsidiaries (collectively, the "Company") as of December
31, 1999 and their results of operations, changes in stockholders' equity and
cash flows for the six months ended December 31, 1999. Certain terms used herein
are defined in the audited consolidated financial statements of the Company as
of June 30, 1999 and for the years ended June 30, 1999 and 1998 (the "Audited
Financial Statements") included in the Company's Annual Report on Form 10-KSB
(the "Form 10KSB") for the year ended June 30, 1999 that was previously filed
with the United States Securities and Exchange Commission (the "SEC"). Pursuant
to rules and regulations of the SEC, certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted from these
consolidated financial statements unless significant changes have taken place
since the end of the most recent fiscal year. Accordingly, these unaudited
condensed consolidated financial statements should be read in conjunction with
the Audited Financial Statements and the other information also included in the
Form 10-KSB.
-6-
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The results of the Company's operations for the six months ended
December 31, 1999 are not necessarily indicative of the results of operations
for the full year ending June 30, 2000.
Note 3 - Purchase business combination:
The Company acquired its approximate 80% interest in American Risk
through the Exchange described in Note 1 herein that has been accounted for as a
purchase business combination and a reverse acquisition in which PeopleFirst was
the accounting acquirer and American Risk was the legal acquirer. Accordingly,
the accompanying historical condensed consolidated financial statements include
the results of operations of American Risk and its subsidiaries from September
1, 1999, the effective date of the acquisition, through December 31, 1999. The
cost of the acquisition of American Risk aggregated $6,373,947 and was comprised
as follows:
Deemed issuance of 1,212,708 shares of
common stock with an estimated fair value
of $3.75 per share based on the market
value of American Risk's shares at the
date of the Exchange $4,547,655
Fair value of shares issued to consultants by
American Risk prior to the Exchange for services
related to the Exchange 1,811,292
Accrued estimated legal, accounting and other
costs related to the Exchange 15,000
----------
Total cost to be allocated $6,373,947
==========
Pursuant to the purchase method of accounting, the initial cost of
acquiring American Risk and its subsidiaries, which exceeded the fair value of
the net assets acquired by $6,598,009, was allocated as follows:
Cash and cash equivalents $ 76,994
Account receivable 463,199
Inventories 507,006
Equipment 1,029,360
Deferred debt financing costs 1,399,075
Other current and noncurrent assets 654,236
Goodwill 7,043,322
Notes payable (2,425,957)
Minority interest (1,482,158)
Other current liabilities (891,130)
-----------
Total cost of the acquisition $ 6,373,947
===========
The following unaudited pro forma information shows the results of
operations for the six and three months ended December 31, 1999 and 1998 as
though the acquisition of American Risk and its subsidiaries had been
consummated on July 1, 1998:
-7-
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Purchase business combination (concluded):
Six Months Three Months
Ended December 31, Ended December 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenues $ 2,499,521 $ 1,919,614 $ 1,405,106 $ 1,037,537
Cost of revenues 1,588,070 1,144,777 899,304 612,960
----------- ----------- ----------- -----------
Gross profit 911,451 774,837 505,802 425,577
----------- ----------- ----------- -----------
Other expenses 3,066,918 2,393,159 1,484,425 1,838,499
----------- ----------- ----------- -----------
Loss before minority interest (2,155,467) (1,618,322) (978,623) (1,412,872)
Loss applicable to minority interest 431,093 323,664 195,725 282,574
----------- ----------- ----------- -----------
Net Loss (1,724,374) (1,294,658) (782,898) (1,130,298)
Preferred dividends 69,750 34,875
----------- ----------- ----------- -----------
Net loss and net loss applicable to common stock $(1,724,374) $(1,224,908) $ (782,898) $(1,165,173)
Basic loss from operations per common share $ (.28) $ (.20) $ (.12) $ (.19)
Weighted average common shares outstanding 6,239,111 6,225,540 6,263,674 6,251,674
In addition to combining the historical results of operations of the
Company and American Risk and its subsidiaries for each period, the unaudited
pro forma results of operations include adjustments primarily to reflect for the
entire period (i) the amortization of the goodwill recorded in connection with
the acquisition of American Risk based on an estimated useful life of ten years
and (ii) minority interest. The unaudited pro forma results of operations set
forth above do not purport to represent what the combined results of operations
actually would have been if the acquisition of American Risk and its
subsidiaries had been consummated on July 1, 1998 instead of, effectively,
September 1, 1999 or what the results of operations would be for any future
periods.
Note 4 - Inventories:
At December 31, 1999, inventories consisted of the following:
Raw materials $705,977
Finished goods 199,679
--------
905,656
Noncurrent inventories 499,581
--------
Total $406,075
========
Noncurrent inventories, which are included in other assets, consisted
of finished goods and other supplies not expected to be utilized by the Company
during the twelve months ending December 31, 2000.
-8-
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Equipment:
At December 31, 1999, equipment consisted of the following:
Machinery $ 921,801
Automobiles and trucks 66,869
Other 40,690
----------
Total 1,029,360
Less accumulated depreciation and amortization 51,004
----------
Total $ 978,356
==========
Depreciation and amortization expense was $51,004 for the six months
ended December 31, 1999.
Note 6 - 8% convertible and nonconvertible notes payable:
The 8% convertible notes and the 8% nonconvertible notes payable
(collectively, the "8% Notes") had an aggregate carrying value of $900,000 at
December 31, 1999, of which $819,000 and $81,000 was attributable to the
convertible and nonconvertible notes, respectively. The 8% Notes are due on
demand commencing on the earlier of February 15, 2000 or the date as of which
the Company has received aggregate proceeds of $1,000,000 from the exercise of
warrants sold through private placement of units by American Risk in March 1999
(see Note 15 to the Audited Financial Statements in the Form 10-KSB).
Convertible notes in the principal amount of $273,000 and $546,000 can be
converted into shares of common stock at $.91 per share and $1.36 per share,
respectively, and, accordingly, a total of 701,471 shares of common stock were
reserved for possible future issuance upon conversion as of December 31, 1999.
However, conversion at any time through March 31, 2000 is subject to the consent
of the investment banking firm that was the placement agent for the private sale
of the units.
The 8% Notes were issued by American Risk on March 10, 1999 as part of
the consideration for the redemption of shares of preferred stock (see Note 15
to the Audited Financial Statements in the Form 10-KSB). The fair value of
American Risk's common stock on that date was $5.25 per share which exceeded the
conversion prices for the convertible notes. Pursuant to interpretations issued
by the staff of the Securities and Exchange Commission, such excess constitutes
a beneficial conversion feature or right for which the value is measured by the
difference between the aggregate conversion price and the fair value of the
common stock into which the securities are convertible, multiplied by the number
of shares into which the securities are convertible. Accordingly, American Risk
initially recorded beneficial conversion rights in connection with the issuance
of the convertible notes with a fair value of approximately $2,864,000, which
equaled the excess of the aggregate proceeds the noteholders would have received
if they had converted the notes and sold the 701,471 shares of common stock for
approximately $3,683,000 based on the fair market value of $5.25 per share on
March 10, 1999 and the aggregate exercise price of approximately $819,000 for
300,000 shares at $.91 per share and 401,471 shares at $1.36 per share.
In connection with the acquisition of American Risk (see Note 3), the
Company allocated $1,399,075 of the purchase price to beneficial conversion
rights, which was equal to American Risk's historical net unamortized cost as of
September 1, 1999, the effective date of the Exchange. Amortization totaled
$921,145 during the period from September 1, 1999 to December 31, 1999. The
unamortized balance of $477,930 comprises the balance of deferred debt financing
costs in the accompanying condensed consolidated balance sheet as of December
31, 1999.
-9-
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Other short-term and long-term debt:
For information as to the Company's notes payable to stockholders and
former stockholder, revolving line-of-credit and long-term debt, see Notes 8, 9
and 10 to the Audited Financial Statements in the Form 10-KSB.
Note 8 - Contingencies:
Litigation:
In the ordinary course of business, the Company is both a plaintiff and
defendant in various legal proceedings. In the opinion of management, the
resolution of these proceedings will not have a material adverse effect on the
consolidated financial position or results of operations of the Company in
subsequent years.
Concentrations of credit risk and major customers: Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and trade accounts receivable. The Company
maintains its cash balances with major financial institutions that have high
credit ratings. At times, such balances may exceed Federally insured limits.
The Company generally extends credit to its customers, substantially
all of whom are located in the central United States. Management of the Company
closely monitors the extension of credit to customers while maintaining
allowances for potential credit losses. During the six months ended December 31,
1999, no customer accounted for more than 10% of the Company's revenues.
Generally, the Company does not have a significant receivable from any single
customer and, accordingly, management does not believe that the Company was
exposed to any significant credit risk at December 31, 1999.
Note 9 - Income taxes:
As of December 31, 1999, the Company had net operating loss
carryforwards of approximately $18,000,000 arising primarily from the operations
of American Risk prior to the Exchange, which are available to reduce future
Federal taxable income and will expire at various dates through 2019. The
Company had no other material temporary differences as of that date. Due to the
uncertainties related to, among other things, the changes in the ownership of
the Company, which could subject those loss carryforwards to substantial annual
limitations, and the extent and timing of its future taxable income, the Company
offset the deferred tax assets attributable to the potential benefits of
approximately $7,200,000 from the utilization of those net operating loss
carryforwards by an equivalent valuation allowance as of December 31, 1999.
The Company had also offset the potential benefits of approximately
$7,000,000 from net operating loss carryforwards by equivalent valuation
allowances as of September 1, 1999, the effective date of the Exchange. As a
result of the increases in the valuation allowance of $200,000 during the period
from September 1, 1999 to December 31, 1999, no credit for income taxes are
included in the accompanying condensed consolidated statements of operations for
the six months ended December 31, 1999.
Note 10 - Earnings (loss) per share:
The Company presents "basic" earnings (loss) per common share and, if
applicable, "diluted" earnings per common share pursuant to the provisions of
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
128"). Basic earnings (loss) per common share is calculated by dividing net
income or loss applicable to common stock by the weighted average number of
common shares outstanding during each period. The calculation of diluted
earnings (loss) per common share is similar to that of basic earnings per common
share, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if all potentially
dilutive common shares, such as those issuable upon the assumed exercise of
stock options and warrants, had been issued during the period.
Note 11 - Stockholders' equity:
Changes in authorized shares:
On July 30, 1999, the board of directors and a majority of the
Company's stockholders approved an amendment to the Company's articles of
incorporation whereby the number of shares of preferred stock authorized for
issuance increased from 200,000 to 5,000,000 shares, the number of shares of
common stock authorized for issuance increased from 3,125,000 to 50,000,000
shares and the par value of the common stock was reduced from $.008 to $.001.
-10-
AMERICAN RISK MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock options:
On July 30, 1999, the Company adopted an Employee Stock Option Plan (
the "1999 Plan") which provides for grants of incentive stock options ("ISOs"),
nonqualified stock options ("NSOs") and reload options to the Company's
employees, directors, consultants and advisors for the purchase of up to
1,000,000 shares of the Company's common stock. The option price per share for
ISOs granted under the Plan may not be less than the fair market value of a
share of the Company's common stock on the date of grant, provided that the
exercise price of any ISO granted to an employee owning more than 10% of the
outstanding common shares of the Company may not be less than 110% of the fair
market value of the shares on the date of grant. The option price per share for
NSOs granted under the Plan may not be less than the par value of the Company's
common stock. Options vest and are exercisable over periods determined by the
board of directors provided that no option may be exercisable more than ten
years from the date of grant. The 1999 Plan will terminate on July 30, 2009. As
of December 31, 1999, no options had been granted under the 1999 Plan.
As further explained in Note 16 to the Audited Financial Statement in
the 10-KSB, there were options to purchase 25,938 shares of common stock
outstanding as of June 30, 1999 that had been granted pursuant to American
Risk's 1997 stock option plan. All of those options were canceled prior to the
date of the Exchange.
Note 12- Segment information:
The Company is reporting segment sales and gross margins in the same
format reviewed by the Company's management (the "management approach"). The
Company has two reportable segments: "Administrative Services" and
"Manufacturing" as further described in Note 1.
Revenues, cost of revenues and other related segment information as of
and for the six and three months ended December 31, 1999 follows:
Six Months Three Months
Ended Ended
December 31, 1999 December 31, 1999
----------------- -----------------
Revenues:
Administrative Services $ 137,997 $ 112,997
Manufacturing 1,648,581 1,292,109
----------- -----------
Total 1,786,578 1,405,106
----------- -----------
Cost of revenues - Manufacturing 1,128,893 899,304
Selling, general and administrative expenses:
Administrative Services 95,337 95,337
Manufacturing 648,975 405,090
Corporate 140,110 110,889
----------- -----------
Total 884,422 611,316
----------- -----------
Depreciation and amortization:
Manufacturing 93,121 34,067
Corporate 120,513 119,521
----------- -----------
Total 213,634 153,588
----------- -----------
Operating income (loss):
Administrative Services 42,660 17,660
Manufacturing (222,408) (46,352)
Corporate (260,623) (230,410)
----------- -----------
Total (440,371) (259,102)
----------- -----------
Other expense - interest:
Manufacturing 13,623 10,663
Corporate 951,144 708,858
----------- -----------
Total 964,767 719,521
----------- -----------
Loss applicable to minority interest 281,028 195,725
----------- -----------
Net loss $(1,124,110) $ (782,898)
=========== ===========
* * *
-11-
MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion regarding the Company and its business and operations
contains "forward-looking statements" within the meaning of Private Securities
Litigation Reform Act 1995. Such statements consist of any statement other than
a recitation of historical fact and can be identified by the use of
forward-looking terminology such as "may," "expect," "anticipate," "estimate" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. The reader is cautioned that all forward-looking statements are
necessarily speculative and there are certain risks and uncertainties that could
cause actual events or results to differ materially from those referred to in
such forward looking statements. The Company does not have a policy of updating
or revising forward-looking statements and thus it should not be assumed that
silence by management of the Company over time means that actual events are
bearing out as estimated in such forward looking statements.
Accounting Treatment of Exchange:
On September 7, 1999, American Risk Management Group, Inc. ("American Risk") and
PeopleFirst Staffing LLC ("PeopleFirst") consummated certain transactions
pursuant to a Exchange Agreement ( the "Exchange") whereby American Risk, which
had effectively 1,212,708 shares of common stock outstanding, issued 5,000,000
shares of common stock in exchange for 100% of the equity interest in
PeopleFirst.
As a result of the Exchange, the former members of PeopleFirst became the owners
of approximately 80% and the former stockholders of American Risk became the
owners of approximately 20% of the 6,212,708 shares of common stock of American
Risk outstanding upon the consummation of the Exchange. Therefore, the Exchange
was treated effective as of September 1, 1999 as a " purchase business
combination" and a "reverse acquisition" for accounting purposes in which
American Risk was the legal acquirer and PeopleFirst was the accounting
acquirer. Accordingly, the assets and liabilities of PeopleFirst will be
accounted for at their historical carrying values and the assets and liabilities
of American Risk will be valued at their fair values as of September 7, 1999
with the excess of PeopleFirst's cost over the fair value allocated to goodwill.
The Condensed Consolidated Statement of Operations includes the operations of
PeopleFirst prior to September 7, 1999 and American Risk together with
PeopleFirst subsequent to that date. See Notes 1 and 3 to the Consolidated
Financial Statements.
Pro Forma
The following discussion includes the results of operations for the six and
three months ended December 31, 1999 and 1998 as though the acquisition had been
consummated on July 1, 1998.
Six months ended December 31, 1999 vs. six months ended December 31, 1998
During the six months ended December 31, 1999, consolidated revenues increased
by approximately $579,907 or 30% from approximately $1,919,614 for the six
months ended December 31, 1998 to approximately $2,499,521 for the six months
ended December 31, 1999. The primary reason for the increase is due to one large
fabrication job which was completed by the company's manufacturing division
during the month of September 1999 and an increase in fabrication contracts in
December 1999.
Cost of revenues during the six months ended December 31, 1999 increased by
approximately $443,293 or 39% from approximately $1,144,777 for the six months
ended December 31, 1998 to approximately $1,588,070 for the six months ended
December 31, 1999. The primary reason for the increase is due to the increase in
revenues for the six months ended December 31, 1999 compared to December 31,
1998.
Gross profit margin during the six months ended December 31, 1999 decreased to
approximately 36% or 4% from approximately 40% for the six months ended December
31, 1998. The primarily reason for the decrease in the gross profit margin is
due to the larger fabrication jobs which contributed a lower gross profit
margin.
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The Company's other expenses increased by approximately by $673,759 or 28% from
approximately $2,393,159 for the six months ended December 31, 1998 to
approximately $3,066,918 for the six months ended December 31, 1999.
Approximately $1,111,457 of this increase was a result of the following non-cash
charges which were incurred during the six months ended December 31, 1999 (1)
$921,145 relating to the amortization of debt issue costs and (2) approximately
$190,312 of common stock issued for services. During the six months ended
December 31, 1998, the Company had non-cash charges totaling $1,212,437. The
balance of the increase is primarily due to an increase in professional and
consulting fees necessitated by the Company's change in corporate direction.
As a result of all the above, the Company's net loss, after allocating the loss
to minority interest, increased by approximately $499,466 from approximately
$1,294,658 or $(.20) per share for the six months ended December 31, 1998 to
approximately $1,724,374 or $(.28) per share for the six months ended December
31, 1999.
Three months ended December 31, 1999 vs. three months ended December 31, 1998
During the three months ended December 31, 1999, consolidated revenues increased
by approximately $366,569 or 35% from approximately $1,037,537 for the three
months ended December 31, 1998 to approximately $1,405,106 for the three months
ended December 31, 1999. The increase is attributable to (1) $112,997 in
staffing sales from PeopleFirst Holdings (2) increase in fabrication contracts
within the manufacturing division in December 1999.
Cost of revenues during the three months ended December 31, 1999 increased by
approximately $286,344 or 47% from approximately $612,960 for the three months
ended December 31, 1998 to approximately $899,304 for the three months ended
December 31, 1999. The primary reason for the increase is due to the increase in
revenues for the three months ended December 31, 1999 compared to December 31,
1998.
Gross profit margin during the three months ended December 31, 1999 decreased to
approximately 36% or 5% from approximately 41% for the three months ended
December 31, 1998. The primarily reason for the decrease in the gross profit
margin is due to the larger fabrication jobs which contributed a lower gross
profit margin.
The Company's other expenses decreased by approximately by $354,024 or 19% from
approximately $1,838,449 for the three months ended December 31, 1998 to
approximately $1,484,425 for the three months ended December 31, 1999.
Approximately $735,853 of the change was a result of the following non-cash
charges which were incurred during the three months ended December 31, 1999 (i)
approximately $690,853 relating to the amortization of debt issue costs and (2)
approximately $45,000 of common stock issued for services. During the three
month period ended December 31, 1998, the Company had recorded approximately
$1,212,437 in non-cash, and stock related compensation. The balance of the
increase is primarily due to an increase in professional and consulting fees
necessitated by the Company's change in corporate direction.
As a result of all the above, the Company's net loss, after allocating the loss
to minority interest, decreased by approximately $347,399 from approximately
$1,130,298 or $(.19) per share for the three months ended December 31, 1998 to
approximately $782,898 or $(.12) per share for the three months ended December
31, 1999.
Historical Information
These results include the operations of the fabrication business only from
September 7, 1999 through December 31, 1999.
Six months ended December 31, 1999
During the six months ended December 31, 1999, the Company had revenues of
$1,786,578, of which $137,997 was from the administrative services business and
the remainder from the fabrication business. The administrative service business
became operational on October 1, 1999 and will continue to grow as new employees
are added.
Selling, general, and administrative expenses were $884,422 for the six months
ended December 31, 1999, and other expenses were $964,767, most of which were
non-cash charges related to amortization of debt issuance costs. The Company had
a net loss for the six months ended of $1,124,110 or $(.18) per share.
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Three months ended December 31, 1999
During the three months ended December 31, 1999, the Company had revenues of
$1,405,106, of which $112,997 was from the administrative services business and
the remainder from the fabrication business. The administrative service business
became operational on October 1, 1999 and will continue to grow as new employees
are added.
Selling, general, and administrative expenses were $611,316 for the three months
ended December 31, 1999, and other expenses were $719,521, most of which were
non-cash charges related to amortization of debt issuance costs. The Company had
a net loss for the three months ended of $782,898 or $(.12) per share.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had a working capital deficiency of
approximately $2,088,000. The working capital deficiency is primarily due to the
excess of current liabilities over assets assumed by PeopleFirst in its reverse
acquisition of American Risk, which includes $1,078,000 of shareholder loans and
$900,000 of other loans due in fiscal 2000. It will be necessary for the Company
to raise additional working capital or to take other action to help its working
capital situation for the operation of PeopleFirst. In October 1999, the Company
received a note for $225,000 and issued 150,000 shares of common stock upon the
exercise of 150,000 warrants. The note and warrant exercise were cancelled in
December 1999. Further, the Company believes, but cannot assure, that it will be
able to generate additional resources through loans, sales or other issuance of
capital stock to related and/or unrelated parties. In addition, the Company
cannot provide any assurances that it will be successful in generating
profitable operations on a sustained basis from PeopleFirst or its manufacturing
division, however, it believes that it will have sufficient resources to fund
operations through June 30, 2000. At this time the Company is reviewing its
options as to whether to sell some or all of its operations or to sell the
Company. No decisions have been made on any definitive action.
In January 1998 American Risk completed a private placement of 5% Convertible
Preferred Stock, resulting in gross proceeds of $1,250,000. The Company filed a
proxy statement for a special meeting of shareholders at which the conversion
terms of additional shares of 5% Convertible Preferred Stock would be submitted
for approval by the Company's shareholders; however, no meeting date was set. In
February 1999, the Company and the holder of the Preferred Stock entered into an
agreement pursuant to which the Preferred Stock was exchanged in March 1999 for
(i) $600,000 in cash, (ii) convertible notes aggregating $819,000 with fixed
conversion prices (iii) a non convertible note for $81,000(iv) 31,250 shares of
Common Stock and (v) the cancellation of outstanding warrants.
In March 1999, American Risk completed a private placement of Common Stock and
warrants to raise additional funds to fund its plan of operations for the
balance of fiscal 1999 and to pay the above-described payment. The Company
issued 250,000 shares of Common Stock, 1,000,000 Class A Warrants, and 1,000,000
Class B Warrants. The Company received gross proceeds of $1,000,000. The funds
received from the private placement have been utilized.
On July 2, 1999, American Risk completed the transaction in which it sold its
real property in Knoxville, Tennessee for $450,000 plus certain other
liabilities. The proceeds from the sale were utilized to satisfy the debt on the
property as well as other outstanding obligations of the Company.
Year 2000
The Company recognized the need to assure that its operations will not be
adversely impacted by Year 2000 (Y2K) software failures. The impact on
operations continues to be evaluated. Management has already assessed the
revisions needed to be made to ensure that the Company will be able to process
information beyond 1999 without disruption. New hardware and software has been
purchased and installed and the Company's accounting programs have been upgraded
and revised to reduce the possibility of Y2K failure. The installation and
testing of the new programs and systems has been completed. The Company has
assessed the Y2K status of its major suppliers to also reduce the likelihood of
Y2K failure. Based on this assessment, Y2K compliance is not anticipated to have
any material adverse effect on the Company's results of operation. The Company
has also determined that a contingency plan in the event that it is unable to
achieve Y2K compliance is unnecessary. The Company does not expect to incur
material costs if such compliance is not achieved. The Company is also subject
to external Y2K related failures or disruptions that might generally affect
industry and commerce Y2K compliance failures and related service interruptions.
All of these could materially effect the Company's results of operations and
financial condition.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
During the three months ended December 31, 1999, the Company
issued an aggregate of 221,667 shares of common stock as follows: (i)
216,667 shares in connection with services rendered by consultants and,
(ii) 5,000 shares to Profutures Special Equities LLP in consideration
for an extension on the payment of interest due.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
On December 31, 1999, Robert Hausman resigned as President of
the Company.
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
American Risk Management Group, Inc.
a Florida corporation
Date: March 15, 1999 By: /s/ RONALD WILHEIM
-----------------------------------
Ronald Wilheim, Chief Executive Officer
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