EX-99 6 exhibite2-2006.txt YORK HISTORICAL FINANCIAL STATEMENTS EXHIBIT E YORK INSURANCE SERVICES GROUP, INC. AND SUBSIDIARIES TABLE OF CONTENTS -------------------------------------------------------------------------------- Page ----- INDEPENDENT AUDITORS' REPORT 1 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003: Balance Sheets 2 Statements of Income 3 Statements of Stockholders' Equity 4 Statements of Cash Flows 5 Notes to Financial Statements 6-13 Supplemental Schedule 14-33 E-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of York Insurance Services Group, Inc. and Subsidiaries Parsippany, New Jersey We have audited the accompanying consolidated balance sheets of York Insurance Services Group, Inc. and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such consolidated financial statements present fairly, in all material respects, the financial position of the companies as of December 31, 2004 and 2003, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule of operating expenses for York Insurance Services Group, Inc. and Subsidiaries, for the years ended December 31 2004 and 2003, is presented for the purpose of additional analysis and is not a required part of the basic financial statements. The supplemental schedule is the responsibility of the Company's management. Such supplemental schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects when considered in relation to the basic financial statements taken as a whole. We have not audited any financial statements of the Company for any period subsequent to December 31, 2004. Significant events subsequent to this date are discussed in Note 13. /s/ DELOITTE & TOUCHE LLP February 11, 2005 (January 20, 2006 as to Note 13.) E-2
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2004 AND 2003 -------------------------------------------------------------------------------------- ASSETS 2004 2003 ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 5,106,919 $ 2,705,401 Accounts receivable, less allowance for doubtful accounts of $553,000 and 450,000 11,742,609 7,768,112 Unbilled revenue 8,714,865 1,712,237 Taxes recoverable 429,939 Deferred income taxes 1,425,306 816,466 Prepaid expenses and other current assets 930,043 559,963 -------- --------- - Total current assets 27,919,742 13,992,118 ----------- ---------- - PROPERTY AND PLANT-- Furniture, fixtures and equipment--Net 4,072,397 3,504,802 ---------- --------- - OTHER ASSETS: Other intangible assets--Net 2,250,000 2,500,000 Goodwill 1,050,294 1,050,294 Other 188,677 166,298 --------- --------- - Total other assets 3,488,971 3,716,592 --------- --------- - TOTAL $ 35,481,110 $ 21,213,512 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,215,555 $ 480,290 Accrued payroll expenses 1,614,685 499,341 Accrued expenses 795,784 349,370 Accrued sub-contractors' fees 3,151,990 - Taxes payable 719,460 - Current portion of deferred income 4,553,345 2,935,284 Current portion of note payable 345,386 320,505 Current portion of capital lease obligation 244,001 163,171 Other current liabilities 110,411 109,565 ---------------------------- - Total current liabilities 13,750,617 4,857,526 ---------- --------- - NONCURRENT LIABILITIES: Deferred income 505,927 322,257 Notes payable 1,209,949 2,046,509 Capital lease obligation 416,129 296,561 Deferred income taxes 26,588 332,891 Other 363,280 283,183 -------- --------- - Total noncurrent liabilities 2,521,873 3,281,401 --------- --------- MINORITY INTEREST 361,647 268,713 ------- ------- STOCKHOLDERS' EQUITY: Common stock--no par value, 1,000 shares authorized, 1,000 shares issued and outstanding - - Additional paid-in capital 3,000,000 3,000,000 Retained earnings 15,846,973 9,805,872 ---------- --------- - Total stockholders' equity 18,846,973 12,805,872 ---------- ---------- - TOTAL $ 35,481,110 $ 21,213,512 ============ ============
See notes to consolidated financial statements. E-3 YORK INSURANCE SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2004 AND 2003 --------------------------------------------------------------------------------
2004 2003 ---- ---- REVENUE $71,409,418 $52,759,165 OPERATING EXPENSES 60,849,590 43,589,651 ----------- ---------- INCOME FROM OPERATIONS 10,559,828 9,169,514 ---------- --------- OTHER INCOME AND DEDUCTIONS: Investment income 38,136 38,331 Interest expense (155,689) (207,376) (117,553) (169,045) --------- --------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 10,442,275 9,000,469 ---------- --------- PROVISION FOR INCOME TAXES (4,208,239) (3,228,231) MINORITY INTEREST IN USTM INCOME (192,935) (172,109) --------- --------- NET INCOME $ 6,041,101 $ 5,600,129 =========== ===========
See notes to consolidated to financial statements. E-4 YORK INSURANCE SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2004 AND 2003 -------------------------------------------------------------------------------- 2004 2003 ---- ---- COMMON STOCK: $ - $ - --- --- ADDITIONAL PAID-IN CAPITAL Balance-- Beginning of year 3,000,000 3,000,000 --------- --------- Balance--End of year 3,000,000 3,000,000 --------- --------- RETAINED EARNINGS: Balance-- Beginning of year 9,805,872 4,205,743 Net income 6,041,101 5,600,129 --------- --------- Balance--End of year 15,846,973 9,805,872 ---------- --------- TOTAL STOCKHOLDERS' EQUITY--End of year $ 18,846,973 $ 12,805,872 ============ ============ See notes to consolidated financial statements. E-5
YORK INSURANCE SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004 AND 2003 ------------------------------------------------------------------------------------------------------ 2004 2003 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,041,101 $ 5,600,129 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,429,752 1,219,776 Bad debt expense 154,740 177,614 Loss on disposition of fixed assets 1,004 30,226 Changes in: Accounts receivable (4,129,237) (2,134,112) Unbilled revenues (7,002,628) 1,069,766 Minority interest 192,935 172,109 Deferred income taxes (915,143) 648,421 Prepaid expenses and other current assets (370,080) 101,062 Other noncurrent assets (22,379) 482,247 Accounts payable 1,735,265 85,929 Accrued payroll expenses 1,115,344 (46,654) Accrued expenses 446,414 254,956 Accrued sub-contractors' fees 3,151,990 0 Taxes payable 1,149,399 (958,939) Deferred income 1,801,731 (392,726) Other payables 80,943 280,813 --------- -------- Net cash provided by operating activities 4,861,151 6,590,617 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (1,355,656) (1,673,818) Net proceeds from sale of fixed assets 1,550 5,200 --------- --------- Net cash used in investing activities (1,354,106) (1,668,618) --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable (811,679) (2,831,628) Repayment of capital lease obligation (193,847) (127,223) Partnership distributions (100,001) - --------- --------- Net cash used in financing activities (1,105,527) (2,958,851) --------- ---------- NET INCREASE IN CASH 2,401,518 1,963,148 CASH AND CASH EQUIVALENTS--Beginning of year 2,705,401 742,253 --------- -------- CASH AND CASH EQUIVALENTS--End of year $ 5,106,919 $ 2,705,401 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid--income taxes $ 4,011,427 $ 3,538,749 =========== =========== Cash paid--interest $ 155,689 $ 206,966 ========= =========
See notes to consolidated financial statements. E-6 YORK INSURANCE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 -------------------------------------------------------------------------------- 1. NATURE OF OPERATIONS AND ORGANIZATION York Insurance Services Group, Inc. (the "Company") provides comprehensive claims services for insurance carriers and self-insureds. Claim services provided include property and casualty, workers' compensation, transportation, environmental and surveillance investigations. Services are provided throughout the United States. The Company has a 50 percent ownership in a general partnership, Underground Storage Tank Management ("USTM"). The partnership was formed to contract with various State agencies to audit the costs incurred for the clean up of contaminated underground storage tanks and perform site inspections. All revenue is derived from work performed for the State of Florida Department of Environmental Protection. The Company maintains managerial, financial and operational control of USTM. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation-- The financial statements include York Insurance Services Group, Inc., its wholly owned subsidiaries, York Claims Service, Inc., York Claims Service, Inc. - Florida, York Special Investigations, Inc., York Claims Service of Nevada, Inc. and its 50 percent investment in USTM. York Claims Service, Inc. and York Claims Service, Inc. - Florida, Inc. provide comprehensive claims services and third-party administration for insurance carriers, self-insureds, municipalities, brokers and other intermediaries. York Special Investigations, Inc. offers surveillance investigation in addition to other special investigation services. Investment in USTM Partnership--The Company's 50 percent investment in USTM is fully consolidated and a minority interest is recorded to account for the minority interest holder's proportionate share of net equity and net income in USTM. Management's Use of Estimates--The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are primarily used in the determination of unbilled revenue, deferred income and allowance for doubtful accounts. Actual results may differ from those estimates. Cash Equivalents--The Company considers money market funds and highly liquid debt instruments purchased with original maturity dates of three months or less to be cash equivalents. Unbilled Revenue-- Unbilled revenue represents work performed on client files that have not been invoiced at the end of the year, as per contract terms or customary on-account billing procedures. The unbilled revenues are valued based on actual time or estimated completion of services. E-7 Deferred Income Taxes--The deferred income tax assets recorded on the consolidated balance sheets represent the income tax effects of temporary differences between the tax basis of assets and their amounts for financial reporting purposes. Deferred income taxes arise from the recognition of these temporary differences. Property and Depreciation--The Company depreciates the cost of property and equipment over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives for the principal classifications are as follows: Furniture, fixtures and equipment 7 years Computer hardware and software 3-5 years Automobiles 5 years Leasehold improvements 3-10 years Capitalized Software and Development--The Company capitalizes costs associated with internally developed software or systems. These costs included external direct costs for services and payroll and payroll related costs for employees directly associated with developing internal-use software and systems. Such costs are amortized on a straight-line basis over five years. Goodwill and Other Intangible Assets--In June 2001, the FASB issued two new pronouncements: SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 was effective as follows: a) use of the pooling-of-interest method is prohibited for business combinations initiated after June 30, 2001; and b) the provisions of SFAS 141 also apply to all business combinations accounted for by the purchase method that are completed after June 30, 2001 (that is, the date of the acquisition was July, 2001 or later). SFAS 142 is effective for fiscal years beginning after December 15, 2001, to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. In connection with the application of SFAS 141 and SFAS 142, the Company initially recorded $4,050,294 as goodwill at the time of acquisition. The Company reviews goodwill and other intangible assets for impairment annually, or more frequently as events or circumstances arise. After considering legal factors, business climate, potential action by regulators, key personnel and financial position, the Company believes there has been no impairment of goodwill and other intangible assets as of December 31, 2004 and 2003. Allowance for Doubtful Accounts--The Company creates a reserve for receivables that may become uncollectible. The amount of the reserve is based upon management's assessment of several factors including the review of aging experience. Revenue Recognition--Revenue is recognized as a claim file is being processed, based on the estimated rate at which services are provided or the actual value of time. The estimated rate at which services are provided is based on the average life of the claim and recognized as the claim enters different phases of the claims handling process. The full amount of revenue is recognized when the claim is closed or when the services have been completed. Deferred Income-- Deferred income represents the unearned portion of fixed fee arrangements or fixed percentages or net earned premiums, derived from insurance policies issued by clients. Deferred income is recognized into income based upon proportional performance. E-8 3. PROPERTY & PLANT The carrying value of depreciable assets as of December 31, 2004 is as follows: Accumulated Carrying Classification Cost Depreciation Value Furniture, fixtures and equipment $2,535,287 $ 734,907 $ 1,800,380 Computer hardware and software 1,655,333 856,337 798,996 Automobiles 7,391 7,391 Leasehold improvements 670,658 217,972 452,686 Systems development 1,774,109 753,774 1,020,335 --------- -------- --------- Total $6,642,778 $2,570,381 $ 4,072,397 ========== ========== =========== During 2004 depreciation expense was $1,179,752. The carrying value of depreciable assets as of December 31, 2003 is as follows: Accumulated Carrying Classification Cost Depreciation Value Furniture, fixtures and equipment $1,895,177 $ 418,839 $ 1,476,338 Computer hardware and software 1,339,297 596,757 742,540 Automobiles 7,391 6,097 1,294 Leasehold improvements 516,001 131,661 384,340 Systems development 1,323,744 423,454 900,290 ---------- --------- ---------- Total $5,081,610 $1,576,808 $ 3,504,802 ========== ========== =========== During 2003, depreciation expense was $969,776. 4. OTHER INTANGIBLE ASSETS Other intangible assets consist principally of trademarks and trade names and customer relationships. Customer relationships are amortized on a straight-line basis over an estimated useful life of 10 years. Trademarks and trade names and goodwill which are not amortized are assessed for impairment on an annual basis or more frequently as events or circumstances arise. Amortization of intangible assets charged to operations amounted to $250,000 for the years ended December 31, 2004 and 2003. E-9 Other intangible assets consist of the following at December 31, 2004: Accumulated Carrying Classification Cost Amortization Value Amortized intangible assets: Customer relationships $2,500,000 $750,000 $1,750,000 ========== ======== ========== Unamortized intangible assets: Trademark names $ 500,000 $ $ 500,000 ========== ======= ========== Other intangible assets consist of the following at December 31, 2003: Accumulated Carrying Classification Cost Amortization Value Amortized intangible assets: Customer relationships $2,500,000 $ 500,000 $2,000,000 ========== ========= ========== Unamortized intangible assets: Trademarks and trade names $ 500,000 $ - $ 500,000 ========= ==== ========= The estimated amortization expense for the years ending December 31, 2005, 2006, 2007, 2008 and 2009 is $250,000 each year. 5. LEASE COMMITMENTS The Company leases office space in each of the cities in which its offices are located and certain office equipment under operating leases. Rental expense for all operating leases totaled $2,702,028 in 2004 and $1,775,331 in 2003. Future minimum lease payments for operating leases that have initial or remaining noncancelable terms in excess of one year as of December 31, 2004 are as follows:
2005 2006 2007 2008 2009 Thereafter Total Office space $1,992,398 $1,742,792 $1,388,674 $ 1,290,961 $ 1,049,961 $2,985,580 $10,450,366 Equipment 346,322 187,740 79,491 16,644 - 630,197 ---------- ---------- ---------- ----------- ----------- ---------- ----------- Total $2,338,720 $1,930,532 $1,468,165 $ 1,307,605 $ 1,049,961 $2,985,580 $11,080,563 =========== ========== ========== =========== =========== ========== ===========
6. CAPITAL LEASE OBLIGATIONS The Company leases certain office equipment and furniture under capital leases with terms up to 48 months. The leases expire between January 2005 and December 2008. The total amount of equipment and furniture financed by capital leases was $394,245 in 2004 and $364,871 in 2003. The total amount paid by the Company was $193,847 in 2004 and $127,223 in 2003. E-10 The carrying value of equipment held under capital leases, which is included in property, plant, and equipment in the financial statements, as of December 31, 2004 is as follows: Accumulated Carrying Classification Cost Depreciation Value Equipment under capital lease $ 912,624 $ 203,045 $ 709,579 ========= ========= ========= During 2004, depreciation expense was $100,400. The carrying value of equipment held under capital leases, which is included in property, plant, and equipment in the financial statements, as of December 31, 2003 is as follows: Accumulated Carrying Classification Cost Depreciation Value Equipment under capital lease $ 654,247 $ 102,645 $ 551,602 ========= ========= ========= During 2003, depreciation expense was $75,862. 7. NOTES PAYABLE During 2002, the Company acquired loans of $5,000,000 and $4,000,000 from AIG and a commercial bank, respectively. The AIG loan was payable in sixty equal monthly installments commencing on February 18, 2002 with interest rate of prime plus 1.5 percent. The prime rate on January 1, 2003 was 4.25 %. On June 17, 2003, the Company paid the AIG note down to $1,000,000, at which time the terms of the loan were renegotiated. The renegotiated loan is payable in 36 equal installments of $31,106, with interest at 7.50 %. The remaining annual principal payments applicable to the AIG note as of December 31, 2004 are as follows: 2005 2006 Total $ 345,387 $ 182,621 $ 528,008 ========= ========= ========= The remaining annual principal payments applicable to the AIG note as of December 31, 2003 are as follows: 2004 2005 2006 Total $ 320,505 $ 345,387 $ 182,621 $ 848,513 ========== ========== ========== ========= E-11 The commercial loan is a revolving line of credit for a period of four years and is deemed automatically renewed for a successive term of one year thereafter. The interest rate on the revolving line of credit is the prime rate, 5.25% at December 31, 2004. Both the AIG and commercial bank loans require the Company to maintain a working capital of not less than $5,000,000 at all times and tangible net worth of $4,250,000, $4,750,000, $5,250,000 and $5,750,000 on December 31, 2002, 2003, 2004 and 2005, respectively. The Company was in compliance with requirements on both loans for December 31, 2004 and 2003. 8. INCOME TAXES The provision for federal, state and local income taxes for the years ended December 31, 2004 and 2003 is comprised of the following: 2004 2003 Current - Federal, state and local $5,123,382 $ 2,579,810 Deferred income tax benefit (915,143) 648,421 ----------- ----------- $4,208,239 $ 3,228,231 ========== =========== The provision for income taxes differs from the amount of income tax expense determined by applying the 35% U.S. statutory Federal income tax rate to pre-tax income as follows: 2004 2003 Income Before Income Taxes and Minority Interest $ 10,442,275 $ 9,000,469 Minority Interest in USTM Income (192,935) (172,109) ------------ ----------- Pre-tax Net Income $ 10,249,340 $ 8,828,360 ============ ===========
Income Tax - Statutory Rate $ 3,587,269 35% $ 3,089,926 35% Meals & Entertainment 76,578 1% 50,056 1% State income taxes (288,184) -3% (217,625) -2% Other 9,194 0% (315,912) -4% -------- -- --------- --- Federal Total Income Tax Expense 3,384,857 33% 2,606,445 25% State Total Income Tax Expense 823,382 8% 621,786 7% ------- -- --------- -- Total Income Tax Expense $ 4,208,239 41% $ 3,228,231 37% =========== === =========== ===
E-12 Net deferred income tax assets and (liabilities) consist of the following as of December 31, 2004 and 2003: 2004 2003 Depreciation and amortization $ (239,012) $ (454,781) Deferred income 1,408,830 771,756 Allowance for doubtful accounts 193,550 157,500 Enterprise appreciation rights 35,350 9,100 ------- ------- $1,398,718 $ 483,575 ========== ========= 9. EMPLOYEE BENEFITS The Company has a voluntary employee savings plan (401(k) plan) in which eligible employees can contribute on a pretax basis a certain portion of their income. Matching contributions are made by the Company up to 6% of annual salary depending on the employees' years of service. The total cost of the plan to the Company was $632,401 in 2004 and $474,050 in 2003. The Company also has the following additional employee benefit plans: group life, health, dental, long-term disability and supplemental life insurance. The aggregate total of such additional employee benefit plan expense to the Company was $2,232,532 in 2004 and $2,109,851 in 2003. 10. CONCENTRATION OF BUSINESS Approximately 30% of the Company's revenues in 2004 and 2003 were provided by one customer and its subsidiaries. 11. FIDUCIARY ACCOUNT The Company holds money in escrow on behalf of certain clients. These escrow funds are used to pay losses and claim-related expenses on behalf of those clients. The payment of losses and claim-expenses does not affect the operating results of the Company. Neither the cash balances nor the related liabilities are included in the accompanying financial statements. The balance of the fiduciary accounts was $1,819,628 at December 31, 2004 and $1,667,824 at December 31, 2003. 12. COMMITMENTS AND CONTINGENCIES The Company is subject to legal proceedings and claims that arise as result of events that occur in the ordinary course of business. Although there can be no assurance as to the ultimate outcome of these matters, it is the opinion of the Company's management that the final disposition of such matters will not have a material adverse effect on the Company's financial position or results of operations. 13. SUBSEQUENT EVENTS On June 10, 2005, the Company declared corporate distributions of $5,000,000, payable to the shareholders of record on the close of business on June 15, 2005. The Company also committed to pay corporate distributions of $341,382 payable to the shareholders of record on the close of business on June 30, 2005. On November 29, 2005, the Company declared corporate distributions totaling $20,000,000, payable to the shareholders of record on the close of business on November 29, 2005. E-13 On December 14, 2005, the Company entered into a $15,000,000 term loan and a $5,000,000 revolving loan facility. On the same date, the Company closed the $4,000,000 revolving loan facility that was entered into on January 18, 2002. On December 23, 2005 the Company announced the signing of a definitive agreement under which Odyssey Investment Partners LLC in partnership with the Company's Chairman & CEO, other members of the Company's senior management and Ward Partners, LLC will purchase the Company. The primary selling shareholder is Bexil Corporation. ****** E-14 YORK INSURANCE SERVICES GROUP INC. AND SUBSIDIARIES SUPPLEMENTAL SCHEDULE OF OPERATING EXPENSES YEARS ENDED DECEMBER 31, 2004 AND 2003 -------------------------------------------------------------------------------- The following table represents the statements of operating expenses of York Insurance Services Group, Inc. for the years ended December 31, 2004 and 2003: 2004 2003 Salaries $ 42,834,174 $ 27,888,574 Employee benefits 3,225,881 2,798,208 Travel 1,425,828 835,174 Automobiles 1,330,018 1,113,140 Rent and related expenses 2,460,964 2,032,647 Equipment 672,853 683,112 Printing and stationary 723,692 610,973 Communications 1,917,145 1,704,209 Data processing 815,420 760,268 Depreciation and other amortization 1,429,752 1,219,776 Service fees 577,973 571,883 Loss adjustment expense 2,523,550 2,382,554 Other 912,340 989,133 -------- ------- Total operating expenses $ 60,849,590 $ 43,589,651 ============ ============ E-15 York Insurance Services Group, Inc. and Subsidiaries Consolidated Financial Statements As of September 30, 2005 and December 31, 2004 and for the Nine Month Periods Ended September 30, 2005 and 2004 (UNAUDITED) E-16 YORK INSURANCE SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 --------------------------------------------------------------------------------
ASSETS 2005 2004 Unaudited Unaudited CURRENT ASSETS: Cash and cash equivalents $ 2,057,302 $ 5,106,919 Accounts receivable, less allowance for doubtful accounts of $574,918 and 553,000 14,249,869 11,742,609 Unbilled revenue 2,515,668 8,714,865 Taxes recoverable 188,687 - Deferred income taxes 1,884,218 1,425,306 Prepaid expenses and other current assets 1,456,603 930,043 --------- --------- - Total current assets 22,352,347 27,919,742 ---------- ---------- - PROPERTY AND PLANT-- Furniture, fixtures and equipment--Net 4,350,548 4,072,397 --------- --------- - OTHER ASSETS: Other intangible assets--Net 2,062,500 2,250,000 Goodwill 1,050,294 1,050,294 Other 197,461 188,677 -------- --------- - Total other assets 3,310,255 3,488,971 --------- --------- TOTAL $ 30,013,150 $ 35,481,110 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 294,640 $ 2,215,555 Accrued payroll expenses 1,424,964 1,614,685 Accrued expenses 610,722 795,784 Accrued sub-contractors' fees - 3,151,990 Taxes payable - 719,460 Current portion of deferred income 6,347,425 4,553,345 Current portion of note payable 1,089,195 345,386 Current portion of capital lease obligation 268,634 244,001 Other current liabilities 70,752 110,411 -------------------------- Total current liabilities 10,106,332 13,750,617 ---------- ---------- - NONCURRENT LIABILITIES: Deferred income 464,578 505,927 Notes payable - 1,209,949 Capital lease obligation 356,033 416,129 Deferred income taxes 515,182 26,588 Other 417,235 363,280 ------- --------- - Total noncurrent liabilities 1,753,028 2,521,873 --------- --------- MINORITY INTEREST 379,018 361,647 ------- ------- STOCKHOLDERS' EQUITY: Common stock--no par value, 1,000 shares authorized, 1,000 shares issued and outstanding Additional paid-in capital 3,000,000 3,000,000 Retained earnings 14,774,772 15,846,973 ---------- ---------- - Total stockholders' equity 17,774,772 18,846,973 ---------- ---------- - TOTAL $ 30,013,150 $ 35,481,110 ============ ============
See notes to consolidated financial statements. E-17 YORK INSURANCE SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME NINE MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004 --------------------------------------------------------------------------------
2005 2004 Unaudited Unaudited REVENUE $51,357,653 $44,761,335 OPERATING EXPENSES 44,717,162 39,882,061 ----------- ---------- INCOME FROM OPERATIONS 6,640,491 4,879,274 --------- --------- OTHER INCOME AND DEDUCTIONS: Investment income 36,373 25,286 Interest expense (111,180) (116,604) -------- -------- (74,807) (91,318) ------- ------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 6,565,684 4,787,956 ---------- --------- PROVISION FOR INCOME TAXES (1,970,222) (1,521,154) MINORITY INTEREST IN USTM INCOME (326,281) (138,881) ---------- ---------- NET INCOME $ 4,269,181 $ 3,127,921 =========== ===========
See notes to consolidated to financial statements. E-18
YORK INSURANCE SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004 ------------------------------------------------------------------------------------------------------------- 2005 2004 Unaudited Unaudited CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,269,181 $ 3,127,921 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,189,694 1,057,391 Bad debt expense - 60,208 Loss on disposition of fixed assets 32,214 142 Changes in: Accounts receivable (2,507,260) (3,510,267) Unbilled revenues 6,199,197 (2,086,035) Minority interest 326,281 138,881 Deferred income taxes 29,682 (990,280) Prepaid expenses and other current assets (688,281) (259,759) Other noncurrent assets 152,937 (137,887) Accounts payable (189,721) 18,814 Accrued payroll expenses (1,920,915) 1,042,096 Accrued expenses (185,062) 479,296 Accrued sub-contractos' fees (3,151,990) 1,310,000 Taxes payable (908,147) 861,969 Deferred income 1,752,731 3,133,619 Other payables 14,296 176,323 ------- ------- Net cash provided by operating activities 4,414,837 4,422,432 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (1,161,005) (985,931) Net proceeds from sale of fixed assets 2,959 - ---------- --------- Net cash used in investing activities (1,158,046) (985,931) ------------ --------- CASH FLOWS FROM FINANCING ACTIVITIES: Corporate distributions (5,341,382) - Repayment of notes payable (466,140) (744,730) Repayment of capital lease obligation (189,976) (138,808) Partnership distributions (308,910) (100,000) ---------- --------- Net cash used in financing activities (6,306,408) (983,538) ------------ --------- NET INCREASE / (DECREASE) IN CASH (3,049,617) 2,452,963 CASH AND CASH EQUIVALENTS--Beginning of year 5,106,919 2,705,401 ---------- --------- CASH AND CASH EQUIVALENTS--September 30 $ 2,057,302 $ 5,158,364 ============ =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid--income taxes $ 2,575,774 $ 1,648,370 ============ =========== Cash paid--interest $ 111,180 $ 116,604 ========= =========
See notes to consolidated financial statements. E-19 YORK INSURANCE SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) -------------------------------------------------------------------------------- 1. NATURE OF OPERATIONS AND ORGANIZATION York Insurance Services Group, Inc. ("the Company") provides comprehensive claims services for insurance carriers and self-insureds. Claim services provided include property and casualty, workers' compensation, transportation, environmental and surveillance investigations. Services are provided throughout the United States. The Company has a 50 percent ownership in a general partnership, Underground Storage Tank Management ("USTM"). The partnership was formed to contract with various State agencies to audit the costs incurred for the clean up of contaminated underground storage tanks and perform site inspections. All revenue is derived from work performed for the State of Florida Department of Environmental Protection. The Company maintains managerial, financial and operational control of USTM. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation--The financial statements include York Insurance Services Group, Inc., its wholly owned subsidiaries, York Claims Service, Inc., York Claims Service, Inc. - Florida, York Special Investigations, Inc., York Claims Service of Nevada, Inc. and its 50 percent investment in USTM. York Claims Service, Inc. and York Claims Service, Inc. - Florida, Inc. provide comprehensive claims services and third-party administration for insurance carriers, self-insureds, municipalities, brokers and other intermediaries. York Special Investigations, Inc. offers surveillance investigation in addition to other special investigation services. Investment in USTM Partnership--The Company's 50 percent investment in USTM is fully consolidated and a minority interest is recorded to account for the minority interest holder's proportionate share of net equity and net income in USTM. Management's Use of Estimates--The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are primarily used in the determination of unbilled revenue, deferred income and allowance for doubtful accounts. Actual results may differ from those estimates. Cash Equivalents--The Company considers money market funds and highly liquid debt instruments purchased with original maturity dates of three months or less to be cash equivalents. Unbilled Revenue--Unbilled revenue represents work performed on client files that have not been invoiced at the end of the year, as per contract terms or customary on-account billing procedures. The unbilled revenues are valued based on actual time or estimated completion of services. Deferred Income Taxes--The deferred income tax assets recorded on the consolidated balance sheets represent the income tax effects of temporary differences between the tax basis of assets and their amounts for financial reporting purposes. Deferred income taxes arise from the recognition of these temporary differences. E-20 Property and Depreciation--The Company depreciates the cost of property and equipment over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives for the principal classifications are as follows: Furniture, fixtures and equipment 7 years Computer hardware and software 3-5 years Automobiles 5 years Leasehold improvements 3-10 years Capitalized Software and Development-- The Company capitalizes costs associated with internally developed software or systems. These costs included external direct costs for services and payroll and payroll related costs for employees directly associated with developing internal-use software and systems. Such costs are amortized on a straight-line basis over five years. Goodwill and Other Intangible Assets--In June 2001, the FASB issued two new pronouncements: SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 was effective as follows: a) use of the pooling-of-interest method is prohibited for business combinations initiated after June 30, 2001; and b) the provisions of SFAS 141 also apply to all business combinations accounted for by the purchase method that are completed after June 30, 2001 (that is, the date of the acquisition was July, 2001 or later). SFAS 142 is effective for fiscal years beginning after December 15, 2001, to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. In connection with the application of SFAS 141 and SFAS 142, the Company initially recorded $4,050,294 as goodwill at the time of acquisition. The Company reviews goodwill and other intangible assets for impairment annually, or more frequently as events or circumstances arise. After considering legal factors, business climate, potential action by regulators, key personnel and financial position, the Company believes there has been no impairment of goodwill and other intangible assets as of September 30, 2005 and 2004. Allowance for Doubtful Accounts--The Company creates a reserve for receivables that may become uncollectible. The amount of the reserve is based upon management's assessment of several factors including the review of aging experience. Revenue Recognition--Revenue is recognized as a claim file is being processed, based on the estimated rate at which services are provided or the actual value of time. The estimated rate at which services are provided is based on the average life of the claims and recognized as the claim enters different phases of the claims handling process. The full amount of revenue is recognized when the claim is closed or when the services have been completed. Deferred Income--Deferred income represents the unearned portion of fixed fee arrangements or fixed percentages or net earned premiums, derived from insurance policies issued by clients. Deferred income is recognized into income based upon proportional performance. E-21 3. LEASE COMMITMENTS The Company leases office space in each of the cities in which its offices are located and certain office equipment under operating leases. Rental expense for all operating leases totaled $2,411,280 and $2,702,028 for the nine month periods ended September 30, 2005 and 2004 respectively. Future minimum lease payments for operating leases that have initial or remaining noncancelable terms in excess of one year as of September 30, 2005 are as follows:
2005-3 Months 2006 2007 2008 2009 Thereafter Total Office space $ 647,901 $1,996,512 $1,568,368 $ 1,478,699 $ 1,244,069 $3,413,662 $ 10,349,211 Equipment 116,063 249,471 141,222 47,510 - 554,266 -------- -------- -------- ------- ----------- ----------- ------------ Total $ 763,964 $2,245,983 $1,709,590 $ 1,526,209 $ 1,244,069 $3,413,662 $ 10,903,477 ========= ========== ========== =========== =========== ========== ============
4. CAPITAL LEASE OBLIGATIONS The Company leases certain office equipment and furniture under capital leases with terms up to 48 months. The leases expire between January 2005 and December 2008. The total amount of equipment and furniture financed under capital leases was $154,513 and $224,040 for the nine months ended September 30, 2005 and 2004 respectively. The total amount paid by the Company was $189,976 and $138,808 for the nine month periods ended September 30, 2005 and 2004 respectively. The carrying value of equipment held under capital leases, which is included in property, plant, and equipment in the financial statements, as of September 30, 2005 is as follows: Classification Cost Depreciation Value Equipment under capital lease $ 1,183,723 $ 312,167 $ 871,556 =========== ========= ========= For the nine month period ended September 30, 2005, depreciation expense was $109,122. The carrying value of equipment held under capital leases, which is included in property, plant, and equipment in the financial statements, as of September 30, 2004 is as follows: Accumulated Carrying Classification Cost Depreciation Value Equipment under capital lease $ 742,419 $ 173,406 $ 569,013 ========= ========= ========= For the nine month period ended September 30, 2004, depreciation expense was $70,761. E-22 5. NOTES PAYABLE During 2002, the Company acquired loans of $5,000,000 and $4,000,000 from AIG and a commercial bank, respectively. The AIG loan was payable in sixty equal monthly installments commencing on February 18, 2002 with interest rate of prime plus 1.5 percent. The prime rate on January 1, 2003 was 4.25 %. On June 17, 2003, the Company paid the AIG note down to $1,000,000, at which time the terms of the loan were renegotiated. The renegotiated loan is payable in 36 equal installments of $31,106, with interest at 7.50 %. On March 25, 2005, the Company paid the remaining balance on the AIG note. The remaining annual principal payments applicable to the AIG note as of December 31, 2004 are as follows: 2005 2006 Total $ 345,387 $ 182,621 $ 528,008 ========= ========= ========= The commercial loan is a revolving line of credit for a period of four years and is deemed automatically renewed for a successive term of one year thereafter. The interest rate on the revolving line of credit is the prime rate, 5.25% at December 31, 2004. Both the AIG and commercial bank loans require the Company to maintain a working capital of not less than $5,000,000 at all times and tangible net worth of $4,250,000, $4,750,000, $5,250,000 and $5,750,000 on December 31, 2002, 2003, 2004 and 2005, respectively. The Company was in compliance with requirements on both loans for December 31, 2004 and 2003. 6. INCOME TAXES The provision for federal, state and local income taxes for the nine month periods ended September 30, 2005 and 2004 is comprised of the following: 2005 2004 Current - Federal, state and local $1,940,540 $ 2,511,434 Deferred income tax benefit 29,682 (990,280) ------- --------- $1,970,222 $ 1,521,154 ========== =========== The provision for income taxes differs from the amount of income tax expense determined by applying the 34% U.S. statutory Federal income tax rate to pre-tax income as follows: E-23
2005 2004 Unaudited Unaudited Income Before Income Taxes and Minority Interest $ 6,565,684 $ 4,787,956 Minority Interest in USTM Income (326,281) (138,881) ------------ ----------- Pre-tax Net Income $ 6,239,403 $ 4,649,075 =========== =========== Income Tax - Statutory Rate $ 2,121,397 34% $ 1,580,686 34% Meals & Entertainment 46,653 1% 51,378 1% State income taxes (187,460) -3% (189,564) -4% Other (561,721) -9% (478,885) -10% -------- --- --------- --- Federal Total Income Tax Expense 1,418,869 23% 963,614 21% State Total Income Tax Expense 551,353 9% 557,540 12% -------- -- -------- --- Total Income Tax Expense $ 1,970,222 32% $ 1,521,154 33% =========== === =========== ===
Net deferred income tax assets and (liabilities) consist of the following as of September 30, 2005 and 2004: 2005 2004 Depreciation and amortization $ (727,906) $ (80,652) Deferred income 1,846,703 1,399,467 Allowance for doubtful accounts 195,472 146,200 Enterprise appreciation rights 54,767 8,840 ------- ----- $1,369,036 $1,473,855 7. EMPLOYEE BENEFITS The Company has a voluntary employee savings plan (401(k) plan) in which eligible employees can contribute on a pretax basis a certain portion of their income. Matching contributions are made by the Company up to 6% of annual salary depending on the employees' years of service. The total cost of the plan to the Company was $531,974 and $462,430 for the nine month periods ended September 30, 2005 and 2004 respectively. The Company also has the following additional employee benefit plans: group life, health, dental, long-term disability and supplemental life insurance. The aggregate total of such additional employee benefit plan expense to the Company was $1,781,342 and $1,726,737 for the nine month periods ended September 30, 2005 and 2004 respectively. 8. CORPORATE DISTRIBUTIONS The Company distributed $5,341,382 and $0 to the shareholders of record for the nine month periods ended September 30, 2005 and 2004 respectively. 9. COMMITMENTS AND CONTINGENCIES The Company is subject to legal proceedings and claims that arise as result of events that occur in the ordinary course of business. Although there can be no assurance as to the ultimate outcome of these matters, it is the opinion of the Company's management that the final disposition of such matters will not have a material adverse effect on the Company's financial position or results of operations. E-24 10. SUBSEQUENT EVENTS On November 29, 2005, the Company declared corporate distributions totaling $20,000,000, payable to the shareholders of record on the close of business on November 29, 2005. On December 14, 2005, the Company entered into a $15,000,000 term loan and a $5,000,000 revolving loan facility. On the same date, the Company closed the $4,000,000 revolving loan facility that was entered into on January 18, 2002. On December 23, 2005 the Company announced the signing of a definitive agreement under which Odyssey Investment Partners LLC in partnership with the Company's Chairman & CEO, other members of the Company's senior management and Ward Partners, LLC will purchase the Company. The primary selling shareholder is Bexil Corporation. ****** YORK INSURANCE SERVICES GROUP, INC. AND SUBSIDIARIES SUPPLEMENTAL SCHEDULE OF OPERATING EXPENSES NINE MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004 -------------------------------------------------------------------------------- The following table represents the statements of operating expenses for the nine month periods ended September 30, 2005 and 2004: 2005 2004 Unaudited Unaudited Salaries $ 31,164,911 $ 26,874,182 Employee benefits 2,755,373 2,396,001 Travel 1,033,133 897,639 Automobiles 976,569 957,114 Rent and related expenses 2,185,083 1,809,475 Equipment 504,876 482,685 Printing and stationary 458,067 510,662 Communications 1,301,789 1,324,978 Data processing 593,109 606,659 Depreciation and other amortization 1,189,694 1,057,391 Service fees 411,635 402,718 Loss adjustment expense 1,450,373 1,968,866 Other 692,550 593,691 ------- ------- Total operating expenses $ 44,717,162 $ 39,882,061 ============= ============