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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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EPS SOLUTIONS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0816510
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10 SOUTH RIVERSIDE PLAZA, 22ND FLOOR 60606
CHICAGO, ILLINOIS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (312) 782-1581
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
(Title of class)
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TABLE OF CONTENTS
Item Page
- ---- ----
Risk Factors..................................................... 2
1 Business......................................................... 11
2 Financial Information............................................ 15
3 Properties....................................................... 24
4 Principal Stockholders........................................... 25
5 Management....................................................... 27
6 Executive and Director Compensation; Employment Agreements....... 29
7 Related Party Transactions....................................... 33
8 Legal Proceedings................................................ 40
9 Market Price of and Dividends on
Common Stock and Related Stockholder Matters..................... 41
10 Recent Sales of Unregistered Securities.......................... 43
11 Description of Capital Stock to be Registered.................... 49
12 Indemnification of Directors and Officers........................ 52
13 Financial Statements and Supplementary Data...................... 54
14 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 58
15 Exhibits and Financial Statement Schedules....................... 59
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RISK FACTORS
The risks described below are not the only risks we face. Additional risks
not presently known to us or which we currently consider immaterial may also
adversely affect our company. Any of these risks could have a significant
adverse effect on our business, financial condition and operating results.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED HISTORY OF MANAGING THE COMBINED OPERATIONS OF OUR BUSINESSES
AND THE TASK OF INTEGRATING THE BUSINESSES WE HAVE ACQUIRED IS ONGOING. OUR
FAILURE TO EFFECTIVELY INTEGRATE OUR BUSINESSES MAY HARM OUR ABILITY TO GROW.
Integrating our businesses and any businesses we may acquire in the future
requires us to combine different operations and systems, create a unified
corporate culture and develop a market for our diverse portfolio of products and
services. For example, building a common infrastructure to centralize our
accounting, finance and human resource functions has been time consuming,
difficult and expensive. Integration is ongoing and we will continue to
encounter financial, managerial or other difficulties as we continue our
integration efforts. If we do not effectively integrate our businesses our
ability to grow will be impaired.
IF WE ARE UNABLE TO MANAGE THE GROWTH OF OUR BUSINESS IT MAY HARM OUR
PROFITABILITY.
Internal growth and growth through acquisitions will require us to spend
significant time and effort in expanding our existing business and identifying,
completing and integrating acquisitions, which may not lead to corresponding
revenue growth. Our systems, procedures and controls may not be adequate to
support our operations as they expand. In addition, our executive officers and
senior management are relatively inexperienced in the management of a combined
enterprise as large and complex as we are. Any future growth will impose
significant added responsibilities on our management, including the need to
identify, recruit and integrate new senior level managers and executives. Our
inability to manage our growth or to recruit, retain and integrate additional
qualified management could harm our profitability.
THE ONGOING PROCESS OF DIVESTING OURSELVES OF SOME OF OUR BUSINESSES WHICH HAVE
NOT PERFORMED IN ACCORDANCE WITH OUR EXPECTATIONS AND WHICH NO LONGER FIT WITHIN
OUR STRATEGIC PLAN IS TIME CONSUMING AND EXPENSIVE AND MAY HARM OUR
PROFITABILITY.
We are currently in the process of divesting ourselves of our cost recovery
businesses, which have not performed in accordance with our expectations and
which we have determined no longer fit within our strategic plan. We have not
yet identified purchasers for several of these businesses and we may not be able
to find purchasers willing to purchase the businesses upon commercially
reasonable terms, if at all. In addition, while we are in the process of
identifying potential purchasers, we continue to operate the businesses, which
leads to continued costs and exposures to the risks commensurate with operating
a going concern. If we are unable to find purchasers willing to purchase
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each of the businesses on commercially reasonable terms, we will not receive the
full market value in exchange for the businesses, which may harm our
profitability.
WE ARE IN DEFAULT UNDER OUR SENIOR SECURED CREDIT FACILITY AND HAVE REACHED A
TENTATIVE AGREEMENT WITH OUR LENDERS TO AMEND IT. FAILURE TO SUCCESSFULLY
CONSUMMATE THE AMENDMENT OF OUR CURRENT SENIOR SECURED CREDIT FACILITY COULD
LEAD TO FORECLOSURE ON OUR ASSETS BY OUR LENDERS.
Since December 31, 1999 we have been in default under our senior secured
credit facility because of our failure to meet certain financial covenants. We
have not been in default of our principal or interest payment covenants. Our
lenders have thus far agreed to waive our outstanding defaults and we have been
negotiating with them to amend and replace our current credit facility. On April
28, 2000 we received unanimous written approval of the lenders to amended terms.
Accordingly, we expect to execute a definitive agreement evidencing the amended
terms by May 15, 2000. However, if we are unable to successfully consummate the
amendment of the credit facility, we may be forced to repay the credit facility
and the facility would terminate, which would have a negative effect on our
business. If we are unable to repay the senior secured credit facility when
asked to do so by the lenders, they may exercise any one or more of the remedies
available to them, including foreclosing on the assets pledged to support the
facility, which includes virtually all of our assets. They may also require our
subsidiaries to repay amounts outstanding under the senior secured credit
facility because each of our subsidiaries has guaranteed the facility.
OUR CLIENTS MAY BE UNWILLING TO PURCHASE MULTIPLE PRODUCTS AND SERVICES FROM US,
WHICH WILL PREVENT US FROM FULLY IMPLEMENTING OUR INTEGRATED GROWTH STRATEGY.
The majority of our clients use only one of the more than 20 distinct
products and services we offer and many of our clients have existing
relationships with other vendors for products and services similar to those that
we offer. There is no established model for a single-source integrated human
capital solutions provider and we are not certain that our clients will accept
our model. If we are unable to demonstrate the advantages of maintaining a
relationship with a single-source integrated human capital solutions provider,
we will not benefit from the competitive advantage we hope to achieve through
the sale of multiple products and services to our clients.
IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL AND HIRE ADDITIONAL PERSONNEL,
OUR ABILITY TO DEVELOP AND SUCCESSFULLY MARKET OUR PRODUCTS AND SERVICES COULD
BE IMPAIRED.
Our business relies upon dedicated management and skilled employees who can
develop and maintain client relationships and provide business services to a
sophisticated clientele. These employees are in great demand and are likely to
remain a limited resource for the foreseeable future. We have several key
employees in senior management who are themselves brand names in their markets.
We rely heavily upon their expertise and client relationships. Many of these
individuals agreed to significant reductions in compensation when they joined us
and entered into non-competition agreements in connection with the sale of their
businesses to us. Many of these non-competition agreements will expire over the
next one to two years. If we do not recruit and retain these professionals,
there may be an adverse effect on our competitive position.
MANY OF OUR EMPLOYEES HAVE PURCHASED STOCK PURSUANT TO RESTRICTED STOCK
ARRANGEMENTS THAT CONTAIN VESTING REQUIREMENTS. WHEN THE SHARES VEST, WE MAY
NEED TO PROVIDE NEW BENEFITS OR TO INCREASE COMMISSION AND SALARIES TO MOTIVATE
OUR EMPLOYEES, THE COST OF WHICH MAY REDUCE OUR PROFITABILITY.
We have implemented a series of compensatory, employment-based restricted
stock purchase arrangements to motivate our employees to remain with us,
maximize their performance and enhance our earnings. The restricted shares are
sold to employees at a price we believe to be the fair market value at the date
of purchase and are subject to performance and/or time-based vesting
requirements, typically over a period of four or five years. This restricted
stock program presents risks. First, as restricted stock vests or is lost, we
will need to implement other incentive programs to motivate our employees.
Second, many of our employees sell insurance products or provide executive
search services for commission compensation. In order to earn restricted stock,
some of these employees have entered into four or five-year agreements to reduce
their annual commissions below historical rates until they have foregone
specified levels of annual compensation to which they would otherwise be
entitled. We may enter into additional arrangements of this kind in the future.
At the end of the vesting period for the restricted stock associated with
reduced commissions, we may need to increase the compensation we pay to these
employees or risk losing them to competitors. Loss of these employees to
competitors would impair our ability to secure and complete engagements and
could have an adverse effect on our business.
WE DEPEND ON THE INTRODUCTION OF NEW PRODUCTS AND SERVICES TO ATTRACT AND RETAIN
OUR CLIENTS. FAILURE TO DEVELOP NEW PRODUCTS AND SERVICES WILL HARM OUR
PROFITABILITY AND GROWTH STRATEGY.
We expect to devote significant resources to developing and implementing new
products and services that we believe are complementary to those we currently
provide in order to attract new clients and to make the purchase of multiple
products more attractive to existing clients. We may not be able to develop
additional products and services that will be attractive to our clients, they
may not be receptive to purchasing additional products and services from us and
they may become dissatisfied with our lack of product innovation. If our
products and services are not viewed favorably in the marketplace we will be
unable to retain existing clients or to attract new clients, which will harm our
profitability and growth strategy.
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WE PLAN TO INVEST IN INTERNET SYSTEMS WITHOUT ANY ASSURANCE OF INCREASED FUTURE
EARNINGS OR PROFITABILITY. OUR FAILURE TO DEVELOP WEB-BASED PRODUCTS AND
SERVICES COULD SUBSTANTIALLY LIMIT OUR GROWTH STRATEGIES AND HARM OUR
PROFITABILITY.
We plan to invest considerable resources to develop and implement Web-based
products and services. We do not currently recognize any meaningful revenues
from Web-based business and we cannot assure you that we will be able to derive
meaningful revenues from this portion of our business in the future. Our
investment in a Web-based business plan presents the following risks:
o use of the Internet as a means of transacting business is relatively new
and may not be accepted by all clients in the markets we have targeted;
o we may be unable to transform our traditional products and services into
Web-based products and services in a timely manner or at all;
o rapid technological change could render our Web-based products and
services obsolete;
o the functionality of products and services we are able to develop for
the Web could be constrained if the infrastructure of the Internet is
not expanded and improved;
o concerns over the security of the Internet and other on-line
transactions and the privacy of users may deter clients from using the
Internet to conduct activities that involve transmitting confidential
information;
o development and implementation of our Web-based products and services
may require significant attention from key management personnel with
extremely limited experience with Web-based business who may therefore
be distracted from managing our traditional product and service
offerings;
o the early stage of development of the Web-based market for our products
and services makes it difficult for us to predict client demand
accurately;
o we may be unable to recover research, development and start-up costs
associated with our Web-based product and service development; and
o future governmental regulation of Internet commerce may impede the
success of our Web-based products and services.
CONTINUED GROWTH THROUGH STRATEGIC ACQUISITIONS COULD DISRUPT OUR BUSINESS AND
HARM OUR OPERATING RESULTS.
We expect to continue to make strategic acquisitions as part of our growth
strategy. We may not be able to identify and acquire additional businesses or
integrate and manage any acquired businesses without substantial costs, delays
or other operational or financial problems. Risks inherent in an acquisition
strategy, such as potentially increasing leverage and debt service requirements,
difficulties associated with combining different business systems and cultures,
and the failure to retain key personnel, could disrupt our business and
adversely affect our operating results. The process of integrating acquired
companies may involve unforeseen difficulties and require a disproportionate
amount of management's attention and financial and other resources. Our
acquisition strategy involves the following risks:
o we often finance acquisitions by issuing shares of stock as part of the
purchase price. If acquisition targets do not perceive our stock as
valuable, we will need to use more cash or issue more debt to implement
our acquisition strategy;
o we may incur debt;
o we may incur amortization expense related to goodwill and other
intangible assets;
o acquisition efforts may divert management's attention from our existing
business and the implementation of our business strategy;
o as a result of acquiring the equity interests (and in some cases, the
assets and certain liabilities) of some acquisition targets we could
expose our business to unforeseen liabilities that would increase our
expenses;
o prospective changes in the generally accepted accounting standards that
apply to amortization of charges associated with goodwill in
acquisitions could have an adverse effect on our financial results;
o uncertainties regarding the size, timing and integration of acquisitions
may cause our operating results to be difficult to predict and compare
from quarter to quarter; and
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o if we make an unsuitable acquisition we could incur losses, substantial
transaction costs and the diversion of management's attention in an
effort to improve the operations of the acquired company or to scale
back, terminate or sell the acquired company.
Businesses that we acquire in the future may not achieve anticipated
revenues and earnings. Additionally, our inability to acquire, integrate and
manage complementary product and service providers could have a material adverse
effect on our business, financial condition and results of operations.
OUR ACQUISITIONS OF COMPLEMENTARY INTERNATIONAL BUSINESSES WILL EXPOSE US TO
RISKS WE HAVE NOT FACED IN THE PAST, WHICH MAY HARM OUR PROFITABILITY.
If we are successful in acquiring complementary international businesses we
will have to confront and manage a number of risks that we have not had to
address in our U.S. operations. We may not be successful in managing these
risks. These risks include:
o expenses associated with customizing products for foreign countries;
o challenges and costs inherent in managing geographically dispersed
operations;
o laws and business practices that favor local competitors;
o multiple, conflicting and changing governmental laws and regulations;
o longer sales and payment cycles and greater difficulties in collecting
accounts receivables;
o little or no protection of our intellectual property rights in some
foreign countries;
o increases in tariffs, duties, price controls, or other restrictions on
foreign currencies;
o economic or political instability in some international markets;
o potentially adverse tax consequences; and
o foreign currency exchange rate fluctuations.
Revenue from international operations may not offset the expense of
establishing and maintaining these foreign operations. If we are unable to
successfully enter or compete in international markets, our growth strategy may
be impeded.
WE MAY BE UNSUCCESSFUL IN PROMOTING BRAND AWARENESS, WHICH MAY HARM OUR ABILITY
TO ATTRACT NEW CUSTOMERS.
In April of 2000 we determined, subject to shareholder approval, to change
our name to 3-D-H-R Corp. We currently promote our products and services under a
wide variety of names. If we are to develop our brand within our target markets,
which we believe is critical to achieving widespread acceptance and market
penetration, we must migrate to using the name "3-D-H-R Corp." in association
with all of our products and services. We have in the past dedicated limited
resources to marketing, public relations and other brand development activities,
and have only recently dedicated personnel and additional resources to this
task. As a result, our efforts in developing this brand awareness may not be
successful. If we fail to successfully promote and maintain our brand, our
operating margins and our growth may decline.
OUR REVENUES AND OPERATING RESULTS MAY VARY CONSIDERABLY FROM QUARTER TO QUARTER
AND FROM YEAR TO YEAR.
Our revenues and operating results may vary from quarter to quarter and from
year to year. We typically realize our lowest percentage of annual revenue in
our first quarter. In addition, our periodic results may vary due to events and
circumstances in our business. The variations result from a number of factors,
including:
o the number of active client engagements;
o the consummation of acquisitions and the integration of acquired
entities;
o the length of the sales cycle on new business;
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o the historical seasonability of the implementation of benefits programs;
and
o the year-end focus of annual incentive compensation systems.
A portion of our revenues result from transaction-based services. Therefore,
our revenues may vary considerably based on our success in obtaining such
engagements, their size and scope, and the timing of when we perform our
services, which determines when we earn and recognize such revenues. Also, we
believe our revenues for the first quarter of a calendar year are adversely
affected by clients' purchasing cycles, which generally start anew with each
calendar year, and the year-end focus of certain services we provide to our
clients. Because a significant portion of our expenses are relatively fixed,
revenue fluctuations can cause significant variations in operating results from
quarter to quarter or from year to year. Given all of the foregoing factors, we
believe that period-to-period comparisons of our operating results are not
necessarily meaningful, and the results for one period should not be relied upon
as an indication of future performance.
OUR OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED IF WE ARE UNABLE TO
PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.
We rely on a combination of copyright, trademark and trade secret laws,
nondisclosure agreements and other contractual arrangements to protect our
proprietary rights. None of our technology is patented. Although many of our
material brand names are the subject of registrations in the U.S. Patent and
Trademark Office, a number are not, including 3-D-H-R Corp. Also, we have not
yet determined whether 3-D-H-R Corp. is eligible for registration. Only a few of
our trademarks are registered outside the United States. Our training manuals,
client databases, and the source codes of our proprietary software are protected
under U.S. copyright law. However, U.S. copyright law protection does not extend
to the ideas contained within the materials or programs, nor will it prevent
others from independently developing materials or software that perform the same
functions or prevent individual items of data from being copied. Thus, our
competitors may also independently develop technologies that are equivalent or
superior to ours. While we generally enter into confidentiality agreements with
our employees, consultants, clients and potential clients and limit access to,
and distribution of, our proprietary information, we may be unable to deter
misappropriation of our proprietary information, detect unauthorized use or take
appropriate steps to enforce our intellectual property rights.
OUR PRODUCTS MAY BE SUSCEPTIBLE TO CLAIMS BY OTHER COMPANIES THAT OUR PRODUCTS
INFRINGE UPON THEIR COPYRIGHTS OR PATENTS, WHICH COULD LIMIT OUR ABILITY TO
OFFER THOSE PRODUCTS OR SUBJECT US TO INCREASED EXPENDITURES.
Although we believe that our services, products and trade names do not
infringe on the intellectual property rights of others, we have had infringement
claims filed against us in the past and we cannot prevent others from asserting
a claim against us in the future for violating their proprietary rights. If any
of our products violate the proprietary rights of third parties, we may be
required to change our products or to obtain licenses to continue offering our
products without substantial change. Any efforts to change our products or
obtain licenses from third parties may not be successful and, in any case, could
have a material adverse effect on our business and financial performance by
substantially increasing our costs. It is possible that we could become subject
to legal actions based upon claims that our products and services infringe the
rights of others. Any such claims, with or without merit, could subject us to
costly litigation and the diversion of our financial resources and management
personnel.
WE ARE INVOLVED IN LITIGATION WITH ANTHEM INSURANCE COMPANY, INC., WHICH
ALLEGES, AMONG OTHER THINGS, MISAPPROPRIATION OF RIGHTS TO THEIR HEALTHCARE
PAYABLES AUDITING SOFTWARE. THIS LITIGATION WILL CONTINUE TO BE COSTLY AND
DIVERT THE EFFORTS OF OUR MANAGEMENT, WHICH WILL HARM OUR PROFITABILITY.
We are involved in litigation with Anthem Insurance Company, Inc. in state
court in Indiana. Settlement attempts in this matter have thus far been
unsuccessful. We are not yet able to assess our potential liability or that of
the other named defendants. Our failure to prevail in this litigation could
result in an adverse judgment against us for monetary damages or a settlement on
unfavorable terms. In addition we may be required to indemnify certain of our
employees and former employees that are named in the litigation against
liabilities and expenses which arise in connection with the lawsuit, which could
prove costly. This litigation, regardless of its outcome, will
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continue to result in significant expenses in defending the lawsuit and may
divert the efforts and attention of our management team from normal business
operations.
RISKS RELATED TO OUR INDUSTRY
OUR BUSINESSES FACE SIGNIFICANT COMPETITION IN A MARKETPLACE THAT IS HIGHLY
COMPETITIVE AND HAS LOW BARRIERS TO ENTRY.
The market for our services is competitive, subject to rapid change and
affected by new service introductions, technological change and other activities
of industry participants.
The global executive search industry is extremely competitive and highly
fragmented. We compete primarily with other large global executive search firms,
such as Korn/Ferry International, Heidrick & Struggles International, Inc.,
SpencerStuart & Associates and Russell Reynolds Associates as well as smaller
boutique or specialty firms that focus on regional or functional markets or on
particular industries. Some of these competitors possess greater resources,
greater name recognition and longer operating histories than we do in particular
markets, which may afford these firms significant advantages in obtaining future
clients and attracting qualified professionals in those markets. Many executive
search firms have a smaller client base than we do and therefore may be subject
to fewer blocking arrangements than us. We may not be able to continue to
compete effectively with existing or potential competitors, or our significant
clients or prospective clients may decide to perform executive search services
using in-house personnel.
Our performance improvement products and services business faces significant
competition from in-house employee development programs, providers of
traditional classroom instruction, providers of CD-ROM performance learning
products and services, suppliers of online information technology performance
learning products and services that are attempting to take advantage of their
current technology and client base and expand into a Web-based market, and
established performance improvement providers such as Provant Inc.
Our corporate and employee benefit programs business faces significant
competition from independent insurance agents and national accounting and
consulting firms.
Historically, there have been few barriers to entry into the executive
search, performance improvement and benefit programs markets. New executive
search firms, performance improvement firms and benefit programs consultants
continue to enter the market. In addition, with the continued development and
increased use of the Internet, technology oriented companies will likely be
attracted to our markets. Many of our current and potential competitors have
longer operating histories, greater name recognition and greater financial,
technical, sales, marketing, support and other resources than we do. We may not
be able to continue to compete effectively against existing or potential
competitors and increased competition may have a material adverse effect on our
business, financial condition and results of operations.
WE MAY HAVE DIFFICULTY KEEPING PACE WITH THE FREQUENT CHANGES IN TECHNOLOGY AND
INDUSTRY STANDARDS IN THE DYNAMIC AND EVOLVING MARKETPLACE IN WHICH WE OPERATE,
WHICH COULD HARM OUR PROFITABILITY.
We operate in a dynamic and continually evolving marketplace characterized
by rapidly changing technologies, frequent new product and service introductions
and evolving industry standards. The growth in the use of the Internet and
intense competition in our industry exacerbate these market characteristics. Our
future success will depend on our ability to adapt to rapidly changing
technologies and client demands by continually improving the features and
performance of our products.
THE SIGNIFICANT CORPORATE RESTRUCTURING OCCURRING IN MANY OF THE INDUSTRIES WE
SERVE COULD HARM SALES OF OUR PRODUCTS AND SERVICES.
Our business and financial performance may be damaged, more so than most
companies, by the corporate restructuring and consolidation occurring in many of
the industries that we serve. During the time period when a client is undergoing
a change in management, employee hiring, education, and development is
temporarily
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suspended, often for a significant length of time. Any such decrease in employee
hiring, education, and development expenditures, even if temporary, would have a
material adverse effect on our sales.
THE CURRENT ACCEPTANCE OF OUTSOURCING BUSINESS SERVICES MAY DECREASE
SIGNIFICANTLY, WHICH COULD HARM OUR OPERATING RESULTS.
Our business and growth depend in large part on the acceptance of outsourced
business services among Fortune 1000 companies and other large organizations.
Our current and potential customers could elect to perform such services with
their own employees. In addition, adverse financial conditions affecting our
target clients or a general weakening of the economy could lead to a decrease in
demand for our services. Some companies may not view outsourced employee search,
performance learning and relocation products as critical to the success of their
business. If these companies experience disappointing operating results, whether
as a result of adverse economic conditions, competitive issues or other factors,
they may decrease or forego education and employee development expenditures
before limiting their other expenditures. A significant decline in the use of
outsourced services in general, or decreased expenditures for education and
employee development, would have a material adverse effect on our business,
financial condition and operating results.
OFF-LIMITS AGREEMENTS WITH OUR CLIENTS MAY RESTRICT THE CLIENTS TO WHOM WE CAN
MARKET OUR EXECUTIVE SEARCH SERVICES, WHICH WILL ADVERSELY AFFECT OUR GROWTH.
Through the execution of off-limits or blocking agreements with clients, or
potential clients, we frequently agree to refrain, for a specified period of
time, from recruiting employees of a client, and possibly other entities
affiliated with that client. Off-limits agreements generally remain in effect
for one or two years following completion of an assignment. The duration and
scope of the off-limits agreement, including whether it covers all operations of
the client and its affiliates or only certain divisions of a client, generally
are subject to negotiation or internal policies and may depend on such factors
as the length of the client relationship, the frequency with which we have been
engaged to perform executive searches for the client and the amount of revenue
we have generated or that we expect to generate from the client. Some of our
clients are recognized as industry leaders and employ a significant number of
qualified executives who are potential recruitment candidates for other
companies. Our inability to recruit employees of such a client and any potential
new clients' awareness of such an arrangement may make it difficult for us to
obtain search assignments from, or to fulfill search assignments for, other
companies in that client's industry. As our client base grows, particularly in
targeted business sectors, blocking arrangements increasingly may impede our
growth, and our ability to attract and serve new clients, which could have a
material adverse effect on our business, results of operations and financial
condition.
IF A SEARCH CONSULTANT DECIDES TO LEAVE US TO JOIN A COMPETING FIRM, CLIENTS MAY
MOVE THEIR BUSINESS TO THE CONSULTANT'S NEW EMPLOYER.
The success of our search business depends upon the ability of our executive
and mid-level search consultants to develop and maintain one-to-one
relationships with our clients. When one of our consultants leaves us to join
another search firm, clients that have established relationships with the
departing consultant may move their business to the consultant's new employer.
The loss of one or more clients is more likely to occur if the departing
consultant enjoys widespread name recognition or has developed a reputation as a
specialist in executing searches in a particular industry. Our failure to retain
our most productive consultants or maintain the quality of service to which our
clients are accustomed, and the ability of a departing consultant to move
business to his or her new employer, could have a material adverse effect on our
business.
OUR EXECUTIVE SEARCH BUSINESS MAY SUBJECT US TO SUBSTANTIAL LIABILITY, WHICH
COULD HARM OUR PROFITABILITY.
The executive search business exposes us to potential claims from a variety
of sources, including:
o clients who could potentially assert a claim alleging we breached an
off-limits agreement or alleging we recommended a candidate who
subsequently proves to be unsuitable for the position filled;
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o current employers of a candidate placed by us, who could assert a claim
alleging we interfered with its employment contract with the candidate;
and
o candidates who could assert claims alleging we failed to maintain the
confidentiality of their employment search or alleging discrimination or
other violations of employment law by one of our clients.
We generally provide a two year guarantee to our retained executive search
clients pursuant to which we are obligated to conduct a free search if an
employee we place with a client leaves within two years after the date of
placement. We maintain professional liability insurance in such amounts and with
such coverages and deductibles as we believe are adequate to cover such claims.
However, our insurance may not cover all such claims and our insurance coverage
may not continue to be available at economically feasible rates.
INCREASING INTEREST RATES AND DECREASING STOCK PRICES MAY HARM THE SALE OF OUR
INDIVIDUAL AND CORPORATE BENEFITS PROGRAMS.
Our commission income is affected by general economic conditions and market
factors, such as changes in interest rates and stock prices. Interest rate
fluctuations may have a significant effect on the sale and profitability of
insurance-financed employee benefits programs we market. For example, if
interest rates rise, competing products may become more attractive to potential
purchasers of our programs. Further, a prolonged decrease in stock prices may
have a significant effect on the sale and profitability of our programs that are
linked to stock market indices. Thus, economic conditions and other factors may
negatively affect the popularity or economic attractiveness of the programs we
market. We may not be able to compete with alternative programs if economic
conditions and inflationary increases make our programs financially
unattractive.
REGULATION OF SOME OF OUR BUSINESSES LIMITS OUR ACTIVITIES AND MAY SUBJECT US TO
ADDITIONAL COSTS OF COMPLIANCE AND PENALTIES IF WE DO NOT COMPLY.
Our individual and corporate benefits programs are subject to regulation by
governmental and self-regulatory organizations in the United States and in other
jurisdictions in which they operate around the world. The regulations are
designed to ensure the integrity of the insurance industry and financial markets
and to protect customers and other third parties who deal with us and are not
designed to protect our stockholders. Consequently, these regulations often
serve to limit our activities, including through net capital, customer
protection and market conduct requirements. We face the risk that regulatory
authorities may:
o conduct extended investigation and surveillance of our operations, which
could be costly and divert management's attention;
o adopt regulations that are costly or restrictive to us; and
o subject us to judicial or administrative proceedings.
Any of these actions by regulatory authorities may result in substantial
penalties or restrict our business activities.
CHANGES TO FEDERAL TAX LAWS MAY HARM THE SALE OF OUR INDIVIDUAL AND CORPORATE
BENEFITS PROGRAMS.
Federal tax laws create certain advantages for the purchase of life
insurance products by individuals and corporations, and therefore the life
insurance products underlying the benefits programs marketed by us are
vulnerable to adverse changes in tax legislation. If any tax law is enacted and
is made retroactive, banks and other of our clients may lose the economic
advantages of maintaining the policies underlying their benefits plans. This
could result in significant surrenders of policies from which we currently
derive commission and fee revenue. We are unable to predict the extent to which
new tax laws or amendments to existing laws will be adopted or the effect that
any such amendments will have on our business. Adverse tax proposals may be
enacted or adverse interpretations of existing laws may occur in the future. If
Congress amends the Internal Revenue Code to eliminate or reduce the
tax-deferred status of the insurance programs marketed by us, or if adverse
interpretations of existing laws occur in the future, the market demand for such
programs would be materially diminished.
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WE DO NOT INTEND TO PAY DIVIDENDS.
We have never paid dividends on our common stock and we do not anticipate
paying any dividends in the foreseeable future. Declarations of dividends on our
common stock will depend upon, among other things, future earnings, if any, our
operating results and our financial condition, capital requirements and general
business conditions. Our current credit facility prohibits dividend payments. We
are a holding company and derive all of our operating income from our
subsidiaries. The ability of our subsidiaries to make payments to us may be
restricted by applicable state laws or terms of agreements to which they are or
may become party, which would limit our ability to pay dividends.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS AND APPLICABLE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL, WHICH MAY HARM OUR STOCK PRICE.
Provisions of our certificate of incorporation and by-laws may discourage,
delay or prevent a merger or acquisition that our stockholders may consider
favorable, including transactions in which stockholders might otherwise receive
a premium for their shares. Some provisions of Delaware law may also discourage,
delay or prevent someone from acquiring us or merging with us. For example, our
certificate of incorporation and bylaws:
o require advance notice for stockholder proposals and director
nominations to be considered at a meeting of stockholders;
o establish a classified board of directors;
o prohibit stockholders from calling special meetings;
o limit stockholder actions by written consent instead of at a meeting;
o limit stockholders' ability to amend, alter or repeal the bylaws; and
o authorize the board of directors to issue preferred stock and to
determine the terms of the preferred stock without stockholder approval.
These factors may inhibit a transaction in which the holders of common stock
might otherwise receive a premium for their shares over then-current market
prices.
FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements" within the meaning of
the federal securities laws. Forward-looking statements typically include words
like "may," "will," "could," "plan," "estimate," "continue," "believe,"
"expect," "predict," "project" or "anticipate" or the negative thereof or other
comparable expressions, including references to assumptions, although some
forward looking statement are expressed differently. The forward-looking
statements contained in this document are generally located in the material set
forth under the headings "Risk Factors," "Business," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and "Financial
Statements and Supplementary Data" but may be found in other locations as well.
These forward-looking statements generally relate to our plans and objectives
for future operations and are based upon our management's expectations of future
results or trends. Although we believe that our expectations are reasonable, our
actual results could differ materially from those contained in the
forward-looking statements due to various risks, both foreseen and unforeseen,
including the following:
o limited combined operating experience and potential for ineffective
integration of our companies;
o restrictions imposed by substantial debt and restrictive covenants;
o potential ineffectiveness of our cross-selling strategy;
o potential inability to acquire new companies that will contribute to our
growth on cost-effective terms;
o potential failure to achieve our anticipated growth and growth
strategies;
o changes in general economic and business conditions; and
o competition.
Our risks are more specifically described in "Risk Factors" and elsewhere in
this document. Given these uncertainties, you should not place undue reliance on
forward-looking statements. We will not update forward-looking statements even
though our situation will change in the future.
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ITEM 1.
BUSINESS
COMPANY FORMATION
In December 1998 we acquired 33 businesses, which we refer to collectively
as the 1998 Business Acquisitions and in March and April 1999 we acquired five
additional companies, which we refer to collectively as the 1999 Business
Acquisitions. The combination of these companies was designed to enable us to
act as a single-source provider of executive search and relocation, performance
improvement and employee retention solutions, as well as cost recovery services,
for the Fortune 1000 and other companies with substantial outsourcing needs.
Effective November 1999 we sold all of the assets of our health care cost
recovery businesses to a company controlled by our founders, Christopher Massey
and Erik Watts, and we rescinded our purchase of National HealthCare Recovery
Services, LLC. Also, in December 1999 we decided to discontinue our cost
recovery operations altogether and the board of directors approved a plan to
divest ourselves of our remaining cost recovery businesses. In addition, we
decided to investigate possible additional acquisitions to complement our
remaining businesses. We are currently in the process of divesting ourselves of
our cost recovery subsidiaries and divisions and plan to acquire additional
businesses that are complementary to our executive search and relocation,
performance improvement and employee retention businesses.
COMPANY OVERVIEW
We provide products and services that assist organizations in finding,
developing and retaining the human capital necessary to compete in today's
rapidly changing business environment. Our human capital solutions consist of
executive and mid-level management recruiting, employee relocation services,
performance improvement solutions, and executive and employee benefits program
design and implementation. Our products and services are designed to meet the
following needs:
Finding Critical Personnel. We provide retainer-based executive and mid-level
management recruiting services that focus on the search and placement of senior
and mid-level management, including board members and executive officers. We
also support an organization's mobility requirements by designing, developing
and implementing customized relocation programs for employees and organizations'
facilities worldwide.
Developing Organizational Effectiveness. We provide a portfolio of performance
improvement products and services designed to increase overall personal and
organizational effectiveness. These products and services are focused on three
core performance content domains of many organizations and include the
following:
o Sales and Service Effectiveness. Our sales and service effectiveness
products and services focus primarily on value-based solutions that
enhance performance at the customer interface level. This offering
includes sales and marketing, customer service and client communication
effectiveness solutions.
o Personal and Organizational Effectiveness. Our personal and
organizational effectiveness products and services are designed to
provide measurable improvement in performance and productivity for
employees and to enable our clients to better improve the overall
performance of their organization. This offering includes personal
skills development lessons, decision-focused communications solutions,
individual, team and organizational assessment services and change
management consultation and training.
o Organizational Processes Improvement. Our organizational processes
improvement services are designed to improve overall corporate
performance through process redesign and modification. These services
consist of merger and acquisition integration services, project success
training and organizational and process redesign solutions.
Retaining Key Employees. We provide a variety of individual and corporate
benefits programs designed to attract and retain key employees for our clients.
These products and services include:
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o Benefit Plan Products and Services. We provide access to an array of
customized investment products and services for our clients, including
qualified and non-qualified deferred compensation plans, 401(k) plans,
bonus plans and insurance plans. In addition, we review existing
benefits plans and analyze various providers' benefits plans in order to
assist a client in selecting the most suitable plan for its
organization.
o Wealth Enhancement Financial Services. We provide wealth enhancement
services to high net worth individuals as well as corporations seeking
to retain executive management through financial incentives other than
traditional forms of compensation. Our services include structuring tax
effective estate plans, developing funding options for business owners,
and delivering other financial products and services.
COMPETITION
Several entities compete in the highly fragmented and competitive executive
search, performance improvement, and employee and corporate benefits markets.
Traditionally we compete with retainer-based and contingency search firms,
specialized training providers, insurance companies, independent insurance
providers, organizations' internal departments and resources, and national and
boutique consulting companies. Competitors in the executive search business
include Heidrick & Struggles International, Inc., Korn/Ferry International,
Inc., SpencerStuart & Associates and Russell Reynolds Associates. In addition to
smaller, specialized training companies, our performance improvement solutions
business competes with a number of larger companies, including Provant Inc. and
AchieveGlobal, Inc. Our employee and corporate benefits programs service
offerings may face competition from Clarke/Bardis, Inc. and others.
OPERATIONAL PLAN FOR REMAINDER OF FISCAL YEAR
In addition to the dispositions and planned acquisitions discussed below,
our business plan for 2000 is to focus on our continuing businesses. We plan to
further integrate our operations, execute our cross-selling opportunities,
and continue developing our integrated product offerings. Through business
alliances and other partnering arrangements we are dedicated to executing our
e-commerce plan for many areas of our business. We are currently working
internally, and in conjunction with partners, on digitizing our existing
performance learning content for the Web, as well as creating new content
specifically for the Internet. Delivering our services through an integrated
offering both traditionally and on the Web is a major focus. We also plan to
further strengthen our operational and financial controls through continued roll
out of our ERP systems.
DISPOSITIONS
Effective November 1999, we rescinded our purchase of National HealthCare
Recovery Services, LLC and sold all of the assets related to our healthcare cost
recovery businesses to a company controlled by our founders, Christopher Massey
and Erik Watts, in conjunction with their resignations from the Company. The
assets sold to Mr. Massey and Mr. Watts' company included all of those assets
that were acquired pursuant to the following agreements:
o Asset Purchase Agreement, dated November 23, 1998, by and among the
Company, Med-co Review, Inc., International Cost Containment Network,
Inc., Tammy SeRine-Richardson, Lance A. SeRine and Dennis W. Reineke
o Securities Purchase Agreement, dated December 7, 1998, by and among
National Recovery Services, LLC, its members and the Company and the
related option acquisition agreements;
o Asset Purchase Agreement, dated November 18, 1998, by and among the
Company, The Oxxford Group, Inc., and Moses K. Cheung (healthcare claims
payment audit and recovery portion of the business only);
o Asset Purchase Agreement, dated March 8, 1999, by and among the Company
and Gerard Smith d/b/a The T&E Group.
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In addition, we rescinded the Securities Purchase Agreement that we entered into
with National HealthCare Recovery Services, LLC and the Members of National
HealthCare Recovery Services, LLC, dated March 1, 1999.
In December 1999, we decided to divest all of our remaining cost recovery
subsidiaries and divisions and adopted a plan to sell two businesses in our
Human Capital Solutions business segment. These businesses include: TSL
Services, Inc., Lease Audit & Analysis Services, Inc., CyberLease, LLC,
CyberStract, LLC, Benefit Funding Services Group LLC, FDSI Logistics, Inc.,
Dimension Funding, Inc., The Oxxford Group, Inc., The Oxxford Consulting
Services Group, Inc., Partners Consulting Services, Inc., Training Grant
Funding, a division of the Company, D'Accord Holdings, Inc. and affiliates,
Hindert & Associates, Inc. and affiliates, Kenneth H. Wells & Associates, Inc.
and affiliates, The Structured Settlements Company, Inc. and D.L.D. Insurance
Brokers, Inc. We have executed letters of intent for the sale of TSL Services,
Inc., Benefit Funding Services Group LLC and the Training Grant Funding
businesses and Bay Group International and plan to divest ourselves of our
remaining cost recovery businesses no later than December 31, 2000. As a result,
these businesses are treated as discontinued operations in our financial
statements, as described more particularly in Item 2 to this document under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations".
The planned sale of Benefit Funding Services Group LLC and our Training
Grant Funding division, is to a company controlled by our founders, Christopher
Massey and Erik Watts.
PROBABLE ACQUISITIONS
We are currently evaluating two probable acquisition candidates that
offer products and services complementary to ours. These candidates are:
o eFox, L.L.C., an Internet-based performance learning company that is
80.1% beneficially owned by James Holden, Chief Executive Officer of one
of our subsidiaries, Holden Corporation, and 19.9% owned by us; and
o PowerBased Selling Limited, PBS, a performance learning company that is
owned by three individuals in the United Kingdom. PBS is the exclusive
distributor of Holden Corporation intellectual property and materials in
the UK and in other selected countries in Europe.
OTHER POTENTIAL ACQUISITIONS
An international consulting firm is in the process of preparing for us a
financial and technological analysis of JobPlex, Inc., an Internet-based
mid-level search firm that is majority owned by our Chief Executive Officer,
David Hoffmann. The results of their report will assist our board of directors
in evaluating the financial terms of any potential acquisition of JobPlex, Inc.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Our success is, in part, attributable to copyrighted materials, corporate
information databases, instructional materials, evaluation methodologies and
research protocols. We depend upon a combination of trade secrets, copyright
law, and non-disclosure and other contractual provisions to protect our
proprietary rights. If disclosure of proprietary information to third parties is
necessary, we typically obtain confidentiality assurances. We also generally
require our clients to sign license agreements for use of our copyrighted
training materials which limit the use and dissemination of the materials.
We claim copyright protection for our proprietary software, instructional
materials, and client databases. Copyrights, however, do not protect the ideas
contained within the programs or materials, nor will they prevent others from
independently developing materials and databases which perform the same
functions.
Our business strategy includes establishing a strong brand identity for the
3-D-H-R Corp. name (assuming our stockholders approve of its use), while
preserving the goodwill in the names of our established products and services.
We have registrations in the U.S. Patent and Trademark Office for a number of
material product and service marks. We also have trademark registrations in
foreign countries. We plan to apply to register the 3-D-H-R Corp. name in the
United States Patent and Trademark Office if our stockholders approve its use,
but we cannot assure that a registration will be issued.
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EMPLOYEES
As of February 1, 2000, we had approximately 660 employees. We are not a
party to any collective bargaining agreement with our employees. We believe our
employee relations are good. In addition, as of February 1, 2000, we were
providing some of our products and services through approximately 95 independent
contractors.
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ITEM 2.
SELECTED FINANCIAL DATA
(Dollars in thousands, except share data)
Set forth below are selected historical financial data for EPS Solutions
Corporation (EPS) for the period from May 29, 1998 (the date of its formation)
to December 31, 1998 and for the year ended December 31, 1999, and National
Benefits Consultants, L.L.C. and National Revmax Consultants, L.L.C.,
(collectively referred to as NBC) whose combined historical financial data for
the three years ended December 31, 1997 and the period from January 1, 1998 to
May 28, 1998 are presented as the Predecessor entity. This data should be read
in conjunction with the consolidated financial statements, related notes and
other financial information included herein.
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EPS SOLUTIONS CORPORATION
SELECTED FINANCIAL DATA
EPS SOLUTIONS
PREDECESSOR CORPORATION
----------------------------------------------------- ------------------------
YEAR ENDED DECEMBER 31
--------------------------------- PERIOD FROM
MAY 29, 1998
PERIOD FROM (INCEPTION(2))
JANUARY 1 TO YEAR ENDED
TO MAY 28, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1998(2) 1998 1999
----------------------------------------------------------------------------------
(dollars in thousands)
Statement of Operations Data (unaudited):
CONTINUING OPERATIONS(1):
Ongoing businesses:
Revenues $ 1,170 $ 141,527
Cost of revenues 70,671
Selling, general and administrative 6,109 59,278
Restructuring charges(3) 5,762
Abandoned bond offering costs(4) 2,418
-------- ---------
Income (loss) from operations (4,939) 3,398
Non-operating expenses (principally
interest) 809 19,013
Businesses closed or to be
disposed of(1):
Revenues 16,588
Costs and expenses (15,840)
Loss on businesses closed or to be
disposed of (5,620)
-------- ---------
Loss from continuing operations before
income taxes (5,748) (20,487)
Income tax benefit 1,639
-------- ---------
Loss from continuing operations (5,748) (18,848)
DISCONTINUED OPERATIONS(1):
Income (loss) from discontinued
operations, net of income taxes (296) 232 819 554 2,463 (2,583)
Loss on disposal of discontinued
operations (no income tax benefit) (62,291)
----- ------- ----- ---- -------- ---------
Net income (loss) $(296) $ 232 $ 819 $554 $ (3,285) $ (83,722)
===== ======= ===== ==== ======== =========
Loss per share (unaudited):
Basic (.78) (3.80)
Diluted (.78) (3.80)
OTHER DATA (unaudited):
EBITDA(5) (4,353) 5,387
BALANCE SHEET DATA (AS OF END OF PERIOD)
(unaudited):
Cash and cash equivalents $ 4 $ 86 $ 76 $16,610 $ 10,025
Current assets held for sale -- -- -- -- 26,478
Working capital (deficit) (13) (1,351) (932) 5,093 (19,760)
Other assets held for sale(1) -- 39,442
Total assets 11 235 269 212,157 195,942
Total long-term debt, including current
maturities 167,802 224,765
Minority interest in a subsidiary company 4,930 5,240
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NOTES TO SELECTED FINANCIAL DATA
(1) In the fourth quarter of 1999, our Board of Directors adopted a plan to
discontinue certain product and service offerings in our Human Capital
Solutions segment and dispose of our Cost Recovery Services segment.
Accordingly, selected financial data is provided for continuing
operations, including businesses closed or to be disposed of, and
discontinued operations of our Cost Recovery Services segment.
(2) The Company was formed May 28, 1998 although the 1998 Business
Acquisitions were not acquired until December 1998. We accounted for
our acquisition of NBC as a combination of entities under common
control, effective as of the incorporation of the Company.
(3) In December 1999, we adopted a plan to relocate our Corporate
headquarters. Accordingly, we recorded a charge of $5,762 for headcount
reduction, lease exit costs and certain asset writedowns.
(4) We incurred $2,418 in transaction costs, including legal and accounting
fees and other costs associated with a contemplated high-yield bond
offering in the second quarter of 1999. In October 1999, we charged the
abandoned bond offering costs to continuing operations after the
Company had determined earlier that market conditions were unfavorable
for such a financing.
(5) EBITDA represents operating income from continuing operations before
depreciation and amortization and non-cash compensation expense. While
we do not intend for EBITDA to represent cash flow from operations as
defined by generally accepted accounting principles (GAAP) and we do
not suggest that you consider it as an indicator of operating
performance or an alternative to cash flow or operating income (as
measured by GAAP), or as a measure of liquidity, we include it herein
to provide additional information with respect to our ability to meet
our future debt service, capital expenditures and working capital
requirements. EBITDA as presented in this offering memorandum may not
be comparable to similarly titled measures of other companies.
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ITEM 2. (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands)
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with the consolidated
financial statements and related notes appearing elsewhere in this document.
OVERVIEW
Our revenues are generated from the delivery of products and services that
assist organizations in finding, developing and retaining the human capital
necessary to compete in today's rapidly changing business environment. Our Human
Capital Solutions products and services are designed to meet the following needs
of our clients -- finding critical personnel, developing organizational
effectiveness, and retaining key employees. We recruit executive and mid-level
managers on a retainer basis and provide complementary global relocation
services for both individuals and entire organizations. We provide a broad
portfolio of performance improvement products and services designed to increase
overall personal and organizational effectiveness. We also provide a variety of
individual and corporate benefits programs designed to attract and retain the
most talented employees for our clients.
FORMATION
In May 1998, we were formed to become a leading provider of a broad range of
professional business services designed to increase our clients' profitability,
efficiency, and competitiveness. In December 1998, we acquired 33 businesses
that provided such services as executive search and relocation, performance
learning, cost recovery, and benefits consulting. In March and April 1999, we
acquired five additional businesses offering similar services.
These businesses were acquired for cash, unsecured subordinated promissory
notes, and our common stock. Thirty-seven of these acquisitions were accounted
for as purchases and one was accounted for as a combination of entities under
common control. The results of operations of the acquired companies are included
in our consolidated results of operations for the period from the date of
acquisition. Thirty-two of the 33 businesses purchased in December 1998 were
accounted for as if the acquisition occurred on December 31, the other 1998
acquisition was accounted for as if the acquisition occurred on November 30. The
operations of the acquired business accounted for as a combination of entities
under common control are included in the consolidated results of operations from
the date of our formation, May 28, 1998. The four businesses acquired in March
1999 were accounted for as if the acquisitions occurred on March 1, while the
April acquisition was accounted for effective May 1, 1999.
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DISCONTINUED OPERATIONS
Effective November 1, 1999, we sold certain assets comprising our healthcare
recovery, travel procurement and telecom procurement businesses, which as a
group had been unprofitable in 1999, to the founding shareholders of the Company
for cash, promissory notes, and surrender of a portion of their EPS shares. In
connection with their purchase of these businesses, the founding shareholders
resigned as officers and directors of the Company. In December 1999, our Board
of Directors adopted a plan to strategically position the Company to be a
leading provider of Human Capital Solutions, discontinue certain product and
service offerings and dispose of the remaining Cost Recovery businesses.
Cost Recovery businesses not sold in 1999 were either closed in 1999 or are
currently marketed for sale. The net proceeds from divestiture of our remaining
Cost Recovery businesses will be used principally to reduce our senior bank
debt. All Cost Recovery businesses have been classified as discontinued
operations in our 1999 consolidated financial statements. In connection with the
discontinuance of our Cost Recovery segment, the Company charged $62,291 to
discontinued operations, including an impairment loss in 1999 primarily as a
result of unrecoverable goodwill and intangibles.
CONTINUING OPERATIONS
The financial information presented in the remainder of this section pertains
only to our continuing operations. The continuing product and service offerings
include executive and mid-level retainer-based recruiting and employee
relocation services, performance improvement solutions, and executive and
employee benefits program design and implementation.
Our clients consist primarily of Fortune 1000 companies and other large and
mid-sized organizations. Substantially all of our facilities are located in the
United States although we may deliver products and services to clients both
within or outside of the United States. In 1999, our revenues were generated
substantially from domestic sales. We market our products and services primarily
through personal contact and direct marketing efforts. We have over 300
employees involved in sales and client management, and through our direct
marketing efforts we have established a growing proprietary client database
containing over 150,000 executive and mid-level contacts in U.S. based and
international organizations. Also, we are currently developing, both internally
and through certain partnering arrangements, Web-based distribution capabilities
for many of our products and services.
Our executive and mid-level management recruiting services are delivered on a
retainer basis. Typically one-third of the contract revenue is billed and
deferred upon execution of the service contract. All revenue from a contract is
recognized and the remaining two-thirds is billed upon delivery of a market
analysis report. In some cases, the final installment will not be billed and a
portion of the revenue will not be recognized until a candidate is successfully
placed. Relocation revenues and fees are recognized as billed upon completion of
the relocation or other service.
In our performance improvement solutions business, we recognize consulting,
training and publishing revenues as billed upon shipment of products or when
services are provided. Revenues on some seminar contracts are recognized upon
the percentage of completion method based on the number of attendees actually
completing the seminars to the total number of attendees in the contract.
Software support services billed in advance of their delivery are deferred and
recognized over the life of the contract.
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Executive and employee benefits program and implementation revenue consists
primarily of commissions earned from the delivery of financial products. This
revenue is recognized when the product provider has approved the client.
Other than our executive and mid-level management recruiting business, most of
our costs are fixed. Accordingly, revenue fluctuations could have an adverse
effect on our gross margins.
RESULTS OF OPERATIONS
As previously discussed, during the fourth quarter of 1999 we adopted a plan to
discontinue certain product and service offerings and dispose of our Cost
Recovery Services segment. In addition, while the Company was formed during May
1998, its activities through December 31, 1998 consisted primarily of acquiring
33 businesses. The operations of substantially all these 33 businesses are
included in the consolidated statements of operations beginning January 1, 1999.
Accordingly, the Company's operating results for 1998 are not comparable to
those for calendar 1999.
In view of the rapidly evolving nature of our business and our limited operating
history, we believe that period-to-period comparisons of our operating results,
revenues, gross margin and expenses as a percentage of revenue, should not be
relied upon as an indication of our future performance. The following table sets
forth statement of operations data related to our continuing businesses
expressed as a percentage of revenue for the periods indicated:
Period from
May 28, 1998
(inception) to Year Ended
December 31, December 31,
1998 1999
-------------- ------------
Net revenue 100.0% 100.0%
Cost of revenue -- 49.9%
------ -----
Gross margin 100.0% 50.1%
Operating expenses:
Selling, general & administrative 522.1% 41.9%
Abandoned bond offering costs -- 1.7%
Restructuring charges -- 4.1%
------ -----
Total operating expenses 522.1% 47.7%
------ -----
Income (loss) from continuing operations (422.1)% 2.4%
====== =====
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Revenues
Revenues from executive search and relocation services, performance improvement
products and services, and benefits consulting were $87,007, $59,945, and
$11,163 respectively, for the year ended December 31, 1999, or 55%, 38% and 7%
of our revenues from continuing operations, respectively.
During 1999, executive search and relocation services gained market share due
to the hiring of additional search consultants and opening new offices in
regions we did not previously operate in.
Also during 1999, we introduced several new performance improvement products in
the areas of change management and organization behavior management.
Additionally, we are developing web-based methods of delivering several of our
product offerings in this area, which is expected to begin generating revenue in
2000.
Revenues from our benefits consulting practice increased primarily due to the
addition of significant new product distribution channels.
Gross Margins
For the year ended December 31, 1999, gross margin from continuing operations
was $70,856 or 50.1% of revenues. The growth in our executive search business,
which has the highest gross margin percentage of the three offering groups,
contributed to our achieving these margin levels. We also abandoned certain
unprofitable operations allowing us to concentrate our efforts on higher margin
services.
Our gross margins for continuing operations are also affected by our employee
relocation services, which records revenues for the entire contract for
relocation. Accordingly, our margins for employee relocation services are lower
than most of our other product offerings. For the year ended December 31, 1999
the gross margin percentage for these services was 20.8% on revenues of $44,748.
Operating Expenses
Total operating expenses of continuing operations were $67,458 for the year
ended December 31, 1999. These expenses included merger integration related
expenses, restructuring charges and abandoned bond offering costs. General and
administrative expenses were $59,278 during 1999, including $1,973 of non-cash
stock-related compensation expense. General and administrative expenses include
the development of a corporate support infrastructure and technology programs,
initially designed to support anticipated growth in our Cost Recovery Services
segment, more anticipated acquisitions than were actually completed during the
year, and an anticipated but uncompleted capital market transactions offering of
the Company's equity securities. In June 1999, we enacted a plan to curtail
these expenditures.
In October, we announced the relocation of our corporate headquarters to
Chicago, Illinois from Costa Mesa, California and recorded a related charge of
$5,762. The relocation commenced in the fourth quarter of 1999 and is expected
to be complete by the end of 2000. During this transition to Chicago, there will
be some duplication of costs while we install the necessary corporate
organization.
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Interest and Other
Interest expense was $19,192 in 1999 and is comprised of interest on senior debt
and subordinated debt borrowings for acquisitions, software development costs,
and other corporate purposes. Interest expense also includes the amortization of
deferred financing costs over the term of the related borrowings.
Income Taxes
We had a net loss of $(3,285) and $(83,722) for the period from May 29, 1998 to
December 31, 1998 and for the year ended December 31, 1999, respectively. We
recorded income tax expense of $0 and $750 for these periods, respectively. The
difference between the U.S. federal statutory rate and our income tax expense is
primarily a result of valuation allowances with respect to our net deferred tax
assets, amortization of nondeductible goodwill and nondeductible stock
compensation expense. Additionally, for the year ended December 31, 1999, we
were unable to use a pretax loss of $(5,767) resulting from the recession of one
of our follow-on acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in May 1998, we have financed our operations primarily with
senior secured bank loans of $89,041 in 1998 and $37,459, net of retirements, in
1999. Net cash provided by operating activities of our continuing businesses in
1998 was $6,298. Operating activities of our continuing businesses used cash of
approximately $840 in 1999. Operating cash was used primarily for the payment of
the cash portion of the purchase price of the acquisitions in 1998 and
acquisition-related interest and other corporate expenses in 1999. We anticipate
that we will generate positive cash flow from operations in the foreseeable
future, including the operations of discontinued businesses up to the dates of
their divestiture.
Cash used in investing activities was $65,166 in 1998 including $59,984 used for
acquisitions, $2,400 advanced to a shareholder, and $2,249 used for the
development of information systems. Cash used in investing activities of
continuing operations in 1999 was $37,911 including $10,360 used for
acquisitions and $7,726 for capital expenditures. We have used and may continue
to use cash from operations to pay for e-commerce development, additional sales
offices, mergers and acquisitions, and other general corporate purposes. In
1998, we purchased equity interests or certain assets, net of certain assumed
liabilities, of 33 businesses for approximately 9,751,000 shares of our common
stock, subordinated promissory notes of $77,896 and cash of $59,984. In 1999, we
purchased equity interests or certain assets, net of certain assumed
liabilities, of five additional companies for approximately 1,866,000 shares of
our common stock, subordinated promissory notes of $11,325 and cash of $7,695.
At December 31, 1999, cash, cash equivalents and short-term investments totaled
$10,025, down $6,585 from $16,610 at December 31, 1998. We have a $126,500
senior credit facility with a commercial bank syndicate although it does not
provide any additional funding capabilities. Its terms as amended require
principal reductions to $120,000 by July 31, 2000, to $85,000 by September 30,
2000, and to $83,500 by December 31, 2000. The terms of this amended credit
Facility require it to be fully retired by January 31, 2001.
We expect that substantially all of the funds needed to pay down the Facility in
the year 2000 will come from sales of our assets held for sale or from an
offering of equity securities. Similarly, we expect that we will need to raise
funds through sales of equity securities or from new debt financing to pay the
remainder of the Facility that is due January 31, 2001. We are presently seeking
buyers for the assets held for sale, but we do not have sales commitments that
provide assurance of obtaining sufficient cash proceeds from assets held for
sale to meet the payment terms contained in the amended Facility. Additionally,
we presently have no commitments for equity placements or alternative debt
financing. If we are unable to meet the payment terms required by the amended
Facility from expected sources, we may be required to sell additional assets,
which may impair our efforts to achieve profitable operations.
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At December 31, 1999, we had no material commitments for capital expenditures.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statement," or SAB 101. SAB
101 summarizes certain of the SEC Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company is currently evaluating the impact of SAB 101. However, it does not
believe that this evaluation will result in any material change to current
revenue recognition policies.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our cash in money market instruments. These investments are
denominated in U.S. dollars. Due to the conservative nature of these
instruments, we do not believe that we have a material exposure to interest
rate or market risk. None of our investments are held for trading purposes. We
do not own derivative financial instruments.
We are exposed to interest rate risk in the ordinary course of business. For
fixed rate debt, interest rate changes affect the fair value but do not affect
earnings or cash flow. Conversely, for floating rate debt, interest rate
changes generally do not affect the fair market value, but do affect future
earnings or cash flow.
Our primary debt instruments include the senior debt Facilities, for which we
expect to execute an amended agreement no later than May 15, 2000. At April 28,
2000, the Facilities have a balance of $125,000, bear interest at LIBOR plus
3.50% or the lenders' base rate plus 2.25%, and mature January 31, 2001, as
amended. Accordingly, this debt instrument is sensitive to changes in interest
rates. We also have $96,200 of subordinated notes payable at December 31, 1999,
which bear a fixed rate of interest at 10% per annum and are due in the fourth
quarter of 2001 or the first quarter of 2002.
In connection with restricted stock purchase agreements with certain employees,
the employees delivered to us ten-year recourse notes receivable, which total
$34,300 at December 31, 1999 and bear interest at a fixed rate of 5.5% per
annum.
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ITEM 3.
PROPERTIES
We lease all of our physical properties which include approximately 304,000
square feet of general office space in eighty-one (81) locations throughout the
United States. The 1999 annualized cost of all of the leased premises is
approximately $8,600,000. Our largest location is our Costa Mesa, California
office, which houses our administrative offices as well as some of the EPS
operating entities. We have subleased 52% of this space due to reduced capacity
requirements.
In December 1999 the Company recorded an accrual of approximately $2,769 to
provide for estimated losses on these leases related to the Company's decision
to relocate its headquarters to Chicago, Illinois.
Our executive office is located in Chicago, Illinois and occupies
approximately 9,700 square feet at an annual cost of $383,000.
We believe that our existing facilities are adequate to meet our current
requirements and that comparable space is readily available at each of our
operating locations.
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ITEM 4.
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of April 15, 2000 of:
o each person or group of affiliated persons who we know owns beneficially
5% or more of our common stock;
o each of our directors;
o each of our current and certain former executive officers listed in the
summary compensation table; and
o all of our directors and executive officers as a group.
Percentage of ownership is calculated as required by Rule 13d-3(d)(1), which
provides, among other things, that a person is deemed to beneficially own shares
if they share with others the right to vote shares or hold investment power over
shares. Therefore, for purposes of this table, if two or more individuals listed
in the table jointly own an entity which holds our shares, the shares held by
the entity are included in the total number and percentage of shares listed next
to each such individual's name. The footnotes to this table describe any such
shares over which two or more individuals listed in the table have beneficial
ownership. For example, footnote five (5) to the table explains Mr. Massey's and
Mr. Watts' beneficial ownership of shares held by I.M. Comet, LLC.
SHARES BENEFICIALLY OWNED
-------------------------------
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER(1) OWNERSHIP(2) CLASS
- ------------------- ----------------- ----------
David H. Hoffmann 4,620,945(3) 11.2%
Erik R. Watts(4) 4,263,386(5) 10.4%
Christopher P. Massey(4) 4,132,693(5,6) 10.0%
James F. Holden 1,968,014(7,8) 4.8%
Early Price Pritchett III(9) 1,296,647(10) 3.2%
Mark C. Coleman 687,714(11) 1.7%
David M. Ehlen 467,204(12) 1.1%
Walter L. Schindler(13) 500,000 1.2%
Michael G. Goldstein 280,000(14) *
Gary C. Grom 10,000(15) *
John Aylsworth 10,000(15) *
All directors and current
executive officers as a group
(11 persons) 14,781,603 35.9%
- -----------------
* Less than 1%
(1) Unless otherwise indicated, the address of each person in this table is
c/o EPS Solutions Corporation, 10 S. Riverside Plaza, 22nd Floor,
Chicago, Illinois 60606.
(2) Unless otherwise noted, all shares listed as beneficially owned by a
stockholder are actually outstanding and such stockholder has sole
voting and investment power with respect to such shares, subject to
community property laws.
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(3) Includes 1,246,665 shares held by Hoffmann Investment Company, Inc., an
entity owned by Mr. Hoffmann. Also includes 3,374,280 shares of
employment-based restricted stock that are eligible to vest over time
provided that certain vesting conditions are met.
(4) Mr. Watts' and Mr. Massey's address is 20371 Irvine Avenue, Suite 200,
Newport Beach, CA 92707.
(5) Includes 3,455,000 shares held by I.M. Comet, LLC, an entity owned 50%
by Mr. Watts and 50% by Mr. Massey, over which both Mr. Watts and Mr.
Massey have beneficial ownership. Mr. Watts and Mr. Massey have
indicated their desire to distribute the shares held by I.M. Comet,
LLC, 50% to entities over which Mr. Watts has sole voting control and
50% to entities over which Mr. Massey has sole voting control. The
result of this transaction would be that Mr. Watts would beneficially
own 2,535,886 shares and Mr. Massey would beneficially own 2,405,193
shares.
(6) Includes 600,000 shares held in trust for the benefit of Mr. Massey's
daughters; 300,000 shares are held by the Kaitlin Massey Trust and
300,000 shares are held by the Jennifer Massey trust. Mr. Massey's
wife, Pamela Massey, is the trustee of both trusts.
(7) Includes 617,200 shares held in the Christine E. Holden Revocable Trust
and 617,201 shares held in the James F. Holden Revocable Trust, over
which Mr. Holden has control. Mr. Holden's address is 2800 W. Higgins
Road, Suite 715, Hoffman Estates, Illinois 60195. Includes an
additional 51,000 shares to be issued to Mr. Holden within the next
sixty days.
(8) Includes 682,613 shares of employment-based restricted stock that are
eligible to vest over time provided that certain vesting conditions are
met.
(9) Dr. Pritchett's address is 5800 Granite Parkway, Suite 450, Plano,
Texas 75024.
(10) Includes 179,147 shares of employment-based restricted stock that are
eligible to vest over time provided that certain vesting conditions are
met. Includes 500,000 shares to be issued to Dr. Pritchett within the
next sixty days as an adjustment to the purchase price we paid for
Pritchett Publishing Company (dba Pritchett & Associates). In addition,
we are issuing 500,000 shares of employment-based restricted stock to
Dr. Pritchett within the next sixty days that are eligible to vest over
time provided that certain vesting conditions are met.
(11) Includes 54,265 shares held by The Ringco Group LLC over which Mr.
Coleman has sole voting power. Also includes 584,804 shares of
employment-based restricted stock that are eligible to vest over time.
(12) Includes 6,145 shares owned by the Lille Woods Haecher Trust, of which
Mr. Ehlen is co-trustee and over which Mr. Ehlen has shared voting
power. Includes 461,059 shares of employment-based restricted stock
that are eligible to vest over time provided that certain vesting
conditions are met.
(13) Mr. Schindler's address is Odyssey Internet Group, Inc., 450 Newport
Center Drive, Suite 500, Newport Beach, California 92660.
(14) Includes 280,000 shares of employment-based restricted stock that are
eligible to vest over time provided that certain vesting conditions are
met.
(15) Includes 10,000 shares of restricted stock which will be issued within
the next sixty days and which will vest 2,000 shares per meeting based
upon attendance at meetings of our board of directors.
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ITEM 5.
MANAGEMENT
EXECUTIVE AND OTHER KEY OFFICERS AND DIRECTORS
The executive officers, directors and key employees of the Company and its
subsidiaries and their ages and positions with the Company are as follows:
Director
Name Age Position Class
---- --- -------- ---------
David H. Hoffmann.........................47 Chairman, Chief Executive Officer, President, 2
Director
Mark C. Coleman...........................54 Executive Vice President and Chief Financial
Officer N/A
David M. Ehlen............................59 Executive Vice President, Corporate Development N/A
Michael G. Goldstein......................53 Senior Vice President, Director 2
Gary C. Grom(1, 2)........................53 Director 1
James F. Holden...........................51 President, Holden Corporation N/A
Early Price Pritchett III.................58 Chairman, Pritchett & Associates, Director 1
John Aylsworth(1, 2)......................49 Director 3
- ----------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Set forth below is information regarding the business experience during the
past five years for each of the persons named above.
David H. Hoffmann joined EPS in December 1998 concurrently with the
acquisition of the assets of DHR International, Inc. by EPS. In May 1999, Mr.
Hoffmann became a director and Chief Operating Officer of EPS and in October
1999 became Chairman of the Board, Chief Executive Officer and President. Prior
to December 1998, Mr. Hoffmann was President of Hoffmann Investments, Inc.
(f/k/a DHR International, Inc.), which he founded in 1989.
Mark C. Coleman joined EPS as Senior Vice President and Chief Financial
Officer at its inception. In December 1999 Mr. Coleman became an Executive Vice
President of EPS. Prior to joining EPS, Mr. Coleman served as National Director
of the HealthCare Services Group of Integrated Cost Recovery Services, a
Division of Deloitte & Touche LLP, since 1997. Prior to this, Mr. Coleman was a
partner at Deloitte & Touche LLP from 1988 to 1997. Prior to joining Deloitte &
Touche, Mr. Coleman was the co-founder of Coleman & Grant, a large independent
accounting firm which merged with Deloitte in 1988. Mr. Coleman has more than 27
years of experience in public accounting.
David M. Ehlen joined EPS as a Vice President in December 1998, and in
September 1999 became Executive Vice President, Corporate Development. Prior to
joining EPS, Mr. Ehlen was a National Director at Deloitte & Touche LLP from
June 1998 to December 1998. Prior to that, Mr. Ehlen was the Chief Executive
Officer of Wilson Learning Worldwide, a leading corporate training company that
is focused in the human resources area. Mr. Ehlen has more than 30 years of line
management, marketing, strategic planning and corporate development experience.
Michael G. Goldstein joined EPS in August 1999 and became Senior Vice
President as well as a member of the board of directors in November 1999. Mr.
Goldstein also has served in a full-time capacity as President of FFR Holding
Co., Inc. and its direct subsidiary, First Financial Resources, since August
1999. Prior to joining First Financial Resources Mr. Goldstein practiced law for
27 years, the last eight years as a partner and Chairman of the Tax & Estate
Planning Department at Husch & Eppenberger, LLC, a law firm in St. Louis,
Missouri.
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Gary C. Grom joined EPS as a member of our board of directors in March 2000.
Mr. Grom has served as Senior Vice President, Human Resources of the Sara Lee
Corporation since 1992.
James F. Holden joined EPS in March 1999 as President of a wholly-owned
subsidiary, Holden Corporation, concurrently with the acquisition of the Holden
Corporation by EPS. Mr. Holden has served as the Chief Executive Officer of
Holden Corporation since it was founded in 1979. Mr. Holden has also served as
the Chief Executive Officer of eFox, L.L.C. since 1998.
Early Price Pritchett III joined EPS in December 1998 concurrently with the
acquisition of Pritchett Publishing Company by EPS. In November 1999, Dr.
Pritchett became a director of EPS. Dr. Pritchett has served as Chairman of
Pritchett Publishing Company, one of our indirect wholly owned subsidiaries,
since its founding in 1974.
John S. Aylsworth joined EPS as a member of our board of directors in April
2000. Mr. Aylsworth has been the President and Chief Operating Officer of
President Casinos, Inc. since July 1997. Prior to that, Mr. Aylsworth served as
Executive Vice President and Chief Operating Officer of President Casinos, Inc.
since March 1995. Mr. Aylsworth has been a member of the board of directors of
President Casinos, Inc. since July 1995.
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ITEM 6.
EXECUTIVE AND DIRECTOR COMPENSATION; EMPLOYMENT AGREEMENTS
The following table sets forth for the year ended December 31, 1999, all
compensation received for services rendered to EPS in all capacities by all
persons serving as chief executive officer, each of the other four most highly
compensated executive officers of EPS or its subsidiaries whose salary and bonus
exceeded $100,000 in 1999 and two individuals who would otherwise have been
listed as one of the four most highly compensated executive officers except they
resigned or otherwise terminated their employment during 1999. Mr. Massey
resigned from his positions as Chairman and as Chief Executive Officer in
November 1999. Mr. Hoffmann was appointed Chairman, Chief Executive Officer, and
President in November 1999. Mr. Schindler resigned from his position in August
1999 and Mr. Watts resigned from his position in November 1999. The compensation
table includes severance pay for Messrs. Massey, Watts and Schindler. The amount
of compensation reflected in the table below does not include the aggregate
value of personal benefits, securities, property or other non-cash compensation
paid or distributed to any officer to the extent such compensation has a cash
value in the aggregate of no more than the lesser of $50,000 or ten percent
(10%) of the aggregate of the total annual salary plus bonus received by such
officer.
SUMMARY COMPENSATION TABLE
1999 COMPENSATION
--------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
--------------------------- ------ ----- ------------
David H. Hoffmann, $498,399 -- $727,663(1)
Chairman of the Board, Chief Executive Officer, and
President
Christopher P. Massey,
Former Chairman and Chief Executive Officer $374,000 -- $ 42,024(2)
David M. Ehlen,
Executive Vice President, Corporate Development $306,461 -- --
Mark C. Coleman,
Executive Vice President and Chief Financial Officer $282,848 -- --
Early Price Pritchett III,
Chairman, Pritchett & Associates $148,809 -- --
James F. Holden,
President, Holden Corporation $244,294 -- --
Erik R. Watts,
Former Vice Chairman $335,486 -- $ 38,154(3)
Walter L. Schindler,
Former Vice Chairman $317,000 -- $173,000(3)
- -------------
(1) This amount consists of the private equity of various of our search clients
valued at an aggregate of approximately $577,000 which was paid to us in
lieu of our typical search fees. Pursuant to the terms of his employment
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agreement with us, Mr. Hoffmann was entitled to retain such fees. This
amount also includes $150,583 in relocation and temporary living
expenses related to Mr. Hoffmann's relocation from St. Louis, Missouri
to Chicago, Illinois.
(2) This amount consists of severance payments equal to $38,154 and country
club dues equal to $3,870.
(3) The total amount consists of severance payments.
OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted to those executive officers listed in the
Summary Compensation Table for the year ended December 31, 1999. We have never
granted any stock appreciation rights.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
We entered into employment agreements with each of the executive officers
listed above. These employment agreements provide for employment at will and
require the executive officers to devote their entire time and attention to our
business. The agreements maintain that those individuals' responsibilities and
authority will not be materially diminished as long as they own employment-based
restricted stock of EPS which is subject to vesting. Each of the agreements
provides for cash severance compensation, if employment is terminated by EPS
without cause or by the officer with good reason, including 90 days for Dr.
Pritchett and Mr. Holden, one year for Mr. Coleman, Mr. Goldstein and Mr. Ehlen,
and two years for Mr. Hoffmann. In addition, each of the executive officers have
entered into various restricted stock purchase agreements with the Company.
These agreements provide that if the executive officer's employment with us is
terminated without cause or by the executive officer for good reason, within
specified time frames following a change in control, unvested shares of
restricted stock owned by the executive will vest.
Mr. Hoffmann's employment agreement provides that in addition to his duties
as Chairman, Chief Executive Officer and President of the Company, he will
continue to serve as Chairman and CEO of our DHR International search business.
In that capacity Mr. Hoffmann remains eligible for performance based
compensation based on the success of our search business and has the right to
determine to accept private company equity in lieu of the normal fee to be
charged for an executive search. If Mr. Hoffmann chooses, he may take any
private company equity accepted in lieu of search fees as a bonus at any time
until the Company completes an initial public offering or undergoes a change of
control. Mr. Hoffmann also has a guaranteed minimum bonus equal to the amount of
any cash interest payment Mr. Hoffmann would otherwise be required to pay with
respect to the promissory notes he issued to the Company in exchange for his
restricted stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee currently consists of Mr. Grom and Mr. Aylsworth.
Prior to March 2000 compensation decisions were made by the board of directors
acting as a whole. Mr. Hoffmann, Dr. Pritchett, and Mr. Goldstein participated
in the November 24, 1999, December 8, 1999 and the December 14, 1999 board of
directors meetings at which compensation matters were discussed. In addition,
Mr. Hoffmann has participated in meetings of the board of directors at which
compensation has been discussed since March 1999. Mr. Hoffmann, Dr. Pritchett
and Mr. Goldstein do not participate in deliberations pertaining to their own
respective compensation.
None of our directors or executive officers who participated in compensation
deliberations during 1999 serve on the compensation or similar committee of any
other entity.
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DIRECTOR COMPENSATION
NON-EMPLOYEE DIRECTOR COMPENSATION
We do not pay our non-employee directors fees. However, we reimburse all
directors for expenses incurred to attend meetings of the board of directors or
committees. In addition, we anticipate that each non-employee director will
receive a grant of 10,000 shares of restricted stock on the day such director
becomes a member of our board of directors. We have not yet granted Mr. Grom or
Mr. Aylsworth restricted stock but anticipate granting each of them 10,000
shares. The terms and conditions of these restricted stock grants will be
governed by a non-employee director equity compensation plan. We also anticipate
that each non-employee director will subsequently receive an additional grant of
10,000 shares of restricted stock on an annual basis and an additional grant of
restricted stock for serving as a member of one of our board committees.
COMPENSATION PLANS
EPS Solutions Corporation 2000 Stock Performance Plan
The EPS Solutions Corporation 2000 Stock Performance Plan (the "2000 Plan")
provides incentives to employees, directors, officers and consultants to achieve
both short-term and long-term objectives, including increasing return to
Stockholders.
The Company believes that the potential reward offered by grants of stock
options (including nonqualified stock options ("NSOs") and incentive stock
options ("ISOs")), stock purchase rights, stock appreciation rights, performance
shares or unit awards, dividend or equivalent rights, restricted share or unit
awards and other stock-based awards will enable it to attract and retain
employees. The Board of Directors adopted the 2000 Plan on April 13, 2000.
A summary of the key features of the 2000 Plan is set forth below.
DESCRIPTION OF THE PLAN
Purpose and Eligibility
The 2000 Plan is designed to attract, retain and motivate executives and key
personnel by offering them an opportunity to become Company stockholders,
thereby giving them a stake in the growth and prosperity of the Company and
encouraging the continuity of their services with the Company or its
subsidiaries.
The 2000 Plan permits the grant of stock options (including NSOs and ISOs),
stock purchase rights, stock appreciation rights, performance shares or unit
awards, dividend or equivalent rights, restricted share or unit awards and other
stock-based awards to employees, directors, officers and consultants to EPS.
However, ISOs may be granted to employees only.
Shares Available
The Board of Directors has authorized a total of 3,500,000 shares of common
stock for issuance under the 2000 Plan. Shares subject to awards may be made
available from unissued or reacquired shares of the common stock. No individual
may be granted awards under the 2000 Plan in any calendar year with respect to
more than 875,000 shares of common stock. The number of shares of common stock
subject to awards may be adjusted for corporate events affecting EPS common
stock.
Administration
The 2000 Plan will be administered by the Board of Directors, or a committee
appointed by the Board comprised solely of non-employee directors (the
"Administrator"). In general, the Administrator has full discretion to select
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participants, determine the number of shares subject to each award, the award
price of the shares subject to each award (which price shall not be less than
the fair market value of the shares at the date of grant), the time or times
when each award becomes exercisable, and the duration of the grant, and adopt
rules, regulations and guidelines for the proper administration of the 2000
Plan.
Awards
The Administrator will determine vesting, exercisability, payment and other
restrictions applicable to an award. The 2000 Plan Administrator has broad
discretion to determine terms of awards. The exercise price of ISOs and NSOs
shall not be less than 100% of the fair market value of EPS common stock at the
date of grant provided, however, the exercise price of ISOs granted to 10%
shareholders must be at least 110% of the fair market value of EPS common stock
at the date of grant. The stock options will vest at such time or times and
subject to such terms and conditions as shall be determined by the
Administrator.
The 2000 Plan Administrator, at its discretion, may accelerate the
exercisability of any option at any time before the expiration or termination of
an option previously granted or waive its exercise provisions.
In the absence of a specified time in the award agreement, upon the
termination of a participant, all options will be terminated. Options will
become automatically vested upon the participant's death or disability and can
be exercised for twelve months. Upon a participant's retirement, options shall
continue to vest and will be exercisable for thirty-six months. Under the 2000
Plan, EPS may buy out option holders by offering to pay them cash for their
options. In addition, if a participant ceases to be an employee, director or
consultant of EPS prior to EPS's closing of a registered public offering, EPS
may repurchase the options or shares of EPS common stock acquired with an
option. An option may not be exercised for less than the lesser of (i) 100
shares of EPS common Stock or (ii) if the option recipient is fully vested, the
total number of shares of EPS common stock subject to such option.
Upon a change in control of EPS, the Administrator may, in its sole
discretion, vest unvested awards. Further, in addition or alternatively, the
Administrator may pay the participant in exchange for the cancellation of the
existing awards or substitute new awards covering stock of the successor
corporation.
The 2000 Plan Administrator may permit the exercise price to be paid, all or
in part (i) in cash, (ii) by check, (iii) by delivery to the Company of other
shares of common stock of the Company, (iv) by surrender of options in exchange
for such number of shares equal to the award less such number of shares that
have a fair market value equal to the aggregate exercise price (a "net
exercise"), (v) by a reduction in liability to participant relating to any
company-sponsored deferred compensation plan, (vi) by any combination of these
methods of payment or, (vii) by any other consideration to the extent permitted
by applicable laws.
Amendment
The Company may suspend, amend, or discontinue the 2000 Plan at any time.
However, the Company may not suspend, amend or discontinue the 2000 Plan, nor
can the Administrator amend any outstanding award, without a participant's
consent if it would adversely affect the participant's rights under such award.
Term
The 2000 Plan will remain in effect until the tenth anniversary of the date
on which it is originally approved.
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ITEM 7.
RELATED PARTY TRANSACTIONS
Set forth below is a description of significant transactions and
relationships between us and our current executive officers, certain former
executive officers, directors, and principal stockholders beneficially owning 5%
or greater of our outstanding capital stock.
MARK C. COLEMAN
Mark C. Coleman is our Executive Vice President and Chief Financial Officer.
THE RINGCO GROUP LLC
On December 14, 1998, we paid $100,000 in cash and issued 193,804 shares of
our common stock to The Ringco Group LLC for the assignment of all of Ringco's
interest in a Participating Consultant Agreement between Ringco and National
Benefits Consultants, L.L.C. At the time of the transaction Mark Coleman owned
28% of the outstanding equity interests of Ringco.
INDEBTEDNESS
Mr. Coleman purchased an aggregate of 584,804 shares of employment-based
restricted common stock. Mr. Coleman purchased this stock by paying the par
value ($.001) in cash and issuing us promissory notes in the aggregate amount of
$1,116,251.79, secured by a pledge of the restricted stock. The notes accrue
interest at 5.5% and are due ten years from their issuance date.
DAVID M. EHLEN
David M. Ehlen is our Executive Vice President, Corporate Development.
INDEBTEDNESS
Mr. Ehlen purchased an aggregate of 461,059 shares of employment-based
restricted common stock. Mr. Ehlen purchased this stock by paying the par value
($.001) in cash and issuing us promissory notes in the aggregate amount of
$552,617.10, secured by a pledge of the restricted stock. The notes accrue
interest at 5.5% and are due ten years from their issuance date.
MICHAEL G. GOLDSTEIN
Mr. Goldstein is a Senior Vice President and a member of our board of
directors.
INDEBTEDNESS
Mr. Goldstein purchased an aggregate of 300,000 shares of employment-based
restricted common stock. Mr. Goldstein purchased this stock by paying the par
value ($.001) in cash and issuing us promissory notes in the aggregate amount of
$619,800, secured by a pledge of the restricted stock. The notes accrue interest
at 5.5% and are due ten years from their issuance date.
ASSOCIATION WITH OUTSIDE COUNSEL
Mr. Goldstein was a partner with Husch & Eppenberger LLC, until August,
1999, at which time he joined First Financial Resources, Inc., one of our
subsidiaries. We have retained Husch & Eppenberger as outside legal counsel on
various legal matters.
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DAVID H. HOFFMANN
David H. Hoffmann is our Chairman, Chief Executive Officer and President,
and a beneficial owner of approximately 11.5% of our outstanding capital stock.
ACQUISITION OF DHR INTERNATIONAL, INC.
On December 14, 1998, we paid $5,445,240 in cash, delivered a subordinated
note for $1,482,000 and issued 1,336,085 shares of our common stock to DHR
International, Inc. for the purchase of substantially all of its operating
assets. In connection with the sale, DHR International, Inc. assigned to us its
rights in the name DHR International, Inc. and changed its name to Hoffmann
Investment Company, Inc. Mr. Hoffmann is the beneficial owner of the outstanding
capital stock of Hoffmann Investment Company, Inc. The cash paid to DHR
International, Inc. was used to retire existing indebtedness, to repay notes
held by shareholders other than Mr. Hoffmann and for working capital. We did not
acquire certain assets that were unrelated to the business of DHR International,
Inc. We also did not acquire its affiliated Internet search business, JobPlex,
Inc., or certain shares of capital stock that DHR International, Inc. received
in lieu of fees for the placement of executives in certain companies.
FIRST ADDITIONAL PURCHASE PRICE PAYMENT TO HOFFMANN INVESTMENT
COMPANY, INC. (F/K/A DHR INTERNATIONAL, INC.)
Because we did not complete an initial public offering of our stock by June
1999, our board of directors deemed it in the best interests of the Company to
amend the purchase transactions of those businesses we acquired whose
performance exceeded plan to increase the purchase prices we paid for those
businesses. All businesses whose performance exceeded plan were eligible for
this amendment. A total of five businesses qualified. Our DHR division was one
of those five businesses. Consequently, we paid an additional $1,612,000 in
purchase price to Hoffmann Investment Company, Inc. in the last four months of
1999.
SECOND ADDITIONAL PURCHASE PRICE PAYMENT TO HOFFMANN INVESTMENT
COMPANY, INC. (F/K/A DHR INTERNATIONAL, INC.)
During March 2000, our board of directors determined it was in the best
interests of the Company to increase the purchase price we paid for the
operating assets and business of DHR International, Inc. A payment in the amount
of $1.2 million was made to Hoffmann Investment Company, Inc. on March 13, 2000.
This additional payment of purchase price for the operating assets and business
of DHR International, Inc. was made in recognition of the substantial over-plan
earnings of this business unit during 1999, and Mr. Hoffmann's relinquishment of
his right to receive certain private equity fees earned by our DHR division (see
below).
NON-CASH COMPENSATION
In addition to receiving cash compensation for his services, Mr. Hoffmann,
pursuant to his employment agreement in his capacity as Chairman and CEO of our
executive recruiting business, may direct us to accept equity fees in lieu of
cash fees for executive search services performed through our executive search
business. Mr. Hoffmann must take reasonable steps to ensure that these equity
fees have a fair market value at least equal to the amount of the standard cash
fees generally collected. Mr. Hoffmann originally had a right to receive from
the Company any or all of these equity fees as a bonus prior to the closing of
an initial public offering of our stock. Pursuant to an amendment to Mr.
Hoffmann's employment agreement dated as of April 25, 2000, Mr. Hoffmann has
elected to receive as a bonus certain private equity fees valued at $577,000
through December 31, 1999. Mr. Hoffmann has relinquished all of his rights to
receive other equity fees through December 31, 1999, but will continue to have
rights to receive as a bonus any future equity fees received by us beginning
January 1, 2000 up to and through the closing of an initial public offering of
our stock.
ADVANCEMENT OF FUNDS TO AFFILIATE
Through December 31, 1999, we advanced to JobPlex, Inc., a Company
majority-owned by David H. Hoffmann, approximately $103,000 for working capital
purposes, and $245,000 as advances against amounts payable pursuant to a five
year professional services agreement whereby JobPlex, Inc. provides us with
professional employment recruiting services through its Internet capabilities.
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INDEBTEDNESS
Mr. Hoffmann purchased an aggregate of 3,374,280 shares of employment-based
restricted common stock. Mr. Hoffmann has purchased this stock by paying the par
value ($.001) in cash and issuing us promissory notes in the amount of
$6,013,905.58, secured by a pledge of the restricted stock. The notes accrue
interest at 5.5% and are due ten years from their issuance date. Mr. Hoffmann is
entitled to receive a guaranteed bonus in the aggregate amount of the yearly
interest payable on the notes.
OTHER RELATED TRANSACTIONS
Prior to our acquisition of the assets of DHR International, Inc., Hoffmann
Investment Company, Inc. had contracted with Hoffmann Holdings, LLC, a company
100% owned by Mr. Hoffmann, to provide airplane transportation services for
Hoffmann Investment Company, Inc. business purposes. Hoffmann Holdings is the
owner of an interest in the airplane. In 1999, the airplane was used extensively
by senior EPS executives for the purpose of conducting our domestic and
international business including acquisition and divestiture activity. In
addition, the airplane received extensive use in connection with our 1999
contemplated high-yield bond offering. During 1999, we paid $1,414,026 for our
prorata use of the airplane. Our usage of the airplane is expected to decrease
in the year 2000.
JAMES E. HOLDEN
Mr. James E. Holden owns approximately 5% of our outstanding common stock.
He also is the President of Holden Corporation, our indirect wholly-owned
subsidiary.
ACQUISITION OF HOLDEN CORPORATION
On March 19, 1999, we purchased all of the outstanding capital stock of
Holden Corporation from James Holden and Christine E. Holden. We purchased the
stock for cash in the amount of $4,000,000, a subordinated promissory note in
the amount of $4,000,000 and 1,320,114 shares of our common stock.
PROBABLE ACQUISITION OF eFox, L.L.C.
On March 19, 1999, we purchased 19.9% of the outstanding membership
interests of eFox, L.L.C. from James F. Holden and Christine E. Holden. In
addition, we acquired an option, expiring March 31, 2004, to purchase the
remaining 80.1% of the outstanding eFox, L.L.C. membership interests for an
exercise price of $800,000.
In March 2000, recognizing additional capital contributions made by the
Holdens, we entered into an agreement to acquire the remaining 80.1% of the
membership interests of eFox, L.L.C. for an aggregate purchase price of
$1,800,000. The purchase price will be paid to Mr. and Mrs. Holden in the form
of an unsecured, 10% promissory note which will be due at the earlier of three
years from the closing date of the transaction or an initial public offering of
our stock.
INDEBTEDNESS
We entered into compensatory, employment-based restricted stock purchase
agreements with Mr. Holden. Pursuant to these agreements, Mr. Holden purchased
682,613 shares of restricted common stock. Mr. Holden purchased this stock by
paying the par value ($.001) in cash and issuing to us promissory notes in the
aggregate amount of $818,452.98, secured by a pledge of the restricted stock.
The notes accrue interest at 5.5% and are due ten years from their issuance
date.
CHRISTOPHER P. MASSEY AND ERIK R. WATTS
Mr. Christopher P. Massey is our former Chairman and CEO. Mr. Erik R. Watts
is our former Vice Chairman. Each of Mr. Massey and Mr. Watts directly or
indirectly holds a 50% ownership interest in I.M. Comet, LLC, an entity that
holds 3,455,000 shares, or 8.6%, of our outstanding capital stock. Excluding Mr.
Massey's beneficial ownership of the 3,455,000 shares held in I.M. Comet, LLC,
Mr. Massey beneficially owns 677,693 shares, or approximately 1.7%, of our
outstanding capital stock. Excluding Mr. Watts' beneficial ownership of the
3,455,000 shares held in I.M. Comet, LLC, Mr. Watts beneficially owns 808,386
shares, or approximately 2.0%, of our outstanding capital stock.
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STOCK ISSUED UPON OUR FORMATION
In August 1998, we issued shares of our common stock to Mr. Massey and Mr.
Watts as well as others who assisted us in our formation. Some of these shares
were unrestricted and others were associated with specified potential target
companies and were subject to repurchase by us if the target companies with
which they were associated were not acquired by December 31, 1999. Of the
6,880,209 shares of this type currently outstanding, Mr. Massey and Mr. Watts
beneficially own 2,322,171 shares and 2,254,478 shares, respectively.
ACQUISITION OF BENEFIT FUNDING SERVICES GROUP, LLC
On December 14, 1998, we paid $250,000 in cash and issued 223,590 shares of
common stock as consideration for the purchase of all of the outstanding
membership interests and any rights to Benefit Funding Services Group, LLC.
These payments included $81,220 in cash and 72,640 shares of common stock to
entities controlled by Mr. Erik R. Watts and Mr. Christopher P. Massey.
ACQUISITION OF DISBURSEMENT RECOVERY SERVICES, LLC
On December 14, 1998, we paid $350,000 in cash, delivered a subordinated
note for $1,733,000 and issued 333,888 shares of common stock as consideration
for the purchase of all of the outstanding membership interests and rights to
Disbursement Recovery Services, LLC. These payments included $225,000 in cash
and 267,110 shares of common stock to IM Comet LLC.
ACQUISITION OF FFR HOLDING CO., INC.
On December 14, 1998, we paid $123,851 in cash and issued 279,696 shares of
common stock to the stockholders of FFR Holding Co., Inc. as consideration for
the purchase of all of its outstanding common stock, including payments of
$40,138 in cash and 93,570 shares of common stock to Mr. Watts and affiliates of
Mr. Watts. Mr. Watts also continues to own, directly or indirectly, an aggregate
of 226,204 shares of preferred stock of FFR Holding Co., Inc.
ACQUISITION OF NATIONAL BENEFITS CONSULTANTS, L.L.C.
On December 14, 1998, we paid $1,500,000 in cash, delivered a subordinated
note for $18,267,000 and issued 1,387,914 shares of common stock to I.M. Comet,
LLC as consideration for the purchase of all outstanding equity interests and
rights to National Benefits Consultants, L.L.C.
ACQUISITION OF NATIONAL RECOVERY SERVICES, LLC
On December 14, 1998, we paid $200,000 in cash and issued 374,932 shares of
common stock as consideration for the purchase of all of the outstanding
membership interests and rights to National Recovery Services, LLC, including
payments of $120,000 in cash and 224,960 shares of common stock to I.M. Comet,
LLC.
ACQUISITION OF NATIONAL REVMAX CONSULTANTS, LLC
On December 14, 1998, we paid $500,000 in cash and issued 507,714 shares of
common stock to I.M. Comet, LLC as consideration for the purchase of all of the
outstanding membership interests and rights to National RevMax Consultants, LLC.
ACQUISITION OF NATIONAL HEALTHCARE RECOVERY SERVICES, LLC
On March 1, 1999, we paid $1,600,000 in cash, and delivered a $6,400,000
contingent subordinated note as consideration for the purchase of all of the
outstanding membership interests and rights to National HealthCare Recovery
Services, LLC (NHCRS). The note was issued to I.M. Comet, LLC in consideration
of its interests in the company.
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Our obligation to pay on the subordinated note was contingent upon NHCRS meeting
prescribed pretax income targets. In addition we paid off certain indebtedness
of NHCRS in the amount of $1,350,000.
FOUNDERS SEPARATION TRANSACTION
Mr. Massey and Mr. Watts resigned from all of their positions as EPS
officers and directors effective as of November 24, 1999. In connection with the
resignations:
- on December 23, 1999, we rescinded the National HealthCare Recovery
Services, LLC transaction. A rescission of a transaction involves the
return by each party of the consideration paid or given to the other
party, with the goal of putting the parties back in the position they
would have been in if the transaction had not occurred;
- I.M. Comet, LLC agreed to indemnify us against liabilities arising out
of our ownership of NHCRS and we agreed to indemnify NHCRS against
liabilities arising from our other businesses;
- on December 23, 1999, we sold the following healthcare division assets
and other non-core business assets to I.M. Comet, LLC for aggregate
consideration of $2,693,000 and the assumption by I.M. Comet LLC of
existing liabilities related to discontinued operations:
- the assets of National Recovery Services, LLC, a healthcare cost
recovery business;
- the assets of our Medco Division, a healthcare cost recovery
related business which we acquired in December 1998 for
$5,000,000;
- certain assets of The Oxxford Group, Inc., a healthcare claims
payment audit and recovery business, which we acquired in
December 1998 pursuant to a subordinated promissory note in the
principal amount of $400,000; and
- the assets of EPS Travel Solutions, a travel procurement business
that we acquired in March 1999 for $175,000 in cash and a
$125,000 subordinated note.
- we agreed to mutual general releases with Mr. Massey and Mr. Watts;
- the aggregate common stock shareholdings of the entities controlled by
Messrs. Massey and Watts and their donees was reduced from 12,972,250
to 5,701,552. In connection with the repurchase of the shares, we made
an aggregate payment of $133,564.04 to I.M. Comet, LLC, reflecting the
original purchase price of the shares. We also granted Mr. Massey and
Mr. Watts the right to transfer a portion of their shareholdings so
long as entities controlled by them continued to own an aggregate of
at least 3,400,000 shares of common stock;
- I.M. Comet, LLC subleased through March 31, 2000 a portion of our
leased premises in Costa Mesa, California, together with the right to
utilize our phone and computer systems, for aggregate consideration of
$66,000;
- we agreed to allow I.M. Comet, LLC to utilize its shares of common
stock as collateral to secure loans provided to fund its operations
and to acquire new businesses. The requirement that entities
controlled by Mr. Massey and Mr. Watts retain at least 3,400,000
shares is inapplicable to a foreclosure of any such pledge; and
- in connection with the sales to I.M. Comet, LLC of the assets
described above, I.M. Comet, LLC issued to us a promissory note in the
amount of $3,130,000, which included operating expenses related to the
assets sold, incurred by us between November 1, 1999 and the closing
date of December 23, 1999. National HealthCare Recovery Services, LLC
issued to us promissory notes in the amounts of $2,950,000 and
$7,695,000, in each case to repay us for amounts expended in the
acquisition of, and in the operation of, National HealthCare Recovery
Services, LLC. Effective as of January 5, 2000, we offset the total
amounts of all of the promissory notes against our $18,276,000 note
issued to I.M. Comet, LLC in connection with our acquisition of
National Benefits Consultants, L.L.C., resulting in a net balance
under that note of $6,317,636 before increases due to the addition of
unpaid accrued interest on such note, and before the offset of other
amounts due from these noteholders.
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LOANS TO COMPANY
On August 1, 1999, Mr. Massey and Mr. Watts each loaned us $100,000. These
loans were used to pay a certain accrued interest payment obligation we incurred
under one of our subordinated promissory notes even though such payment was not
due and payable under the terms of the note at the time it was paid. We must
repay these loans plus interest at 10% per annum on the date that other accrued
interest under the promissory interest payment note is paid.
EARLY PRICE PRITCHETT III
Dr. Early Price Pritchett III is a member of our board of directors.
ACQUISITION OF PRITCHETT PUBLISHING COMPANY
On December 14, 1998, we purchased all of the outstanding capital stock of
Pritchett Publishing Company (dba Pritchett & Associates) from Dr. Early Price
Pritchett, a director of our company. We purchased the stock from Dr. Pritchett
for cash in the amount of $2,000,000, a subordinated promissory note in the
amount of $6,000,000, and 117,500 shares of our common stock. Dr. Pritchett
continues to serve as the Chairman of Pritchett Publishing Company.
FIRST ADDITIONAL PURCHASE PRICE PAYMENT TO DR. PRITCHETT
On September 17, 1999, our board of directors determined it was in the best
interests of the Company to amend our Stock Purchase Agreement with Dr.
Pritchett to increase the purchase price paid to Dr. Pritchett for the shares of
Pritchett Publishing Company through the issuance of 500,000 unrestricted shares
of EPS. Additionally, Dr. Pritchett is purchasing 500,000 shares of employment-
based restricted stock that are eligible to vest over time provided that certain
conditions are met.
SECOND ADDITIONAL PURCHASE PRICE PAYMENT TO DR. PRITCHETT
Because we did not complete an initial public offering of our stock by June
1999, our board of directors deemed it in the best interests of the Company to
amend the purchase transactions of those businesses we acquired whose
performance exceeded plan to increase the purchase prices we paid for those
businesses. All businesses whose performance exceeded plan were eligible for
this amendment. A total of five businesses qualified. Our Pritchett & Associates
division was one of those five businesses. Consequently, we paid an additional
$300,278 in purchase price to Dr. Pritchett in 1999.
INDEBTEDNESS
Dr. Pritchett purchased an aggregate of 179,147 shares of employment-based
restricted common stock. Dr. Pritchett has purchased this stock by paying the
par value ($.001) in cash and issuing us promissory notes in the amount of
$214,976.40, secured by a pledge of the restricted stock. The Note accrues
interest at 5.5% and is due ten years from the issuance date.
WALTER L. SCHINDLER
Walter Schindler is the former Vice Chairman of our Company.
INDEBTEDNESS
We entered into compensatory, time-based restricted stock purchase
agreements with Mr. Schindler. Pursuant to those agreements, Mr. Schindler
purchased an aggregate of 500,000 shares of our employment-based common stock,
all of which are vested in accordance with the term of Mr. Schindler's
separation agreement. Mr. Schindler purchased this stock by paying the par value
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($.001) in cash and issuing us promissory notes in the amount of $288,000,
secured by a pledge of the restricted stock. The Note accrues interest at 5.5%
and is due ten years from the issuance date.
ASSOCIATION WITH OUTSIDE COUNSEL
Mr. Schindler was a partner with Gibson, Dunn & Crutcher, LLC, until
January 1999, at which time he joined our company. We have retained Gibson, Dunn
& Crutcher, LLC as our counsel on various legal matters.
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ITEM 8.
LEGAL PROCEEDINGS
In October 1998, Anthem Insurance Companies, Inc. filed complaints naming
National Benefits Consultants, L.L.C. (one of our former subsidiaries), EPS, and
other defendants in Indiana and California state courts. The California action
sought declaratory relief and alleged that conduct by us excuses Anthem of its
remaining obligations, including payment of money, under a separate settlement
agreement of previous litigation entered into in 1995. The California action was
settled in our favor, with National Benefits Consultants receiving $1,898,535.82
as part of the settlement.
The initial complaint in the Indiana action accused us of violating the
Indiana Uniform Trade Secrets Act, unjust enrichment, and inducement of breach
of duty. It also named as defendants two individuals who left Anthem to manage
our former subsidiary National HealthCare Recovery Services, LLC, and accused
them of breaching their employment agreements with Anthem, breaching their
fiduciary duties to Anthem, stealing Anthem's trade secrets, conversion, and
unjust enrichment. Anthem filed a First Amended Complaint on March 20, 2000, and
added as defendants our former chairman, Christopher Massey, our former Vice
Chairman, Erik Watts, I.M. Comet, LLC, National HealthCare Corp, and our
operating entity, Enterprise Profit Solutions Corporation. In addition, the
amended complaint added claims for (1) breach of implied contract against the
two individuals who left Anthem to manage our former subsidiary National
HealthCare Recovery Services, LLC, (2) intentional interference with employment
relationship against all defendants, and (3) intentional interference with
contractual relations. The First Amended Complaint seeks preliminary and
permanent injunctive relief and unspecified compensatory and punitive damages.
Settlement attempts to date have been unsuccessful and discovery is
proceeding. We believe Anthem's claims are without merit and we are defending
them vigorously. A trial date in this matter has been set for September 12,
2000.
We and our subsidiaries are also parties to other litigation which arises
in the ordinary course of business from time to time. We believe that none of
the pending legal proceedings will have a material adverse effect on our
business, financial condition, liquidity or operating results.
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ITEM 9.
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
As of April 15, 2000 we had 915 stockholders. As of April 28, 2000 our
board of directors had authorized the issuance of options to purchase up to
660,000 shares of our common stock pursuant to the EPS Solutions Corporation
2000 Stock Performance Plan. There are no other options, warrants or securities
convertible into our common stock outstanding and there is no established public
trading market for our common stock. We have never declared or paid any cash
dividends on our capital stock. We currently intend to retain future earnings
for use in our business and do not anticipate declaring or paying any dividends
on shares of common stock in the foreseeable future. Further, our board of
directors will make any determination to declare and pay dividends in light of
our earnings, financial position, capital requirements, agreements for our
outstanding debt and such other factors as the board of directors deems
relevant. The payment of cash dividends by us is restricted by our current bank
credit facilities, which contain restrictions prohibiting us from paying cash
dividends without the bank's prior approval.
Furthermore, our sole source of cash from which to make dividend payments
will be dividends paid to us or payments made to us by our subsidiaries. The
ability of our subsidiaries to make these payments may be restricted by
applicable state laws or terms of agreements to which they are or may become
party.
We are not currently offering, or proposing to offer, shares of our common
stock to the public.
We have not granted any demand registration rights to our stockholders. We
have granted "piggyback" registration rights to most of our stockholders which
allow them to sell a portion of the shares held by them in an initial public
offering of our common stock or any subsequent underwritten public offering of
our common stock within twenty-four months of an initial public offering (not
including a registration statement filed in connection with an acquisition or
employee benefit plan). The number of shares that any stockholder may sell in
any initial or subsequent underwritten public offering is generally limited as
follows: (i) each stockholder has an individual contractual limitation with
respect to the number of shares that such stockholder is allowed to sell in an
IPO; (ii) the managing underwriter for any offering may limit or eliminate
stockholder participation in any offering altogether; (iii) if the managing
underwriter has limited the total number of shares all stockholder's may sell in
any offering, each stockholder will be limited to pro-rata participation in the
offering; and (iv) most stockholder's piggyback rights are contractually limited
to allow for the sale of a maximum of one-half of such stockholder's shares in
an initial public offering and all subsequent underwritten public offerings
combined.
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In general, under Rule 144 as currently in effect, any affiliate of ours or
a person, or persons whose shares are aggregated, who has beneficially owned
restricted shares for at least one year, including the holding period of any
prior owner other than a person who may be deemed an affiliate of ours, is
entitled to sell within any three-month period a number of shares of common
stock that does not exceed the greater of:
- one percent of the then-outstanding shares of common stock; and
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 notice with respect
to this sale.
Sales under Rule 144 of the Securities Act are subject to certain
restrictions relating to manner of sale, notice and the availability of current
public information about us. Under Rule 144(k), a person who is not an affiliate
of ours at any time during the 90 days preceding a sale, and who has
beneficially owned shares for at least two years, including the holding period
of any prior owner other than a person who may be deemed an affiliate of ours,
would be entitled to sell these shares immediately following the effective date
of this registration statement without regard to the volume limitations, manner
of sale provisions or notice or other requirements of Rule 144 of the Securities
Act. However, we may require an opinion of counsel that a proposed sale of
shares comes within the terms of Rule 144 of the Securities Act prior to
effecting a transfer of these shares.
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ITEM 10.
RECENT SALES OF UNREGISTERED SECURITIES
Since August 28, 1998, we have issued an aggregate of 58,073,642 shares of
common stock, consisting of 32,721,024 shares of Series A Common Stock,
24,212,099 shares of Series B Common Stock and 1,140,519 shares of No Series
Common Stock. An aggregate of 18,006,513 shares of common stock have been
repurchased. All sales of unregistered securities were made in reliance on
either Rule 506 of Regulation D or Rule 701 promulgated under Sections 4(2) and
3(b) of the Securities Act, respectively. All of the transactions were effected
without the use of an underwriter. Appropriate legends were affixed to the share
certificates issued in the transactions.
Sales made in reliance on Rule 506 were made in compliance with all the
terms of Rule 501 and 502 of Regulation D. The sales were made without general
solicitation or advertising. Each purchaser to whom sales were made in reliance
on Rule 506 was an accredited investor as defined in Rule 501(a) with access to
all relevant information necessary to evaluate the investment and represented to
us that the shares were being purchased for investment and not for resale.
When issuing shares in reliance on Rule 701, we met the conditions imposed
under Rule 701(b). In addition, each person to whom we issued shares in reliance
on Rule 701 met the conditions imposed by Rule 701(c). All sales were made
pursuant to a written compensatory benefit plan or a written compensation
contract, a copy of which was provided to the investor. Offers and sales of
shares were made only to our employees, directors, officers, consultants or
advisors who were employed by us or providing services to us at the time the
shares were offered. The aggregate amount of shares sold did not exceed the
limitations set forth by Rule 701(d).
Since August 28, 1998, we have issued unregistered securities as described
below.
SUBSCRIPTION SHARES
Since August 28, 1999 we have sold an aggregate of 16,741,567 shares of
common stock consisting of an aggregate of 64,584 shares of Series A Common
Stock, 16,656,983 shares of Series B Common Stock and 20,000 shares of No Series
Common Stock as described below.
In connection with the founding of the company and their efforts toward
completing successful acquisitions on August 28, 1998, we sold in the aggregate
11,036,564 shares of Series B Common Stock at a price of $0.02 per share, to 21
accredited investors for an aggregate cash consideration of $220,731.28.
In connection with their efforts toward completing successful acquisitions
on December 14, 1998, we sold in the aggregate 2,863,715 shares of Series B
Common Stock at a price of $1.20 per share, to 20 accredited investors for an
aggregate consideration of $3,436,458, of which $3,433,594.28 was originally
subject to promissory notes.
As part of a private placement, in the fourth quarter of 1998 we sold an
aggregate of 58,643 shares of Series B Common Stock valued at $1.20 per share to
an aggregate of two investors for an aggregate consideration of $70,311.60, of
which $70,253.00 was originally subject to a promissory note.
As part of a private placement, in the first quarter of 1999 we sold an
aggregate 2,698,061 shares of Series B Common Stock valued at $1.20 per share to
an aggregate of 23 investors for an aggregate consideration of $3,237,673.20, of
which $3,082,702.13 was originally subject to promissory notes.
As part of a private placement, in the fourth quarter of 1999 we sold
20,000 shares of No Series Common Stock valued at $2.50 per share to one
investor for an aggregate consideration of $50,000.00, of which $49,980.00 was
originally subject to a promissory note.
In exchange for completed consulting services, on March 18, 1999 we issued
64,584 shares of Series A Common Stock valued at $1.20 per share to one
accredited investor.
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All of the subscriptions shares were issued in reliance on Rule 506.
ACQUISITION SHARES
In December 1998 and January 1999, in connection with the simultaneous
acquisition of the stock or assets of acquired companies, we issued in the
aggregate 10,021,590 shares of Series A Common Stock valued at $1.20 per share,
to an aggregate of 147 former shareholders or members of some of the acquired
companies and to some of the companies whose assets were acquired. The table
below sets forth data on a company-by-company basis.
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NUMBER OF SHARES NUMBER OF PERSONS
COMPANY NAME TYPE OF ACQUISITION ISSUED RECEIVING SHARES
- ------------ ------------------ ---------------- -----------------
BayGroup Stock 286,725 10
International, Inc.
Benefit Funding Membership Interests 223,590 6
Services Group, LLC
Better Communications, Stock 56,373 2
Inc.
CyberLease, LLC and Asset 87,579 2
Cyberstract, LLC
D'Accord Group, Inc. Stock 969,839 13
and D'Accord Holdings,
Inc.
DHR International, Inc. Asset 1,336,085 1
Dimension Funding, Inc. Stock 155,029 1
Disbursement Recovery Membership Interests 333,887 2
Services, LLC
The Dublin Group, Inc. Stock 125,111 4
Equitax Asset 64,286 1
FDSI Logistics, Inc. Asset 505,586 1
FFR Holding Co., Inc. Stock 279,648 70
Lease Audit & Analysis Stock 94,703 2
Services, Inc.
Mobility Services Asset 275,500 4
International, Inc.
National Recovery Membership Interests 374,932 4
Services, LLC
National Benefits Membership Interests 1,387,914 1
Consultants, LLC
National Revmax Membership Interests 507,714 1
Consultants, LLC
The Oxxford Consulting Stock 607,543 1
Group, Inc.
The Oxxford Group, Inc. Asset 562,171 1
Partners Consulting Stock 77,857 1
Services, Inc.
The Praxis Group, Inc. Stock 829,945 5
Pritchett Publishing Stock 117,500 1
Company
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NUMBER OF SHARES NUMBER OF PERSONS
COMPANY NAME TYPE OF ACQUISITION ISSUED RECEIVING SHARES
- ------------ ------------------- ---------------- -----------------
The Ringco Group LLC Contract Rights 193,804 1
The Rummler-Brache Asset 168,929 1
Group, Ltd.
Sigma International, Stock 62,657 1
Inc.
The Structured Stock 64,286 1
Settlements Company,
Inc.
The Wadley-Donovan Stock 79,357 5
Group, Inc.
Young, Clark & Stock 193,040 4
Associates, Inc.
In March 1999, in connection with the simultaneous acquisition of the stock
or assets of four companies, we issued in the aggregate 1,572,057 shares of
Series A Common Stock valued at $1.20 per share, to an aggregate of four former
shareholders or members of two of the acquired companies and to the company
whose assets were acquired. The table below sets forth data on a
company-by-company basis.
NUMBER OF SHARES NUMBER OF PERSONS
COMPANY NAME TYPE OF ACQUISITION ISSUED RECEIVING SHARES
- ------------ ------------------- ---------------- -----------------
D.L.D. Insurance Stock 238,148 1
Brokers, Inc.
Holden Corporation Stock 1,320,114 2
The T&E Group Asset 13,795 1
In April 1999, in connection with the acquisition of the assets of First
Choice Brokerage Corporation we issued 20,908 shares of Series A Common Stock
valued at $2.50 per share to the company.
COMPENSATORY SHARES SOLD IN RELIANCE ON RULE 701
In connection with written compensatory benefit plans or written
compensation contracts, we sold an aggregate of shares of Common Stock
consisting of an aggregate of 2,233,788 shares of Series A Common Stock, an
aggregate of 228,931 shares of Series B Common Stock and an aggregate of 253,599
shares of No Series Common Stock to employees, directors, officers, consultants
and advisors. The shares were sold in reliance on Rule 701. The table below sets
forth data on a quarterly basis.
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AGGREGATE AMOUNT
ORIGINALLY
AGGREGATE NUMBER AGGREGATE CASH SUBJECT TO
PERIOD SERIES PRICE PER SHARE OF SHARES CONSIDERATION PROMISSORY NOTES
- ------ ------ --------------- ---------------- -------------- ----------------
Fourth Quarter, 1998 A $1.20 855,673 $1,026,807.60 $1,025,951.92
Fourth Quarter, 1998 B $1.20 204,145 $244,974.00 $244,769.85
First Quarter, 1999 A $1.20 1,216,640 $1,459,968.00 $1,458,751.36
First Quarter, 1999 B $1.20 17,286 $20,743.20 $20,725.91
Second Quarter, 1999 A $2.50 54,642 $136,605.00 $136,550.35
Third Quarter, 1999 A $2.50 58,107 $145,267.50 $145,209.39
Third Quarter, 1999 B $2.50 7,500 $18,750 $18,742.50
Fourth Quarter, 1999 A $2.50 48,726 $121,815.00 $121,766.27
Fourth Quarter, 1999 No Series $2.50 216,099 $540,247.50 $540,031.40
First Quarter, 2000 No Series $2.50 37,500 $93,750.00 $93,712.50
TOTAL 2,716,318 $3,808,927.80 $3,806,211.45
In connection with written compensation contracts, in the second quarter of
1999, we awarded an aggregate of 13,000 shares of Series A Common Stock to 16
employees. The shares were awarded in reliance on Rule 701.
In connection with written compensation contracts, in the fourth quarter of
1999, we awarded an aggregate of 15,286 shares of No Series Common Stock to 13
employees. The shares were awarded in reliance on Rule 701.
COMPENSATORY SHARES SOLD IN RELIANCE ON RULE 506
In connection with written compensatory benefit plans or written
compensation contracts, we sold an aggregate of shares common stock consisting
of 18,795,097 shares of Series A Common Stock, an aggregate of 7,326,185 shares
of Series B Common Stock and an aggregate of 851,634 shares of No Series Common
Stock to employees, directors, officers, consultants and advisors. The shares
were sold in reliance on Rule 506. The table below sets forth data on a
quarterly basis.
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AGGREGATE AMOUNT
ORIGINALLY
AGGREGATE NUMBER AGGREGATE CASH SUBJECT TO
PERIOD SERIES PRICE PER SHARE OF SHARES CONSIDERATION PROMISSORY NOTES
- ------ ------ --------------- ---------------- -------------- ----------------
Fourth Quarter, A $1.20 9,087,483 $10,904,979.60 $10,895,892.11
1998
Fourth Quarter, B $1.20 763,522 $916,226.40 $915,462.87
1998
First Quarter, 1999 A $1.20 6,938,959 $8,326,750.80 $8,319811.84
First Quarter, 1999 B $1.20 6,462,663 $7,755,195.60 $7,748,732.93
Second Quarter, A $2.50 86,635 $216,587.50 $216,500.86
1999
Second Quarter, B $2.50 100,000 $250,000.00 $249,900.00
1999
Third Quarter, 1999 A $2.50 1,181,214 $2,953,035.00 $2,951,853.78
Fourth Quarter, A $2.50 1,500,806 $3,752,015.00 $3,750,514.19
1999
Fourth Quarter, No Series $2.50 734,134 $1,835,335.00 $1,834,600.86
1999
First Quarter, 2000 No Series $2.50 117,500 $293,750.00 $293,632.50
TOTAL 26,972,916 $37,203,874.90 $37,176,901.94
REPURCHASED
Since August 28, 1998, an aggregate of 18,006,513 shares consisting of an
aggregate of 4,086,765 shares of Series A Common Stock, an aggregate of
13,882,604 shares of Series B Common Stock and an aggregate of 37,144 shares of
No Series Common Stock were repurchased from shareholders due to either a
failure to reach specified performance targets or a termination of employment.
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ITEM 11.
DESCRIPTION OF CAPITAL STOCK TO BE REGISTERED
GENERAL
In November of 1999 we amended and restated our Certificate of
Incorporation to eliminate the distinction between our various series of common
stock. As a result all shares of Series A Common Stock and Series B Common Stock
are now denoted simply as common stock.
We are authorized to issue up to 240,000,000 shares of common stock, par
value $0.001 per share, and 10,000,000 shares of preferred stock, par value
$0.001 per share.
The following description summarizes the material terms of our stock, but
does not purport to be complete and is subject in all respects to provisions of
applicable Delaware law and to the provisions of our certificate of
incorporation and bylaws.
COMMON STOCK
All outstanding shares of common stock are, and the common stock are fully
paid and nonassessable.
The following summarizes the rights of our holders of common stock:
- each holder is entitled to one vote per share held on all matters
submitted to a vote at a meeting of stockholders;
- each holder may exercise his or her vote either in person or by proxy;
- holders are not entitled to cumulate their votes for the election of
directors, which means that, subject to any rights granted to the
holders of any shares of preferred stock, the holders of more than 50%
of the outstanding shares of common stock are able to elect all of the
directors to be elected by holders and the holders of the remaining
shares of common stock will not be able to elect any director;
- subject to the preferences of the holders of any shares of preferred
stock, the holders of are entitled to receive ratably any dividends
declared from time to time by the board of directors out of funds
legally available for that purpose;
- in the event of our liquidation, dissolution or winding up, the
holders are entitled to share ratably in all of our assets which are
legally available for distribution to holders, subject to the prior
rights on liquidation of creditors and to any preferences to which
holders of any shares of preferred stock may be entitled; and
- the holders do not have any preemptive, subscription, redemption or
sinking fund rights.
PREFERRED STOCK
Pursuant to our certificate of incorporation, the board of directors has
authority, without further action by the stockholders, to issue up to 10,000,000
shares of preferred stock, in one or more series and containing rights,
privileges and limitations, including dividend rights, voting rights, conversion
privileges, redemption rights, liquidation rights or sinking fund rights, as
determined by the board of directors. The effect of having preferred stock
authorized is that the board of directors alone, within the bounds and subject
to the federal securities laws and the Delaware General Corporation Law, may be
able to authorize the issuance of preferred stock, which may adversely affect
the voting and other rights of holders of common stock. The issuance of
preferred stock may also have the effect of delaying or preventing a change in
control.
Although we have no present plans to issue any shares of preferred stock,
preferred stock may be issued in the future in connection with acquisitions,
financings or any other matters which the board of directors deems to be
appropriate. If any shares of preferred stock are issued, a Certificate of
Designation, setting forth the series of the preferred stock and the relative
rights, privileges and limitations of such preferred stock, is required to be
filed with the Secretary of State of the State of Delaware.
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ANTITAKEOVER EFFECTS OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND
BYLAWS
The following brief description of provisions of our certificate of
incorporation and bylaws does not purport to be complete and is subject in all
respects to the provisions of the certificate of incorporation and bylaws,
copies of which have been filed as exhibits to the Registration Statement of
which this prospectus forms a part.
CLASSIFIED BOARD OF DIRECTORS
Our bylaws provide for the board of directors to be divided into three
classes serving staggered terms. The number of directors in each class is as
nearly equal as is possible based upon the number of directors forming the
entire board of directors. The term of office of the second class of directors
will expire at the first annual meeting of stockholders following the date of
this registration statement, the term of office of the third class will expire
at the second annual meeting of stockholders following this registration
statement, and the term of office of the first class will expire at the third
annual meeting of stockholders following the date of this registration
statement. At each annual meeting of stockholders, successors to directors of
the class whose term expires at that meeting will be elected to serve for a
three-year term and until their successors are elected and qualified.
The classification of directors has the effect of making it more difficult
for stockholders to change the composition of the board of directors. At least
two annual meetings of stockholders, instead of one, will generally be required
to effect a change in a majority of the board of directors. Such a delay may
help ensure that our directors, if confronted by a third party attempting to
force a proxy contest, a tender or exchange offer or other extraordinary
corporate transaction, would have sufficient time to review the proposal as well
as any available alternatives to the proposal and to act in what they believe to
be the best interests of the stockholders. However, the classification
provisions could also have the effect of discouraging a third party from
initiating a proxy contest, making a tender offer or otherwise attempting to
obtain control of us, even though such an attempt might benefit us and our
stockholders. The classification of the board of directors could thus increase
the likelihood that incumbent directors will retain their positions.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES; QUALIFICATION
Our bylaws provide that the number of directors comprising the entire board
of directors will be between three and nine, with the actual number of directors
fixed from time to time by action of the board of directors. In addition, the
bylaws provide that newly created director positions resulting from an increase
in the authorized number of directors or vacancies on the board of directors
resulting from resignation, death, or any other cause may be filled only by the
board of directors (and not by the stockholders unless there are no directors in
office). Also, under Delaware law, unless otherwise provided in the certificate
of incorporation, directors serving on a classified board may only be removed by
the stockholders for cause. Our certificate of incorporation does not provide
that our directors may be removed for any reason other than cause. Accordingly,
the board of directors could prevent any stockholder from enlarging the board
and filling the new directorships with that stockholder's own nominees.
Our bylaws provide that no person shall be qualified to be elected or
appointed to the board of directors while there is a proposed transaction
pending and within the two years preceding such election or appointment, the
person to be elected or appointed had a specified business or financial
relationship with the other parties to the transaction.
The provisions of our certificate of incorporation and bylaws governing the
number of directors, their removal, the filling of vacancies and director
qualification requirement may have the effect of discouraging a third party from
initiating a proxy contest, making a tender offer or otherwise attempting to
gain control of us, or of attempting to change the composition or policies of
the board of directors, even though such attempts might be to our benefit and
that of our stockholders. These provisions could thus increase the likelihood
that incumbent directors retain their positions.
LIMITATION ON SPECIAL MEETINGS AND STOCKHOLDER ACTION BY WRITTEN CONSENT
Our certificate of incorporation and bylaws provide that only a majority of
the board of directors or the Chairman can call a special meeting of
stockholders; and stockholder action by written consent requires the consent
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of 75% of stockholders entitled to vote on such action. These provisions, taken
together, limit stockholders from taking any action over the opposition of the
board of directors.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS
Our bylaws provide that stockholders seeking to bring business before a
meeting of stockholders, or to nominate candidates for election as directors,
must provide timely notice of this intention in writing. Otherwise, only persons
who are nominated by or at the direction of the board of directors, any
committee appointed by the board of directors will be eligible for election as
our directors. To be timely, notice of stockholder nominations or proposals to
be made at an annual or special meeting must be received by us not less than 90
days nor more than 120 days prior to the scheduled date of the meeting , or, if
less than 95 days' notice or prior public disclosure of the date of the meeting
is given, then the 7th day following the earlier of (i) the day such notice was
mailed or (ii) the day such public disclosure was made.
Under our bylaws a stockholder's notice to us proposing to nominate a
person for election as director must contain specified information about the
nominating stockholder and the proposed nominee, and a stockholder's notice
relating to the conduct of business other than the nomination of directors must
contain specified information about such business and about the proposing
stockholder. If the Chairman or other officer presiding at a meeting determines
that a person was not nominated, or other business was not brought before the
meeting, in accordance with the procedure set forth in our bylaws, the person
will not be eligible for election as a director, or such business will not be
conducted at such meeting, as the case may be.
By requiring advance notice of nominations by stockholders, the board of
directors has an opportunity to consider the qualifications of the proposed
nominees and, to the extent deemed necessary or desirable by the board of
directors, to inform stockholders about the nominees qualifications. Advance
notice of other proposed business, provides a more orderly procedure for
conducting annual meetings of stockholders and, to the extent deemed necessary
or desirable by the board of directors, provides the board of directors with an
opportunity to inform stockholders, prior to the meetings, of any business
proposed to be conducted at such meetings, together with any recommendations as
to the board of director's position regarding action to be taken with respect to
such business, so that stockholders can better decide whether to attend such a
meeting or to grant a proxy regarding the disposition of any such business.
However, the advance notice provisions may have the effect of precluding a
contest for the election of directors or the consideration of stockholder
proposals and of discouraging or deterring a third party from conducting a
solicitation of proxies to elect its own slate of directors or to approve its
own proposal, if the proper advance notice procedures are not followed, without
regard to whether consideration of such nominees or proposals might be harmful
or beneficial to us or our stockholders.
AMENDMENT OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS
Our certificate of incorporation and bylaws contain provisions requiring
the affirmative vote of the holders of (i) at least 75% of the voting power of
our common stock or more to amend the provisions of the certificate of
incorporation discussing votes required to amend our certificate of
incorporation or bylaws, and limiting stockholder written consent; and (ii) at
least 75% of the voting power of our common stock to repeal or amend our bylaws
(including the provisions discussed above relating to the size and
classification of the board of directors, replacement or removal of directors,
action by written consent, special stockholder meetings, and limitation of the
liability of directors). These provisions make it more difficult for
stockholders to make changes in our certificate of incorporation or bylaws,
including changes designed to facilitate the exercise of control over us.
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ITEM 12.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
We are a Delaware corporation. Our certificate of incorporation provides
that to the fullest extent permitted by Delaware law, no director will be
personally liable to us or our stockholders for monetary damages for any breach
of fiduciary duty as a director, except for liability (i) for any breach of the
Directors' duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the Director derived an improper
benefit.. Our certificate of incorporation and our bylaws also provide that to
the fullest extent permitted by Delaware law, we will fully indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (whether civil, criminal,
administrative or investigative) by reason of the fact that such person is or
was our employee, director or officer or is or was serving at our request as an
employee, director or officer of another corporation, partnership joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding.
Section 145 of the General Corporation Law of the State of Delaware (the
"GCL") provides that a Delaware corporation has the power to indemnify its
officers and directors in certain circumstances.
Subsection (a) of Section 145 of the GCL empowers a corporation to indemnify
any director or officer, or former director or officer, who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation), against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such action, suit or
proceeding provided that such director or officer acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, provided
that such director or officer had no cause to believe his or her conduct was
unlawful.
Subsection (b) of Section 145 of the GCL empowers a corporation to indemnify
any director or officer, or former director or officer, who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that such person acted in any of the capacities set forth
above, against expenses actually and reasonably incurred in connection with the
defense or settlement of such action or suit provided that such director or
officer acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
may be made in respect of any claim, issue or matter as to which such director
or officer shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such action
was brought shall determine that despite the adjudication of liability such
director or officer is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper.
Section 145 of the GCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith; that indemnification provided for in Section 145 shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the corporation shall have power to purchase and maintain
insurance on behalf of a director or officer of the corporation against any
liability asserted against him or her or incurred by him or her in any such
capacity or arising out of his or her status as such whether or not the
corporation would have the power to indemnify him or her against such
liabilities under Section 145.
The Company also carries directors' and officers' liability insurance
covering its directors and officers. In addition, we have entered into
agreements to indemnify our directors and officers. We believe that these
agreements are necessary to attract and retain qualified directors and officers.
These agreements generally provide that the Company will indemnify the director
or officer against expenses actually and reasonably incurred
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(including without limitation attorneys' and experts' fees and costs), and all
liabilities, losses, judgments, fines, penalties, and taxes actually incurred by
the director or officer, and amounts paid in settlement (if such settlement is
approved in advance by the Company) arising from, or related to civil, criminal,
or administrative claims brought against such directors and officers (or which
otherwise require such directors or officers participation) by reason of the
fact that the director or officer was a director or officer of the Company or
one of its affiliates; provided that the director or officer acted in good faith
and in a manner the director or officer reasonably believed to be in or not
opposed to the best interests of the Company and, with respect to any criminal
action or proceeding, had no reasonable cause to believe that the director or
officer's conduct was unlawful. The Company is also obligated to advance
expenses to any director or officer entitled to indemnification pursuant to our
charter or bylaws, the indemnification agreement or applicable law.
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ITEM 13.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(dollars in thousands)
The following unaudited pro forma condensed consolidated financial data, which
we refer to as the Pro Forma Financial Data, of EPS Solutions Corporation (EPS)
are based on historical consolidated financial statements of EPS as adjusted to
give effect to the acquisitions of companies in the year ending December 31,
2000 which are deemed probable (which we refer to as the 2000 Acquisitions) at
April 30, 2000: PowerBase Selling Limited, and eFox, L.L.C.
The unaudited pro forma condensed consolidated balance sheet reflects
adjustments related to the 2000 Acquisitions. Regarding the 2000 Acquisitions,
the Company expects to issue $3,550 in 10% unsecured subordinated notes to the
sellers of these companies. Separately, certain of the key employees of these
companies are expected to purchase approximately 902,000 shares of the Company's
common stock, such shares to vest over periods ranging up to five years, subject
to and depending upon the actual pretax earnings of these companies.
The unaudited pro forma condensed consolidated statements of operations
include adjustments to reflect a full year's amortization of goodwill and other
intangible assets, as well as incremental interest expense and vesting of
stock-based compensation. The adjustments are more fully explained in the notes
to the unaudited pro forma condensed consolidated financial statements. The
unaudited pro forma condensed consolidated financial data should be read in
conjunction with the respective unaudited consolidated financial statements of
the Company appearing elsewhere herein.
The pro forma adjustments are based upon available information and upon
certain assumptions that management believes are reasonable under the
circumstances. The Pro Forma Financial Data and the accompanying notes should be
read in conjunction with the historical consolidated statements of EPS,
including the notes thereto, and the financial statements of certain of the EPS
Companies, and other financial information pertaining to EPS which are included
elsewhere herein. The Pro Forma Financial Data do not purport to represent what
our actual results of operations or actual financial position would have been if
the acquisitions of the 2000 Acquisition Companies in fact occurred on such
dates or to project our results of operations or financial position for any such
future period or date.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
------------------------------------------------------------
2000
COMPANY ACQUISITIONS(1) ADJUSTMENTS AS ADJUSTED
----------- --------------- ----------- -----------
(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 10,025 $219 $ 10,244
Accounts receivable 29,928 269 30,197
Other current assets 13,040 2 13,042
Current assets held for sale 26,478 26,478
----------- ---- ------ --------
Total current assets 79,471 490 79,961
Property and equipment, net 11,425 151 11,576
Goodwill and other intangibles 37,948 3,244 (2) 41,392
200 (3)
Deferred financing costs 9,414 9,414
Other assets 18,242 (200)(3) 18,042
Other assets held for sale 39,442 39,442
----------- ---- ------ --------
Total assets $ 195,942 $641 $3,244 $199,827
=========== ==== ====== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 25,050 $107 $ 25,157
Accrued payroll and related expenses 14,154 82 14,236
Deferred revenue 1,984 102 2,086
Current liabilities of discontinued operations 14,550 14,550
Current portion of long-term debt 43,493 43 43,536
----------- ---- ------ --------
Total current liabilities 99,231 334 0 99,565
Long-term debt, less current portion 83,573 1 83,574
Subordinated notes payable 96,233 3,550 (2) 99,783
Deferred income taxes 2,349 2,349
Other 4,007 4,007
----------- ---- ------ --------
Total liabilities 285,393 335 3,550 289,278
Minority interest in a subsidiary company 5,240 5,240
Stockholders' deficit:
Common stock 56 5 (5)(2) 58
1 (4)
Treasury stock (10,404) (10,404)
Additional paid-in capital 37,068 2,254 (4) 39,321
Notes receivable from stockholders (34,314) (2,255)(4) (36,569)
Accumulated deficit and other comprehensive loss (87,097) 301 (301)(2) (87,097)
----------- ---- ------ --------
Total stockholders' deficit (94,691) 306 (306) (94,691)
----------- ---- ------ --------
Total liabilities and stockholders' deficit $ 195,942 $641 $3,244 $199,827
=========== ==== ====== ========
See accompanying notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements.
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EPS SOLUTIONS CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------------------
1999 AND 2000 PRO FORMA PRO FORMA AS
COMPANY ACQUISITIONS(1)(5) ADJUSTMENTS ADJUSTED
-------- ------------------ ----------- ------------
(Dollars in thousands)
Continuing Operations
Ongoing businesses:
Revenues $141,527 $3,130 $ (438)(6) $144,219
Cost of revenues 70,671 1,257 (438)(6) 71,490
Selling, general and administrative 59,278 2,037 227 (7) 61,665
123 (8)
Restructuring charges 5,762 5,762
Abandoned bond offering costs 2,418 2,418
-------- ------ ------ --------
Income (loss) from operations 3,398 (164) (350) 2,884
Non-operating expenses (principally interest) (19,013) (36) (488)(9) (19,537)
Businesses closed or to be disposed of:
Revenues 16,588 16,588
Costs and expenses (15,840) (15,840)
Loss on businesses closed or to be disposed of (5,620) (5,620)
-------- ----- ----- --------
Loss from continuing operations before income taxes (20,487) (200) (838) (21,525)
Income taxes 1,639 (32) -- 1,607
-------- ----- ----- --------
Loss from continuing operations $(18,848) $(232) $(838) $(19,918)
======== ===== ===== ========
See accompanying notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements.
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EPS SOLUTIONS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands)
(1) The accompanying unaudited pro forma condensed consolidated financial
statements include the accounts as of and for the year ended December 31,
1999 for two companies we believe are probable acquisitions as of April 30,
2000 (the "2000 Acquisitions"). These companies are PowerBase Selling
Limited (formed in 1999) and eFox, L.L.C. (formed in 1998).
(2) The amount expected to be paid in connection with the 2000 Acquisitions,
and the estimated allocation of purchase price, is as follows:
Fair value of identifiable net assets acquired $ 306
Goodwill and other intangible assets 3,244
Subordinated notes payable issued (3,550)
-------
Cash paid for acquisitions --
Cash acquired in acquisitions 219
-------
Net cash from acquisitions $ 219
=======
(3) To eliminate investment in eFox, L.L.C.
(4) To record notes receivable for 902,000 shares of common stock issued under
the restricted stock program for employees of the 2000 Acquisitions.
(5) Revenues, costs and expenses include amounts for 1999 Acquisitions prior to
the dates of their acquisition, and calendar 1999 amounts for the probable
2000 Acquisitions.
(6) To eliminate all significant intercompany transactions.
(7) To reflect pro forma amortization of goodwill and other intangible assets
for the full year 1999 for the 1999 and 2000 Acquisitions. Pro forma
amortization of goodwill is based upon annual amortization over a period of
20 years and amortization periods of four to seven years for other
intangible assets.
(8) To adjust non-cash compensation expense in connection with performance and
employment-based restricted shares, effective for the 2000 Acquisitions,
assuming all shares eligible for annual vesting were vested.
(9) To adjust interest expense for pro forma interest expense on indebtedness
incurred in connection with the 1999 and 2000 Acquisitions.
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ITEM 14.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
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ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
Set forth below is a list of the exhibits included as part of this Registration
Statement:
Exhibit Number Description
- -------------- -----------
3.1 Certificate of Incorporation
3.2 Bylaws
4.1 Form of Stockholder Agreement
10.1 2000 Stock Performance Plan
10.2 Form of Indemnification Agreement
10.3 David H. Hoffmann Employment Agreement (11/24/99)
10.4 David H. Hoffmann Restricted Stock Purchase Agreement (12/14/98)
10.5 David H. Hoffmann Restricted Stock Purchase Agreement (9/1/99)
10.6 David H. Hoffmann Amendment to Restricted Stock Purchase Agreement (11/24/99)
10.7 David H. Hoffmann Restricted Stock Purchase Agreement (11/24/99)
10.8 David H. Hoffmann Amendment to Employment Agreement
10.9 James F. Holden Employment Agreement/Holden (3/19/99)
10.10 James F. Holden Employment Agreement/EMD (3/19/99)
10.11 James F. Holden Restricted Stock Purchase Agreement/Holden (3/19/99)
10.12 James F. Holden Restricted Stock Purchase Agreement/EMD (3/19/99)
10.13 James F. Holden Amendment to Restricted Stock Purchase Agreement (9/1/99)
10.14 Early Price Pritchett III Employment Agreement (12/14/98)
10.15 Early Price Pritchett III Restricted Stock Purchase Agreement (12/14/98)
10.16 First Amendment to DHR International, Inc. Asset Purchase Agreement
10.17 [reserved]
10.18 Mark C. Coleman Employment Agreement (12/10/99)
10.19 Mark C. Coleman Amendment Agreement (12/10/99)
10.20 Mark C. Coleman Restricted Stock Purchase Agreement (8/13/99)
10.21 Mark C. Coleman Restricted Stock Purchase Agreement (12/14/98)
10.22 Mark C. Coleman Restricted Stock Purchase Agreement (8/28/98)
10.23 David M. Ehlen Confidential Agreement
10.24 David M. Ehlen Restricted Stock Purchase Agreement
10.25 Michael G. Goldstein Employment Agreement (12/10/99)
10.26 Michael G. Goldstein Restricted Stock Purchase Agreement (3/18/99)
10.27 Michael G. Goldstein Restricted Stock Purchase Agreement Amendment (12/10/99)
10.28 Michael G. Goldstein Restricted Stock Purchase Agreement (12/10/99)
10.29 The Ringco Group LLC Participating Consultant Assignment Agreement
10.30 DHR International, Inc. Asset Purchase Agreement
10.31 Holden Corporation Stock Purchase Agreement
10.32 eFox, L.L.C. Stock Purchase and Option Agreement
10.33 Agreement
59
61
10.34 Benefit Funding Services Group, LLC Securities Purchase Agreement
10.35 National RevMax Consulting, LLC Securities Purchase Agreement
10.36 National HealthCare Recovery Services, LLC Rescission Agreement
10.37 CENV Option Purchase Agreement
10.38 Disbursement Recovery Services LLC Securities Purchase Agreement
10.39 FFR Holding Co., Inc. Stock Purchase Agreement
10.40 National Benefits Consultants, L.L.C. Securities Purchase Agreement
10.41 National Recovery Services, LLC Securities Purchase Agreement
10.42 Eric R. Watts and Christopher P. Massey Settlement Agreement
10.43 NRS/OGI/Medco/EPS Travel Solutions Asset Purchase Agreement
10.44 National HealthCare Recovery Services, LLC Securities Purchase Agreement
10.45 Pritchett Publishing Company Stock Purchase Agreement
10.46 Deloitte & Touche LLP Asset Purchase Agreement
10.47 Deloitte & Touche LLP Contract Rights Purchase Agreement
10.48 TSL Services, Inc. Stock Purchase Agreement
10.49 D.L.D. Insurance Brokers, Inc. Stock Purchase Agreement
10.50 Credit Agreement (12/7/98)
10.51 First Amendment to Credit Agreement and Waiver (3/17/99)
10.52 Amended and Restated Credit Agreement (4/1/99)
10.53 First Amendment to Amended and Restated Credit Agreement (9/30/99)
10.54 First Amendment to Pritchett Publishing Company Stock Purchase Agreement
22.1 Subsidiaries of the Registrant
(b) Financial Statement Schedule
The applicable financial statement schedules are located on pages F-110 to
F-114 of this document.
60
62
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
EPS SOLUTIONS CORPORATION
By: /s/ David H. Hoffmann
------------------------------------
Name: David H. Hoffmann
Title: Chairman, CEO and President
Date: May 1, 2000
61
63
EPS SOLUTIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
FINANCIAL STATEMENTS OF REGISTRANT:
EPS SOLUTIONS CORPORATION AND PREDECESSOR
Consolidated Balance Sheets of EPS Solutions Corporation as of December 31,
1998 and December 31, 1999 (unaudited).............................................. F-4
Consolidated Statements of Operations of EPS Solutions Corporation from May 29,
1998 (inception) to December 31, 1998 and for the year ended December 31, 1999
and of Predecessor for year ended December 31, 1997 and the period from January
1, 1998 to May 28, 1998 (unaudited)................................................. F-5
Consolidated Statements of Stockholders' Deficit of EPS Solutions Corporation
from May 29, 1998 (inception) to December 31, 1998 and for the year ended
December 31, 1999 and of Predecessor for year ended December 31, 1997 and the
period from January 1, 1998 to May 28, 1998 (unaudited)............................. F-6
Consolidated Statements of Cash Flows of EPS Solutions Corporation from May 29,
1998 (inception) to December 31, 1998 and for the year ended December 31, 1999
and of Predecessor for year ended December 31, 1997 and the period from January
1, 1998 to May 28, 1998 (unaudited)................................................. F-7
Notes to Consolidated Financial Statements (unaudited).............................. F-8
FINANCIAL STATEMENTS OF ACQUIRED COMPANIES:
DHR INTERNATIONAL, INC.
Report of Independent Auditors...................................................... F-42
Consolidated Statements of Operations for the years ended December 31, 1996,
1997 and 1998....................................................................... F-43
Consolidated Statements of Shareholders' Equity for the years ended December
31, 1996, 1997 and 1998............................................................. F-44
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1997 and 1998....................................................................... F-45
Notes to Consolidated Financial Statements.......................................... F-46
FFR HOLDING CO., INC. AND SUBSIDIARIES
Report of Independent Auditors...................................................... F-49
Consolidated Statements of Operations for the year ended December 31, 1997 and
eleven months ended November 30, 1998............................................... F-50
Consolidated Statements of Stockholders' Equity for the year ended December 31,
1997 and eleven months ended November 30, 1998...................................... F-51
F-1
64
Consolidated Statements of Cash Flows for the year ended December 31, 1997 and
eleven months ended November 30, 1998............................................... F-52
Notes to Consolidated Financial Statements.......................................... F-53
HOLDEN CORPORATION
Statements of Income for the years ended December 31, 1997 and 1998 and the
period from January 1, 1999 to February 28, 1999 (unaudited)........................ F-57
Statements of Shareholders' Equity for the years ended December 31, 1997 and
1998 and the period from January 1, 1999 to February 28, 1999 (unaudited)........... F-58
Statements of Cash Flows for the years ended December 31, 1997 and 1998
(unaudited)......................................................................... F-59
Notes to Financial Statements (unaudited)........................................... F-60
MOBILITY SERVICES INTERNATIONAL, INC.
Report of Independent Auditors...................................................... F-62
Consolidated Statement of Income and Retained Earnings for the year ended
December 31, 1998................................................................... F-63
Consolidated Statement of Cash Flows for the year ended December 31, 1998........... F-64
Notes to Consolidated Financial Statements.......................................... F-65
PRAXIS COMPANIES
Report of Independent Auditors...................................................... F-67
Combined Statements of Operations and Owners' Equity (Deficit) for the years
ended December 31, 1997 and 1998.................................................... F-68
Combined Statements of Cash Flows for the years ended December 31, 1997 and 1998.... F-69
Notes to Combined Financial Statements.............................................. F-70
PRITCHETT PUBLISHING COMPANY
Report of Independent Auditors...................................................... F-73
Statements of Operations for the years ended December 31, 1997 and 1998............. F-74
Statements of Stockholder's Equity for the years ended December 31, 1997 and
1998................................................................................ F-75
Statements of Cash Flows for the years ended December 31, 1997 and 1998............. F-76
Notes to Financial Statements....................................................... F-77
RBG GROUP, LTD.
Report of Independent Auditors...................................................... F-79
Statements of Operations for the period from January 29, 1997 (inception) to
December 31, 1997 and for the year ended December 31, 1998.......................... F-80
Statements of Members' Capital for the period from January 29, 1997 (inception)
to December 31, 1997 and for the year ended December 31, 1998....................... F-81
Statements of Cash Flows for the period from January 29, 1997 (inception) to
December 31, 1997 and for the year ended December 31, 1998.......................... F-82
F-2
65
Notes to Financial Statements....................................................... F-83
WADLEY-DONOVAN GROUP LTD.
Report of Independent Auditors...................................................... F-85
Statement of Operations for the year ended December 31, 1998........................ F-86
Statement of Shareholders' Equity for the year ended December 31, 1998.............. F-87
Statement of Cash Flows for the year ended December 31, 1998........................ F-88
Notes to Financial Statements....................................................... F-89
FINANCIAL STATEMENTS OF COMPANIES TO BE ACQUIRED:
eFox, L.L.C.
Balance Sheets as of December 31, 1998 and 1999 (unaudited)......................... F-91
Statements of Operations for the period from May 29, 1998 (inception) to
December 31, 1998 and the year ended December 31, 1999 (unaudited).................. F-92
Statements of Members' Capital (Deficit) for the period from May 29, 1998
(inception) to December 31, 1998 and the year ended December 31, 1999
(unaudited)......................................................................... F-93
Statements of Cash Flows for the period from May 29, 1998 (inception) to
December 31, 1998 and the year ended December 31, 1999 (unaudited).................. F-94
Notes to Financial Statements (unaudited)........................................... F-95
POWERBASE SELLING LIMITED
Profit and Loss Account for the 8 months ended 31 December 1999 (unaudited)......... F-100
Balance Sheet at 31 December 1999 (unaudited)....................................... F-101
Statement of Cash Flows for the 8 months ended 31 December 1999 (unaudited)......... F-102
Notes to the Accounts at 31 December 1999 (unaudited)............................... F-103
FINANCIAL STATEMENT SCHEDULES:
EPS Solutions Corporation - period from May 29, 1998 (inception) to December 31,
1998 and for the year ended December 31, 1999:
Schedule I -- Condensed Financial Information
EPS Solutions Corporation (Parent Company)........................................ F-110
Schedule II -- Valuation and Qualifying Accounts.................................... F-114
F-3
66
EPS Solutions Corporation
Consolidated Balance Sheets
(Unaudited)
DECEMBER 31
1998 1999
------------------------
(Dollars and share amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 16,610 $ 10,025
Accounts receivable, net of allowance for doubtful accounts of
$4,705 and $3,109 in 1998 and 1999, respectively 37,572 29,928
Notes and other receivables 4,721 6,001
Prepaid expenses and other assets 4,408 3,571
Refundable income taxes -- 928
Deferred income taxes 1,312 2,540
Current assets held for sale -- 26,478
------------------------
Total current assets 64,623 79,471
Property and equipment, net 9,705 11,425
Goodwill and other intangibles, net 119,609 37,948
Deferred financing costs 14,671 9,414
Other assets 3,549 18,242
Other assets held for sale -- 39,442
------------------------
Total assets $ 212,157 $ 195,942
========================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 36,438 $ 25,050
Accrued payroll and related expenses 14,806 14,154
Deferred revenue 1,845 1,984
Current liabilities of discontinued operations -- 14,550
Current portion of long-term debt 6,441 43,493
------------------------
Total current liabilities 59,530 99,231
Long-term debt, less current portion 83,465 83,573
Subordinated notes payable to stockholders 60,896 78,212
Other subordinated notes payable 17,000 18,021
Other liabilities of discontinued operations -- 2,094
Deferred income taxes 2,052 2,349
Other -- 1,913
------------------------
Total liabilities 222,943 285,393
Commitments and contingencies
Minority interest in a subsidiary company 4,930 5,240
Stockholders' deficit:
Preferred stock, $.001 par value
Authorized - 10,000 shares
Issued and outstanding - none -- --
Common stock, $.001 par value;
Authorized - 240,000 shares at December 31, 1998 and 1999
Issued and outstanding - 35,085 shares at
December 31, 1998 and 40,769 at December 31, 1999 35 56
Common stock subscribed 336 --
Treasury stock at cost - 15,344 shares -- (10,404)
Additional paid-in capital 4,326 37,068
Notes receivable from stockholders (17,128) (34,314)
Accumulated deficit (3,285) (87,007)
Accumulated other comprehensive loss -- (90)
------------------------
Total stockholders' deficit (15,716) (94,691)
------------------------
Total liabilities and stockholders' deficit $ 212,157 $ 195,942
========================
See accompanying notes.
F-4
67
EPS Solutions Corporation
Consolidated Statements of Operations
(Unaudited)
PREDECESSOR EPS SOLUTIONS CORPORATION
----------------------------------- -------------------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, 1998 MAY 29, 1998
YEAR ENDED TO (INCEPTION) TO YEAR ENDED
(Dollars in thousands, except per share data) DECEMBER 31, 1997 MAY 28, 1998 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------------------------- -------------------------------------
CONTINUING OPERATIONS:
Ongoing businesses
Revenues:
Services and fees $ 1,170 $ 131,124
Product sales -- 10,403
----------------------------------- -------------------------------------
1,170 141,527
Cost of revenues:
Services and fees -- 69,089
Product sales -- 1,582
----------------------------------- -------------------------------------
-- 70,671
----------------------------------- -------------------------------------
Gross margin 1,170 70,856
Operating expenses:
Selling, general and administrative 6,109 59,278
Restructuring charges -- 5,762
Abandoned bond offering costs -- 2,418
----------------------------------- -------------------------------------
Total operating expenses 6,109 67,458
----------------------------------- -------------------------------------
Income (loss) from operations (4,939) 3,398
----------------------------------- -------------------------------------
Non-operating expense:
Other income -- 179
Interest expense (809) (19,192)
Businesses closed or to be disposed of
Revenues -- 16,588
Costs and expenses -- (15,840)
----------------------------------- -------------------------------------
Gross margin -- 748
Loss on businesses closed or to be disposed of -- (5,620)
----------------------------------- -------------------------------------
-- (4,872)
----------------------------------- -------------------------------------
Loss from continuing operations before (5,748) (20,487)
income taxes
Income tax benefit -- 1,639
----------------------------------- -------------------------------------
Loss from continuing operations (5,748) (18,848)
DISCONTINUED OPERATIONS:
Income (loss) from discontinued
operations, net of income tax expense of
$2,389 in 1999 (none in 1997 or 1998) 819 554 2,463 (2,583)
Loss on disposal of discontinued
operations (no income tax benefit) -- -- -- (62,291)
----------------------------------- -------------------------------------
Net loss $ 819 $ 554 $ (3,285) $ (83,722)
=================================== =====================================
Basic and diluted loss per share of common stock:
Loss from continuing operations $ (1.36) $ (0.85)
Income (loss) from discontinued operations 0.58 (2.95)
-------------------------------------
Net loss $ (0.78) $ (3.80)
=====================================
Weighted average number of shares outstanding 4,219,000 22,046,000
=====================================
See accompanying notes.
F-5
68
EPS Solutions Corporation
Consolidated Statements of Stockholders' Deficit
(Unaudited)
PREDECESSOR EPS SOLUTIONS CORPORATION
----------- -------------------------------------------
MEMBERS'
CAPITAL COMMON STOCK TREASURY
(In thousands) DEFICIENCY SHARES AMOUNT SUBSCRIBED STOCK
----------- -------------------------------------------
PREDECESSOR:
Deficiency at January 1, 1997 $ (1,351) -- $ -- $ -- $ --
Member distributions (400)
Net income 819
--------
Deficiency at December 31, 1997 (932)
Member distributions (164)
Net income to May 28, 1998 554
--------
Balance at May 28, 1998 (542)
EPS SOLUTIONS CORPORATION:
Acquisition of National Benefits
Consultants, L.L.C 542 1,388 1 -- --
Issuances of unrestricted stock to
initial stockholders 6,261 -- -- --
Issuances of restricted stock to
employees 19,082 25 -- --
Issuances and subscriptions of stock
for acquisitions 8,354 9 336 --
Non-cash compensation expense -- -- -- --
Net loss -- -- --
----------- -------------------------------------------
Balance at December 31, 1998 35,085 35 336 --
Net loss -- -- -- --
Unrealized loss on investments, net
of income taxes
Comprehensive loss -- -- -- -- --
Issuances of stock for acquisitions 1,886 2 (336) --
Issuances of stock to employees 19,077 19 -- --
Issuances of stock for services 65 -- -- --
Repurchases of stock (15,344) -- -- (10,404)
Collections on subscription notes -- -- -- --
Non-cash compensation expense -- -- -- --
Tax benefit from acquisition -- -- -- --
----------- -------------------------------------------
Balance at December 31, 1999 $ -- 40,769 $ 56 $ -- $(10,404)
=========== ===========================================
EPS SOLUTIONS CORPORATION
---------------------------------------------------------------------
NOTES ACCUMULATED
ADDITIONAL RECEIVABLE OTHER TOTAL
PAID-IN FROM ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
(In thousands) CAPITAL STOCKHOLDERS DEFICIT LOSS DEFICIT
---------------------------------------------------------------------
PREDECESSOR:
Deficiency at January 1, 1997 $ -- $ -- $ -- $ -- $ --
Member distributions
Net income
Deficiency at December 31, 1997
Member distributions
Net income to May 28, 1998
EPS SOLUTIONS CORPORATION:
Acquisition of National Benefits
Consultants, L.L.C (23,543) -- -- (23,542)
Issuances of unrestricted stock to
initial stockholders 172 (5) -- 157
Issuances of restricted stock to
employees 17,192 (17,123) -- 104
Issuances and subscriptions of stock
for acquisitions 10,017 -- -- 10,362
Non-cash compensation expense 488 -- -- 488
Net loss -- -- (3,285) (3,285)
---------------------------------------------------------------------
Balance at December 31, 1998 4,326 (17,128) (3,285) -- (15,716)
Net loss -- -- (83,722) (83,722)
Unrealized loss on investments, net
of income taxes (90) (90)
-----------
Comprehensive loss (83,812)
Issuances of stock for acquisitions 2,261 -- -- 1,927
Issuances of stock to employees 27,750 (27,747) -- 22
Issuances of stock for services 78 -- -- 78
Repurchases of stock -- 10,089 -- (315)
Collections on subscription notes -- 472 -- 472
Non-cash compensation expense 2,202 -- -- 2,202
Tax benefit from acquisition 451 -- -- 451
---------------------------------------------------------------------
Balance at December 31, 1999 $ 37,068 $(34,314) $(87,007) $ (90) $(94,691)
=====================================================================
See accompanying notes.
F-6
69
EPS Solutions Corporation
Consolidated Statements of Cash Flows
(Unaudited)
PREDECESSOR EPS SOLUTIONS CORPORATION
------------------------------- -------------------------------
PERIOD FROM
PERIOD FROM MAY 29, 1998
YEAR ENDED JANUARY 1, 1998 (INCEPTION) TO YEAR ENDED
DECEMBER 31, TO MAY 28, DECEMBER 31, DECEMBER 31,
(Dollars in thousands) 1997 1998 1998 1999
------------------------------- -------------------------------
OPERATING ACTIVITIES
Net loss -- -- $ (3,285) $(83,722)
Loss from discontinued operations -- -- 2,463 64,874
Adjustments to reconcile net loss to net cash provided by
(used in) continuing operations:
Depreciation and amortization -- -- 17 4,709
Amortization of deferred financing costs -- -- -- 5,440
Provision for doubtful accounts -- -- 50 1,698
Non-cash compensation -- -- 488 1,973
Non-cash restructuring charges -- -- -- 2,913
Minority interest in subsidiary -- -- -- 310
Benefit for deferred income taxes -- -- -- (931)
Interest charges paid in kind -- -- -- 6,212
Loss on disposal of businesses -- -- -- 5,620
Issuance of common stock for services -- -- -- 78
Net changes in assets and liabilities, net of effects from
companies purchased:
Accounts receivable -- -- (2,324) 8,029
Notes and other receivables -- -- (1,280)
Other current assets -- -- (732) 77
Accounts payable and accrued expenses -- -- 12,084 (14,207)
Accrued payroll and related expenses -- -- -- (2,285)
Deferred revenue -- -- -- (348)
------------------------------- -------------------------------
Net cash used in continuing operations -- -- 8,761 (840)
Net cash provided by (used in) discontinued operations $ 390 $ 88 (2,463) (2,803)
------------------------------- -------------------------------
Net cash provided by (used in) operating activities 390 88 6,298 (3,643)
INVESTING ACTIVITIES
Purchase of equipment and improvements -- -- (2,249) (7,726)
Collections from (advances to) related parties -- -- (2,933) 533
Net purchase price adjustments to prior year acquisitions -- -- -- (2,665)
Acquisitions, net of cash acquired -- -- (59,984) (7,695)
Increase in other assets -- -- -- (1,104)
Net non current assets held for sale -- -- -- (19,254)
------------------------------- -------------------------------
Net cash used in investing activities -- -- (65,166) (37,911)
FINANCING ACTIVITIES
Proceeds from bank term loan (450) -- 50,000 21,500
Payments on bank term loan -- -- -- (6,000)
Proceeds from (payments on) bank revolving loan -- -- 39,041 21,959
Proceeds from subordinated debt -- -- 500 1,800
Proceeds on notes receivable from stockholders -- -- -- 472
Deferred financing costs -- -- (14,671) (4,168)
Proceeds from issuance of common stock -- -- 261 20
Repurchases of common stock -- -- -- (315)
Other notes -- -- 347 (299)
Advance from affiliate 450 -- -- --
Member distributions (400) (164) -- --
------------------------------- -------------------------------
Net cash provided by (used in) financing activities (400) (164) 75,478 34,969
Net increase (decrease) in cash and cash equivalents (10) (76) 16,610 (6,585)
Cash and cash equivalents at beginning of period 86 76 -- 16,610
------------------------------- -------------------------------
Cash and cash equivalents at end of period $ 76 $ -- $ 16,610 $ 10,025
=============================== ===============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid $ -- $ -- $ 417 $ 9,714
=============================== ===============================
Income taxes paid $ -- $ -- $ -- $ 2,009
=============================== ===============================
NON-CASH INVESTING AND FINANCING
ACTIVITIES
Common stock issued for notes receivable $ -- $ -- $ 17,128 $ 27,746
=============================== ===============================
Sale of healthcare cost recovery businesses for
notes receivable $ -- $ -- $ -- $ 14,009
=============================== ===============================
Repurchase of stock in exchange for notes receivable $ -- $ -- $ -- $ 10,089
=============================== ===============================
Liability incurred for common stock to be issued $ -- $ -- $ -- $ 1,250
=============================== ===============================
Purchase of minority interest in exchange for notes payable $ -- $ -- $ -- $ 200
=============================== ===============================
See accompanying notes
F-7
70
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
December 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
EPS Solutions Corporation (the "Company") was formed on May 29, 1998 to acquire
a number of complementary companies and to thereby become a leading integrated
one-source provider of business services throughout the United States. The
Company is the successor entity to National Benefits Consultants, L.L.C. and
National RevMax Consultants, L.L.C., (collectively referred to as "NBC") whose
combined financial statements for the period to May 28, 1998 are presented as
the Predecessor entity.
From the date of formation until December 1999, the Company's business segments
were:
- - Human Capital Solutions, which provides executive search and relocation
services, performance improvement products and services to develop
organizational effectiveness, and benefits consulting services.
- - Cost Recovery Services, which provides audit recovery services in
operational areas such as healthcare, telecommunications, logistics,
utilities and real estate, and other services in the areas of lease
finance consulting, insurance brokerage, telecommunications and other
services.
In December 1999, the Company sold its healthcare-related Cost Recovery
businesses and the Company's Board of Directors approved a plan to restructure
its operations and sell the remaining businesses in the Cost Recovery Services
segment, including NBC (see Notes 3 and 4).
Two individuals who established the Company in May 1998 and, through November
19, 1999 were Company executive officers and directors, also owned NBC. The
Company has accounted for this acquisition as a combination of entities under
common control, effective as of the establishment of the Company, in the
accompanying consolidated financial statements due to the commonality of control
and ownership between the Company and NBC. Accordingly, the net assets acquired
from NBC have been recorded at their historical carrying value at May 28, 1998.
The Company has included the results of NBC's operations in its consolidated
statement of operations commencing on such date, and the amount paid by the
Company to acquire NBC plus the negative balance of this entity's equity at May
28, 1998 ($23,542) has been recorded as a charge to additional paid-in capital
in the accompanying 1998 financial statements. The benefit to be derived in the
future from the tax deductible goodwill arising from this transaction will be
recognized as a credit to additional paid-in capital as it is realized.
NBC was a Delaware limited liability company formed in October 1994. It was in
the business of marketing and selling employee benefits insurance products,
healthcare claims recovery products, training services and workers' compensation
products. In general, all income, gain, loss, deductions, and other items, such
as cash available for distribution and additional funds, were allocated to the
members of NBC on a pro rata basis.
F-8
71
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its direct and indirect subsidiaries, including its wholly-owned subsidiary,
Enterprise Profit Solutions Corporation (the "Operating Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation. Two businesses use a November 30 fiscal year end to accommodate
their annual business cycle.
REVENUE RECOGNITION
Fees and commissions are recognized when earned, generally when the Company's
services are completed. Consulting service revenues are recognized as the
services are provided. Revenue from the sale of consulting materials and
products is recognized upon shipment. In December 1999, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," or SAB 101. SAB 101 summarizes certain of
the SEC Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company is currently evaluating
the impact of SAB 101. However, The Company does not believe that its evaluation
will result in any material change to its revenue recognition policies.
CASH AND CASH EQUIVALENTS
Highly liquid investments with original maturities of three months or less are
considered to be cash equivalents. At December 31, 1999, restricted cash of
$2,357 is included in current assets held for sale. The Company had no
restricted cash at December 31, 1998.
F-9
72
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Estimated useful lives for purposes
of determining depreciation and amortization, principally on the straight-line
basis, are as follows:
Furniture and fixtures 5 years
Computer equipment 3-5 years
Capitalized internal use software 5 years
Leasehold improvements Lesser of lease life or 10 years
Depreciation and amortization on property and equipment charged to continuing
and discontinued operations was $17 and none, respectively, for the period from
May 29, 1998 (inception) to December 31, 1998 and $2,308 and $1,365,
respectively, for the year ended December 31, 1999.
The Company is implementing an enterprise-wide information system. External
direct costs of materials and services and payroll-related costs of employees
working solely on the development of the software system portion of the project
are capitalized.
INVESTMENTS AND OTHER COMPREHENSIVE INCOME
As consideration for rendering executive search services to certain clients, the
Company may elect to receive shares of the client's common stock in lieu of
cash. Revenues and the related investments are recorded based on the fair value
of the services rendered or shares received, whichever is more readily
determinable. Because the Company owns less than a 20% interest in these
businesses and does not have the ability to exercise significant influence over
them, the Company's investment in common stock is accounted for using the cost
method and are held as available for sale. Any impairment of the carrying value
of an investment is recognized in the period during which it occurs. These
investments, totaling $299 at December 31, 1999, are included in Other Assets on
the accompanying balance sheets.
The Company reports all components of comprehensive income (loss), including
net income (loss), in the period in which it is recognized. The Company's only
component of other comprehensive income (loss) is the unrealized gains and
losses on investments.
F-10
73
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of cost over the fair value of net identifiable
assets of purchased businesses. Cost of businesses purchased includes
consideration paid to former owners and related transaction costs. Goodwill is
amortized on the straight-line basis. Other acquired intangibles consist of
assembled workforce, covenants-not-to-compete, and contract rights, and are
amortized on the straight-line method over 4-7 years. The Company's annual
amortization expense for its recorded goodwill with respect to ongoing entities
as of December 31, 1999 is expected to approximate $2,000 before any charges due
to future acquisitions accounted for under the purchase method, or reduction due
to dispositions and divestitures, other than those classified as discontinued
operations and businesses to be disposed of, if any.
LONG-LIVED ASSETS
The carrying amount of long-lived assets, including goodwill and other
intangible assets, is reviewed if facts and circumstances suggest that it may
not be recoverable. The Company makes such evaluation at the business unit
level. For purposes of evaluating the recoverability of long-lived assets, the
Company estimates the future undiscounted cash flows of the businesses to which
goodwill and other long-lived assets relate. When such estimates of the future
undiscounted cash flows are less than the carrying amount of goodwill and other
long-lived assets, the difference is charged to operations. The carrying amount
of the goodwill related to those assets is first reduced to zero before the
carrying amounts of the long-lived assets and identifiable intangibles are
reduced. The Company estimates the future undiscounted cash flows using
historical results and current projections. If current projections of future
cash flows are not achieved, the Company may be required to record reduction of
the carrying values of long-lived assets in future periods.
F-11
74
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs consist of transaction costs incurred to raise both
senior and subordinated debt financing and are amortized over the term of the
related financing. Amortization of deferred financing costs are charged to
interest expense from continuing and discontinued operations based on relative
borrowings to acquire each Acquisition Entity and was $5,440 and $2,201,
respectively, for the year ended December 31, 1999. There was no amortization of
deferred financing costs for the period from May 29, 1998 (inception) to
December 31, 1998.
STOCK-BASED COMPENSATION
The Company uses the fair value method of accounting for stock-based
compensation as set forth in Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." Under the fair value method,
expense is recognized for stock-based awards over their vesting period based on
their fair value on the date of grant. Compensation expense is estimated in each
period assuming all shares subject to performance requirements will vest.
Subsequent revisions to reflect actual forfeitures or accelerated vesting are
made in the period the forfeitures or acceleration occur.
INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Accordingly, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of assets and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period of the enactment
F-12
75
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
date. A valuation allowance is established against deferred tax assets when
management concludes that a "more likely than not" realization that has not been
met.
NBC was a limited liability company classified as a partnership for federal and
state tax purposes and was, therefore, not subject to federal or state income
taxes. Accordingly, no separate provision for income taxes is required in the
accompanying statements of operations up to May 28, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The fair value of long-term debt and notes receivable from stockholders is
determined using current applicable interest rates as of the balance sheet date
and approximates the carrying value of such debt.
Concentrations of credit risk with respect to accounts receivable are limited
due to the diversity of customers who are in a variety of industries and are
primarily located throughout the United States. No one customer accounts for a
significant portion of the Company's accounts receivable portfolio or revenues.
As a result, the Company does not consider itself to have any significant
concentrations of credit risk.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have been
within management's expectations and within amounts provided through the
allowance for doubtful accounts.
NET LOSS PER SHARE
Basic and diluted net loss per share are presented in conformity with SFAS No.
128, "Earnings per Share," and Staff Accounting Bulletin 98.
Under the provisions of SAB 98, common stock that has been issued or granted
for nominal consideration prior to the anticipated effective date of an initial
registration of securities must be included in the calculation of basic and
diluted net loss per common share as if these shares had been outstanding for
all periods presented. To date, the Company has not issued or granted shares
for nominal consideration.
In accordance with SFAS No. 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock
outstanding during the period, less outstanding nonvested shares subject to
repurchase. The Company also has excluded the equivalent share effect of
outstanding nonvested shares subject to repurchase from the calculation of
diluted net loss per common share because they are antidilutive for the periods
presented.
The number of shares excluded from the calculation of diluted net loss per
share, prior to the application of the treasury stock method, was 16,491,000 and
15,158,000 for the period from May 28, 1998 (inception) to December 31, 1998 and
the year ended December 31, 1999, respectively. At December 31, 1998 and 1999
the Company's repurchase right for 11,890,000 and 10,638,000, respectively, of
the outstanding nonvested shares subject to repurchase will lapse only on
attainment of specified performance requirements that must be met in future
periods. Accordingly, the equivalent share effect of these nonvested shares will
only be included in the treasury stock calculation commencing with the period in
which the specified performance requirements are met.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. On an ongoing basis,
management reviews those estimates, including those related to allowances for
doubtful accounts, loss contingencies for litigation, accruals for acquisition
and restructuring, income taxes and discontinued operations, and projection of
future cash flows used to assess the recoverability of long-lived assets.
F-13
76
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made in the 1998 financial statements to
conform to the 1999 presentation.
2. ACQUISITIONS
In December 1998, the Company acquired 33 businesses, of which 22 were completed
by purchasing all of their outstanding equity interests. The remaining
businesses were acquired by purchasing specified net assets from their former
owners.
In March and April 1999, the Company acquired five additional businesses
completed by purchasing all of the outstanding equity interests for three of the
businesses and by purchasing specified net assets from their former owners for
two businesses.
F-14
77
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
2. ACQUISITIONS (CONTINUED)
The businesses comprising the Company's two business segments consist of the
following:
Human Capital Solutions Cost Recovery Services
----------------------- ----------------------
BayGroup International, Inc. Benefit Funding Services Group, LLC
Better Communications, Inc. CyberLease, LLC and affiliate
DHR International, Inc. Deloitte & Touche LLP - Integrated Cost
FFR Holding Co., Inc. and affiliates Reduction Strategies Group
First Choice Brokerage, Inc.* D'Accord Holdings, Inc. and affiliates
Holden Corporation* Dimension Funding, Inc.
Mobility Services International, Inc. Disbursement Recovery Services LLC
Pritchett Publishing Company and affiliates D.L.D. Insurance Brokers, Inc.*
RBG Group, Ltd. Equitax
Sigma International, Inc. FDSI Logistics, Inc.
The Conrad Lee Company Hindert & Associates, Inc.
The Dublin Group, Inc. Kenneth H. Wells & Associates, Inc. and
The Praxis Group, Inc. and affiliates affiliates
Wadley-Donovan Group, Ltd. Lease Audit & Analysis Services, Inc.
Young, Clark & Associates, Inc. Med-co Review, Inc./International Cost
Containment Network, Inc.
National Benefits Consultants, L.L.C.
National HealthCare Recovery Services, L.L.C.*
National Recovery Services, LLC
National RevMax Consulting, LLC
Partners Consulting Services, Inc.
TSL Services, Inc.
The Oxxford Consulting Group, Inc.
The Oxxford Group, Inc.
The Structured Settlements Company, Inc.
The T & E Group*
* Follow-on Acquisitions
F-15
78
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
2. ACQUISITIONS (CONTINUED)
The amount paid in connection with the Acquisition Entities is as follows:
1998 1999
--------------------------
Fair value of identifiable assets acquired $ 74,922 $ 10,083
Goodwill 116,977 24,095
Excess purchase price over carrying value
of net assets for NBC 25,207 --
Liabilities assumed and incurred (50,768) (7,806)
Subordinated notes payable issued (77,396) (11,325)
Common stock issued or subscribed (12,027) (1,927)
--------------------------
Cash paid for acquisitions 76,915 13,120
Cash acquired in acquisitions (16,931) (5,425)
--------------------------
Net cash paid for acquisitions $ 59,984 $ 7,695
==========================
During the second half of 1999, because the Company did not complete an initial
public offering of its stock by June 30, 1999, the Board of Directors approved
the payment of approximately $2,000 of additional purchase price to a total of
five business units whose performance exceeded plan and amended the purchase
transactions of four of the businesses we acquired to increase the purchase
prices for those businesses by their respective payments. Substantially all of
the payments were made to individuals who are officers and shareholders of the
Company.
During September 1999, the Board of Directors approved the issuance of 500,000
unrestricted shares of its common stock to one of its officers and shareholders
as additional consideration for the purchase of his business. Additionally, this
stockholder is purchasing 500,000 shares of employment-based restricted stock
that are eligible to vest over time provided that certain conditions are met.
During March 2000, the Company's Board approved the payment of $1,200 to a
selling entity controlled by an officer and shareholder of the Company and
former Acquisition Entity owner as additional consideration for the purchase of
his business.
In its acquisition of FFR Holding Co., Inc. (FFR), the Company purchased all the
common stock of FFR. Additionally, at the date of acquisition, FFR had
outstanding 1,470,894 shares of non-voting Series A preferred stock bearing
cumulative dividends at the annual rate of $0.11 per share, which is presented
in the consolidated balance sheet as minority interest in a subsidiary company.
The Series A preferred stock is redeemable upon the earlier of the third
anniversary of the sale of the common stock of FFR to the Company (December 14,
2001) or five days after the closing of an underwritten initial public offering
of equity securities of the Company having gross proceeds of at least $200,000.
The Series A preferred stock may be redeemed by FFR in whole or part at any
time. The redemption price is $3.66 per share plus cumulative dividends, which
has been discounted to yield an imputed dividend rate of 6%. At December 31,
1998 and 1999, cumulative preferred dividends in arrears were approximately $122
and $162, respectively.
F-16
79
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
2. ACQUISITIONS (CONTINUED)
Except for the acquisition of NBC (see Note 1), the Acquisitions have been
accounted for as purchases and, accordingly, the acquired tangible and
identifiable intangible assets and liabilities have been recorded at their
estimated fair values at the dates of acquisition with any excess purchase price
reflected as goodwill and other intangible assets in the accompanying
consolidated financial statements.
For financial accounting purposes, except for NBC, and TSL Services, Inc. (TSL)
(a business acquired effective November 30, 1998), the 1998 Acquisitions have
been reported as if they occurred immediately prior to the close of business on
December 31, 1998. Accordingly, the cost of these acquired businesses has been
adjusted for the results of operations between December 14, 1998 and December
31, 1998. The accompanying 1998 consolidated statement of operations therefore
includes the results of operations for the Company and the Operating Company for
the periods May 29, 1998 (inception) and October 6, 1998 (inception),
respectively, to December 31, 1998, the results of operations of NBC for the
period May 29, 1998 to December 31, 1998, and one month's results of operations
for TSL. The accompanying 1998 consolidated statement of operations does not
include any revenues or expenses related to the other 31 businesses. The
accompanying 1999 consolidated statement of operations also includes the results
of operations for four of the five 1999 acquisitions from March 1, 1999, the
effective date of their acquisition, to December 31, 1999 or the date of their
disposal if earlier. The operations of the other 1999 acquisition is included in
the accompanying 1999 Consolidated Statement of Operations from the effective
date of its acquisition, May 1, 1999 to December 31, 1999.
F-17
80
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
2. ACQUISITIONS (CONTINUED)
The following table sets forth the pro forma results of continuing operations
for the years ended December 31, 1998 and 1999 as if all of the acquisitions
were consummated at the beginning of each year (in thousands, except for share
amounts):
1998 1999
--------------------------
Total revenues $ 140,626 $ 160,232
Income (loss) (1,034) (18,702)
Earnings (loss) per share (.06) (.88)
Subsequent to December 31, 1999 the Company issued letters of intent ("LOI") to
an existing shareholder to purchase the remaining 80.1% interest in eFox, L.L.C.
("eFox") that the Company does not own, and 100% of the outstanding shares of
PowerBase Selling Limited ("PBS"), (a United Kingdom limited liability company).
Both eFox and PBS provide performance learning products and services and will
become part of the Human Capital Solutions business segment. The total expected
consideration for eFox and PBS consists of a $1,800 and $1,750 Seller
Subordinated Note, respectively.
3. DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE
In December, 1999, the Company's Board of Directors adopted a plan to
discontinue certain product and service offerings in the Human Capital Solutions
segment and dispose of the Company's Cost Recovery Services segment. With the
disposal of the Cost Recovery Services segment, management of the Company
believes it is strategically positioned to be a leading provider of Human
Capital Solutions.
Continuing Segment (Human Capital Solutions)
During 1999, the Company closed The Dublin Group, Inc. and a division of
Mobility Services International, Inc. and adopted a plan to sell BayGroup
International, Inc. and Better Communications, Inc. to their former owners.
These businesses are included in the Company's Human Capital Solutions business
segment. Accordingly, their operating results and the estimated losses on
closure or sale are classified in "Businesses closed or to be disposed of" in
the accompanying Statements of Operations.
Subsequent to December 31, 1999, the Company entered into agreements in
principle with the former owners of the two companies discussed above. Estimated
aggregate consideration for these two separate transactions total approximately
$1,160 cash at the closings, the return of approximately 514,000 common shares,
and cancellation of subordinated notes payable to these stockholders totaling
approximately $1,275. There can be no assurances that these transactions will be
consummated on the terms indicated or at all.
A summary of the loss on the disposal of businesses closed or to be disposed of
in Continuing Segment in 1999 is as follows:
Loss on closed or to be disposed of businesses $3,329
Impairment losses on goodwill and other intangibles 1,861
Reserve for future obligations 430
------
$5,620
======
F-18
81
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
3. DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE (CONTINUED)
Discontinued Segment (Cost Recovery Services)
In November 1999, the Company sold certain assets comprising its healthcare
recovery, travel procurement, and telecom procurement businesses to two
shareholders of the Company pursuant to an Asset Purchase Agreement dated
November 24, 1999 (Sale Agreement) in exchange for a promissory note of $3,130
and the assumption of certain liabilities. Pursuant to the Sale Agreement, the
shareholders assumed responsibility for the operations of the acquired
businesses as of November 1, 1999. The businesses sold as part of the Sale
Agreement were as follows:
National Recovery Services, LLC The T&E Group
The Oxxford Group, Inc. (healthcare Telecom Services division of the
component) Deloitte & Touche, LLP - Integrated
Med-Co Review, Inc./International Cost Cost Reduction Strategies Group
Containment Network, Inc.
Concurrent with the Sale Agreement, the Company entered into an agreement
(Rescission Agreement) to rescind its acquisition of National HealthCare
Recovery Services, L.L.C. (NHCRS). Pursuant to the Rescission Agreement, the
Company assigned its interest in NHCRS to the same two company shareholders who
purchased assets pursuant to the Sale Agreement in exchange for promissory notes
of $10,645.
The promissory notes received as consideration from both transactions are
included in other assets in the accompanying balance sheet at December 31, 1999.
In accordance with the Sale Agreement and Rescission Agreement, on January 5,
2000, the promissory notes and related accrued interest totaling $14,009 were
offset against subordinated notes payable totaling $20,172 due to these
shareholders, leaving a balance of $6,163. In connection with the Sale and
Rescission Agreements, the Company recorded a loss on disposal of $1,264 during
the year ended December 31, 1999.
F-19
82
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
3. DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE (CONTINUED)
In December 1999, the Company's Board of Directors announced its decision to
discontinue the following businesses comprising the remainder of its Cost
Recovery Services segment:
Benefit Funding Services Group, LLC Hindert & Associates, Inc.
CyberLease, LLC and affiliate Kenneth H. Wells & Associates, Inc. and
Deloitte & Touche LLP - Integrated Cost Reduction affiliates
Strategies Group Lease Audit & Analysis Services, Inc.
D'Accord Holdings, Inc. and affiliates National Benefits Consultants, L.L.C.
Dimension Funding, Inc. National RevMax Consulting, LLC
Disbursement Recovery Services, LLC Partners Consulting Services, Inc.
D.L.D. Insurance Brokers, Inc. TSL Services, Inc.
Equitax The Oxxford Consulting Group, Inc.
FDSI Logistics, Inc. The Oxxford Group, Inc.
The Structured Settlements Company, Inc.
Training Grant Funding, a division of EPS
Equitax Services was closed in December 1999. The Company is marketing the
remaining Cost Recovery Services businesses for sale. Disposal of these
businesses is expected to be completed no later than December 2000. In
connection with discontinuance of its Cost Recovery Services segment, the
Company charged $62,291 to discontinued operations, including an impairment loss
in 1999 primarily as a result of unrecoverable goodwill and intangibles. This
charge and the results of operations of these businesses are classified in the
discontinued operations portion in the accompanying Statements of Operations.
F-20
83
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
3. DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE (CONTINUED)
The summarized results of operations of the Cost Recovery Services segment is as
follows:
1998 1999
-------------------------
Revenues:
Services and fees $ 3,760 $ 111,834
Product sales -- 469
-------------------------
3,760 112,303
Cost and expenses:
Costs of services and fees revenues 1,857 50,010
Cost of product sales -- 306
Selling, general and administrative 490 54,957
-------------------------
2,347 105,273
-------------------------
Operating income 1,413 7,030
Other income (expense) 1,050 (100)
Interest expense -- (7,124)
Income taxes -- (2,389)
-------------------------
Income (loss) from discontinued operations $ 2,463 $ (2,583)
=========================
Interest expense has been allocated between continuing and discontinued
operations based on relative borrowings to acquire each Acquisition Entity.
A summary of the loss on the disposal of discontinued operations in 1999 is as
follows:
Impairment losses on goodwill and other intangibles $42,247
Reserve for future obligations 13,986
Loss on disposal of discontinued businesses 6,058
-------
$62,291
=======
F-21
84
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
3. DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE (CONTINUED)
Assets Held For Sale and Liabilities of Discontinued Operations
Assets held for sale approximate their estimated net realizable value. The
amounts the Company will ultimately realize from the sale of the net assets
could differ materially from management's best estimates of their net realizable
value. A summary of the assets and liabilities held for sale at December 31,
1999 is as follows:
Human Cost
Capital Recovery
Solutions Services Totals
------------------------------------
Current assets
Cash and restricted cash $ -- $ 3,386 $ 3,386
Accounts receivable, net 2,011 18,016 20,027
Notes receivable 65 1,926 1,991
Other assets 326 748 1,074
------------------------------------
$ 2,402 $24,076 $26,478
====================================
Current liabilities
Accounts payable and accrued expenses $ 138 $11,686 $11,824
Accrued payroll and related expenses 309 1,976 2,285
Deferred revenue 130 294 424
Current portion of long-term debt -- 17 17
------------------------------------
$ 577 $13,973 $14,550
====================================
Other assets
Property and equipment, net $ 648 $ 3,678 $ 4,326
Goodwill and other intangible assets 1,740 30,465 32,205
Other assets 27 2,884 2,911
------------------------------------
$ 2,415 $37,027 $39,442
====================================
Other liabilities
Long-term debt, less current portion $ 1,318 $ 131 $ 1,449
Other -- 645 645
------------------------------------
$ 1,318 $ 776 $ 2,094
====================================
During April 2000, the Company entered into agreements in principle to sell
Benefit Funding Services Group, LLC, its Training Grant Funding division, and
the Company's interest in certain cost recovery contracts, all businesses within
its Cost Recovery segment, to a company controlled by two shareholders of the
Company for $3,250 in cash and the redemption of 100,000 shares of the Company's
common stock.
The Company also entered into an agreement in principle in April 2000 with a
third party to sell the assets and operations, including the assumption of
substantially all liabilities, of the Company's wholly owned subsidiary TSL
Services, Inc. for approximately $19,100 in cash, adjusted for working capital.
There can be no assurances that the above transactions will be consummated, or
that the terms will be as indicated.
Available cash proceeds from the sale or disposal of businesses will be used to
reduce amounts due under the Facilities (see note 5). The Company is not
required, and does not anticipate repaying; the unsecured subordinated notes
payable arising from the acquisition of these entities until their scheduled
maturities in December 2001.
F-22
85
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
4. RESTRUCTURING AND OTHER NONRECURRING CHARGES
Restructuring
Beginning in early 1999, the Company developed a corporate cost structure that
included substantial marketing and technology programs to support anticipated
growth in its Cost Recovery Services businesses, significant acquisition
activity, and a public offering of its equity securities. In June 1999, in
reaction to prevailing market conditions management enacted a plan to, among
other things, significantly reduce the corporate overhead structure of the
Company and defer implementation of certain scheduled technology programs.
In December 1999, the Company adopted a plan to relocate its Corporate
headquarters from Costa Mesa, California to Chicago, Illinois. Accordingly, the
Company recorded a charge of $5,762 for headcount reduction, lease exit costs
and other asset writedowns. In connection with these restructurings, the Company
initiated involuntary separation plans that included headcount reductions of
approximately 36 employees at a cost of $1,994 for severance and related costs,
including $656 in non-cash charges resulting from accelerated vesting of
restricted stock. Additional costs of $3,768 were recorded to include losses on
asset writedowns and corporate office leases, net of anticipated sublease income
over the lease term. As of December 31, 1999, there remained approximately 22
employees subject to separation.
The major components of the 1999 charges and the remaining accrual balance as of
December 31, 1999 are as follows:
Accrued
Amounts restructuring
Charge used costs
--------------------------------
Employee termination and severance costs $1,994 $1,361 $ 633
Lease exit costs 2,769 -- 2,769
Asset writedowns 999 999 --
--------------------------------
$5,762 $2,360 $3,402
================================
F-23
86
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
4. RESTRUCTURING AND OTHER NONRECURRING CHARGES (CONTINUED)
Abandoned Bond Offering Costs
The Company incurred $2,418 in transaction costs, including legal and accounting
fees and other costs associated with a contemplated high-yield bond offering in
the first and second quarter of 1999. In the third quarter of 1999, management
of the Company determined that market conditions were unfavorable for such a
financing. Accordingly, the bond offering was terminated and the Company decided
to pursue an initial public offering. In October 1999, the Company charged the
abandoned bond offering costs to continuing operations upon a determination that
the proposed initial public offering would not occur in 1999.
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1998 and 1999:
1998 1999
----------------------
Revolving loan maturing June 2001; bearing interest at 9.61% $ 39,041 $ --
Term loan maturing June 2001; $1,500,000 payable
quarterly; bearing interest at 9.69% 50,000 --
Senior secured credit facility, as amended -- 126,500
Other 865 566
----------------------
89,906 127,066
Less current portion 6,441 43,566
----------------------
$ 83,465 $ 83,500
======================
F-24
87
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
5. LONG-TERM DEBT (CONTINUED)
In connection with the 1998 Business Acquisitions, the Operating Company
obtained $100,000 in financing comprised of a $50,000 revolving loan and a
$50,000 term loan (the "Facilities") from a group of lenders. The Facilities are
secured by substantially all the existing and future assets of the Operating
Company including the capital stock of the Operating Company's subsidiaries. The
Facilities are guaranteed by the Company. At the Operating Company's option,
loans under the Facilities bear interest through December 13, 1999 at a rate
equal to one of the following (i) LIBOR plus 3.50% or (ii) the Base Rate plus
2.25% (Base Rate defined as the higher of (a) one of the lender's reference rate
and (b) the Federal Funds rate plus .50%). Beginning December 14, 1998 the
interest rate fluctuates based on the Operating Company's ratio of total debt to
earnings before interest, taxes, depreciation and amortization. The Operating
Company is required to pay a quarterly commitment fee of .50% per annum on the
unused portion of the revolving loan.
The Facilities contain customary covenants and restrictions on the Company's
ability to engage in certain activities, including, but not limited to (i)
incurring additional debt, (ii) limitations on mergers and acquisitions and
capital expenditures, and (iii) transactions with affiliates and other similar
distributions. The Facilities were further amended and restated in September
1999 to adjust certain financial covenants.
During March 1999, the Operating Company obtained an increase in the total
amounts available under the Facilities to $145,000 by increasing the revolving
loan to $75,000 and the term loan to $70,000. The terms of the increase in the
Facilities are substantially the same terms as described in the preceding
paragraph. The proceeds were used to finance the 1999 Business Acquisitions, to
pay certain acquisition transaction costs and for working capital purposes.
F-25
88
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
5. LONG-TERM DEBT (CONTINUED)
As of December 31, 1999, the Company was in violation of certain of its
covenants under the Facilities. The Company has not been in default of its
principal or interest payment covenants. On April 28, 2000, the Company received
unanimous written approval of the lenders to amended Facilities terms (the "2000
Amendment"). The Company and its lenders expect to execute a definitive
agreement evidencing the amended terms by May 15, 2000. This amendment will
restructure the Facilities to become non-revolving and will require the
Operating Company to reduce the Facilities by the net proceeds of asset
disposals greater than $250 in the aggregate, including sales of the Company's
Cost Recovery Services businesses. The 2000 Amendment will also amend the
maturity date requiring the outstanding balance of the Facilities to be $120,000
by July 31, 2000 and $85,000 by September 30, 2000, with a new final maturity of
January 31, 2001. Net proceeds from any underwritten initial public offering of
the Company's equity securities or other capital event (as defined) are required
to be used to pay down the Facilities. This amendment also waives certain
financial covenants and further restricts the Company's ability to incur
additional indebtedness, make additional investments, pay dividends, pay
interest on subordinated notes payable and merge with another entity. The
Company believes it will be able to maintain compliance with the amended
Facilities terms. Accordingly, amounts outstanding under the Facilities at
December 31, 1999 are classified to reflect the terms of the 2000 Amendment.
Aggregate scheduled maturities of long-term debt at December 31, 1999 based upon
the amended Facilities are as follows:
2000 $ 43,493
2001 83,573
--------
Total $127,066
========
The Company expects that substantially all of the funds needed to pay down the
Facilities in the year 2000 pursuant to the terms set forth in the 2000
Amendment will come from sales of its assets held for sale or from an offering
of its equity securities. Similarly, the Company expects that it will need to
raise funds through sales of its equity securities or from new debt financing to
pay the remainder of the Facilities that is due January 31, 2001. As discussed
in Note 2, the Company is presently seeking buyers for the assets held for sale,
but the Company does not have sales commitments that provide assurance of
obtaining sufficient cash proceeds from its assets held for sale to meet the
payment terms contained in the 2000 Amendment. Additionally, the Company
presently has no commitments for equity placements or alternative debt
financing. If the Company is unable to meet the payment terms required by the
2000 Amendment from expected sources, the Company may be required to sell
additional assets, which may impair its efforts to achieve profitable
operations.
F-26
89
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
6. SUBORDINATED NOTES PAYABLE
Subordinated notes payable to stockholders consist of the following at December
31, 1998 and 1999 (in thousands):
1998 1999
-------------------
Subordinated notes payable issued to sellers of the
1998 Business Acquisitions; bearing interest at
10%, payable quarterly in cash except that to the
extent necessary to comply with subordination or
other covenants in favor of the Company's senior
lenders, accrued interest may be paid in kind.
These notes mature the earlier of December 2001 or
the consummation of an underwritten initial public
offering of the Company's equity securities having
gross proceeds to the Company of at least $200,000. $60,896 $65,887
Subordinated notes payable issued to sellers of the
1999 Business Acquisitions bearing interest at
10% payable quarterly; maturing the earlier of
March 2002; or the consummation of an underwritten
initial public offering of the Company's equity
securities having gross proceeds to the Company of
at least $200,000. -- 12,014
Other subordinated notes due to former officers of
the Company, maturing December 2001. -- 311
-------------------
Total subordinated notes payable to stockholders $60,896 $78,212
===================
F-27
90
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
6. SUBORDINATED NOTES PAYABLE (CONTINUED)
Other subordinated notes payable consist of the following at December 31, 1998
and 1999 (in thousands):
1998 1999
-------------------
Subordinated notes payable issued to seller of a
1998 Business Acquisition; bearing interest at 10%
payable quarterly; maturing the earlier of
December 2001 or the consummation of an
underwritten initial public offering of the
Company's equity securities or a debt offering
having gross proceeds to the Company of at least
$50,000. $12,000 $12,613
Subordinated notes payable issued to seller of a
1998 Business Acquisition; bearing interest at 10%
payable quarterly; maturing the earlier of
December 2001 or the consummation of an
underwritten initial public offering of the
Company's equity securities or a debt offering
having gross proceeds to the Company of at least
$200,000. 5,000 5,408
-------------------
Total other subordinated notes payable $17,000 $18,021
===================
In connection with one of the Follow-on Acquisitions, the Company issued a
$6,400 subordinated note payable that was payable in March 2002 provided the
acquired entity met certain defined profitability levels, completed an initial
public offering of its equity securities or merged or consolidated with a
publicly traded company. This subordinated note was cancelled in connection with
the Rescission Agreement of NHCRS.
F-28
91
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
7. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases facilities and computer equipment under various noncancelable
operating lease agreements that expire through June 2009. The facility leases
generally require the Company to pay operating costs, such as property taxes,
insurance and maintenance. In addition the facility leases generally provide for
renewal options and provisions adjusting the lease payments based upon changes
in the consumer price index. Rent expense for continuing operations for the
period from May 29, 1998 (inception) to December 31, 1998 and the year ended
December 31, 1999 totaled approximately $33 and $6,245, respectively. Rent
expense for discontinued operations for the period from May 29, 1998 (inception)
to December 31, 1998 and the year ended December 31, 1999 totaled approximately
$48 and $4,987, respectively.
On March 30, 1999, the Operating Company received a commitment from a national
leasing company to provide an operating lease line of credit for up to $5,000.
The line is secured by the equipment subject to the lease guaranteed by
the Company, and has no availability at December 31, 1999.
Future minimum payments under noncancelable operating leases with initial terms
of one year or more are as follows:
Continuing Discontinued
Operations Operations
-------------------------
2000 $ 6,478 $ 3,625
2001 5,852 3,396
2002 5,097 3,213
2003 3,992 2,504
2004 3,106 2,125
Thereafter 9,531 3,526
-------------------------
$34,056 $18,389
=========================
F-29
92
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has subleased portions of its facilities to third parties. Future
minimum receipts under noncancelable operating subleases with initial terms of
one year or more are as follows (in thousands):
2000 $1,383
2001 1,495
2002 770
2003 770
2004 770
Thereafter 602
------
$5,790
======
Litigation
The Company is subject to lawsuits and claims in the ordinary course of
business, many of which are covered in whole or part by insurance. Management
believes that the ultimate resolution of such lawsuits and claims will not have
a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
F-30
93
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
8. STOCKHOLDERS' DEFICIT
Preferred Stock
The Company's Board of Directors has the authority to issue shares of preferred
stock, in one or more series, and containing certain rights and limitations,
including dividend rights, voting rights, conversion privileges, redemption
rights, and liquidation or sinking fund rights. No preferred stock is
outstanding at December 31, 1999 and the Company has no present plans to issue
any shares of preferred stock.
Common Stock
Upon its formation, the Company's Board of Directors was staggered into three
classes and common stock was classified into two series, Series A and Series B.
Holders of Series A were entitled to elect Directors in Classes 2 and 3 and
holders of Series B were entitled to elect Directors in Class 1. On December 1,
1999, the Company's Certificate of Incorporation was amended such that all
authorized Series A and Series B common stock became 240,000,000
undifferentiated shares of authorized common stock. Concurrently, all
outstanding shares of Series A common stock and Series B common stock
automatically converted into shares of undifferentiated common stock on a
share-for-share basis.
In August and December 1998, the Company was capitalized through the purchase by
employees of 15,020,874 shares of unrestricted and restricted common stock at
prices ranging from $.02 to $1.20 per share (aggregate consideration of
approximately $5,002).
As partial consideration for the 1998 business acquisitions, the Company issued
9,741,943 shares of common stock and committed to an additional 279,696 shares
pursuant to subscription agreements for common stock. The shares committed
pursuant to subscription agreements were issued in January 1999. As partial
consideration for the 1999 business acquisitions, the Company issued 1,605,965
shares of common stock.
F-31
94
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
8. STOCKHOLDERS' DEFICIT (CONTINUED)
Stock-Based Compensation
In connection with the 1998 and 1999 business acquisitions, the Company entered
into employment-based restricted stock purchase agreements with certain
employees of the Company and the acquired businesses, whom Company management
expects will contribute significantly to the Company's ability to integrate,
manage and grow the company's business. Under the terms of the restricted stock
purchase program, eligible employees purchased specific amounts of common stock
that are subject to restrictions and generally vest in equal installments over a
three to five year period if employment continues and, in most cases, if
pre-specified performance targets are attained. The Company has a right to
repurchase, at the original issuance price, any restricted shares that do not
vest. Management believes that by providing performance incentives, the
Company's compensation structure achieves the dual objectives of retaining key
employees over the term of the restricted stock awards and aligning each key
employee's goals with those of maximizing Company stockholder value.
Employees paid for their common stock by paying the aggregate par value in cash
and by delivery to the Company a ten-year recourse notes payable, bearing
interest at 5.5% per annum. For the year ended December 31, 1999, the Company
accrued interest income of $333, representing the amount due on those shares
which vested as of December 31, 1999.
In accordance with the fair value method, compensation expense is calculated
based on the fair value of the right to purchase and vest in the restricted
shares on the date of issuance and is recognized as an expense as the restricted
shares vest. Using the minimum value method, the Company determined a fair value
of $.18 per share for purchases made in December 1998 at $1.20 per share, and
$.34 per share, on a weighted average basis, for purchases made from January
through December 1999 at prices ranging from $1.20 to $2.50 per share. For the
year ended December 31, 1999, the Company charged $1,973 (including a
restructuring charge of $656 related to acceleration of vesting pursuant to
certain severance agreements) and $229 to compensation expense of continuing and
discontinued operations, respectively. For the period from May 29, 1998
(inception) through December 31, 1998, the Company charged $299 and $189 to
compensation expense of continuing and discontinued operations, respectively.
F-32
95
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
8. STOCKHOLDERS' DEFICIT (CONTINUED)
The fair value of each restricted stock grant is estimated on the date of grant
using the minimum value method with the following weighted average assumptions:
1998 1999
-----------------
Interest rate 4.4% 5.0%
Dividend yield 0 0
Expected volatility 0% 0%
Expected life in years 3.8 4.4
The following table summarizes the share activity and the weighted average
purchase price per share of the restricted stock purchase agreements during the
respective period:
1998 1999
-----------------------------------------------------
Number of Purchase Number of Purchase
(In thousands) shares price shares price
-----------------------------------------------------
Unvested shares outstanding, beginning of period -- $ -- 16,491 $ .86
Shares issued 19,082 .90 16,298 1.49
Shares repurchased -- -- (14,471) .86
Shares vested (2,591) 1.16 (3,160) 1.42
-----------------------------------------------------
Unvested shares outstanding, end of period 16,491 $ .86 15,158 $ 1.42
=====================================================
Voting Agreement
Through November 24, 1999, all holders of the restricted and unrestricted Series
A and Series B common stock had entered into a voting agreement granting the
power to vote their shares to two of the Company's officers. The voting
agreement terminated upon the resignation of the two officers on November 24,
1999.
F-33
96
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
8. STOCKHOLDERS' DEFICIT (CONTINUED)
Warrants
In connection with the acquisition of TSL, the Company issued warrants to
purchase 5,000 shares of common stock of TSL. The warrants have an exercise
price of $.01 per warrant share (as defined), may be exercised beginning
December 14, 2000 and expire May 15, 2005. Upon the earlier of the consummation
of an initial public offering of the Company's equity securities, or a change in
control of TSL (as defined), the warrants become exercisable for such number of
shares of common stock of the Company as will result in the holder of the
warrants realizing an aggregate 40% annual return (including interest) on the
$5,000 portion of the purchase price for TSL that the Company paid with a
promissory note.
During April 2000, the Company reached agreement in principle with a third party
to purchase all of the assets and business of TSL. Included in the accompanying
financial statements is the accrual of approximately $2,500 in recognition of
the Company's obligation pursuant to the above warrant agreement, which also has
been included in estimating net realizable value of assets held for sale.
9. INCOME TAXES
The provision (benefit) for income taxes on income from continuing operations
for the period from May 29, 1998 (inception) through December 31, 1998 and the
year ended December 31, 1999 is as follows:
1998 1999
------------------------
Current:
Federal $ -- $ (372)
State and local -- (121)
------------------------
Total current expense (benefit) -- (493)
Deferred:
Federal -- (1,066)
State and local -- (80)
------------------------
Total deferred expense (benefit) -- (1,146)
------------------------
Total income tax expense (benefit) $ -- $(1,639)
========================
F-34
97
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
9. INCOME TAXES (CONTINUED)
A reconciliation of differences between the statutory U.S. federal income tax
rate and the Company's effective tax rate on continuing operations for the
period from May 29, 1998 (inception) to December 31, 1998 and the year ended
December 31, 1999 is as follows:
1998 1999
------------------
U.S. federal statutory rate (34.0)% (34.0)%
Change in valuation allowance 23.8 19.0
Nondeductible acquisition-related costs 10.2 1.1
Nondeductible stock compensation expense -- 2.2
Amortization of goodwill -- 2.7
State taxes, net of federal benefit -- (0.7)
Other -- 1.7
------------------
Total income tax expense -- (8.0)%
==================
In connection with its discontinued operations, the Company recorded a current
tax provision of $2,648 and a deferred tax benefit of $(259). Since the Company
rescinded the acquisition of one of its 1999 business acquisitions, a pretax
loss of $(5,767) cannot be used by the Company in its consolidated tax returns.
Significant components of the Company's deferred taxes at December 31, 1998 and
1999 are as follows:
F-35
98
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
9. INCOME TAXES (CONTINUED)
1998 1999
----------------------
Deferred tax liabilities:
Lease basis differences $ 1,483 $ 1,399
Depreciation 61 1,182
Cash to accrual conversion 892 583
Basis difference in acquired intangibles 575 555
Other 807 75
---------------------
Total deferred tax liabilities 3,818 3,794
Deferred tax assets:
Discontinued operations reserves -- 14,335
Amortization of intangibles -- 13,564
Allowance for doubtful accounts 13 2,023
Expenses not currently deductible 705 1,653
Employee benefits -- 612
Net operating loss carryforwards 915 603
Acquired asset basis differences 1,427 --
Other 953 2,011
---------------------
Total deferred tax assets 4,013 34,801
Less valuation allowance for deferred tax assets 935 30,816
---------------------
Total deferred tax assets 3,078 3,985
---------------------
Net deferred tax asset (liability) $ (740) $ 191
=====================
The Company has evaluated the available evidence supporting the realization of
its gross deferred tax assets of $4,013 and $34,801 at December 31, 1998 and
1999, respectively. Due to the Company's operating losses and accumulated
deficit since inception, the Company has established valuation reserves of $935
and $30,816 at December 31, 1998 and 1999, respectively. These tax benefits
could be recorded as a reduction of income tax expense in the future as realized
or as it becomes more likely than not that such tax benefits or portions
thereof will be realized.
The Company has approximately $1,700 of net operating loss carryforwards from
two acquired businesses that begin to expire in 2007. These net operating loss
carryforwards are subject to loss limitation rules under IRC Section 382.
F-36
99
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
10. RELATED PARTY TRANSACTIONS
Officer Resignations
In connection with the resignation of two officers of the Company on November
24, 1999, the Company repurchased certain shares of common stock held by them.
The aggregate common stock shareholdings of the officers or entities controlled
by them was reduced from 12,972,250 to 5,701,552. In connection with the
repurchase of the shares, the Company made an aggregate payment of approximately
$133, reflecting the original purchase price of the shares. The Company also
granted the former officers the right to transfer a portion of their
shareholdings so long as entities controlled by them continued to own an
aggregate of at least 3,400,000 shares of common stock.
Officer Non-cash Compensation
The Chairman and Chief Executive Officer of the Company (the CEO), pursuant to
his employment agreement in his capacity as Chairman and Chief Executive Officer
of the Company's executive search business, may direct the Company to accept
equity fees in lieu of cash fees for executive search services rendered. The CEO
must take reasonable steps to ensure that these equity fees have a fair market
value at least equal to the amount of the standard cash fees generally
collected. The CEO's original employment agreement granted him a right to
receive from the Company any or all of these equity fees as a bonus prior to an
initial public offering of the Company's equity securities. The CEO has elected
to receive as a bonus certain private equity fees valued at $577 in 1999.
F-37
100
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
Services rendered
In March 1999, the Company acquired a 19.9% interest in eFox, L.L.C. The balance
of this entity is owned by an employee/shareholder. During the course of 1999,
eFox, L.L.C. rendered various e-commerce related services for the Holden
Corporation, an acquired business. Fees for services performed were $56 in 1999.
JobPlex, Inc., an entity majority-owned by the CEO of the Company, performed
services in 1999 for DHR International (DHR), an Acquisition Entity. Using its
Internet database capability, JobPlex, Inc. provides properly matched job
candidates to assist DHR in performing certain of their services. In 1999, DHR
also advanced funds to JobPlex, Inc. for services to be rendered in 2000. Fees
and retainers paid by DHR to JobPlex, Inc. for these services were $348.
Travel
An entity owned by the CEO is the owner of an interest in an airplane. In 1999,
the airplane was used extensively by certain of the Company's senior executives
for the purpose of conducting the Company's domestic and international business,
including acquisition and divestiture projects, debt and/or equity financing
activities, and other business purposes. During 1999, the Company paid $1,415
for its prorata use of the airplane.
Notes Receivable
The Company has a note receivable due from an employee/stockholder totaling
$2,400 at December 31, 1998 and 1999, which is included in other assets in the
accompanying consolidated balance sheets. The note bears interest at 5.5% per
annum and matures on December 14, 2003 or upon the consummation of an initial
public offering of the Company's equity securities. The note receivable is
secured by common shares of the Company owned by the individual. During 1999,
the Company accrued interest income of approximately $120 on this note.
F-38
101
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
Other Advances
The Company has made various loans and advances to employees in the ordinary
course of business. Such amounts totaled $1,597 and $442 at December 31, 1998
and 1999, respectively, and are included in notes and other receivables in the
accompanying consolidated balance sheets.
11. EMPLOYEE BENEFIT PLAN
Effective February 1, 1999, the Company adopted the EPS Solutions Corporation
401(k) Plan covering substantially all of the Company's employees. Employees may
contribute up to 15% of their compensation to the plan. Contributions to the
plan by the Company are discretionary. 401(k) expenses for the plan for
continuing and discontinued operations were $814 and $857, respectively, for the
year ended December 31, 1999.
12. STOCK PERFORMANCE PLAN
The Company's Board of Directors adopted the EPS Solutions Corporation 2000
Stock Performance Plan (the "2000 Plan") on April 13, 2000 to provide incentives
to employees, directors, officers and consultants to achieve both short-term and
long-term objectives, including increasing return to stockholders.
The Company believes that the potential reward offered by grants of stock
options (including nonqualified stock options ("NSOs") and incentive stock
options ("ISOs")), stock purchase rights, stock appreciation rights, performance
shares or unit awards, dividend or equivalent rights, restricted share or unit
awards and other stock-based awards will enable it to attract and retain
employees.
F-39
102
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
13. COMPONENTS OF CERTAIN BALANCE SHEET AMOUNTS
The components of certain balance sheet amounts at December 31, 1998 and 1999
were as follows (in thousands):
Property and Equipment
1998 1999
----------------------
Furniture, fixtures and equipment $ 3,447 $ 6,620
Computer software and equipment 5,193 6,260
Leasehold improvements 1,082 1,075
----------------------
9,722 13,955
Less accumulated depreciation and amortization (17) (2,530)
----------------------
$ 9,705 $ 11,425
======================
Expenditures on property and equipment for each business segment for the period
from May 29, 1998 (inception) to December 31, 1998 and the year ended December
31, 1999 were as follows:
1998 1999
----------------------
Human Capital Solutions $ 2,249 $ 7,726
Cost Recovery Services -- 932
----------------------
$ 2,249 $ 8,658
======================
Goodwill and Other Intangibles
1998 1999
------------------------
Goodwill $116,977 $ 37,686
Assembled workforce 2,100 2,100
Covenants-not-to-compete 200 200
Contract rights 332 332
------------------------
119,609 40,318
Less accumulated amortization -- (2,370)
------------------------
$119,609 $ 37,948
========================
F-40
103
EPS Solutions Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands)
13. COMPONENTS OF CERTAIN BALANCE SHEET AMOUNTS (CONTINUED)
Accounts Payable and Accrued Expenses
1998 1999
-----------------------
Accounts payable $15,726 $ 7,515
Other accrued expenses 9,069 15,112
Accrued acquisition costs 6,143 2,423
Accrued transaction fees 5,500 --
-----------------------
$36,438 $25,050
=======================
In connection with the 1998 business acquisitions, the Company initiated a plan
to exit certain activities of these entities and eliminate redundant
administrative functions. The estimated cost of the plan totaled approximately
$1,514 and was included in accrued expenses in the accompanying financial
statements at December 31, 1998. As of December 31, 1999 there was $397
remaining to be paid under the plan.
F-41
104
REPORT OF INDEPENDENT AUDITORS
Board of Directors
EPS Solutions Corporation
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of DHR International, Inc. for each of the
three years in the period ended December 31, 1998. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of DHR International, Inc. for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 8, 1999
F-42
105
DHR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
Net revenues........................................ $13,295,314 $17,723,805 $23,601,025
Expenses:
Payroll expense................................... 2,026,022 2,930,310 4,284,493
Commission expense................................ 7,360,264 9,389,052 12,072,952
General and administrative........................ 3,962,018 4,577,822 6,072,833
Interest expense.................................. 198,348 355,862 385,849
Other income...................................... (148,616) (99,226) (83,925)
----------- ----------- -----------
Income (loss) before income taxes and extraordinary
item.............................................. (102,722) 569,985 868,823
Income taxes on income (loss) before extraordinary
item.............................................. (80,150) (263,458) (364,249)
----------- ----------- -----------
Income (loss) before extraordinary item............. (182,872) 306,527 504,574
Extraordinary item, net of income tax benefit of
$169,794.......................................... -- -- (235,206)
----------- ----------- -----------
Net income (loss)................................... $ (182,872) $ 306,527 $ 269,368
=========== =========== ===========
See accompanying notes.
F-43
106
DHR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NOTES ACCUMULATED
ADDITIONAL RECEIVABLE OTHER
COMMON PAID-IN RETAINED FROM COMPREHENSIVE
STOCK CAPITAL EARNINGS SHAREHOLDERS INCOME(LOSS) TOTAL
------ ---------- ---------- ------------ ------------- ----------
Balance at January 1, 1996......... $ -- $ 506,591 $ 903,929 $ (91,000) $ -- $1,319,520
Issuance of common stock......... -- 306,533 -- -- -- 306,533
Loans to shareholders............ -- -- -- (133,550) -- (133,550)
Unrealized loss on marketable
securities..................... -- -- -- -- (629) (629)
Net loss......................... -- -- (182,872) -- -- (182,872)
----------
Comprehensive loss............... (183,501)
-- ---------- ---------- --------- -------- ----------
Balance at January 1, 1997......... -- 813,124 721,057 (224,550) (629) 1,309,002
Issuance of common stock......... -- 629,933 -- -- -- 629,933
Loans to shareholders............ -- -- -- (170,113) -- (170,113)
Unrealized gain on marketable
securities..................... -- -- -- -- 65,518 65,518
Net income....................... -- -- 306,527 -- -- 306,527
----------
Comprehensive income............. 372,045
-- ---------- ---------- --------- -------- ----------
Balance at January 1, 1998......... -- 1,443,057 1,027,584 (394,663) 64,889 2,140,867
Repurchase of common stock,
net............................ -- (110,600) -- -- -- (110,600)
Repayment of loans from
shareholders................... -- -- -- 394,663 -- 394,663
Unrealized loss on marketable
securities..................... -- -- -- -- (79,767) (79,767)
Net income....................... -- -- 269,368 -- -- 269,368
----------
Comprehensive income............. 189,601
---- ---------- ---------- --------- -------- ----------
Balance at December 31, 1998....... $ -- $1,332,457 $1,296,952 $ -- $(14,878) $2,614,531
==== ========== ========== ========= ======== ==========
See accompanying notes.
F-44
107
DHR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
--------- ----------- -----------
OPERATING ACTIVITIES
Net income (loss).................................... $(182,872) $ 306,527 $ 269,368
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization................... 210,410 160,882 176,570
Provision for uncollectible receivables......... -- 365,183 889,000
Recoveries of bad debts and cancellations,
net........................................... (685,616) -- --
Deferred income taxes........................... (39,484) 59,172 (552,534)
Change in operating assets and liabilities:
Accounts receivable........................... 644,577 (598,140) (2,147,586)
Other receivables............................. (245,135) (691,526) 220,073
Prepaid expenses and other current assets..... (44,359) (110,589) 166,369
Accounts payable.............................. 321,225 99,525 175,130
Accrued expenses.............................. 285,813 132,815 56,892
Accrued commissions........................... -- -- 970,601
Income taxes payable.......................... -- -- 263,397
Other......................................... -- -- (20,270)
--------- ----------- -----------
Net cash provided by (used in) operating
activities......................................... 264,559 (276,151) 467,010
INVESTING ACTIVITIES
Purchases of fixed assets............................ (418,354) (343,660) (453,123)
Loans to shareholder................................. (234,176) (1,975,738) --
Payments made by shareholder......................... -- -- (422,382)
Purchases of marketable securities................... (120,875) (155,898) (193,904)
--------- ----------- -----------
Net cash used in investing activities................ (773,405) (2,475,296) (1,069,409)
FINANCING ACTIVITIES
Proceeds from lines of credit and long-term debt..... 630,000 5,382,822 5,167,978
Repayment of lines of credit and long-term debt...... -- (3,533,944) (4,055,545)
Net proceeds (payments) from issuance (purchase) of
common stock....................................... 172,983 459,820 (486,012)
--------- ----------- -----------
Net cash provided by financing activities............ 802,983 2,308,698 626,421
--------- ----------- -----------
Net increase (decrease) in cash...................... 294,137 (442,749) 24,022
Cash and cash equivalents at beginning of year....... 159,878 454,015 11,266
--------- ----------- -----------
Cash and cash equivalents at end of year............. $ 454,015 $ 11,266 $ 35,288
========= =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes........................... $ 231,000 $ 332,000 $ --
Cash paid for interest............................... $ 189,000 $ 357,293 $ 375,294
See accompanying notes.
F-45
108
DHR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Headquartered in Chicago, Illinois, DHR International, Inc. (the Company)
provides retained executive search services worldwide with 32 domestic offices
and 15 international offices. The Company primarily identifies candidates for
senior management positions with compensation levels exceeding $100,000.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All significant intercompany
accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
short-term, highly liquid investments with maturities generally less than three
months to be cash equivalents.
REVENUE RECOGNITION
The Company recognizes revenues from services and all associated costs for
retained searches upon delivery of a market analysis report. Under certain
circumstances, the Company contracts searches from which a portion of the fee
will not be collected until the successful placement of a candidate. In those
instances, the Company recognizes this portion of the revenue from services and
associated costs upon the successful placement. At December 31, 1997 and 1998,
accounts receivable includes $414,000 and $227,000, respectively, in uninvoiced
amounts relating to completed services.
MARKETABLE SECURITIES
Marketable equity securities are classified as available-for-sale and are
carried at fair value, with unrealized gains and losses, net of tax, recorded in
shareholders' equity. Realized gains and losses, declines in value judged to be
other-than-temporary, and interest and dividends are included in income. There
was no impact on net income in 1998 for these items.
FIXED ASSETS
Fixed assets are stated on the basis of cost. Provisions for depreciation
and amortization are computed using straight-line methods over estimated useful
lives of 30 years for the building, five to seven years for furniture, fixtures,
equipment, and vehicles, and over the shorter of the useful life or the term of
the lease for leasehold improvements.
INCOME TAXES
Income taxes are accounted for using the asset and liability approach.
Such approach results in the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
book carrying amounts and the tax basis of assets and liabilities.
COMPREHENSIVE INCOME (LOSS)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No.
130). This standard was effective for fiscal years beginning after December 15,
1997. SFAS No. 130 requires that all components of
F-46
109
DHR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
comprehensive income (loss), including net income (loss), be reported in the
financial statements in the period in which they are recognized. Operating
results of prior periods have been reclassified. The Company's only component of
other comprehensive income (loss) is the unrealized gains and losses on
investments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. SALE OF CERTAIN ASSETS AND LIABILITIES TO EPS SOLUTIONS CORPORATION
On December 14, 1998, the Company's stockholders entered into an agreement
to sell the Company to EPS Solutions Corporation. For financial accounting
purposes, the effective date of the transaction was December 31, 1998.
Accordingly, the consolidated financial statements have been prepared on a
historical basis and, as such, do not reflect any purchase price adjustments
related to the sale. Expenses related to the sale of the business are presented
as an extraordinary item in the consolidated statement of operations.
4. INCOME TAXES
Significant components of the provision for income taxes are as follows:
DECEMBER 31,
----------------------------------
1996 1997 1998
-------- --------- ---------
Current provision:
Federal........................................ $ 96,046 $ 299,070 $ 645,434
State.......................................... 23,588 69,270 101,555
-------- --------- ---------
119,634 368,340 746,989
Deferred tax benefit............................. (39,484) (104,882) (552,534)
-------- --------- ---------
Provision for income taxes....................... $ 80,150 $ 263,458 $ 194,455
======== ========= =========
The reconciliation of income taxes computed at the U.S. federal statutory
tax rate to income tax expense is as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
-------- --------- ---------
Federal income tax at statutory rate............. $(34,925) $ 193,795 $ 157,700
State income taxes, net of federal tax benefit... (6,163) 34,199 27,829
Other, net....................................... 121,238 35,464 8,926
-------- --------- ---------
Income tax expense............................... $ 80,150 $ 263,458 $ 194,455
======== ========= =========
The income tax provision for 1998 includes an income tax benefit of
$169,794 related to the extraordinary item.
F-47
110
DHR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LEASES
The Company leases certain facilities under various operating leases
resulting in rent expense of approximately $641,000, $1,059,000 and $1,418,000,
for the years ended December 31, 1996, 1997 and 1998, respectively. Aggregate
annual minimum future rental payments at December 31, 1998, under noncancelable
building leases are as follows:
1999..................................... $1,702,000
2000..................................... 1,451,000
2001..................................... 1,335,000
2002..................................... 1,236,000
2003..................................... 1,008,000
Thereafter............................... 3,236,000
----------
$9,968,000
==========
Certain of the lease agreements contain options to renew and require
payments of taxes, insurance, and maintenance costs. In addition, certain leases
also include escalation clauses based on various economic indicators.
6. EMPLOYEE BENEFIT PLANS
The Company sponsored a defined-contribution benefit plan covering a
majority of employees which consists of a 401(k) plan. Employees can contribute
a percentage of their compensation to the 401(k) plan in the form of payroll
deductions, subject to certain limits established by the Internal Revenue Code.
The Company does not match employee contributions.
7. RELATED PARTY TRANSACTIONS
The principal shareholder of the Company regularly transacts business with
the Company and other companies which he controls. These transactions are
appropriately disclosed on the face of the financial statements.
F-48
111
REPORT OF INDEPENDENT AUDITORS
Board of Directors
EPS Solutions Corporation
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of FFR Holding Co., Inc. and subsidiaries
for the year ended December 31, 1997 and the eleven months ended November 30,
1998. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of FFR Holding Co., Inc. and subsidiaries for the year ended December 31, 1997
and the eleven months ended November 30, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
March 12, 1999
F-49
112
FFR HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
ELEVEN
YEAR ENDED MONTHS ENDED
DECEMBER 31, NOVEMBER 30,
1997 1998
------------ ------------
Revenues
Marketing fees and commissions............................ $3,387,617 $5,055,027
Membership and subscription fees.......................... 306,909 337,309
Interest income........................................... 58,344 77,629
---------- ----------
Total revenues.............................................. 3,752,870 5,469,965
Operating expenses:
Commissions and bonuses................................... 1,437,349 577,796
General and administrative................................ 1,157,198 2,113,608
Payroll and benefits...................................... 883,188 546,771
Sales and promotions...................................... 699,191 367,934
Depreciation and amortization............................. 121,931 119,324
---------- ----------
Total operating expenses.................................... 4,298,857 3,725,433
---------- ----------
Income (loss) before income taxes and extraordinary item.... (545,987) 1,744,532
Income taxes................................................ -- 434,692
---------- ----------
Income (loss) before extraordinary item..................... (545,987) 1,309,840
Extraordinary item.......................................... -- (40,000)
---------- ----------
Net income (loss)........................................... $ (545,987) $1,269,840
========== ==========
See accompanying notes.
F-50
113
FFR HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SERIES A PREFERRED
COMMON STOCK CLASS A COMMON STOCK STOCK ADDITIONAL
-------------------- ---------------------- ------------------ PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- ------- ----------- -------- --------- ------ ---------- -----------
Balance January 1, 1997.......... -- $ -- 12,480,196 $ 12,481 -- $ -- $2,833,014 $(1,780,684)
Class A common stock issued.... -- -- 745,945 746 -- -- 312,551 --
Compensation and bonuses
earned, shares not issued
(1,729,943 shares)........... -- -- -- -- -- -- -- --
Net loss....................... -- -- -- -- -- -- -- (545,987)
---------- ------- ----------- -------- --------- ------ ---------- -----------
Balance, December 31, 1997....... -- -- 13,226,141 13,227 -- -- 3,145,565 (2,326,671)
Class A common stock issued.... -- -- 1,742,987 1,743 -- -- 800,031 --
Conversion of Class A common
stock to common stock and
Series A preferred stock..... 14,711 15 (14,969,128) (14,970) 1,471,065 1,471 (133,451) --
Issuance of common stock....... 47,636,014 47,636 -- -- -- -- 93,575 --
Net income..................... -- -- -- -- -- -- -- 1,269,840
---------- ------- ----------- -------- --------- ------ ---------- -----------
Balance at November 30, 1998..... 47,650,725 $47,651 -- $ -- 1,471,065 $1,471 $3,905,720 $(1,056,831)
========== ======= =========== ======== ========= ====== ========== ===========
COMPENSATION
AND BONUS
TREASURY SHARES EARNED
STOCK BUT NOT ISSUED TOTAL
--------- -------------- ----------
Balance January 1, 1997.......... $(146,935) $ 313,297 $1,231,173
Class A common stock issued.... -- (313,297) --
Compensation and bonuses
earned, shares not issued
(1,729,943 shares)........... -- 795,774 795,774
Net loss....................... -- -- (545,987)
--------- --------- ----------
Balance, December 31, 1997....... (146,935) 795,774 1,480,960
Class A common stock issued.... -- (795,774) 6,000
Conversion of Class A common
stock to common stock and
Series A preferred stock..... 146,935 -- --
Issuance of common stock....... -- -- 141,211
Net income..................... -- -- 1,269,840
--------- --------- ----------
Balance at November 30, 1998..... $ -- $ -- $2,898,011
========= ========= ==========
See accompanying notes.
F-51
114
FFR HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, NOVEMBER 30,
1997 1998
------------ ------------
OPERATING ACTIVITIES
Net income (loss)........................................... $ (545,987) $ 1,269,840
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation........................................... 27,243 24,636
Amortization........................................... 94,688 94,688
Provision for deferred taxes........................... -- 198,864
Loss on disposal of property and equipment............. -- 7,992
Compensation and bonus expenses paid or due in common
shares net of forfeitures............................. 795,774 --
Changes in operating assets and liabilities:
Accounts receivable and related-party receivables.... (230,164) (1,297,485)
Prepaid expenses and other current assets............ (37,168) (8,568)
Decrease (increase) in other assets.................. (23,109) 27,110
Accounts payable and accrued liabilities............. (8,819) 856,326
Income taxes payable................................. -- 235,828
Payable to affiliate................................. -- 227,500
----------- -----------
Net cash provided by operating activities................... 72,458 1,636,731
INVESTING ACTIVITIES
Purchases of property and equipment......................... (12,751) (4,589)
FINANCING ACTIVITIES
Payments on notes payable to stockholders................... (56,200) (157,253)
Net sales (purchases) of investments........................ (1,032,253) 679,818
Issuance of common stock.................................... -- 147,211
----------- -----------
Net cash provided by (used in) financing activities......... (1,088,453) 669,776
----------- -----------
Net increase (decrease) in cash and cash equivalents........ (1,028,746) 2,301,918
Cash and cash equivalents, beginning of period.............. 1,125,811 97,065
----------- -----------
Cash and cash equivalents, end of period.................... $ 97,065 $ 2,398,983
=========== ===========
See accompanying notes.
F-52
115
FFR HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION
FFR Holding Co., Inc. and subsidiaries (the Company) is a marketing
organization that primarily distributes products of various insurance carriers
through Principals or agents located throughout the United States who contract
to use the Company's products and services. The Company derives revenues from
(i) overrides, bonuses and other compensation on products sold by or through
Principals, and (ii) Principal membership fees and annual dues.
The agreements between the insurance carriers and the Company are
terminable at will, subject to certain conditions defined in the agreements, and
there can be no assurance that any such agreements or arrangements will
continue, or that any such agreements or arrangements will continue on present
terms.
On December 14, 1998, the Company's stockholders entered into an agreement
to sell the Company's common stock to EPS Solutions Corporation. For financial
accounting purposes the effective date of the transaction was December 31, 1998.
Accordingly, the Company's financial statements have been prepared on a
historical basis and, as such, do not reflect any purchase price adjustments
related to the sale. Expenses related to the sale of the business are presented
as an extraordinary item in the statement of operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of FFR Holding
Co., Inc. and its wholly-owned subsidiaries, First Financial Resources, Inc.;
First Financial Resources, Inc. -- Nevada; First Financial Resources Management
Co., Inc. (a Pennsylvania corporation); FFP Insurance Services, Inc. (FFPIS);
and Benefit Funding Services, LLC. All intercompany accounts and transactions
have been eliminated in consolidation.
FISCAL YEAR END
In 1998, the Company changed its fiscal year end from December to
November. Accordingly, the 1998 financial statements are for the eleven-month
period ended November 30, 1998.
CASH EQUIVALENTS
Cash equivalents are deemed to be any short-term, nonequity investment
that is readily convertible to cash and is not subject to market fluctuations,
with an original maturity of three months or less.
PROPERTY AND EQUIPMENT
The cost of property and equipment was depreciated using the straight-line
method over the estimated useful lives of the related assets, ranging from five
to seven years.
GOODWILL
The excess of the aggregate purchase price over the fair value of net
assets acquired was included in the accompanying consolidated balance sheets as
goodwill. Goodwill was being amortized over a period of seven years.
F-53
116
FFR HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes using the liability method as
required by Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures 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.
REVENUE RECOGNITION
The Company recognizes revenue upon the sale of memberships to Principals,
who act as independent agents, or notification of referral commissions from
insurance carriers. Conversions fees from employer benefit plans is earned upon
the signing of the contract by the employer indicating the assets to be
transferred.
2. STOCKHOLDERS' EQUITY
Pursuant to a private placement memorandum dated November 21, 1989,
4,000,000 shares of the Company's Class A common stock were offered to
Principals in 20,000 share units at $1,500 per unit. Only Principals who were
not currently stockholders, officers or directors of the Company could subscribe
for units.
Pursuant to a private placement memorandum dated March 31, 1993, 2,800,000
shares of Class A common stock were offered to Principals in 14,000 share units
at $3,500 per share unit. Unsold units were purchased by the Company's three
largest stockholders in exchange for amounts owed to the stockholders for
services and notes payable totaling $454,500. Concurrent with the issuance of
shares, two of the stockholders assumed debt of the Company in the amount of
$200,000 in exchange for 800,000 shares.
In 1994, the Company's Board of Directors established a Producer-Owner
Bonus Plan which provides fully vested stock for achievement of certain
production goals. Recipients could elect to receive up to one-half of the bonus
in cash.
In 1997, the Company authorized, under the Producer-Owner Bonus Plan, the
issuance of 1,583,201 fully vested shares of Class A common stock to certain
Principals, based on the achievement of certain revenue goals. The Company
recorded bonus expense of $728,272 in 1997, based on an estimate of the fair
value of the shares as of December 31, 1997 as determined by the Company's Board
of Directors.
For 1997, the Company authorized the issuance of 146,742 shares of fully
vested Class A common stock to certain directors, officers and employees of the
Company for services rendered in 1997. This resulted in expense of $67,502 based
on an estimate of the fair value of the shares as determined by the Company's
Board of Directors for the year ended December 31, 1997.
During 1998, the Company issued an additional 13,044 shares of Class A
common stock to certain directors of the Company for an aggregate purchase price
of $6,000.
F-54
117
FFR HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCKHOLDERS' EQUITY (CONTINUED)
During 1998, the Company approved a plan of recapitalization. Under the
plan, the Company is authorized to issue up to 50,000,000 shares of a new series
of common stock and 2,000,000 shares of Series A preferred stock. In addition,
each outstanding share of Class A common stock was converted into 1/1000 share
of common stock and 1/10 share of preferred stock. Subsequent to the plan of
recapitalization, the Company issued 47,636,014 additional shares of common
stock for an aggregate price of $141,211.
The Series A preferred stock is non-voting. Dividends are cumulative at
the annual rate of $0.11 per share. The Series A preferred stock shall be
redeemable out of funds legally available upon the earlier of the third
anniversary of the sale of the common stock of the Company to EPS Solutions
Corporation or five days after the closing of an underwritten initial public
offering of EPS Solutions Corporation of the equity securities of EPS Solutions
Corporation having gross proceeds of at least $200 million. The Series A
preferred stock may be redeemed by the Company in whole or part at any time. The
redemption price is $3.66 per share plus cumulative dividends. At November 30,
1998, cumulative preferred dividends in arrears were approximately $121,000.
3. INCOME TAXES
The components of the provision for income taxes for the eleven months
ended November 30, 1998 consist of the following:
Current:
Federal................................. $100,396
State................................... 135,432
--------
235,828
Deferred.................................. 198,864
--------
$434,692
========
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $2,102,675 for federal and $865,925 for state income tax purposes.
The federal and state loss carryforwards were fully utilized in 1998. At
December 31, 1997, a valuation allowance of $760,608 was provided to fully
reserve the net deferred tax assets.
Income taxes of approximately $5,000 and $3,000 were paid during 1997 and
1998, respectively.
4. COMMITMENTS AND CONSULTING AGREEMENTS
LEASE COMMITMENTS
The Company leases its offices and certain office equipment under various
operating leases. Rental expense was $71,076 and $57,550 for the year ended
December 31, 1997 and for the eleven months ended November 30, 1998,
respectively.
CONSULTING AGREEMENTS
On October 15, 1994, the Company entered into a profit sharing consulting
agreement with the former FFPIS stockholders. Under the terms of the agreement,
the Company will pay the stockholders, as compensation for services to be
performed, one-half of the cumulative net commission revenues earned by FFPIS in
excess of $533,334. Total compensation will not exceed $133,333. During 1997 and
1998, no payments were made on these agreements.
F-55
118
FFR HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONSULTING AGREEMENTS (CONTINUED)
During 1997 and 1998, the Company paid $49,000 and $39,000, respectively,
to certain directors of the Company for consulting services rendered during the
year.
5. RELATED PARTY TRANSACTIONS
During 1998, the Company paid consulting fees to Benefit Funding Services
Group LLC, a related party, and National Benefits Consultants, a related party,
in the amounts of $650,000 and $250,000, respectively.
F-56
119
Holden Corporation
Statements of Income
(unaudited)
YEAR ENDED DECEMBER 31 PERIOD FROM
-------------------------- JANUARY 1, 1999
1997 1998 TO FEBRUARY 28, 1999
----------- ----------- --------------------
Net revenues $14,338,669 $15,749,004 $1,985,278
Cost of revenues 5,986,458 6,338,940 812,376
----------- ----------- ----------
Gross profit 8,352,211 9,410,064 1,172,902
Selling, general, and administrative expenses 4,849,524 6,122,235 836,201
----------- ----------- ----------
Operating income 3,502,687 3,287,829 336,701
Other income:
Interest income 176,999 142,886 18,893
Miscellaneous income 12,075 1,602 --
Realized gain on sale of investment 14,796 -- --
Gain on disposal of property and equipment 2,576 -- --
----------- ----------- ----------
Total other income 206,446 144,488 355,594
----------- ----------- ----------
Income before income taxes 3,709,133 3,432,317 355,594
Provision for foreign and state income taxes 34,852 191,069 9,858
----------- ----------- ----------
Net income $ 3,674,281 $ 3,241,248 $ 345,736
=========== =========== ==========
See accompanying notes to financial statements.
F-57
120
Holden Corporation
Statements of Shareholders' Equity
(unaudited)
Years ended December 31, 1997 and 1998 and the period from
January 1, 1999 to February 28, 1999
COMMON STOCK TREASURY STOCK TOTAL
---------------- ----------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
----------------------------------------------------------------------
Balance at December 31, 1996 2,000 $2,000 50 $(40,000) $ 2,462,590 $ 2,424,590
Distributions -- -- -- -- (3,570,648) (3,570,648)
Net income -- -- -- -- 3,674,281 3,674,281
----- ------ --- -------- ----------- -----------
Balance at December 31, 1997 2,000 2,000 50 (40,000) 2,566,223 2,528,223
Distributions -- -- -- -- (3,174,000) (3,174,000)
Net income -- -- -- -- 3,241,248 3,241,248
----- ------ --- -------- ----------- -----------
Balance at December 31, 1998 2,000 2,000 50 (40,000) 2,633,471 2,595,471
Net income -- -- -- -- 345,736 345,736
----- ------ --- -------- ----------- -----------
Balance at February 28, 1999 2,000 $2,000 50 $(40,000) $ 2,979,207 $ 2,941,207
===== ====== === ======== =========== ===========
See accompanying notes to financial statements.
F-58
121
Holden Corporation
Statements of Cash Flows
(unaudited)
PERIOD FROM
YEAR ENDED DECEMBER 31 JANUARY 1, 1999
---------------------------- TO
1997 1998 FEBRUARY 28, 1999
----------- ----------- -----------------
OPERATING ACTIVITIES
Net income $ 3,674,281 $ 3,241,248 $345,736
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 215,630 182,473 28,297
Gain on disposal of property and
equipment (2,576) -- --
Gain on sale of investments (14,796) -- --
Changes in operating assets
and liabilities:
Accounts receivable (298,738) (135,897) (95,957)
Inventory (21,242) (27,210) 41,414
Prepaid expenses (42,863) (3,673) (94,567)
Interest receivable 3,907 -- --
Accounts payable 96,036 (84,715) (9,103)
Accrued income taxes (13,937) 14,946 5,079
Deferred revenue 15,149 (225,283) 6,860
Accrued salaries and bonuses 112,521 272,365 175,940
Accrued commissions (22,930) 127,139 (88,976)
Accrued expenses 75,475 176,176 (4,152)
Other assets -- (9,529) 4,927
Deferred bonus and interest 105,186 129,689 1,720
---------- ----------- ----------
Net cash provided by operating activities 3,881,103 3,657,729 317,218
INVESTING ACTIVITIES
Sale of investments 697,167 --
Purchases of property and equipment (59,592) (189,337) (15,603)
Disposal of property and equipment 4,791 --
---------- ----------- ----------
Net cash (used in) provided by investing
activities 642,366 (189,337) (15,603)
FINANCING ACTIVITIES
Distributions of income to shareholders (3,570,648) (3,174,000) --
---------- ----------- ----------
Net cash used in financing activities (3,570,648) (3,174,000) --
---------- ----------- ----------
Increase in cash and cash equivalents 952,821 294,392 301,615
Cash and cash equivalents at
beginning of year 1,487,541 2,440,362 2,734,754
---------- ----------- ----------
Cash and cash equivalents at
end of year $2,440,362 $ 2,734,754 $3,036,369
========== =========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes $ 48,789 $ 194,720 $ --
========== =========== ==========
See accompanying notes to financial statements.
F-59
122
Holden Corporation
Notes to Financial Statements
(unaudited)
February 28, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION
Holden Corporation (the Company) is a sales and marketing effectiveness
consulting and training firm. The Company provides services to top international
information technology and communications companies.
In March 1999, the Company's stock was acquired by EPS Solutions Corporation.
For financial accounting purposes the effective date of the transaction was
March 1, 1999. Accordingly, the Company's financial statements have been
prepared on a historical basis and, as such, do not reflect any purchase price
adjustments related to the sale.
As a result of the transaction, the Company no longer qualifies for treatment as
an S corporation under the Code. As such, after the acquisition, the Company
will need to provide for federal income taxes and account for income taxes using
the liability approach as described by Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes."
CASH AND CASH EQUIVALENTS
Highly liquid investments with a maturity of three months or less when purchased
are considered by the Company to be cash equivalents.
USE OF ESTIMATES
The presentation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues on seminar contracts are recognized based on the percentage of
completion of each individual contract. This percentage is determined based on
the number of attendees actually completing the seminars versus the number in
total on the contracts.
Revenues from consulting fees are recognized as the service is performed.
S CORPORATION - INCOME TAX STATUS
Effective January 1, 1986, the Company, with the consent of its shareholders,
elected under the Internal Revenue Code (Code) to be an S corporation. In lieu
of corporation income taxes, the shareholders of an S Corporation are taxed on
their proportionate share of the Company's taxable income. Therefore, no
provision or liability for federal income taxes has been included in the
financial statements for the years ended December 31, 1997 and 1998 or the
period from January 1, 1999 to February 28, 1999. However, certain states and
foreign countries in which the Company conducts business require income taxes to
be paid on S corporation earnings. As such, provisions for state and foreign
F-60
123
Holden Corporation
Notes to Financial Statements
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income taxes in the amounts of $34,852, net of a foreign income tax refund of
$28,687, for the year ended December 31, 1997, and $191,069, including foreign
income taxes of approximately $115,000, for the year ended December 31, 1998,
are included in these financial statements. For the period from January 1, 1999
to February 28, 1999 a provision for state and foreign income taxes in the
amount of $9,858 has been provided, of which $4,780 was foreign income taxes.
2. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) pension plan covering substantially all of its
employees. Effective July 1, 1998, the Company matches 50% of a participant's
salary reductions up to 6% of a participant's contribution with an annual
maximum of $5,000. Prior to July 1, 1998, the Company did not contribute funds
on behalf of the participants. The total cost of contributions made in 1998 was
$26,468 and for the two month period ended February 28, 1999 was $12,396.
The Company also has a profit-sharing plan (the Plan) covering substantially
all of its employees. Contributions under the Plan are discretionary and are
determined annually by the Company's Board of Directors. The Company
contributed $50,000 to the Plan for the year ended December 31, 1997, and no
contributions were made in 1998 and the two-month period ended February 28,
1999.
3. COMMITMENTS
Holden Corporation occupies its premises under a lease which expires in May
2003. The lease requires base monthly rentals of $26,845 plus a proration of
taxes and operating expenses.
Rent expense for the years ended December 31, 1997 and 1998, was $321,183 and
$323,987, respectively. Rent expense for the two-month period ended February
28, 1999 was $56,353.
Minimum rental payments under this lease at December 31, 1998, are as follows:
MINIMUM
LEASE
YEAR ENDING DECEMBER 31 PAYMENT
----------------------- ----------
1999 $ 324,833
2000 329,490
2001 334,243
2002 339,114
To May 2003 142,152
----------
$1,469,832
==========
F-61
124
REPORT OF INDEPENDENT AUDITORS
Board of Directors
EPS Solutions Corporation
We have audited the accompanying consolidated statements of income and
retained earnings and cash flows of Mobility Services International, Inc. for
the year ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Mobility Services International, Inc. for the year ended December 31, 1998,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
February 19, 1999
F-62
125
MOBILITY SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1998
Revenue, net................................................ $37,561,795
Cost of services............................................ 29,495,171
Selling, general and administrative expenses................ 7,097,280
-----------
Income from operations...................................... 969,344
Interest expense............................................ 31,803
===========
Income before provision for income taxes and extraordinary
item...................................................... 937,541
Provision for income taxes.................................. 29,000
-----------
Income before extraordinary item............................ 908,541
Extraordinary item.......................................... (161,000)
-----------
Net income.................................................. 747,541
Retained earnings at beginning of year...................... 724,154
Distributions to shareholder................................ (1,157,622)
-----------
Retained earnings at end of year............................ $ 314,073
===========
See accompanying notes.
F-63
126
MOBILITY SERVICES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
OPERATING ACTIVITIES
Net income.................................................. $ 747,541
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation........................................... 125,169
Changes in operating assets and liabilities:
Fees, commissions and move charges receivable........ (929,108)
Deposits and other assets............................ 4,008
Accounts payable..................................... (360,814)
Accrued expenses..................................... 145,793
Payable to related party............................. 754,416
-----------
Net cash provided by operating activities................... 487,005
INVESTING ACTIVITIES
Purchase of property and equipment.......................... (35,859)
Net assets acquired from acquisition, excluding cash
acquired.................................................. (18,520)
Proceeds from repayments of loans to related parties........ 380,123
-----------
Net cash provided by investing activities................... 325,744
FINANCING ACTIVITIES
Net repayments on lines of credit........................... (300,000)
Bank overdrafts............................................. 651,111
Repayments on capital lease obligations..................... (69,509)
Shareholder distributions................................... (1,157,622)
Net cash used in financing activities....................... (876,020)
Net decrease in cash and cash equivalents................... (63,271)
Cash and cash equivalents at beginning of year.............. 63,271
-----------
Cash and cash equivalents at end of year.................... $ --
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................... $ 31,803
Income taxes........................................... $ 28,871
Non-cash investing activities:
Equipment acquired under capital leases................ $ 123,433
Acquisition of Protocol, Inc........................... $ 250,000
See accompanying notes.
F-64
127
MOBILITY SERVICES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION
Mobility Services International, Inc. (the Company) provides
administration and arrangements for the relocation of employees of U.S.
companies throughout the world.
On December 14, 1998, the Company's stockholder entered into an agreement
to sell the Company's net assets to EPS Solutions Corporation at a gain. For
financial accounting purposes the effective date of the transaction was December
31, 1998. Accordingly, the Company's financial statements have been prepared on
a historical basis and, as such, do not reflect any purchase price adjustments
related to the sale. Expenses related to the sale of the business are presented
as an extraordinary item in the statement of income.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary, Protocol International, Inc. (as discussed in Note 2). All
significant intercompany transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure for 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 vary from the estimates that were used.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
include all highly liquid investments with maturities of three months or less
when purchased.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
a combination of accelerated and straight-line methods over the estimated useful
lives of the assets. Furniture and fixtures are depreciated over five to seven
years. Computer hardware and software are depreciated over three to five years.
Amortization of assets under capital leases is included in depreciation.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value
of net assets at the date of the acquisition of Protocol International, Inc. (as
discussed in Note 2). Goodwill is amortized using the straight-line method over
ten years.
INCOME TAXES
The Company has elected to be treated as an S Corporation, whereby all
income and losses are reported by the shareholder on his individual income tax
return. Accordingly, no provision for federal taxes on income is recorded in the
accompanying financial statements. The provision for taxes represents state
income taxes in those states which do not fully recognize Subchapter S status.
F-65
128
MOBILITY SERVICES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
It is management's intention to make distributions to the shareholder
which are sufficient to fund required tax payments.
RECOGNITION OF REVENUES
Revenues are recognized upon completion of each relocation.
CONCENTRATION OF CREDIT RISK
During 1998, the Company's ten largest customers contributed 70% of
revenues. The Company does not require trade receivable to be collateralized;
however, management believes that credit risk is minimal as most customers are
Fortune 500 companies.
2. ACQUISITION
On November 30, 1998, the Company acquired certain assets and assumed
certain liabilities of Protocol International, Inc., a Chicago, Illinois based
company for $250,000. Protocol International, Inc. provides events arrangement
services to companies throughout the United States. The acquisition of Protocol
International, Inc. was accounted for under the purchase method of accounting
for business combinations. Revenues for Protocol International, Inc. for the one
month ended December 31, 1998 totaled $176,570.
The Company's balance sheet includes a payable to a related party of
$250,000, which represents the subordinated note issued by EPS Solutions
Corporation to fund the acquisition of Protocol International, Inc.
3. COMMITMENTS
At December 31, 1998, the Company was obligated under four operating
leases for various periods through March 2009. Some of the leases provide for
additional payments, including real estate taxes and various operating costs.
One of the leases, which was entered into in November 1998, also contains
scheduled rent increases. The term of this lease is from April 1999 to March
2009. Total rental expense charged to operations was $155,000 in 1998.
The Company leases its primary office space as tenant-at-will from a
realty trust whose trustee and beneficiary is the shareholder of the Company.
Rent expense related to the lease amounted to $84,000 in 1998.
The Company also maintains various capital leases for office equipment.
Lease terms are two to four years and the Company has the option to purchase the
equipment at a nominal cost at the termination of the lease.
4. RETIREMENT PLAN
The Company has a 401(k) plan for all employees over the age of
twenty-one. Under the plan, employees may elect to defer a portion of their
salary, subject to Internal Revenue Service limits. The plan allows
discretionary employer contributions. The Company did not make any discretionary
contributions in 1998.
F-66
129
REPORT OF INDEPENDENT AUDITORS
Board of Directors
EPS Solutions Corporation
We have audited the accompanying combined statements of operations and
owners' equity (deficit) and cash flows of Praxis Group, Inc., Vitality
Alliance, Inc., Praxis Development, LC. and Praxis Group Limited Partnership
(the Praxis Companies) for the years ended December 31, 1997 and 1998. These
combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined results of operations and
cash flows of the Praxis Companies for the years ended December 31, 1997 and
1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Salt Lake City, Utah
February 26, 1999
F-67
130
PRAXIS COMPANIES
COMBINED STATEMENTS OF OPERATIONS AND OWNERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31,
------------------------
1997 1998
---------- ----------
Revenues:
Consulting services....................................... $1,704,886 $2,513,633
Product sales............................................. 1,502,815 3,268,232
Training and other revenues............................... 751,022 740,213
---------- ----------
Total revenues.............................................. 3,958,723 6,522,078
Operating expenses:
Direct costs of revenues, excluding salaries and wages.... 614,854 287,634
Salaries and wages........................................ 3,437,781 3,602,467
Other operating expenses.................................. 689,931 601,277
---------- ----------
Total operating expenses.................................... 4,742,566 4,491,378
---------- ----------
Income (loss) from operations............................... (783,843) 2,030,700
Other income (expense):
Interest income........................................... 9,581 23,209
Interest expense.......................................... (4,155) (30)
Gain (loss) on disposal of property and equipment......... (47,175) 6,652
---------- ----------
Other income (expenses) -- net.............................. (41,749) 29,831
Income (loss) before extraordinary item..................... (825,592) 2,060,531
Extraordinary item.......................................... -- (106,000)
Net income (loss)........................................... (825,592) 1,954,531
---------- ----------
Owners' equity (deficit) at the beginning of the year....... 357,057 (518,535)
Distributions to owners..................................... (50,000) (835,834)
---------- ----------
Owners' equity (deficit) at the end of the year............. $ (518,535) $ 600,162
========== ==========
See accompanying notes.
F-68
131
PRAXIS COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------
1997 1998
---------- -----------
OPERATING ACTIVITIES:
Net income (loss)........................................... $(825,592) $1,954,531
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 94,073 95,660
Net gain (loss) on disposal of property and equipment..... 47,175 (6,651)
Changes in operating assets and liabilities:
Accounts receivable.................................... 265,618 (75,849)
Inventories............................................ -- (24,293)
Prepaid expenses and other assets...................... 543 (7,178)
Accounts payable and accrued liabilities............... (4,961) 106,189
Accrued compensation and benefits...................... (29,668) (39,508)
Deferred revenue....................................... 565,724 (818,373)
--------- ----------
Net cash provided by operating activities................... 112,912 1,184,528
INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (82,266) (9,354)
Proceeds from sale of property and equipment................ -- 20,000
--------- ----------
Net cash (used in) provided by investing activities......... (82,266) 10,646
FINANCING ACTIVITIES:
Proceeds from short-term borrowings (related party)......... 94,000 --
Payments of short-term borrowings (related party)........... (94,000) --
Distributions to owners..................................... (50,000) (835,834)
--------- ----------
Net cash used in financing activities....................... (50,000) (835,834)
--------- ----------
Net (decrease) increase in cash and cash equivalents........ (19,354) 359,340
Cash and cash equivalents at beginning of year.............. 27,660 8,306
--------- ----------
Cash and cash equivalents at end of year.................... $ 8,306 $ 367,646
========= ==========
See accompanying notes.
F-69
132
PRAXIS COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of
Praxis Group, Inc., Vitality Alliance, Inc., Praxis Development, LC. and Praxis
Group Limited Partnership (the Praxis Companies). All four Companies had common
management and ownership through December 14, 1998. The operations of the Praxis
Companies are summarized below:
Praxis Group, Inc. -- A Utah corporation which provides management
consulting and employee training.
Vitality Alliance, Inc. -- A Utah corporation which primarily sells
software, manuals, videos and provides software support and training.
Praxis Development, LC. -- A Utah limited liability company which sells a
book developed by owners of the original Companies. The period of duration
for this entity is from July 1, 1994 to July 1, 2124.
Praxis Group Limited Partnership -- A Utah limited partnership which owns
and leases assets to the other entities.
On December 14, 1998, the owners of the Praxis Companies entered into an
agreement to sell the Praxis Companies to EPS Solutions Corporation (EPS). For
financial accounting purposes the effective date of the transaction was December
31, 1998. Accordingly, the combined financial statements have been prepared on a
historical basis and, as such, do not reflect any purchase price adjustments
related to the sale. Expenses related to the sale of the business are presented
as an extraordinary item in the combined statement of operations and owners'
equity (deficit).
PRINCIPLES OF COMBINATION
The combined financial statements include accounts of the above companies.
All significant intercompany accounts and transactions among these entities have
been eliminated.
REVENUE AND COST RECOGNITION
Consulting and training services are recognized when services are
provided. Performance based fees are recognized upon acceptance from the
customer and receipt of cash.
Product sales include sales of software, manuals, and videos which are
recognized upon shipment.
Software support billed in advance of services is deferred and recognized
over the term of the support contract.
Direct costs of revenues include all direct material, delivery and other
costs directly related to the services performed or products shipped. Other
operating expenses are charged to expense as incurred. Research and development
expenses are expensed as incurred. There were approximately $241,000 in research
and development expenses for the year ended December 31, 1997 which were
included in salaries and wages and other operating expenses, and none for the
year ended December 31, 1998.
MAJOR CUSTOMER
During the years ended December 31, 1997 and 1998, sales to one customer
accounted for approximately $600,000 and $1,500,000 or 15% and 23% of total
revenues, respectively.
F-70
133
PRAXIS COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, all highly liquid investments
with a maturity of three months or less when purchased are considered to be cash
equivalents.
The Praxis Companies maintain cash and cash equivalents in federally
insured banks.
INVENTORIES
Inventories are stated at the lower of cost or market applying the
first-in, first-out cost method. Inventories primarily consist of printed
material and videos.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method over the useful lives of
the related assets or, for leasehold improvements, over the shorter of the
remaining lease period. Estimated useful lives are as follows:
Furniture and fixtures.................................. 7 years
Computer and office equipment........................... 3 - 5 years
Video................................................... 7 years
Leasehold improvements.................................. 7 years
INCOME TAXES
Praxis Group, Inc. and Vitality Alliance, Inc. file federal and state
income tax returns under the provisions of Subchapter S for Federal and Utah
Revenue Codes while Praxis Development, LC. and Praxis Group Limited Partnership
file federal and state income tax returns as partnerships. Accordingly, no
provision has been made for federal or state income taxes in the accompanying
combined financial statements. Subsequent to the date of acquisition, Praxis
Group, Inc. and Vitality Alliance, Inc. no longer qualified for Subchapter S
status and became subject to federal and state corporation taxes. The effect of
this change in tax status and the establishment of deferred income taxes under
the liability method for cumulative temporary differences between income for tax
and financial reporting purposes aggregated approximately $40,000, which has
been accounted for by EPS Solutions Corporation as an adjustment to the purchase
price.
ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to use certain estimates and
assumptions. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses during the reporting period. Although
management believes its estimates are appropriate, changes in assumptions used
in preparing such estimates could cause these estimates to change sometime in
the future.
CONCENTRATION OF CREDIT RISK
The Praxis Companies grant credit to substantially all of its customers
without requiring collateral. This credit risk is mitigated by the financial
stability of its major customers.
F-71
134
PRAXIS COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
2. COMMITMENTS
The Praxis Companies lease office facilities under a non-cancelable
operating lease. Total rent expense for each of the years ended December 31,
1997 and 1998 was approximately $70,000. The Praxis Companies also lease
equipment under non-cancelable operating leases. Total equipment lease expense
for the years ended December 31, 1997 and 1998 was approximately $10,800 and
$7,400, respectively.
The Praxis Companies have other commitments for phone services of
approximately $30,000, and $15,000 for the years ended December 31, 1999 and
2000 respectively.
3. EMPLOYEE BENEFITS
Management has established a qualified 401(k) profit sharing plan,
effective January 1, 1995. The plan allows all employees to contribute an
elected percentage of earnings in the form of a salary reduction up to the
maximum allowable percentage, not to exceed established limits by the Internal
Revenue Service. Employees are eligible to participate in the plan after one
year of service and attainment of age 21. Management may make discretionary
contributions. For the years ended December 31, 1997 and 1998, the Praxis
Companies did not contribute funds to the 401(k) plan.
4. RELATED PARTY TRANSACTIONS
The Praxis Companies had short-term borrowings totaling $94,000 from a
director during the year ended December 31, 1997 which were repaid in full.
Interest on this borrowing was approximately $4,000.
5. INCOME TAXES
Through the date of acquisition, the Company elected to be treated as a
Subchapter S-Corporation for federal income tax purposes. As such, it did not
incur any taxes at the corporate level. All federal taxable income was passed
through to its owners. Subsequent to the date of acquisition, the Company is
included in the consolidated income tax returns filed by EPS.
F-72
135
REPORT OF INDEPENDENT AUDITORS
Board of Directors
EPS Solutions Corporation
We have audited the accompanying statements of operations, stockholder's
equity, and cash flows of Pritchett Publishing Company for the years ended
December 31, 1997 and 1998. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Pritchett
Publishing Company for the years ended December 31, 1997 and 1998, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
February 5, 1999
F-73
136
PRITCHETT PUBLISHING COMPANY
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998
----------- -----------
Revenues:
Publishing................................................ $ 7,232,470 $ 5,753,331
Training.................................................. 6,678,438 5,464,978
Consulting................................................ 3,892,313 2,141,488
Other operating revenue................................... 139,578 280,809
----------- -----------
Total revenues.............................................. 17,942,799 13,640,606
Costs and Expenses:
Cost of sales............................................. 4,714,602 4,246,774
Selling, general and administrative....................... 12,045,635 10,017,673
----------- -----------
Income (loss) from operations............................... 1,182,562 (623,841)
Interest income............................................. 124,094 109,447
Other nonoperating income................................... 38,869 2,443
----------- -----------
Income (loss) before extraordinary item..................... 1,345,525 (511,951)
Extraordinary item.......................................... -- (148,000)
----------- -----------
Net income (loss)........................................... $ 1,345,525 $ (659,951)
=========== ===========
See accompanying notes.
F-74
137
PRITCHETT PUBLISHING COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
COMMON STOCK
--------------- ADDITIONAL RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- ---------- -------------
Balance at January 1, 1997................ 125 $1 $12,511 $6,398,321 $6,410,833
Net income.............................. -- -- -- 1,345,525 1,345,525
Capital distribution.................... -- -- -- (134,027) (134,027)
--- -- ------- ---------- ----------
Balance at December 31, 1997.............. 125 1 12,511 7,609,819 7,622,331
Net loss................................ -- -- -- (659,951) (659,951)
Capital distribution.................... -- -- -- (134,027) (134,027)
--- -- ------- ---------- ----------
Balance at December 31, 1998.............. 125 $1 $12,511 $6,815,841 $6,828,353
=== == ======= ========== ==========
See accompanying notes.
F-75
138
PRITCHETT PUBLISHING COMPANY
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------
1997 1998
----------- ----------
OPERATING ACTIVITIES
Net income (loss)........................................... $ 1,345,525 $ (659,951)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 853,628 674,434
Provision for doubtful accounts........................... 99,806 5,787
Loss on sale of fixed assets.............................. -- 818,518
Changes in operating assets and liabilities:
Accounts receivable, net............................... (1,143,378) 1,549,780
Accounts receivable -- EPS............................. -- (812,097)
Inventory.............................................. 209,996 28,259
Prepaid expenses and other current assets.............. (12,630) (23,037)
Other assets........................................... -- (47,293)
Accounts payable....................................... (791,068) (233,490)
Accrued liabilities and other.......................... 100,293 77,858
----------- ----------
Net cash provided by operating activities................... 662,172 1,378,768
INVESTING ACTIVITIES
Purchase of furniture, fixtures, and equipment.............. (822,434) (140,112)
Proceeds from the sale of furniture, fixtures, and
equipment................................................. -- 79,800
Purchases of other assets................................... (25,817) --
----------- ----------
Net cash used in investing activities....................... (848,251) (60,312)
FINANCING ACTIVITIES
Capital distributions....................................... (134,027) (134,027)
----------- ----------
Net cash used in financing activities....................... (134,027) (134,027)
Net (decrease) increase in cash............................. (320,106) 1,184,429
Cash and cash equivalents at beginning of year.............. 1,701,071 1,380,965
----------- ----------
Cash and cash equivalents balance at end of year............ $ 1,380,965 $2,565,394
=========== ==========
See accompanying notes.
F-76
139
PRITCHETT PUBLISHING COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION
Pritchett Publishing Company (dba Pritchett & Associates) (the Company),
is a publishing, training, and consulting company that specializes in improving
employee and organizational productivity. The Company, based in Dallas, Texas,
has both domestic and international sales. The Company was incorporated in 1991.
On December 14, 1998, the Company's stockholder entered into an agreement
with EPS Solutions Corporation (EPS) to sell the Company's common stock. For
financial accounting purposes the effective date of the transaction was December
31, 1998. Accordingly, the Company's financial statements have been prepared on
a historical basis and, as such, do not reflect any purchase price adjustments
related to the sale. Expenses related to the sale of the business are presented
as an extraordinary item in the statement of operations.
REVENUE RECOGNITION
Consulting, training and publishing revenues are recognized when the
services are provided. Fees and commission revenues are recognized during the
period such services are earned.
CONCENTRATION OF CREDIT RISK
Concentration of credit risk with respect to accounts receivable are
limited due to the diversity of customers who are dispersed across many
geographic regions. No one customer accounts for a significant portion of the
Company's accounts receivable portfolio. As a result, the Company does not
consider itself to have any significant concentrations of credit risk.
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Credit losses
have been within management's expectations and within amounts provided through
the allowances for doubtful accounts.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers
investment securities with original maturities of three months or less to be
cash equivalents.
FURNITURE, FIXTURES, AND EQUIPMENT
Furniture, fixtures, and equipment are carried at amortized cost.
Depreciation and amortization have been provided using a method that
approximates the straight-line method over the assets' estimated useful lives
ranging from 5 to 7 years.
MARKETING EXPENSES
The Company expenses marketing costs as incurred. Marketing expenses
totaled approximately $2,787,000 and $1,765,000 in the years ended December 31,
1997 and 1998, respectively.
LOSS ON SALE OF ASSETS
During 1998, the Company sold certain furniture, fixtures, and equipment
to a third party. The Company incurred a loss on the sale of approximately
$819,000.
F-77
140
PRITCHETT PUBLISHING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates made in preparing the financial statements include the
allowance for doubtful accounts.
2. COMMITMENTS
The Company has entered into operating leases for its computer equipment
and office facilities with varying terms and escalation clauses. Rent expense
for the years ended December 31, 1997 and 1998, was approximately $916,000 and
$947,000, respectively.
3. EMPLOYEE BENEFIT PLAN
The Company sponsored a 401(k) benefit program which was available to all
employees. The Company matches 100% of employee contributions up to 5% of
employee compensation for participating employees. Participants are vested 100%
in employer contributions to the Plan after five years. The Company contributed
approximately $163,000 and $150,000 to the plans during 1997 and 1998,
respectively.
4. INCOME TAXES
Through the date of acquisition, the Company's stockholder elected for the
Company to be treated as a Subchapter S-Corporation for federal income tax
purposes. As such, it did not incur any taxes at the corporate level. All
federal taxable income was passed through to its stockholder. Subsequent to the
date of acquisition, the Company is included in the consolidated income tax
returns filed by EPS.
F-78
141
REPORT OF INDEPENDENT AUDITORS
Board of Directors
EPS Solutions Corporation
We have audited the accompanying statements of operations, members'
capital, and cash flows of RBG Group, Ltd., for the period from January 29, 1997
(inception) to December 31, 1997 and the year ended December 31, 1998. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of RBG Group,
Ltd. for the period from January 29, 1997 (inception) to December 31, 1997 and
the year ended December 31, 1998, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Columbus, Ohio
March 24, 1999
F-79
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RBG GROUP, LTD.
STATEMENTS OF OPERATIONS
PERIOD
JANUARY 29, 1997
(INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
---------------- ------------
Revenues:
Fees...................................................... $6,907,305 $7,240,814
Royalty income............................................ 157,983 232,398
Other operating revenue................................... 11,451 4,449
---------- ----------
Total revenue............................................... 7,076,739 7,477,661
Costs and expenses:
Cost of sales............................................. 2,264,248 2,130,062
Selling, general and administrative....................... 5,341,168 4,863,103
---------- ----------
Total costs and expenses.................................... 7,605,416 6,993,165
---------- ----------
Income (loss) from operations............................... (528,677) 484,496
Interest expense............................................ (230,585) (191,004)
Interest income............................................. 10,173 6,091
---------- ----------
Income (loss) before extraordinary item..................... (749,089) 299,583
Extraordinary item.......................................... -- (76,000)
---------- ----------
Net (loss) income........................................... $ (749,089) $ 223,583
========== ==========
See accompanying notes.
F-80
143
RBG GROUP, LTD.
STATEMENTS OF MEMBERS' CAPITAL
TOTAL
MEMBERS'
PAID-IN RETAINED CAPITAL
CAPITAL EARNINGS (DEFICIT)
------- --------- ---------
Balance at January 29, 1997 (inception)................... $ -- $ -- $ --
Capital contributions..................................... 63,000 -- 63,000
Net loss.................................................. -- (749,089) (749,089)
------- --------- ---------
Balance at December 31, 1997.............................. 63,000 (749,089) (686,089)
Net income................................................ -- 223,583 223,583
------- --------- ---------
Balance at December 31, 1998.............................. $63,000 $(525,506) $(462,506)
======= ========= =========
See accompanying notes.
F-81
144
RBG GROUP, LTD.
STATEMENTS OF CASH FLOWS
PERIOD
JANUARY 29, 1997
(INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
---------------- ------------
OPERATING ACTIVITIES
Net (loss) income........................................... $(749,089) $ 223,583
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Depreciation and amortization.......................... 376,364 410,175
Changes in operating assets and liabilities:
Accounts receivable.................................. (321,509) 400,812
Deposits and other assets............................ 10,000 (5,258)
Inventory............................................ 16,701 (5,589)
Deferred revenue..................................... 946,189 (406,822)
Accounts payable..................................... 384,804 (283,240)
Accrued expenses..................................... (201,529) 370,745
--------- ---------
Net cash provided by operating activities................... 461,931 704,406
INVESTING ACTIVITIES
Purchase of predecessor company............................. (623,290) --
Purchase of furniture, fixtures and equipment............... (16,284) (5,164)
Other intangibles........................................... (18,871) --
--------- ---------
Net cash used in investing activities....................... (658,445) (5,164)
FINANCING ACTIVITIES
Proceeds from short-term borrowings......................... 250,000 --
Payments of long-term borrowings............................ (820,774) (697,179)
Members' contributions...................................... 63,000 --
Proceeds from acquisition financing -- bank................. 705,175 --
--------- ---------
Net cash provided by (used in) financing activities......... 197,401 (697,179)
--------- ---------
Net increase in cash........................................ 887 2,063
Cash and cash equivalents at beginning of period............ -- 887
--------- ---------
Cash and cash equivalents at end of period.................. $ 887 $ 2,950
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................... $ 230,585 $ 156,404
See accompanying notes.
F-82
145
RBG GROUP, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION
RBG Group, Ltd., an Ohio limited liability company, commenced operations
on January 29, 1997 when the Company entered into an Asset Purchase Agreement to
acquire Rummler-Brache of Texas, Inc. (the predecessor company) for
approximately $3.2 million. The purchase was financed with a term loan from a
financial institution and seller provided financing. Acquisition costs exceeded
the fair value of the net assets acquired and the resulting goodwill was
amortized over 15 years.
The Company derives its revenues primarily from consulting and training
services in the area of process improvement.
On December 14, 1998, the Company's stockholders entered into an agreement
to sell certain assets of the Company to EPS Solutions Corporation for a gain.
For financial accounting purposes the effective date of the transaction was
December 31, 1998. Accordingly, the Company's financial statements have been
prepared on a historical basis and, as such, do not reflect any purchase price
adjustments related to the sale. Expenses related to the sale of the business
are presented as an extraordinary item in the statements of operations. As a
result of the sale, RBG Group, Ltd. ceased operations subsequent to the close of
business on December 31, 1998.
REVENUE RECOGNITION
The Company recognizes consulting revenues as the services are provided.
Training revenues are recognized at the time the courses or seminars are held.
CONCENTRATION OF CREDIT RISK
Concentrations of credit risk with respect to accounts receivable are
limited due to the diversity of customers who are dispersed across many
geographic regions and industries. In addition, all of the company's largest
customers are Fortune 500 companies with good credit ratings. As a result, the
Company does not consider itself to have any significant credit risks. No
customer represented more than 10% of the Company's annual sales for the periods
ended December 31, 1997 and 1998.
The company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Credit losses
have been within management's expectations and within amounts provided through
the allowances for doubtful accounts.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the company considers
investment securities with original maturities of three months or less to be
cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation and
amortization have been provided on the straight-line method over the assets'
estimated useful lives ranging from 4 to 7 years.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess cost of certain assets acquired over the
fair value of the net assets at the date of the acquisition and is being
amortized on the straight-line method over 15 years. Other
F-83
146
RBG GROUP, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
intangibles include non-compete agreements. These intangibles have been
amortized over the lives of the agreements, ranging from 2 to 4 years.
INCOME TAXES
As a limited liability company, income taxes are liabilities of the
individual holders of the company's membership units.
ADVERTISING EXPENSES
The Company expenses advertising costs as incurred. Advertising expenses
totaled approximately $120,000 and $178,000 for the periods ended December 31,
1997 and 1998, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Estimates
made in preparing the financial statements include the allowance for doubtful
accounts.
RECLASSIFICATION
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation period.
2. RELATED PARTY TRANSACTIONS
The Company has entered into the following contracts with McLernon &
Associates, Ltd. (M&A) (Four of the five members of RBG Group, Ltd. are also
members of M&A):
- Management Services Contract, whereby M&A provided certain accounting,
finance, legal and administrative services for the Company. Management
services fees paid to M&A aggregated approximately $443,000 and $480,000
for the periods ended December 31, 1997 and 1998, respectively.
- Real Estate Lease, whereby the Company leases a portion offices located
in Columbus, Ohio from M&A.
- Office Equipment and Furniture Lease, whereby the Company leases various
office equipment and furniture located at its Columbus, Ohio offices
from M&A.
The Company is also charged for work performed on behalf of the Company by
M&A employees. Fees charged by M&A for the real estate lease, lease of office
equipment, and work performed by M&A employees aggregated approximately $26,000
and $45,000 for the periods ended December 31, 1997 and 1998, respectively.
3. EMPLOYEE BENEFIT PLANS
The Company has no direct employees or benefit plans. All employees are
leased through a contracted relationship with Team America Corporation, which
provides all benefit plans.
F-84
147
REPORT OF INDEPENDENT AUDITORS
Board of Directors
EPS Solutions Corporation
We have audited the accompanying statements of operations, shareholders'
equity, and cash flows of the Wadley-Donovan Group Ltd. for the year ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of the
Wadley-Donovan Group Ltd. for the year ended December 31, 1998, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Metropark, New Jersey
June 23, 1999
F-85
148
THE WADLEY-DONOVAN GROUP LTD.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
Revenues:
Consulting fees........................................... $2,884,085
Operating expenses:
Payroll and benefits...................................... 2,041,759
Outside services.......................................... 451,428
General and administrative................................ 478,507
----------
Total operating expenses.................................... 2,971,694
Interest and other income................................... 23,142
----------
Loss before income taxes and extraordinary item............. (64,467)
Provision for income taxes.................................. 25,000
----------
Income before extraordinary item............................ (89,467)
Extraordinary item.......................................... (53,968)
----------
Net loss.................................................... $ (143,435)
==========
See accompanying notes.
F-86
149
THE WADLEY-DONOVAN GROUP LTD.
STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998
COMMON RETAINED
STOCK EARNINGS TOTAL
------ --------- ---------
Balance at December 31, 1997................................ $6,117 $ 487,463 $ 493,580
Net loss.................................................. -- (143,435) (143,435)
Issuance of common shares................................. 2,000 -- 2,000
------ --------- ---------
Balance at December 31, 1998................................ $8,117 $ 344,028 $ 352,145
====== ========= =========
See accompanying notes.
F-87
150
THE WADLEY-DONOVAN GROUP LTD.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
OPERATING ACTIVITIES
Net loss.................................................... $(143,435)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation expense...................................... 16,346
Gain on sales of assets................................... (11,457)
Changes in operating assets and liabilities:
Increase in accounts receivable........................ (439,289)
Increase in accounts payable and accrued liabilities... 593,662
Increase in income taxes payable....................... 13,122
---------
Net cash provided by operating activities................... 28,949
INVESTING ACTIVITIES
Purchase of property and equipment.......................... (11,708)
Proceeds from sales of assets............................... 27,500
---------
Net cash provided by investing activities................... 15,792
FINANCING ACTIVITIES
Issuance of common shares................................... 2,000
Receipt of shareholders' advances........................... 35,040
Net cash provided by financing activities................... 37,040
Net increase in cash and cash equivalents................... 81,781
Cash and cash equivalents at beginning of period............ 244,158
---------
Cash and cash equivalents at end of period.................. $ 325,939
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes................ $ 13,221
See accompanying notes.
F-88
151
THE WADLEY-DONOVAN GROUP LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
The Wadley-Donovan Group Ltd. (the Company) is a New Jersey professional
services corporation (PSC) that provides location consulting services and
economic data to major clients throughout the country. Also, the Company
provides consulting services to local, state, and regional development agencies.
The Company was incorporated March 27, 1992.
On September 30, 1998 the Company was merged with the following affiliated
entities:
James P. Wadley & Co., Inc.
Location Data Resources, Inc.
Economic Development Services, Inc.
During the year prior to the merger the affiliated corporations were
inactive.
On December 14, 1998, the shareholders of the Company entered into an
agreement to sell the Company's common stock to EPS Solutions Corporation (EPS).
For financial accounting purposes the effective date of the transaction was
December 31, 1998. Accordingly, the Company's financial statements have been
prepared on a historical basis and, as such, do not reflect any purchase price
adjustments related to the sale. Expenses related to the sale of the business
are presented as an extraordinary item in the statement of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents are deemed to be any short-term, nonequity investment
that is readily convertible to cash and is not subject to market fluctuations,
with an original maturity of three months or less.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Income tax expense is the current tax payable
for the period and the change during the period in deferred tax assets and
liabilities.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures 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.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets, ranging from five
to seven years.
F-89
152
THE WADLEY-DONOVAN GROUP LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Consulting fees are recognized upon completion of services provided by the
Company.
3. DEFINED CONTRIBUTION PLAN
The Company adopted an age weighted defined contribution plan effective as
of January 1, 1995. For the year ended December 31, 1998 the Company contributed
$125,000 to the plan.
4. LEASES
The Company leases their New Jersey office facility on a month-to-month
basis. Rent expense amounted to $75,894 for the year ended December 31, 1998.
5. INCOME TAXES
The provision for income taxes for the year ended December 31, 1998
consisted of the following:
Current:
Federal................................................... $20,000
State and city............................................ 5,000
-------
Provision for income taxes................................ $25,000
=======
The provision for income taxes differs from the amount of income tax
determined by applying the applicable statutory federal income tax rate to
pre-tax income, principally as a result of state income taxes and certain book
expenses that are not deductible for income tax purposes.
F-90
153
eFox, L.L.C.
Balance Sheets
(unaudited)
DECEMBER 31
-----------------------
1998 1999
-----------------------
ASSETS
Current assets:
Cash $ 683,308 $ 143,894
Accounts receivable due from affiliates -- 10,557
Prepaid expenses and other 2,191 1,690
-----------------------------
Total current assets 685,499 156,141
Property and equipment, net 210,303 140,525
Other assets 1,690 -
-----------------------------
Total assets $ 897,492 $ 296,666
=============================
LIABILITIES AND MEMBERS' CAPITAL (DEFICIT)
Current liabilities:
Accounts payable $ 85,277 $ 22,797
Deferred revenue -- affiliates -- 55,457
Due to members 1,000,000 --
-----------------------------
Total current liabilities 1,085,277 78,254
Members' capital (deficit) (187,785) 218,412
------------------------------
Total liabilities and members' capital (deficit) $ 897,492 $ 296,666
==============================
See accompanying notes.
F-91
154
eFox, L.L.C.
Statements of Operations
(unaudited)
PERIOD FROM
MAY 29, 1998
(INCEPTION)
TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------------------------
Net revenues:
Web site services $ -- $ 59,678
Licenses -- 82,089
Other -- 10,699
------------------------------
Total net revenues -- 152,466
Operating expenses:
Selling, general and administrative expenses 179,701 741,584
Royalty expense - affiliate -- 18,856
------------------------------
Total operating expenses 179,701 760,440
------------------------------
Operating loss (179,701) (607,974)
Other income (expense):
Interest income 4,583 14,171
Interest expense - members (12,667) --
------------------------------
(8,084) 14,171
------------------------------
Net loss $(187,785) $(593,803)
==============================
See accompanying notes.
F-92
155
eFox, L.L.C.
Statements of Members' Capital (Deficit)
(unaudited)
Period from May 29, 1998 (inception) to December 31, 1999
MEMBERS' ACCUMULATED
CONTRIBUTIONS DEFICIT TOTAL
-------------------------------------------
Net loss $ -- $(187,785) $ (187,785)
-------------------------------------------
Balance at December 31, 1998 -- (187,785) (187,785)
Conversion of due to members into
members' capital 1,000,000 -- 1,000,000
Net loss -- (593,803) (593,803)
-------------------------------------------
Balance at December 31, 1999 $1,000,000 $(781,588) $ 218,412
===========================================
See accompanying notes.
F-93
156
eFox, L.L.C.
Statements of Cash Flows
(unaudited)
PERIOD FROM
MAY 29, 1998
(INCEPTION)
TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------------------------
OPERATING ACTIVITIES
Net loss $ (187,785) $ (593,803)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 7,157 86,320
Changes in operating assets and liabilities:
Accounts receivable due from affiliates -- (10,557)
Prepaid expenses and other (2,191) 501
Other assets (1,690) 1,690
Accounts payable 85,277 (62,480)
Deferred revenue - affiliates -- 55,457
------------------------------
Net cash used in operating activities (99,232) (522,872)
INVESTING ACTIVITIES
Purchases of property and equipment (217,460) (16,542)
------------------------------
Net cash used in investing activities (217,460) (16,542)
FINANCING ACTIVITIES
Proceeds from due to members 1,000,000 --
------------------------------
Net (decrease) increase in cash 683,308 (539,414)
Cash at beginning of year -- 683,308
------------------------------
Cash at end of year $ 683,308 $ 143,894
==============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest to members $ 12,667 $ --
==============================
Conversion of due to members into members' capital $ -- $1,000,000
==============================
See accompanying notes.
F-94
157
eFox, L.L.C.
Notes to Financial Statements
(unaudited)
December 31, 1998 and 1999
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTIONS OF BUSINESS
eFox, L.L.C. (the Company) was formed as a limited liability company (L.L.C.)
in Delaware on May 29, 1998. The Members of the Company include: EPS
Corporation (EPS), the parent company of Holden Corporation (Holden); the chief
executive officer and former owner of Holden; and his spouse. The Members of the
Company are not personally liable for any expense, liability or obligation of
the Company except to the extent of the member's interest in the Company and the
member's obligation to return distributions made under certain circumstances.
The Company is a software development company that designs, develops, markets
and distributes sales personnel training, assessment, marketing, recruiting and
similar sales personnel materials and products through the Internet or
corporate intranet systems in the United States.
The Company was classified as a development stage company until June 1999. In
June 1999, the Company completed its planned principal operations by releasing
its signature product, Foxview, the Company's premiere Web-based sales
performance enhancement system.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash accounts with one bank in Illinois. The total
cash balances are insured by the FDIC up to $100,000 per bank. The Company has
cash balances of $683,304 and $143,894 at December 31, 1998 and 1999,
respectively, that exceed the balance insured by the FDIC.
F-95
158
eFox, L.L.C.
Notes to Financial Statements (continued)
(unaudited)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
double declining method over the estimated useful lives which are as follows:
Asset Description Life
- -------------------------------- --------
Furniture and fixtures 7 years
Computer software and hardware 3-5 years
DEFERRED REVENUE
Deferred revenue represents the unearned portion of agreements that have been
invoiced and will be recognized in revenue when the service is performed.
REVENUE RECOGNITION
The Company generates revenues from the creation of Web sites and licensing the
right to use its proprietary software product, Foxview, to its customers.
Revenue is recognized upon completion and delivery of the Web site to the
customer and revenue from software license agreements is recognized ratably
over the term of the license agreement, which is typically twelve months, if:
- - persuasive evidence of an arrangement exists;
- - the fee is fixed or determinable; and
- - collection is probable.
The Company's policy is to not allow returns of any products. The Company
issues product upgrades on a when and if available basis.
F-96
159
eFox, L.L.C.
Notes to Financial Statements (continued)
(unaudited)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
The Company is treated substantially as if it were a partnership. The Company
is not subject to U.S. federal income taxes as this amount is transferred to
its Members and reported directly by the Members on their income tax returns.
The Company is subject to state replacement taxes; however, a provision has not
been made in the accompanying financial statements since the Company had a
taxable net loss in 1998 and 1999.
USE OF ESTIMATES
The preparation of financial statements on the accrual method of accounting
used for federal income tax purposes requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
1998 1999
---- ----
Furniture and fixtures $ 30,190 $ 31,937
Computer software and hardware 187,270 202,065
-------- --------
217,460 234,002
Less: Accumulated depreciation (7,157) (93,477)
-------- --------
$210,303 $140,525
======== ========
F-97
160
eFox, L.L.C.
Notes to Financial Statements (continued)
(unaudited)
3. LEASE COMMITMENTS
In December 1998 the Company entered into an operating lease for its facility.
In March 2000, the Company entered into an operating lease for certain computer
hardware. Future minimum lease payments under the leases with a term of one
year or more at December 31, 1999 is as follows:
2000 $21,085
2001 2,432
2002 2,432
2003 608
-------
$26,557
=======
Rent expense totaled $1,690 and $20,493 for period from June 22, 1998 through
December 31, 1998 and for the year ended December 31, 1999, respectively.
4. RELATED PARTY TRANSACTIONS
Accounts receivable due from affiliates totaling $10,557 at December 31, 1999
consists of $8,977 due from Holden and $1,580 due from EPS.
Deferred revenue totaling $55,457 at December 31, 1999 consists of $45,057 for
Holden and $10,400 for EPS.
Due to members totaling $1,000,000 at December 31, 1998 consists of an amount
due to the chief executive officer of Holden and his spouse and bears interest
at 8% per annum. Interest expense and interest paid related to this amount
totaled $12,667 for period from June 22, 1998 through December 31, 1998. This
amount was converted into members' capital on January 1, 1999.
Revenues from affiliates consist of the following at December 31, 1999:
EPS $138,378
Holden 14,088
--------
$152,466
========
F-98
161
eFox, L.L.C.
Notes to Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
On July 1998, the Company entered into a license agreement with Holden whereby
the Company obtained a non-exclusive, non-transferable and non-assignable
worldwide license to use the Holden intellectual property into the Company's
products which are to be used, marketed, distributed, transmitted, sublicensed
and licensed in electronic form by the Company. The Company agreed to pay Holden
a 15% royalty for products sold based on cash receipts which incorporate a
portion of the Holden intellectual property. There was no royalty expense for
period from June 22, 1998 through December 31, 1998. Royalty expense totaled
$18,856 for the year ended December 31, 1999.
On January 29, 2000, the Company entered into a professional services agreement
with Holden whereby the Company agreed to provide Holden with certain
professional services in the form of software development and software
consulting. Holden agreed to pay the Company's operating expenses including
appropriate out-of-pocket expenses approved by Holden that are directly related
to the project. The total of these costs is expected to range between $60,000
and $70,000 per month, as stated in the agreement. The agreement can be
terminated by either party at any time.
F-99
162
PowerBase Selling Limited
PROFIT AND LOSS ACCOUNT
for the 8 months ended 31 December 1999
(unaudited)
Notes (pound sterling)
----- -----------------
TURNOVER 2 535,544
Cost of sales 275,723
-------
Gross profit 259,821
Administrative expenses 189,898
-------
OPERATING PROFIT 3 69,923
Interest receivable 1,798
Interest payable 6 (85)
-------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION 71,636
Taxation 7 20,000
-------
PROFIT FOR THE FINANCIAL PERIOD 51,636
=======
There were no recognised gains or losses other than those recorded above.
The notes to the financial statements are an integral part of the financial
statements.
F-100
163
PowerBase Selling Limited
BALANCE SHEET
at 31 December 1999
(unaudited)
Notes (pound sterling)
---------- ----------------
FIXED ASSETS
Tangible assets 8 5,955
-----------
CURRENT ASSETS
Debtors 9 160,364
Cash at bank and in hand 46,734
-----------
207,098
CREDITORS: amounts falling due within one year 10 (157,659)
-----------
NET CURRENT ASSETS 49,439
-----------
TOTAL ASSETS LESS CURRENT LIABILITIES 55,394
CREDITORS: amounts falling due after more than one year 11 758
-----------
54,636
===========
CAPITAL AND RESERVES
Called up share capital 15 3,000
Profit and loss account 16 51,636
-----------
SHAREHOLDERS' FUNDS-EQUITY 54,636
===========
The notes to the financial statements are an integral part of the financial
statements.
F-101
164
PowerBase Selling Limited
STATEMENT OF CASH FLOWS
for the 8 months ended 31 December 1999
(unaudited)
Notes (pound sterling)
-------- ----------------
NET CASH INFLOW FROM OPERATING ACTIVITIES 3 (b) 47,196
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE ------
Bank interest paid (48)
Interest element of finance lease rental payments (37)
Interest received 1,798
------
NET CASH INFLOW FROM RETURNS ON INVESTMENTS
AND SERVICING OF FINANCE 1,713
------
TAXATION
Corporation tax paid --
------
TAX PAID --
------
CAPITAL EXPENDITURE
Payments to acquire tangible fixed assets (6,842)
Proceeds from sale of tangible fixed assets --
------
NET CASH OUTFLOW FROM CAPITAL EXPENDITURE (6,842)
------
NET CASH INFLOW BEFORE FINANCING 42,067
------
FINANCING
Issue of share capital 3,000
Net movement in short term borrowings --
Net movement in long term borrowings --
Repayments of capital element of finance lease rentals 1,667
------
NET CASH INFLOW FROM FINANCING 4,667
------
INCREASE IN CASH 14 46,734
======
The notes to the financial statements are an integral part of the financial
statements.
F-102
165
PowerBase Selling Limited
NOTES TO THE ACCOUNTS
at 31 December 1999
(unaudited)
1. ACCOUNTING POLICIES
ACCOUNTING CONVENTION
The accounts are prepared under the historical cost convention, and in
accordance with applicable United Kingdom accounting standards.
COMPANIES ACT 1985
These financial statements do not comprise statutory accounts within the
meaning of section 240 of the Companies Act 1985 of Great Britain. No
statutory accounts for PowerBase Selling Limited have been delivered to the
Registrar of Companies for England and Wales.
DEPRECIATION
Depreciation is provided on all tangible fixed assets at rates calculated
to write off the cost or valuation, less estimated residual value, of each
asset evenly over its expected useful life, as follows:
Office furniture and fittings - 25% reducing balance
Computer equipment - 33% on cost
The carrying values of tangible fixed assets are reviewed for impairment in
periods if events or changes in circumstances indicate the carrying value
may not be recoverable.
LEASING AND HIRE PURCHASE AGREEMENTS
Assets held under finance leases and hire purchase contracts are
capitalised in the balance sheet and are depreciated over their estimated
useful lives.
The interest element of the rental obligations is charged to the profit and
loss account over the period of the lease and represents a constant
proportion of the balance of capital repayments outstanding.
Rentals paid under operating leases are charged to income on a straight
line basis over the lease term.
FOREIGN CURRENCY
Assets and liabilities in foreign currencies are translated into Sterling
at the rates of exchange ruling at the balance sheet date. Transactions in
foreign currencies are translated into Sterling at the rate of exchange at
the date of the transaction. Exchange differences are taken to the profit
and loss account.
DEFERRED TAXATION
Deferred taxation is provided on the liability method on all timing
differences which are expected to reverse in the future without being
replaced, calculated at the rate at which it is estimated that taxation
will be payable.
Deferred tax assets are only recognised if recovery without replacement by
equivalent debit balances is reasonably certain.
F-103
166
PowerBase Selling Limited
NOTES TO THE ACCOUNTS
at 31 December 1999
2. TURNOVER
Turnover, which is stated net of value added tax, represents amounts
invoiced to third parties in respect of the group's continuing activity,
the provision of sales training and consultancy services.
Turnover arises from the following geographic markets:
8 months
ended
31 December
1999
(Pound sterling)
United Kingdom 455,212
Europe 80,332
-------
535,544
=======
3. OPERATING PROFIT
(a) This is stated after charging/(crediting):
8 months
ended
31 December
1999
(Pound sterling)
Depreciation of owned fixed assets 735
Depreciation of assets held under finance leases
and hire purchase contracts 152
Operating lease rentals - land and buildings 10,625
=======
(b) Reconciliation of operating profit to net cash outflow from operating
activities:
8 months
ended
31 December
1999
(Pound sterling)
Operating profit 69,923
Depreciation 887
Increase in operating debtors and prepayments (160,364)
Increase in operating creditors and accruals 136,750
--------
47,196
========
4. DIRECTORS' REMUNERATION
8 months
ended
31 December
1999
(Pound sterling)
Emoluments 75,000
=======
F-104
167
PowerBase Selling Limited
NOTES TO THE ACCOUNTS
at 31 December 1999
4. DIRECTORS' REMUNERATION (continued)
8 months
ended
31 December
1999
No.
Members of defined contribution pension schemes --
=======
5. STAFF COSTS
8 months
ended
31 December
1999
(pound sterling)
Wages and salaries 127,512
Social security costs 12,692
Other pension costs --
-------
140,204
=======
The average weekly number of employees during the
period was
8 months
ended
31 December
1999
No.
Consultancy 4
Administration 1
-------
5
=======
6. INTEREST PAYABLE
8 months
ended
31 December
1999
(pound sterling)
Interest on bank and overdraft loans 48
Interest on finance leases 37
-------
85
=======
F-105
168
PowerBase Selling Limited
NOTES TO THE ACCOUNTS
at 31 December 1999
7. TAXATION
8 months
ended
31 December
1999
(pound sterling)
Based on the profit for the period:
Corporation tax - 20% 20,000
==========
8. TANGIBLE FIXED ASSETS
Office
furniture and Computer
fittings equipment Total
(pound sterling) (pound sterling) (pound sterling)
---------------- ---------------- ----------------
Cost:
Additions in the period 875 5,967 6,842
--- ----- -----
At 31 December 1999 875 5,967 6,842
=== ===== =====
Depreciation:
Charge for the period 96 791 887
--- ----- -----
At 31 December 1999 96 791 887
=== ===== =====
Net book value:
At 31 December 1999 779 5,176 5,955
=== ===== =====
The net book amount of computer equipment above includes (pound
sterling) 1,667 in respect of assets held under finance leases and hire
purchase contracts.
F-106
169
PowerBase Selling Limited
NOTES TO THE ACCOUNTS
at 31 December 1999
9. DEBTORS
31 December
1999
(pound sterling)
Trade debtors 151,769
Other debtors 6,000
Prepayments 2,595
-------
160,364
=======
Other debtors includes (pound sterling) 6,000 in respect of a rent
deposit which is repayable upon expiry of the lease under which it was
paid. This is due to expire within one year.
10. CREDITORS: amounts falling due within one year
31 December
1999
(pound sterling)
Sales invoiced in advance 28,667
Bank loans and overdrafts 25,617
Obligations under finance leases and hire purchase 909
contracts (note 12)
Trade creditors 31,807
Corporation tax 20,000
Other taxes and social security costs 32,539
Accruals and deferred income 18,120
-------
157,659
=======
11. CREDITORS: amounts falling due after more than one year
31 December
1999
(pound sterling)
Obligations under finance leases and hire purchase
contracts (note 12) 758
=======
F-107
170
PowerBase Selling Limited
NOTES TO THE ACCOUNTS
at 31 December 1999
12. OBLIGATIONS UNDER FINANCE LEASES AND HIRE PURCHASE CONTRACTS
31 December
1999
(pound sterling)
Obligations under finance leases 2,075
Less: finance charges allocated to future periods (408)
------
1,667
======
Amounts payable:
within one year 909
due within two to five years 758
------
1,667
======
13. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS
31 December
1999
(pound sterling)
INCREASE IN CASH 46,734
Cash outflow from decrease in lease financing (1,667)
------
Change in net debt resulting from cash flows 45,067
------
MOVEMENT IN NET FUNDS IN THE PERIOD 45,067
NET FUNDS AT 4 MAY --
------
NET FUNDS AT 31 DECEMBER 45,067
======
14. ANALYSIS OF NET FUNDS
At At
4 May Cash 31 December
1999 flow 1999
(pound sterling) (pound sterling) (pound sterling)
Cash at bank and in hand -- 46,734 46,734
Finance leases -- (1,667) (1,667)
------ ------ ------
-- 45,067 45,067
====== ====== ======
F-108
171
PowerBase Selling Limited
NOTES TO THE ACCOUNTS
at 31 December 1999
15. SHARE CAPITAL
Allotted,
called up
Authorised and fully paid
31 December 31 December
1999 1999
No. (pound sterling)
Ordinary shares of (pound sterling) 1 each 1,000,000 3,000
========= =======
During the period the company issued 3,000 ordinary shares of (pound sterling) 1
each for cash consideration of (pound sterling) 3,000.
16. RECONCILIATION OF SHAREHOLDERS' FUNDS
Share Profit and
capital loss account Total
(pound sterling) (pound sterling) (pound sterling)
Share issue 3,000 3,000
Profit for the period 51,636 51,636
----- ------ ------
At 31 December 1999 3,000 51,636 54,636
===== ====== ======
17. OTHER FINANCIAL COMMITMENTS
Annual commitments under non-cancellable operating leases are as follows:
Land and
buildings
31 December
1999
(pound sterling)
Operating leases which expire:
within one year 31,150
======
F-109
172
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
EPS SOLUTIONS CORPORATION (PARENT COMPANY)
CONDENSED BALANCE SHEETS
(Unaudited)
(dollars in thousands)
ASSETS
DECEMBER 31,
---------------------
1998 1999
-------- ---------
Current assets
Cash...................................................... $ 29 $ 232
Income taxes receivable................................... -- 6,379
-------- ---------
Total current assets........................................ 29 6,611
Deferred tax asset.......................................... -- 376
Investment in Subsidiary.................................... 132,096 90,569
Deferred financing costs.................................... 6,044 4,466
Other....................................................... 2,400 2,853
-------- ---------
Total assets................................................ $140,569 $ 104,875
======== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities....................................... $ 352 $ 2,334
Note payable to subsidiary................................ 78,039 99,681
Subordinated notes payable................................ 77,896 96,251
Other liabilities held for sale........................... -- 1,300
-------- ---------
Total liabilities........................................... 156,285 199,566
Stockholders' deficit:
Common stock.............................................. 35 56
Accumulated deficit....................................... (15,751) (94,747)
-------- ---------
Total stockholders' deficit................................. (16,245) (100,214)
-------- ---------
Total liabilities and stockholders' equity.................. $140,569 $ 104,875
======== =========
F-110
173
EPS SOLUTIONS CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands)
PERIOD FROM MAY 29,
1998 (INCEPTION) TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------- -----------------
Revenues.................................................. $ 2,080 $ --
Expenses (primarily interest)............................. (276) (15,740)
------- --------
Income (loss) before income taxes and equity
in net loss of subsidiary............................... 1,804 (15,741)
Income tax benefit........................................ -- 6,213
------- --------
1,804 (9,527)
Equity in net loss of subsidiaries........................ (5,089) (74,195)
------- --------
Net loss.................................................. $(3,285) $(83,722)
======= ========
F-111
174
EPS SOLUTIONS CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
PERIOD FROM
MAY 29, 1998
(INCEPTION) TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
Net cash provided by (used in) operating activities........ $ 2,155 $ (6,752)
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchase price adjustments to prior year
acquisitions.............................................. -- (2,665)
Acquisitions of subsidiaries............................... (59,984) (7,695)
Increase in notes receivable............................... (2,400) (453)
-------- --------
Net cash used in investing activities...................... (62,384) (10,813)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of subordinated notes payable....... 500 1,800
Cash of acquisition entities contributed to
Operating Company......................................... (16,931) (5,426)
Advances from Operating Company............................ 78,037 21,644
Increase in deferred financing cost........................ (6,044) (600)
Decrease in stockholders' equity........................... 4,696 350
-------- --------
Net cash provided by financing activities.................. 60,258 17,768
-------- --------
Net change in cash......................................... 29 203
Cash at beginning of period................................ -- 29
-------- --------
Cash at end of period...................................... $ 29 $ 232
======== ========
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Common stock issued for notes receivable................... $ 17,128 $ 27,746
Sale of subsidiaries for notes receivable.................. -- 14,009
Repurchase of common stock in exchange for notes
receivable................................................ -- 10,089
Liability incurred for common stock to be issued........... -- 1,250
Purchase of minority interest in exchange for notes
payable................................................... -- 200
F-112
175
EPS SOLUTIONS CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands)
NOTE A -- BASIS OF PRESENTATION
In these parent company-only financial statements, EPS Solutions
Corporation's (the Parent Company) investment in its wholly owned subsidiary,
Enterprise Profit Solutions Corporation (the Subsidiary) is stated at cost less
equity in undistributed losses of the Subsidiary since its date of inception.
These financial statements should be read in conjunction with the Company's
consolidated financial statements included elsewhere herein.
NOTE B -- ACQUISITIONS
In December 1999, the Parent Company acquired 33 businesses. Twenty-two
acquisitions were completed by purchasing all of the outstanding equity
interests of the acquired businesses, while eleven acquired businesses were
acquired by purchasing specified net assets from their former owners.
Concurrently, the Parent Company contributed the net assets or equity interest
of the acquired businesses to the Subsidiary in exchange for 999 shares of the
Subsidiary.
In March and April 2000, the Parent Company acquired five additional
businesses. Three of these acquisitions were completed by purchasing all of the
outstanding equity interests of the business and two acquisitions were acquired
by purchasing specified net assets from its former owner. Concurrently, the
Parent Company contributed the net assets or equity interests of these entities
to the Subsidiary in the form of additional capital contribution.
NOTE C -- LONG-TERM DEBT
The Subsidiary advanced approximately $72,000 and $28,000 of the proceeds
from borrowings under its credit facility to the Parent Company during 1998 and
1999, respectively. The Parent Company used these advances as partial
consideration for the purchase of the acquired businesses. The advances are
evidenced by an unsecured note payable to the Subsidiary that bears interest at
5.5%, payable in cash or in-kind, and has no stated maturity date. Interest
paid-in-kind of none and $5,030 is included in note payable to the Subsidiary at
December 31, 1998 and 1999, respectively.
The Parent Company issued subordinated notes payable as partial
consideration for the acquisitions. The subordinated notes payable, including
amounts classified as Other Liabilities Held for Sale, bear interest, payable
in-kind. Interest paid-in-kind of $0 and $9,109 is included in subordinated
notes payable at December 31, 1998 and 1999, respectively.
NOTE D -- GUARANTEE
The Subsidiary has $126,500 of long-term debt outstanding at December 31,
1999. Under the terms of its credit agreement (the Agreement), the Company has
guaranteed to the lenders the payment of all principal and interest. The
Agreement also restricts the transfer of funds to the Parent Company from its
subsidiary.
NOTE E -- TAX SHARING ARRANGEMENT
The Company files a consolidated tax return, which includes the operating
results of its Subsidiary. The Company and its Subsidiary have entered into a
tax sharing arrangement whereby federal and state income taxes are computed on a
separate return basis.
The Company uses the liability method of accounting for income taxes.
Under this method, deferred taxes are determined based on the differences
between the financial statements and the tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse. Deferred tax assets are recognized and measured based on
the likelihood of realization of the related tax benefit in the future.
F-113
176
EPS SOLUTIONS CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING OF COSTS AND ACCOUNTS - DEDUCTIONS - END OF
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------- ------------ ---------- ---------- ------------ ----------
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
Period from May 29, 1998
to December 31, 1998 $ -- $ 50(A) $ 4,655 (B) $ -- $4,705
Year ended December 31, 1999 $4,705 $2,585(A) $(2,380)(C) $(1,868)(D)
$ 634(E) $ (567)(F) -- $3,109
NOTES
(A) Bad debt expense
(B) Allowance for doubtful accounts assumed in acquisitions
(C) Amounts reclassified to current assets held for sale
(D) Accounts written off
(E) Amounts charged against revenues
(F) Amounts reclassified to other assets
F-114
177
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1 Certificate of Incorporation
3.2 Bylaws
4.1 Form of Stockholder Agreement
10.1 2000 Stock Performance Plan
10.2 Form of Indemnification Agreement
10.3 David H. Hoffmann Employment Agreement (11/24/99)
10.4 David H. Hoffmann Restricted Stock Purchase Agreement (12/14/98)
10.5 David H. Hoffmann Restricted Stock Purchase Agreement (9/1/99)
10.6 David H. Hoffmann Amendment to Restricted Stock Purchase Agreement (11/24/99)
10.7 David H. Hoffmann Restricted Stock Purchase Agreement (11/24/99)
10.8 David H. Hoffmann Amendment to Employment Agreement
10.9 James F. Holden Employment Agreement/Holden (3/19/99)
10.10 James F. Holden Employment Agreement/EMD (3/19/99)
10.11 James F. Holden Restricted Stock Purchase Agreement/Holden (3/19/99)
10.12 James F. Holden Restricted Stock Purchase Agreement/EMD (3/19/99)
10.13 James F. Holden Amendment to Restricted Stock Purchase Agreement (9/1/99)
10.14 Early Price Pritchett III Employment Agreement (12/14/98)
10.15 Early Price Pritchett III Restricted Stock Purchase Agreement (12/14/98)
10.16 First Amendment to DHR International, Inc. Asset Purchase Agreement
10.17 [reserved]
10.18 Mark C. Coleman Employment Agreement (12/10/99)
10.19 Mark C. Coleman Amendment Agreement (12/10/99)
10.20 Mark C. Coleman Restricted Stock Purchase Agreement (8/13/99)
10.21 Mark C. Coleman Restricted Stock Purchase Agreement (12/14/98)
10.22 Mark C. Coleman Restricted Stock Purchase Agreement (8/28/98)
10.23 David M. Ehlen Confidential Agreement
10.24 David M. Ehlen Restricted Stock Purchase Agreement
10.25 Michael G. Goldstein Employment Agreement (12/10/99)
10.26 Michael G. Goldstein Restricted Stock Purchase Agreement (3/18/99)
10.27 Michael G. Goldstein Restricted Stock Purchase Agreement Amendment (12/10/99)
10.28 Michael G. Goldstein Restricted Stock Purchase Agreement (12/10/99)
10.29 The Ringco Group LLC Participating Consultant Assignment Agreement
10.30 DHR International, Inc. Asset Purchase Agreement
10.31 Holden Corporation Stock Purchase Agreement
10.32 eFox, L.L.C. Stock Purchase and Option Agreement
10.33 Agreement
178
10.34 Benefit Funding Services Group, LLC Securities Purchase Agreement
10.35 National RevMax Consulting, LLC Securities Purchase Agreement
10.36 National HealthCare Recovery Services, LLC Rescission Agreement
10.37 CENV Option Purchase Agreement
10.38 Disbursement Recovery Services LLC Securities Purchase Agreement
10.39 FFR Holding Co., Inc. Stock Purchase Agreement
10.40 National Benefits Consultants, L.L.C. Securities Purchase Agreement
10.41 National Recovery Services, LLC Securities Purchase Agreement
10.42 Eric R. Watts and Christopher P. Massey Settlement Agreement
10.43 NRS/OGI/Medco/EPS Travel Solutions Asset Purchase Agreement
10.44 National HealthCare Recovery Services, LLC Securities Purchase Agreement
10.45 Pritchett Publishing Company Stock Purchase Agreement
10.46 Deloitte & Touche LLP Asset Purchase Agreement
10.47 Deloitte & Touche LLP Contract Rights Purchase Agreement
10.48 TSL Services, Inc. Stock Purchase Agreement
10.49 D.L.D. Insurance Brokers, Inc. Stock Purchase Agreement
10.50 Credit Agreement (12/7/98)
10.51 First Amendment to Credit Agreement and Waiver (3/17/99)
10.52 Amended and Restated Credit Agreement (4/1/99)
10.53 First Amendment to Amended and Restated Credit Agreement (9/30/99)
10.54 First Amendment to Pritchett Publishing Company Stock Purchase Agreement
22.1 Subsidiaries of the Registrant