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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-25890
INTERNATIONAL ALLIANCE SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2769024
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10055 SWEET VALLEY DRIVE
VALLEY VIEW, OHIO 44125
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (216) 447-9000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant is approximately $150,000,912 million as of March 27, 1997.
The number of outstanding shares of the Registrant's common stock is 34,724,428
shares as of March 25 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of the Registrant's Definitive Proxy
Statement relative to the 1997 Annual Meeting of
Stockholders.
Part IV Portions of previously filed reports and registration
statements.
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INTERNATIONAL ALLIANCE SERVICES, INC.
-------------------------------------
ANNUAL REPORT ON FORM 10-K
--------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------
TABLE OF CONTENTS
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PART I Page
Items 1 and 2. Business and Properties.......................................................... 2
Item 3. Legal Proceedings................................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders.............................. 17
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters............. 19
Item 6. Selected Consolidated and Combined Historical Financial Data..................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 21
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant............................... 27
Item 11. Executive Compensation........................................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management................... 27
Item 13. Certain Relationships and Related Transactions................................... 27
PART IV
Item 14. Exhibits and Reports on Form 8-K................................................. 27
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THE FOLLOWING TEXT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES
THERETO) APPEARING ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K ("ANNUAL
REPORT"). UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS ANNUAL
REPORT TO "IASI" OR THE "COMPANY" SHALL MEAN INTERNATIONAL ALLIANCE SERVICES,
INC., A DELAWARE CORPORATION, AND ITS OPERATING SUBSIDIARIES.
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
OVERVIEW
IASI is a diversified services company which, acting through its
subsidiaries, provides specialty insurance services, business outsourcing
services and environmental services. In October 1996, IASI completed two
acquisitions (the "Merger Transactions") pursuant to which it acquired, through
a reverse merger, Century Surety Company ("CSC") and its subsidiaries (together
with CSC, the "CSC Group"), which includes three insurance companies, and
Commercial Surety Agency, Inc. d/b/a Century Surety Underwriters ("CSU"), an
insurance agency that markets surety bonds. Through its insurance subsidiaries,
IASI provides specialty insurance and bonding services to small and medium sized
commercial enterprises throughout the United States.
In December 1996, IASI acquired SMR & Co. Business Services ("SMR").
Through SMR, IASI provides a wide range of business outsourcing services,
including information technology consulting, tax return preparation and
compliance, tax planning, business valuation, human resource management,
succession and estate planning, personal financial planning and employee benefit
program design and administration to individuals and small and medium sized
commercial enterprises primarily in Ohio.
In February 1997, IASI signed a non-binding letter of intent and
confidentiality agreement (collectively, the "Letter of Intent") to sell IASI's
environmental services operations. The Letter of Intent also contemplates the
formation of a strategic alliance between IASI and the purchaser whereby IASI
will continue to have access to IASI's environmental resources for the benefit
of its insurance customers after the sale. IASI anticipates that the sale will
be completed by mid-1997. Consummation of the transaction remains subject to the
purchaser's due diligence, the negotiation and execution of definitive
documentation and the receipt of necessary governmental and third party
approvals and consents. Accordingly, there can be no assurance that the
transaction will be consummated. See "- Environmental Services - General."
IASI's strategy is to aggressively grow as a diversified services
company by expanding its recently acquired specialty insurance and business
outsourcing services operations through internal growth and additional
acquisitions in such industries. See "- Business Strategy."
IASI was formed as a Delaware corporation in 1987 under the name Stout
Environmental, Inc. ("Stout"). In 1992, IASI was acquired by Republic
Industries, Inc. (formerly known as Republic Waste Industries, Inc., "RII"). In
April 1995, RII effected a spin-off of its hazardous waste operations through a
distribution of the common stock, $.01 par value per share ("Common Stock"), of
IASI to the stockholders of record of RII (the "Spin-off"). In connection with
the Merger Transactions, in October 1996, IASI changed its name to International
Alliance Services, Inc. from Republic Environmental Systems, Inc. IASI's Common
Stock trades on the Nasdaq National Market ("Nasdaq") under the trading symbol
"IASI." In June 1996, IASI declared and distributed a two-for-one stock split in
the form of a 100% stock dividend ("Stock Split"). All the share numbers and per
share amounts set forth herein reflect the Stock Split.
The principal executive office of IASI is located at 10055 Sweet Valley
Drive, Valley View, Ohio, 44125 and its telephone number is (216) 447-9000.
BUSINESS STRATEGY
IASI's business strategy is to expand its current operations in the
specialty insurance and business outsourcing services areas, and discontinue its
operations in the environmental services area. IASI plans to implement its
business strategy through internal growth and by acquiring and integrating
existing businesses that provide specialty insurance services or business
outsourcing services.
IASI generally targets acquisitions in markets where it will be, or the
prospects are favorable to increase its market share to become, a significant
provider of a comprehensive range of specialty insurance and business
outsourcing services. IASI's strategy is to acquire companies that (i) have
strong and energetic entrepreneurial leadership; (ii) have solid historic and
expected future internal growth; (iii) can add to the level and breadth of
services
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offered by IASI thereby enhancing IASI's competitive advantage over other
specialty insurance and business outsourcing services providers; (iv) have a
strong income stream; and (v) have a strong potential for cross-selling among
IASI's subsidiaries. As opportunities are identified, within or outside such
criteria, IASI may acquire specialty insurance and business outsourcing
operations throughout the United States.
IASI uses internal acquisition teams and its contacts in the specialty
insurance and business outsourcing services industries to identify, evaluate and
acquire businesses in attractive markets. Acquisition candidates are evaluated
by IASI's internal acquisition teams based on a comprehensive process which
includes operational, legal and financial due diligence reviews.
Although management believes that IASI currently has sufficient
resources, including cash on hand, cash flow from operating activities, credit
facilities and access to financial markets to fund current and planned
operations, service any outstanding debt and make certain acquisitions, there
can be no assurance that additional financing will be available on a timely
basis, if at all, or that it will be available on terms acceptable to IASI. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
ACQUISITIONS
RECENT ACQUISITIONS
The following are acquisitions completed since the consummation of the
Merger Transactions in October 1996:
In November 1996, IASI acquired Environmental and Commercial Insurance
Agency, Inc. ("ECI"), a small, privately-held insurance agency, for $1.0 million
in cash and 192,500 shares of Common Stock. ECI markets, through over 100
independent agents, property and casualty insurance surety bonds to
environmental remediation contractors, landfill operators, consultants, and
other small and medium sized companies specializing in environmental businesses
throughout the United States.
In December 1996, IASI completed the acquisition of all of the
outstanding shares of SMR in exchange for 600,000 shares of Common Stock and
warrants to purchase an additional 900,000 shares of Common Stock at an exercise
price of $10.375 per share.
In January 1997, IASI acquired certain of the assets and business of
Midwest Indemnity Corporation ("Midwest"), in exchange for $3.3 million in cash,
407,256 shares of Common Stock and $1.8 million in non-interest bearing notes
payable in installments through December 31, 1998. Midwest markets environmental
and surety bond products throughout the United States through a system of
approximately 100 independent agents and subagents.
In February 1997, IASI acquired Midland Consultants, Inc., a
full-service specialized employment firm, in exchange for $208,000 in cash,
87,500 shares of Common Stock and warrants to purchase an additional 20,000
shares of Common Stock at an exercise price of $11.625 per share.
In March 1997, IASI acquired M&N Risk Management, Inc., M&N
Enterprises, Inc. and Millisor Firmco, Inc. (collectively, the "M&N Companies")
for $1.0 million in cash, 384,600 shares of Common Stock and warrants to
purchase an additional 900,000 shares of Common Stock at an exercise price of
$13.00 per share. The M&N Companies provide third party workers' compensation
administration services.
PENDING ACQUISITIONS
In March 1997, IASI announced the contemplated acquisition of all of
the outstanding capital stock of The Benefits Group Agency, Inc, a full-service
corporate benefits administration company. ("The Benefits Group"), for $2.5
million in cash, 395,000 shares of Common Stock and warrants to purchase an
additional 500,000 shares of Common Stock at an exercise price of $12.50 per
share.
SPECIALTY INSURANCE SERVICES
GENERAL
Through its insurance subsidiaries, IASI provides specialty insurance
and bonding services to small and medium sized commercial enterprises throughout
the United States. The following is a description of the specialty insurance and
bonding services currently offered by IASI.
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OPERATIONS
The products provided by IASI's insurance subsidiaries can be divided
into two categories: commercial lines, which constitutes approximately 85% of
IASI's specialty insurance business, and surety bonds, which constitutes the
other 15% of IASI's specialty insurance business. In addition, IASI employs
reinsurance to limit its exposure on policies and bonds that it has written.
COMMERCIAL LINES. IASI's commercial lines operations consist of
approximately 40 different programs for a wide variety of specialty risk groups.
Largest among these are general liability insurance and related coverages for
small construction contractors; restaurants, bars, and taverns; small commercial
and retail establishments; sun tanning salons; and environmental contractors and
professionals.
Insurance coverages offered to environmental contractors and
professionals, include (i) property and general liability insurance for
remediation action contractors engaged in a full hazard range of clean-ups;
asbestos abatement contractors; underground storage tank removal and remediation
contractors; and solid waste landfill operators; and (ii) errors and omissions
insurance for environmental consultants. In addition IASI conducts a
comprehensive inspection of environmental risks which management believes
enhances its position as a provider of environmental insurance.
IASI's commercial lines business is produced by a network of
approximately 72 agents (with 104 offices) and 28 brokers (with 28 offices).
Subject to strict and detailed written underwriting guidelines regarding pricing
and coverage limitations published by IASI, agents have limited authority to
bind coverage. For casualty coverage, agents may bind and write up to $1.0
million combined single limit of liability for risks other than those on the
list of prohibited classes or on the list for referral to IASI. Policies that
are bound by agents are immediately forwarded to IASI for review and inspection
and IASI reserves the right to make the final underwriting decision based on
IASI's acceptance or rejection of individual risks. Risks outside the written
guidelines must be submitted to IASI for specific approval for underwriting.
Brokers have no underwriting authority and must submit all risks to IASI for
underwriting, quoting, binding and policy insurance.
IASI checks premium ratings on a selective basis to verify that program
rules and rates are being followed. In addition, underwriters perform monthly
reviews of files for renewal risks. Files are reviewed on a selective basis by
policy types, particular risk classes, or individual general agents as loss
experience or changing underwriting practices dictate. In addition to other
underwriting quality control measures, a continuous audit process for each
general agent is maintained. At least once a year, a visit to each agent's
office is arranged to review all of the foregoing areas, as well as premium
production, losses and loss ratio. Management also performs internal
underwriting audits of all underwriters on a regular basis to maintain control
of the underwriting quality and pricing of IASI.
All claims against commercial policies are managed by IASI's claim
departments. Outside adjusters and attorneys are engaged, as necessary, to
supplement IASI's in-house staff and to represent IASI in litigation over
disputed claims. Claims guidelines are in place on all programs. State
regulations and data on unfair claims practices are also provided to the staff
members as necessary and appropriate. IASI's philosophy is to pay valid claims
as expeditiously as possible but to resist firmly what management believes are
unjust and fraudulent claims. In an effort to provide adequate resources to the
claims staff, CSC became a member of the Property Loss Research Bureau and the
Liability Insurance Research Bureau in 1995. IASI also submits claim data to the
index bureaus of the American Services Insurance Group and the Property
Insurance Loss Register.
It is the responsibility of the claims manager to appoint outside
adjusting firms to work on behalf of IASI. These firms, however, are given no
authority to settle any claims without IASI's prior agreement. The internal
adjuster assigned to each individual claim determines, after coverage is
analyzed, whether the claim can be handled in house or should be assigned to an
outside firm.
SURETY BONDING. IASI's surety bonding operations consist of two major
programs: contract surety bonds for smaller construction contractors (with work
programs typically ranging from $250,000 to $10.0 million per year) and bonds
for the solid waste industry, including waste haulers and landfill operators.
Contract surety consists of bonds that government authorities and some
private entities require construction contractors to post to provide assurance
that contract work will be performed timely, to specification, on budget, and
without encumbrance from suppliers or subcontractors who may have lien rights
for non-payment. Contract surety business is underwritten by IASI subject to
authority defined in agency agreements with the insurance companies. The
business is produced by approximately 100 appointed agents, who have limited
authority to bind the companies in accordance with specific guidelines
established by IASI. Because the contract surety business is specialized in
smaller, newer and more difficult accounts, underwriters take collateral,
require contract funds control, and take other risk control measures considered
extraordinary by standard market sureties. In virtually all cases, bond
principals indemnify the surety against loss with their personal as well as
corporate assets.
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Once bonds are issued, IASI continues to review all projects to
determine job progress, bill payment, and other factors. IASI maintains
real-time records of all bonded exposures, amended as appropriate, in an effort
to obtain the most current possible assessment of exposures for each account and
to avoid excessive exposure on any one account. IASI also strives through its
review procedures to provide the companies with the earliest possible notice of
potential difficulty so that claim resources can be brought to bear at the
earliest possible stage in an effort to mitigate losses.
While claims against surety bonds are managed by IASI, outside counsel
are engaged to handle surety defense litigation. In addition, IASI has or has
access to completion capability for finishing bonded work which bonded
principals are unable to prosecute, and pursues recoveries on behalf of the
companies from principals who have defaulted on bond obligations. Such recovery
efforts range from execution on collateral posted by bonded principals to
indemnity litigation to recover surety losses from indemnitors' business and
personal assets. Finally, IASI manages funds control escrow accounts as
specified by the underwriters for particular accounts.
IASI's solid waste bond program, which is national in scope, is
primarily written directly by IASI, and serves bond accounts that are generally
much larger than those handled by IASI's contract surety program. The primary
focus of this program is bonds for landfill closure and post-closure care
required by states in accordance with Subtitle D of the Resource Conservation
and Recovery Act of 1976, as amended ("RCRA"). These bonds are designed to
assure that non-hazardous solid waste landfills will be closed when their
useable airspace is exhausted in accordance with Subtitle D closure requirements
(or such higher standards as individual states may impose) and that the sites
will be maintained in accordance with Subtitle D standards for a period of at
least 30 years after closure. Management believes that this program is one of
only a few landfill bond programs in the United States, although bank letters of
credit and other devices may be used to satisfy Subtitle D financial assurance
requirements. Full implementation of RCRA financial assurance requirements by
the United States Environmental Protection Agency (the "EPA") is not currently
scheduled until after April 1997, although several states have already proceeded
with such implementation, including, most significantly for IASI, Ohio, Kentucky
and Pennsylvania. See "- Regulation." IASI currently writes landfill bonds for
some of the larger solid waste disposal firms in the country. As a companion to
the landfill closure bonds, IASI also writes bonds required of waste haulers to
assure the observance of terms of their contracts with the local communities
from which they collect waste.
To stay abreast of technical and market developments in the surety
industry, certain of IASI's subsidiaries are members of the Surety Association
of America, the National Association of Independent Sureties, National
Association of Surety Bond Producers, the Surety Federation of Ohio, and The
American Surety Association, on which Board of Directors CSC occupies a
position.
REINSURANCE. IASI employs reinsurance to limit its exposure on the
policies and bonds it has written. IASI utilizes several different reinsurance
programs to cover its exposure, including "treaties" that cover all business in
a defined class and "facultative" reinsurance that covers individual risks. IASI
retains from $50,000 to $200,000 of each commercial line risk, depending on the
program. Surety retentions may go as high as $1.0 million or more, but typically
are less than $250,000.
Numerous domestic and international reinsurers support these various
programs in different combinations. Generally, IASI's reinsurers are rated A- or
better by A.M. Best, a leading rating agency of insurance companies and
reinsurers, and demonstrate capital and surplus in excess of $80.0 million
(collectively in excess of $10.0 billion). Cessions are diversified so that
every reinsurance treaty (i.e., excluding facultative arrangements) is supported
by more than one reinsurer and no reinsurer is participating in all of IASI's
reinsurance programs.
MARKETING
IASI's insurance and bonding business is focused on niche insurance and
surety coverages known in the insurance business as "non-standard" or specialty
coverages. These terms refer to risks regarded as higher than standard or normal
risks and to risk groups regarded as too small or too specialized to permit
profitable underwriting by larger, "standard market" insurance companies. In
general, non-standard insurance and bonds are more expensive, and coverage more
limited, because of perceived additional risk associated with this type of
business. IASI attempts to identify and exploit such niches in the non-standard
insurance market where management believes the actual risk is significantly less
than the perceived risk at which the coverage is defined and priced, or where
IASI, because of its smaller size and lower overhead, is able to underwrite
coverages more economically than larger carriers.
Many non-standard insurance products can be marketed on an excess and
surplus lines basis, which means that the carrier is not fully admitted in a
given state but instead satisfies a less restrictive threshold of regulatory
scrutiny, known as "eligibility," to write excess and surplus lines ("E&S"). E&S
eligibility offers much more flexibility than admitted carriers enjoy. For
example, E&S eligibility offers certain marketing advantages, principally,
exemption from rate and form filing requirements that apply to admitted
carriers, which permits E&S carriers to adjust prices and coverages, or to cease
writing altogether. Accordingly, the majority of the non-surety business of IASI
is written on an
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E&S basis. Through certain of its subsidiaries, IASI is admitted in 34 states,
but is eligible to write on an E&S basis in 39 other states plus the District of
Columbia, the most significant of such states being California, Texas and
Florida.
Certain commercial lines products, however, are virtually impossible to
write on an E&S basis because of competitive or regulatory requirements to use
admitted carriers. In order to market these programs, IASI uses its admitted
subsidiaries, thereby reaching a market of 30 states. Management believes that
this strategy of employing both admitted and non-admitted E&S carriers helps to
maximize IASI's flexibility within the insurance regulatory environment in an
effort to market a broad range of products on a profitable basis. IASI also
employs reinsurance arrangements to market certain products in all 50 states.
COMPETITION
Both the commercial lines and the surety industries have been highly
competitive in recent years, resulting in the consolidation of some of the
industries' largest companies. Competition is particularly acute for smaller,
specialty carriers like IASI because the market niches exploited by IASI are
small and can be penetrated by a large carrier that elects to cut prices or
expand coverage. IASI has endured this risk historically by maintaining a high
level of development of new products, such as its environmental coverage and
landfill bonds eschewed by most major carriers. Nevertheless, there can be no
assurance that future development efforts will succeed or that product erosion
from intensifying competition will not outpace development efforts.
CUSTOMERS
IASI provides specialty insurance services to approximately 6,000
clients through a network of nearly 200 agents. IASI attempts to maintain
diversity within its client base to lower its exposure to downturns or
volatility in any particular industry and help insulate IASI to some extent from
general economic cyclicality. All prospective customers are evaluated
individually on the basis of insurability, financial stability and operating
history. No customer individually comprises more than 3.5% of the total
consolidated revenue of IASI.
REGULATION
FEDERAL REGULATION. IASI's specialty insurance operations are
vulnerable to both judicial and legislative law changes. Judicial expansion of
terms of coverage can increase risk coverage beyond levels contemplated in the
underwriting and pricing process. According to industry estimates reported by
A.M. Best, judicial imposition of pollution liability on insurers before the era
of specific pollution exclusions in insurance policies created an estimated $25
billion liability for U.S. insurers and reinsurers that such companies did not
know they were underwriting and for which they received no premium.
At the same time, coverages that are established by statute may be
adversely affected by legislative or administrative changes of law. Most surety
bonds exist because they are required by government agencies. When governments
change the threshold for requiring surety, the market for surety bonds is
directly affected. The repeated postponement by the EPA of deadlines for
compliance with the financial assurance portions of RCRA Subtitle D has
significantly slowed growth of IASI's landfill closure bond program, which was
begun in March 1994 because of the anticipated deadline of April 1994 for
universal compliance. Such compliance currently is not anticipated to be
universally mandated until after April 1997.
STATE REGULATION. The companies of the CSC Group are subject to
regulation and supervision by state insurance regulatory agencies, applicable
generally to each insurance company in its state of incorporation. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Sources of Cash." These regulatory bodies have broad administrative
powers relating to (i) standards of solvency, which must be met on a continuing
basis; (ii) granting and revoking of licenses; (iii) licensing of agents; (iv)
approval of policy forms; (v) maintenance of adequate reserves; (vi) form and
content of financial statements; (vii) types of investments permitted; (viii)
issuance and sale of stock; and (ix) other matters pertaining to insurance.
Each of the CSC Group companies are required to file detailed annual
statements with the respective state regulatory bodies and are subject to
periodic examination by the regulators. The most recent regulatory examination
for CSC was made as of December 31, 1993. The most recent regulatory
examinations of each of Evergreen National Indemnity Company ("Evergreen") and
Continental Heritage Insurance Company ("Continental Heritage"), each
subsidiaries of IASI, were made December 31, 1993 and December 31, 1994.
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BUSINESS OUTSOURCING SERVICES
GENERAL
Through its subsidiary, SMR, IASI provides a wide range of business
outsourcing services. It is IASI's goal to expand the business outsourcing
services offered by IASI into a comprehensive personnel, consulting and
management system that enables IASI to assist its clients with substantially all
business outsourcing matters. The following is a description of the business
outsourcing services currently offered by IASI.
OPERATIONS
IASI provides a comprehensive range of business outsourcing services,
including information technology consulting, tax return preparation and
compliance, tax planning, business valuation, human resource management,
succession and estate planning, personal financial planning and employee benefit
program design and administration services to individuals and small and medium
sized commercial enterprises engaged in a wide variety of businesses. IASI
contracts with its clients based upon the services they require.
INFORMATION TECHNOLOGY CONSULTING. IASI provides a wide range of
information technology services. Such services include developing strategic
technology plans, determining emerging technology capabilities (such as imaging
and the Internet), reviewing operational use of software and hardware, defining
and implementing software and hardware systems to address day-to-day business
challenges and designing and implementing network solutions for clients with
multiple sites.
TAX RETURN PREPARATION AND COMPLIANCE; TAX PLANNING. IASI's tax return
preparation and compliance services include the preparation and review of
federal and state tax returns on behalf of IASI clients. In addition, IASI
offers tax planning services to businesses with the goal of reducing the
client's tax liabilities. Such services include assistance with the choice of
business entity, development of executive compensation plans and employee
benefit and retirement policies, and evaluation of investments.
BUSINESS VALUATION. IASI's business valuation services are designed to
assist a client in determining the precise value of a business or professional
practice, either to avoid tax and regulatory problems or simply to facilitate
organizational change. Such services are required in a variety of contexts,
including litigation, sales, employee stock ownership plans, corporate
recapitalization, succession plans or acquisitions.
Business valuation involves a formalized system of gathering
information to gain an in-depth understanding of a client's business and the
pertinent factors affecting its value. IASI employs a team of Certified
Valuation Analysts to perform such analyses.
HUMAN RESOURCE MANAGEMENT. As part of its human resource management
services, IASI performs organizational development audits and analyses and
organizational structure analyses to provide its clients with solutions to
strengthen both the financial and human resource side of the clients'
businesses. IASI then works with its clients to implement such solutions.
Included in the services provided by IASI is the development of
detailed personnel guides, which set forth a systematic approach to
administering personnel policies and practices including recruiting, discipline
and termination procedures. In addition, IASI will review and revise, if
necessary, personnel policies and employee handbooks or will create customized
handbooks for its clients.
IASI's human resource management services include the recruiting of new
employees. IASI will also perform executive compensation analyses and provide
management with detailed information regarding competitive salaries for a wide
variety of positions throughout the United States.
SUCCESSION AND ESTATE PLANNING. IASI provides business and estate
planning services, as well as assists in the review of estate planning
documents. Such services include the review and analysis of the laws affecting,
and the development of customized plans regarding, the management and succession
of businesses and estates.
PERSONAL FINANCIAL PLANNING. IASI offers financial planning services to
individuals. IASI employs tax and financial planners who assess the individual's
cash flow and tax situation, financial requirements and financial objectives,
and work with the individual to define his or her short and long term financial
goals. IASI's financial planners then work with the individual to develop and
implement plans and methods for achieving the individual's goals.
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EMPLOYEE BENEFIT PROGRAM DESIGN AND ADMINISTRATION. IASI currently
offers small group health care plans and other insurance coverages that its
clients may provide to their employees. Such insurance coverages include group
term life, universal life, accidental death and dismemberment and long-term
disability. IASI works with the client to determine its needs and, in accordance
with such needs, gives the client the opportunity to select from among several
different plan packages or, with the assistance of IASI, design a personalized
package of benefits for the client.
As part of its services, IASI administers the foregoing benefit plans
and is responsible for negotiating the benefits and costs of such plans. IASI
serves as a liaison for the delivery of such services to its client's employees
and monitors and reviews claims for loss control purposes.
In addition, IASI offers to its clients 401(k), profit-sharing, defined
benefit and money purchase plans, as well as administration and consulting
services associated with such plans. IASI also provides support services to
insurance companies who offer retirement plans.
IASI's QuickVal Daily Valuation System ("QuickVal") provides 24-hour
telephone access to qualified retirement plan administration information for
individual participants. QuickVal provides participants with their account
balances and enables participants to change investments at any time.
OTHER BUSINESS OUTSOURCING SERVICES. In addition to the business
outsourcing services described above, IASI also provides the following business
outsourcing services: merger and acquisition analysis; litigation support; cash
flow management; process improvement consulting, including quality management
and strategic services; business management consulting, including communications
consulting, market research and organizational development; and bookkeeping
services.
MARKETING AND CUSTOMERS
IASI's business outsourcing services are sold primarily in Ohio. All
services use common marketing techniques, including direct sales methodologies
with emphasis on referral sources.
None of IASI's major business outsourcing services groups have a single
homogeneous client base. Rather, IASI's clients come from a large variety of
industries and markets. IASI believes that such diversity helps to insulate IASI
from a downturn in a particular industry. In addition, none of IASI's business
outsourcing services are overly sensitive to price change. Nevertheless,
economic conditions among selected clients and groups of clients may have a
temporary impact on the demand for such services.
COMPETITION
The business outsourcing services industry has been highly competitive
in recent years resulting in consolidation and strategic alliances across
industry lines. The principal competitive factors in this industry are service
and price. This is particularly important to small to medium sized providers
because larger providers, or alliances with larger providers, can create service
and price distortions in the market place.
IASI's competitors in the business outsourcing services industry
include independent consulting services companies, divisions of diversified
enterprises and banks.
REGULATION
IASI's provision of business outsourcing services is vulnerable to
legislative changes with respect to its tax advisory, compliance and preparation
services. Legislative changes may expand or contract the types and amounts of
business services that individuals and businesses require.
ENVIRONMENTAL SERVICES
GENERAL
In February, 1997, IASI signed the non-binding Letter of Intent to sell
IASI's environmental services operations. The Letter of Intent also contemplates
the formation of a strategic alliance between IASI and the purchaser whereby
IASI will continue to have access to IASI's environmental resources for the
benefit of its insurance customers after the sale. IASI anticipates that the
sale will be completed by mid-1997. Consummation of the transaction remains
subject to the purchaser's due diligence review, the negotiation and execution
of definitive documentation and the receipt of necessary government and third
party approvals and consents. Accordingly, there can be no assurance, however,
that the transaction will be consummated or, if consummated, that the
transaction will be consummated on the terms set forth herein.
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The following is a description of IASI's environmental services
business as of the date of this Annual Report.
OPERATIONS
IASI's environmental services operations include the operation of its
treatment, storage and disposal facilities ("TSD Facilities"), transportation,
remediation and technical services and related engineering, consulting and
analytical services. IASI currently operates seven hazardous and non-hazardous
TSD Facilities located in the United States and Canada. These TSD Facilities are
serviced by IASI's integrated trucking operations. IASI does not own any
hazardous waste disposal sites. IASI also provides a broad range of related
environmental services including engineering, consulting and analysis,
remediation, groundwater/wastewater services and other technical services.
TSD FACILITIES. IASI provides hazardous and non-hazardous waste
treatment, storage and disposal services through seven commercial hazardous TSD
Facilities located in the United States and Canada. The wastes handled by these
TSD Facilities include substances which are classified as hazardous under
applicable law because of their source of generation, characteristic properties,
specific constituents and other substances subject to federal, provincial and
state environmental regulations.
Treatment, storage and disposal services are typically performed under
service agreements that obligate IASI to accept from its customer waste material
conforming to the specifications set forth in the services agreement. Before
IASI signs a service agreement with a customer, a representative sample of the
waste is analyzed by a laboratory to enable IASI to recommend the best method of
transportation, treatment and disposal. Prior to unloading at IASI's treatment
facility, a representative sample of the delivered waste is tested and analyzed
on site to ensure that it conforms to the customer's waste profile sheet. Once
the wastes are characterized, compatible groups are consolidated to achieve
economies in storage, handling, transportation and ultimate treatment and
disposal.
The operational and permitted capabilities of the seven TSD Facilities
operated by IASI vary extensively with each facility operating under site
specific permit requirements. The seven TSD Facilities in the aggregate have the
ability to process bulk liquids, solids, drums and laboratory-packaged waste
materials. Six of these TSD Facilities have received final hazardous waste
permits (EPA and/or state-issued Part B Permits or Canadian Ministry of the
Environment ("MOE") Permits) from the appropriate regulatory agencies and the
remaining TSD Facility is operating under an interim status permit. See "-
Regulation." IASI expects to obtain the final Part B permit for this facility in
1997. If this Part B permit application is denied, the TSD Facility would be
forced to cease hazardous waste operations and be subject to closure procedures
with respect to such operations. The oil recycling operations that are conducted
at such location would be permitted to continue even if the permit is denied. It
is the opinion of management that the failure to obtain such permit and the
subsequent closure of the facility would not have a material adverse effect on
IASI.
The TSD Facilities have the collective ability to accept virtually all
types of hazardous and non-hazardous wastes, except radioactive materials. Each
TSD Facility is specifically regulated with respect to waste types that are
included in its permits.
The TSD Facilities collectively perform the following treatment and
storage services:
- -- bulking and consolidation for off-site incineration
- -- waste water treatment, including heavy metal precipitation,
carbon absorption, oxidation, reduction,
biological treatment and filtration
- -- low level cyanide destruction
- -- fuels blending
- -- oil recycling
- -- phase separation
- -- PCB storage
- -- solids liquification
- -- stabilization of solid and semi-solid sludges
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IASI currently owns nine TSD Facilities, seven of which are
operational. The following table provides certain information concerning the
operating TSD Facilities owned by IASI. These facilities serve markets in the
northeastern and midwestern United States and southern Ontario regions.
PERMITTED
OPERATING AND STORAGE
TSD FACILITY PERMITTED ACTIVITIES CAPACITIES
------------ -------------------- ----------
Republic Environmental Part B Permit - hazardous waste Operating capacities - approximately 55
Systems (Pennsylvania), treatment and storage facilities million gallons per year bulk liquid,
Inc., Hatfield, PA; for hazardous and non-hazardous 73,000 tons per year bulk solid, 99,000
(formerly known as Waste solid and liquid waste in bulk, drums per year; storage capacity
Conversion, Inc., "RES drum and lab pack; interim status -approximately 568 drums, 335,000 gallons
(Pennsylvania)") PCB storage bulk liquid, 1,500 cubic yards solid
Republic Environmental Part B application filed in 1986; Operating capacities - approximately 18
Recycling (New Jersey), EPA and NJDEP (defined herein) million gallons per year of bulk waste;
Inc.; Clayton, New Jersey interim status-waste oil blending storage capacity - 2 million gallons
and recycling, fuels blending and
transfer facility
Republic Environmental Part B Permit - bulk solid Operating capacities - approximately
Systems (Cleveland), Inc., hazardous waste treatment and 124,800 tons per year bulk solid, 18,250
Bedford, Ohio; (formerly storage, hazardous and drums per year; storage capacity
Evergreen Environmental non-hazardous drum treatment, -approximately 975 drums and 47,500
Group, Inc., "RES bulk liquids and oils treatment gallons bulk liquid, 1,000 cubic yards
(Cleveland)") and fuels blending solid
Republic Environmental MOE Permit - hazardous waste Operating capacities - approximately 3.4
Systems (Fort Erie) Ltd.; treatment, processing, recovery, million gallons per year bulk liquid,
Fort Erie, Ontario transfer and storage 1,170 tons per year bulk solid, 52,000
drums per year; storage capacity -
approximately 1,300 drums and 65,000
gallons bulk liquid, 120 tons solid
Republic Environmental MOE Permit - hazardous waste Operating capacities - approximately 12.5
Systems (Brantford) Ltd.; treatment, processing, recovery, million gallons per year bulk liquid;
Brantford, Ontario transfer and storage storage capacity - 175,000 gallons bulk
liquid
Republic Environmental MOE Permit - hazardous waste Operating capacities - approximately 2.9
Systems (Pickering) Ltd.; treatment, processing, recovery, million gallons per year bulk or drum
Pickering, Ontario transfer and storage liquid or solid; storage capacity -
110,000 gallons bulk or drum
Republic Environmental MOE Permit - hazardous waste Operating capacities - approximately 3.1
Systems (Brockville) Ltd.; treatment, processing, recovery, million gallons per year bulk liquid,
Brockville, Ontario transfer and storage 24,000 tons per year bulk solid,
approximately 39,000 drums per year;
storage capacity - 3,000 drums and 120,000
gallons bulk liquid
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IASI also owns TSD Facilities in Farmingdale, New York and Dayton,
Ohio, at which operations terminated in June 1993 and October 1995,
respectively. See "Legal Proceedings - Administrative Proceedings - RES
(Cleveland) and Republic Environmental Systems (Ohio), Inc." and "- Republic
Environmental Systems (New York), Inc."). With respect to the closing of both of
these TSD Facilities, IASI believes that it has accrued the appropriate costs.
During June 1996, the Ohio Environmental Protection Agency (the "Ohio
EPA") approved the expansion of the types of waste managed in IASI's TSD
Facility located in Cleveland, Ohio. The remaining permit revisions are
currently still under review. Management expects final approval of the remaining
permit revisions during 1997.
TRANSPORTATION SERVICES. As an integral part of IASI's treatment,
storage and disposal operations, hazardous and non-hazardous wastes are
collected from customers and transported by IASI to and between its TSD
Facilities for treatment or bulking in preparation for shipment to final
disposal locations. In providing this service, IASI utilizes a variety of
specially designed and constructed tank trucks, vacuum trucks and semi-trailers.
Liquid waste is frequently transported in bulk, but may also be transported in
drums. Heavier sludges or bulk solids are transported in sealed roll-off
containers or sealed gate-dump trailers.
IASI's United States hazardous waste transportation services are
performed primarily by two of IASI's waste services subsidiaries, Republic
Environmental Systems (Transportation Group), Inc. ("RES (Transportation
Group)") and Chem-Freight, Inc. ("Chem-Freight"). RES (Transportation Group) is
located in Hatfield, Pennsylvania and has been operating since 1985.
Chem-Freight is located in Walton Hills, Ohio and has been operating since 1971.
These trucking companies provide a majority of their direct services to IASI's
TSD Facilities. IASI believes that this transportation arrangement ensures
quality control and improved efficiency and helps prevent delays at the TSD
Facilities. Trucking revenues for services provided to third parties, such as
other environmental service companies, waste brokers and waste generators, are
recognized as trucking revenue. Third-party customers of RES (Transportation
Group) and Chem-Freight include general industrial businesses and other waste
management companies. RES (Transportation Group) is licensed to haul in 36
states from the eastern to the midwestern regions of the United States and
Chem-Freight is licensed to haul in the 48 contiguous states.
Most of the transportation services provided to IASI's Canadian TSD
Facilities are performed by one of IASI's subsidiaries, Republic Environmental
Systems (Brockville) Ltd. ("RES (Brockville)"). RES (Brockville) is licensed to
haul in the provinces of Ontario and Quebec in Canada and in the states of
Michigan and New York in the United States.
REMEDIATION. IASI's hazardous waste division provides selected
remediation services through its subsidiary, Republic Environmental Systems
(Technical Services Group), Inc. ("RES (Technical Services)"). RES (Technical
Services) is a full-service environmental remediation contractor specializing in
remedial services, tank cleaning, testing and removal, decontamination/lagoon
closure, excavation and removal of contaminated soils, dewatering, emergency
response, "Superfund" clean-up work and waste sampling. These services are
provided to IASI's TSD Facility customers and others on a competitive bid basis.
When IASI is engaged to perform an entire environmental remediation
project, it will first perform a site or situation assessment which involves
gathering samples from the contaminated site and then analyzing them to
establish or verify the nature and extent of the contaminants. Analysis of
samples is conducted by IASI at its TSD Facilities or by independently-operated
laboratory companies. IASI's engineering and consulting group then develops,
evaluates and presents alternative solutions to remedy the particular situation.
TECHNICAL SERVICES. At IASI's analytical facilities, technicians test
samples provided by customers through the use of comprehensive analytical
procedures to identify and quantify toxic pollutants in virtually every
component of the environment, including, without limitation, drinking water,
surface and groundwater, soil, air, food, industrial effluents and biological
tissues. The laboratory staff evaluates the properties of a given material,
selects appropriate analytical methods, and designs, documents and executes a
laboratory work plan that results in a comprehensive technical report.
IASI also provides environmental consulting services, including
regulatory consulting, RCRA consulting, Environmental Clean-up Responsibility
Act site assessment, remedial action plan preparation, treatment process
technology and system design, waste minimization programs planning and alternate
waste disposal evaluations.
SALES AND MARKETING
IASI's sales and marketing strategy is to provide full-service
environmental management to its customers. IASI targets customers of all sizes
from small quantity generators to large "Fortune 100" companies. Marketing
efforts also target environmental engineers, real estate brokers, potentially
responsible party ("PRP") committees, lawyers, hospitals and waste brokers.
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IASI believes in maintaining a strong foundation of repeat business.
IASI derives its business from a broad base of clientele which management
believes enables IASI to experience stable growth. Marketing efforts focus on
continuing and increasing business with existing customers, as well as
attracting new clients.
COMPETITION
The hazardous waste treatment, storage and disposal industry is highly
competitive and requires substantial amounts of capital. The competition in this
industry includes large national companies such as Clean Harbors, Inc., Laidlaw
Environmental Services, Inc. and Rollins Environmental, Inc., as well as local
TSD Facilities and disposal and treatment companies. IASI environmental services
subsidiaries compete for business on the basis of price and geographic location.
CUSTOMERS
IASI's sales efforts with respect to its environmental services
operations have been directed toward establishing and maintaining business
relationships with businesses in the eastern and midwestern regions of the
United States and Ontario, Canada, which have ongoing requirements for one or
more of IASI's services. No one customer individually comprises more than 5% of
the total consolidated revenue of IASI.
SEASONALITY
IASI's environmental services operations experience seasonal
fluctuations, with higher demand commencing in approximately April of each year
and continuing through October, and lower demand occurring from November through
March. Additionally, IASI's environmental services operations may experience
operational limitations from November through March due to weather conditions in
the northeastern United States and southeastern Ontario. Severe weather
experienced during winter months may adversely affect IASI's results of
operations.
REGULATION
The transportation and disposal of solid and chemical wastes and
rendering of related environmental services are subject to federal, state,
provincial and local requirements which regulate health, safety, the
environment, zoning and land-use. Operating permits are generally required for
TSD Facilities and certain transportation vehicles, and these permits are
subject to revocation, modification and renewal. Federal, state, provincial and
local regulations vary, but generally govern waste management activities
(including final disposal), the location and use of facilities and also impose
restrictions to prohibit or minimize air and water pollution. In addition,
governmental authorities have the power to enforce compliance with these
regulations and to obtain injunctions or impose fines in the case of violations,
including criminal penalties. These regulations are administered by the EPA and
various other federal, state, provincial and local environmental, health and
safety agencies and authorities, including the Occupational Safety and Health
Administration of the United States Department of Labor.
Although IASI strives to conduct its operations in compliance with
applicable laws and regulations, IASI believes that in the existing climate of
heightened legal, political and citizen awareness and concerns, companies in the
hazardous waste and environmental services industry, including IASI, may be
faced with fines and penalties and the need to expend funds for remedial work
and related activities at TSD Facilities. IASI has established a reserve to
cover such fines, penalties and costs which management believes will be
adequate. Further, in connection with the acquisition of certain TSD Facilities,
IASI has been indemnified against certain environmental liabilities. See "Legal
Proceedings." While such amounts expended in the past or anticipated to be
expended in the future have not had and are not expected to have a materially
adverse effect on IASI's financial condition or operations, the possibility
remains that technological, regulatory or enforcement developments, the results
of environmental studies or other factors could materially alter this
expectation and despite such reserves and indemnification obligations, could
adversely affect IASI's operating results.
IASI's operation of TSD Facilities subjects it to certain operating,
monitoring, site maintenance and closure obligations. In order to construct,
expand and operate a TSD Facility, one or more construction or operating
permits, as well as zoning approvals, must be obtained. These operating permits
and zoning approvals are difficult and time-consuming to obtain, and the
issuance of such permits and approvals often is opposed by neighboring
landowners and local and national citizens' groups. Once obtained, the operating
permits may be subject to periodic renewal and are subject to modification and
revocation by the issuing agency. In connection with IASI's acquisition of
existing TSD Facilities, it often may be necessary to expend considerable time,
effort and money to bring the acquired facilities into compliance with
applicable requirements and to obtain the permits and approvals necessary to
increase their capacity. The failure of IASI to renew existing permits or obtain
newly required permits, could adversely affect IASI's operating results. In
addition, IASI's waste transportation operations are subject to evolving and
expanding laws and regulations that may impose additional monitoring, training
and safety requirements.
Governmental authorities have the power to enforce compliance with
regulations and permit conditions and to obtain injunctions or impose fines in
case of violations. Citizens' groups may also bring suit for alleged violations.
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During the ordinary course of its operations, IASI may from time to time receive
citations or notices from such authorities that its operations are not in
compliance with applicable environmental, health or safety regulations. Upon
receipt of such citations or notices, IASI will work with the authorities to
attempt to resolve the issues raised. Failure to correct the problems to the
satisfaction of the authorities could lead to monetary or criminal penalties,
curtailed operations or facility closure any of which could have a material
adverse effect on IASI's operating results.
FEDERAL REGULATION. The following summarizes the primary United States
federal statutes affecting the business of IASI:
(1) THE SOLID WASTE DISPOSAL ACT ("SWDA"), AS AMENDED BY RCRA.
SWDA and its implementing regulations establish a framework for the
regulation of the generation, handling, transportation, treatment,
storage and disposal of hazardous and non-hazardous wastes. They also
require states to develop programs to insure the safe disposal of solid
wastes in sanitary landfills.
Subtitle C of RCRA imposes a variety of regulatory
requirements on a person who is either a "generator" or "transporter"
of hazardous waste, or an "owner" or "operator" of a hazardous waste
treatment, storage or disposal facility. The EPA has issued regulations
under RCRA for hazardous waste generators, transporters, and owners and
operators of TSD Facilities. These regulations impose, among other
requirements, detailed operating, inspection, training and emergency
preparedness and response standards, as well as requirements for
permitting, manifesting, record keeping and reporting, facility
closure, post-closure care and financial assurance. Owners and
operators of TSD Facilities also are subject to stringent corrective
action requirements that can be very expensive. The Hazardous and Solid
Waste Amendment of 1984 mandated that hazardous wastes be treated prior
to land disposal. Owners and operators of TSD Facilities must treat
wastes to meet specified performance-based or technology-based
treatment standards.
(2) THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION,
AND LIABILITY ACT OF 1980, AS AMENDED ("CERCLA"). CERCLA, also known as
"Superfund," among other things, established a regulatory and remedial
program intended to provide for the investigation and the clean-up of
sites from which there is or has been a release or threatened release
of a hazardous substance into the environment. CERCLA's primary
mechanism for remedying such problems is to impose strict liability
(and pursuant to the interpretation of certain courts, joint and
several liability) for clean-up and for damages to natural resources
upon: (a) any person who currently owns or operates the facility or
site; (b) any person who owned or operated the facility or site at the
time of disposal of hazardous substances; (c) any person who by
contract, agreement or otherwise, arranged or accepted for disposal or
treatment (or for transport for disposal or treatment) of the hazardous
substances; and (d) any generator of the hazardous substances. Under
the authority of CERCLA and its implementing regulations, detailed
requirements apply to the manner and degree of remediation of
facilities and sites where hazardous substances have been or are
threatened to be released into the environment. The costs of CERCLA
investigation and clean-up can be substantial.
Among other things, CERCLA authorizes the federal government
either to remediate sites at which hazardous substances were disposed
and have been or are threatened to be released into the environment, or
to order (or offer an opportunity to order) persons potentially liable
for the clean-up of the hazardous substances to do so. Both the
government and the potentially liable party may seek to recover the
cost of clean-up from the responsible class of persons. In addition,
CERCLA requires the EPA to establish a National Priorities List of
sites at which hazardous substances have been or are threatened to be
released and which require investigation or clean-up.
Liability under CERCLA is not dependent upon the intentional
disposal of "hazardous wastes." It can be founded upon the release or
threatened release, even as a result of unintentional and non-negligent
action, of very small amounts of any one of thousands of "hazardous
substances" listed by the EPA, many of which can be found in household
waste. If this is the case, and if there is a release or threatened
release of such substances, IASI could be held liable under CERCLA for
all investigative and remedial costs even if others may also be liable.
CERCLA also authorizes the imposition of a lien in favor of the United
States upon all real property subject to or affected by a remedial
action for all costs for which a party is liable. The ability of IASI
to obtain reimbursement from others for their allocable share of such
costs would be limited by its ability to find other responsible parties
and prove the extent of each of such other parties' responsibility and
by the financial resources of such other parties. The costs of a CERCLA
clean-up can be very expensive. Given the difficulty of obtaining
insurance for environmental impairment liability, such liability could
have a material impact on IASI's business and financial condition. See
"--Liability Insurance and Bonding."
(3) THE FEDERAL WATER POLLUTION CONTROL ACT OF 1972, AS
AMENDED (THE "CLEAN WATER ACT"). The Clean Water Act establishes a
framework for regulating the discharge of pollutants from a variety of
sources, including TSD Facilities, into streams, rivers and other
waters. Whenever point source runoff from IASI's facilities is to be
discharged into surface waters, the Clean Water Act requires IASI to
apply for and obtain discharge permits, conduct sampling and monitoring
and, under certain circumstances, reduce the quantity of pollutants in
those discharges. In 1990, the EPA published new storm water discharge
regulations which
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require a facility to apply for a storm water discharge permit unless
it is covered under a storm water general permit promulgated by the
agency. These storm water discharge regulations also require a permit
for certain construction activities, which may affect IASI's
operations. If a facility discharges wastewater through a sewage system
to a publicly-owned treatment works ("POTW"), the facility must comply
with discharge limits imposed by the POTW. In addition, states may
adopt groundwater protection programs under the Clean Water Act or Safe
Drinking Water Act or independent state authority that could affect TSD
Facilities.
(4) THE CLEAN AIR ACT. The Clean Air Act establishes a
framework for the federal, state and local regulation of the emission
of air pollutants. These regulations may impose emission limitations
and monitoring and reporting requirements on certain of IASI's
operations. The Clean Air Act Amendments, which were enacted into law
at the end of 1990, resulted in the imposition of stringent
requirements on many activities that were previously largely
unregulated, such as emissions of solvents used in small parts
degreasing baths in IASI's vehicle maintenance shops, as well as
imposing more stringent requirements on, among others, motor vehicle
emissions and emissions of hazardous air pollutants.
(5) THE OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970 ("OSHA").
OSHA authorizes the Occupational Safety and Health Administration to
promulgate occupational safety and health standards. Various of these
standards, including standards for notices of hazardous chemicals and
the handling of asbestos, may apply to IASI's operations.
STATE REGULATION. Each state in which IASI operates has its own laws
and regulations governing hazardous and solid waste disposal, water and air
pollution and, in most cases, release and clean-up of hazardous substances and
liability for such matters. The states also have adopted regulations governing
the design, operation, maintenance and closure of TSD Facilities. IASI's
facilities and operations are likely to be subject to many, if not all, of these
types of requirements.
Finally, various states have enacted, are considering enacting or are
considering repealing, laws that restrict the disposal within the state of solid
or hazardous wastes generated outside the state. While laws that overtly
discriminate against out-of-state waste have been found to be unconstitutional,
some laws that are less overtly discriminatory have been upheld in court.
Challenges to other such laws are pending. The outcome of pending litigation and
the likelihood that other such laws will be passed and will survive
constitutional challenge are uncertain. In addition, Congress is currently
considering legislation authorizing states to adopt such restrictions.
CANADIAN REGULATION. IASI's operations in Canada relating to hazardous
waste treatment, recycling and recovery of chemical waste and waste water are
subject to the general business and environmental laws and regulations of
Canada, which are similar in nature to United States laws and regulations. While
IASI believes that its Canadian operations are in substantial compliance with
applicable laws and regulations, IASI is unable to predict the course of
development of such laws and regulations.
LIABILITY INSURANCE AND BONDING
IASI carries commercial general liability insurance, automobile
liability insurance, workers' compensation, pollution legal liability and
employer's liability insurance as required by law in the various states and
provinces in which operations are conducted and umbrella policies to provide
excess limits of liability over the underlying limits contained in the
commercial general liability, automobile liability and employer's liability
policies. The nature of IASI's environmental services operations exposes it to a
significant risk of liability for legal damages arising out of such operations.
See "Legal Proceedings." The majority of IASI's environmental services
operations have environmental liability insurance subject to certain limitations
and exclusions in excess of the limits required by permit regulations; however,
there is no assurance that such limits would be adequate in the event of a major
loss.
From time to time, IASI may be required to post a performance bond or a
bank letter of credit in connection with the operation of TSD Facilities,
certain remediation contracts or certain environmental permits. Bonds issued by
surety companies operate as a financial guarantee of IASI's performance. To
date, IASI has satisfied financial responsibility requirements by making cash
deposits, obtaining bank letters of credit or by obtaining surety bonds.
EMPLOYEES
At December 31, 1996, IASI employed approximately 451 employees, 6 of
whom are party to collective bargaining agreements. IASI considers its
relationships with its employees to be satisfactory.
PROPERTIES
IASI's corporate headquarters are located in Valley View, Ohio in
leased premises. Certain of the property and equipment of IASI are subject to
liens securing payment of portions of the indebtedness of IASI and its
subsidiaries. IASI and its subsidiaries also lease six offices in five states,
as well as one office in Canada, and certain of their equipment. IASI believes
that all of its facilities are sufficient for its needs.
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In addition, IASI operates seven TSD Facilities in the United States
and Canada. For more information regarding these properties, see
"- Environmental Services - Operations."
ITEM 3. LEGAL PROCEEDINGS
ADMINISTRATIVE PROCEEDINGS
RES (CLEVELAND) AND REPUBLIC ENVIRONMENTAL SYSTEMS (OHIO), INC.
In June 1993, RES (Cleveland) received a Complaint and Compliance Order
from the Enforcement Division of EPA Region 5 alleging that the former owners of
RES (Cleveland)'s TSD Facility failed to submit a proper RCRA Facility
Investigation ("RFI") workplan to the EPA on a timely basis and fined RES
(Cleveland). In September 1993, EPA Region 5 granted approval for implementation
of the RFI workplan submitted by RES (Cleveland). In June 1995, RES (Cleveland)
reached an agreement with EPA Region 5 by consent agreement and final order (the
"CAFO") to settle the issues related to the former owners' failure to achieve an
approvable RFI workplan. The CAFO included a fine of $60,000 and required the
meeting of certain stipulations. IASI paid the fine in June 1995 and completed
all required activities stipulated under the CAFO in December 1996, and
submitted a final report to the EPA detailing the results. In 1996, the EPA
accepted and approved the final RFI report. The EPA has requested and approved a
second phase of the RFI workplan which requires additional sample collections.
In addition, RES (Cleveland) was involved in negotiations with the Ohio
EPA to bring RES (Cleveland)'s facility located in Bedford, Ohio into full
compliance with the Ohio EPA regulations and settle a proposed penalty. In
August 1994, RES (Cleveland) reached an agreement by consent order with the Ohio
EPA which included a penalty for $250,000, payable over a three-year period, as
well as meeting certain stipulations. Final payment on the penalty was made in
1996. RES (Cleveland) has provided all of the required deliverables specified in
the consent order to Ohio EPA and is presently awaiting their final approval.
In June 1996, the Ohio Attorney General's Office began enforcement
proceedings against Republic Environmental Systems (Ohio), Inc. (formerly known
as Ecolotec, Inc., "RES (Ohio)") related to several past alleged violations at
the Dayton, Ohio facility, at which IASI ceased operations in September 1995.
Such violations included the failure to construct certain tertiary containment
features at the facility and issues related to the submission of permit
revisions in connection with the facility's groundwater monitoring program. At
this time, both parties have agreed to enter into a mediation agreement to
attempt to settle these matters with a third party mediator.
In addition, RES (Ohio)'s recent groundwater monitoring program results
indicate that past operations at the facility may have potentially affected
groundwater quality. RES (Ohio) is currently investigating the groundwater
further to determine what, if any, corrective measures should be taken.
In October 1996, the Ohio attorney general's office determined that the
Merger Transactions constituted a change of ownership of Ohio EPA permitted
facilities owned by RES (Cleveland) and RES (Ohio). In addition, the Ohio EPA
may determine that the Merger Transactions constitute a modification of such
permits. As a result, Ohio law requires that the change of ownership of the
permitted facilities, as well as the permit modifications, if any, be approved
by the director of the Ohio EPA, based upon the disclosure statements and an
investigative report prepared by the Ohio attorney general's office. IASI
consummated the Merger Transactions prior to receipt of the requisite approval
of the director of the Ohio EPA as permitted by applicable law. During the
approval process, IASI does not anticipate that the operations at such
facilities will be affected. In the event that the director of the Ohio EPA
ultimately disapproves such change of ownership or, if required, such permit
modifications, IASI would be required to effect the negation of the change of
ownership of such facilities. The negation could be accomplished through the
restoration of the original ownership structure of such facilities, the
disposition of the facilities or another means that complies with the
requirements of applicable law.
REPUBLIC ENVIRONMENTAL SYSTEMS (NEW YORK), INC.
In late June 1993, Republic Environmental Systems (New York), Inc.
("RES (New York")) ceased operations at its TSD Facility in Farmingdale, New
York, due to ongoing disputes and negotiations with various regulatory agencies
including the New York Department of Environmental Conservation (the "New York
DEC"), the town of Oyster Bay and Nassau County. In addition, RES (New York)
received from the New York DEC a proposed Summary Order in an Administrative
Action commenced by the New York DEC against the RES (New York) facility,
whereby the New York DEC sought revocation of RES (New York)'s permit to operate
as a TSD Facility. The New York DEC withdrew a previous consent order against
RES (New York), under which RES (New York) had agreed to pay $100,000 for past
alleged violations at the facility and to resolve several administrative permit
issues.
In early 1994, RES (New York) voluntarily ceased operations at its
hazardous waste TSD Facility and discontinued any efforts to pursue its permit
for this facility as a result of the ongoing disputes described above. In
addition, RES (New York) entered into negotiations for a consent order with the
New York DEC which provided for (i)
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payment of a fine by RES (New York) of $270,000, $170,000 of which will be
suspended upon successful completion of the terms of the consent order, and (ii)
the closure of the facility in accordance with the requirements specified by the
order. RES (New York) has begun closure activities at the facility which it
expects to complete by the end of 1997.
PROCEEDINGS COVERED BY THIRD PARTY INDEMNITY
In connection with the acquisition of Stout, the former stockholders of
Stout (the "Party Stockholders") agreed to indemnify RII, IASI, subsidiaries of
IASI and their respective officers, directors, agents and representatives from
losses associated with, among other things, soil, water and groundwater
contamination occurring prior to RII's acquisition of Stout.
IASI has been identified as a PRP in a number of governmental
investigations and actions relating to waste disposal facilities which may be
subject to remedial action under CERCLA. Proceedings arising under CERCLA
typically involve numerous waste generators and other waste transportation and
disposal companies. Generally, these proceedings are based on allegations that
these entities (or their predecessors) transported hazardous substances to the
facilities in question, in all cases prior to acquisition of Stout by RII. As a
successor to Stout, IASI and RII have become a party to and become potentially
liable in these proceedings to the same extent as Stout. IASI and RII have been
indemnified for all costs and expenses incurred with regard to these proceedings
by Party Stockholders. The Party Stockholders' obligation under the indemnity
was secured by a first lien and perfected security interest covering two million
shares of RII's common stock. During June 1995, Party Stockholders had placed
$7.0 million in an escrow account (the "Party Collateral") in lieu of the two
million shares of RII's stock as security for the remaining indemnification
obligations. IASI is currently paying costs and legal expenses with regard to
these proceedings which are then reimbursed by the Party Stockholders. Pursuant
to agreements with RII, IASI has agreed to assume any and all liabilities of RII
in these proceedings and has accepted assignment from RII of all of its rights
in connection therewith, including, without limitation, RII's rights as
indemnitee and pledgee pursuant to the Party Stockholders indemnification
obligations.
Management believes that the legal and environmental proceedings
covered by the indemnity will be resolved in a manner that will not have a
materially adverse effect on IASI's results of operations or combined financial
position.
The following is a description of proceedings whose claims are covered
by the indemnity obligations of the Party Stockholders.
ADAMS OIL, INC.
In March 1996, IASI and the Party Stockholders entered into an
agreement amending the Merger Agreement and the Settlement Agreement to which
they are parties and voiding the transfer of Adams Oil, Inc. ("Adams Oil") to
IASI. Adams Oil is the owner of a former oil terminal located in Camden, New
Jersey at which there is evidence of contamination. Pursuant to such agreement,
on March 3, 1997, IASI transferred ownership of all of the capital stock of
Adams Oil to the Party Stockholders and released to the Party Stockholders $1.5
million of the Party Collateral. The Party Stockholders have agreed to use the
released Party Collateral to comply with New Jersey Department of Environmental
Protection ("NJDEP") requirements regarding the clean-up of the Camden facility,
including the requirement that the Party Stockholders post $500,000 with the
NJDEP within 30 days after the transfer to secure such clean-up. At such time
that the Party Stockholders post the required $500,000 with the NJDEP, IASI has
agreed to release an additional $500,000 of the Party Collateral to the Party
Stockholders. The Party Stockholders also have agreed to indemnify, defend and
hold harmless IASI, its environmental services subsidiary, Republic
Environmental Systems, Inc., and RII from losses incurred in connection with the
environmental condition of the Camden, New Jersey facility.
REPUBLIC ENVIRONMENTAL SYSTEMS (PENNSYLVANIA), INC.
RES (Pennsylvania) has been named as a PRP in the North Penn Area No. 2
regional groundwater problem involving 56 square miles occupied by hundreds of
industrial companies. The EPA is currently investigating the septic system and
the contamination of groundwater and is considering adding other PRP companies.
The EPA and RES (Pennsylvania) have entered into an administrative order on
consent to investigate and determine: (i) whether or not there is sufficient
evidence to indicate that RES (Pennsylvania) has contributed to the groundwater
problem, and (ii) if RES (Pennsylvania) should participate in a regional
investigation. RES (Pennsylvania) has recently completed the required soil and
groundwater testing, as required under the administrative order, and has
submitted a final report to the EPA. Based on the results of this testing, RES
(Pennsylvania) has requested the EPA to release it from further investigation.
In addition, RES (Pennsylvania) also has been named as a PRP along with
13 other primary defendants for the recovery costs to remediate the Moyers
Landfill Site in eastern Pennsylvania. A company previously known as Waste
Conversion of Delaware, Inc. disposed of materials at Moyers Landfill from 1979
to 1981. This company then sold its assets to RES (Pennsylvania), which was then
owned by Stout. RES (Pennsylvania) is currently in settlement negotiations with
the EPA to limit its exposure in this matter.
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RES (New York) and RES (Pennsylvania) are parties in a PRP action with
respect to a former IASI Aqua-Tech TSD Facility in South Carolina. There are 180
parties to date. In April 1993, an agreement was reached whereby IASI paid
approximately $360,000 for proposed settlement of certain issues at the
facility, pending the PRP committee's final allocation to the PRPs.
REPUBLIC ENVIRONMENTAL SYSTEMS (NEW YORK), INC.
The New York DEC has alleged that RES (New York) is liable for unpaid
generator fees in the amount of $240,000 plus interest. RES (New York) and other
owners of New York TSD Facilities argue that the state is subjecting them to
excess fees by categorizing them both as a TSD Facility and as an original waste
generator. The central issue of the amount of generator fees owed by RES (New
York) has been stayed pending New York DEC determination of the appropriate
category for RES (New York) and what generator fee it should pay as a result
thereof. This matter will be settled under the consent order being negotiated
for the facility's closure. Payments scheduled under this order will be credited
to settle this matter.
In addition, on March 19, 1992, the New York DEC informed RES (New
York) that it may be a PRP with respect to the Quanta Resources site in Queens,
New York. At present, RES (New York) is awaiting additional information from the
New York DEC in order to assess the extent of its exposure, but believes it is
not material.
GENERAL
IASI is also a party to other administrative proceedings related to its
environmental services operations which have arisen in the ordinary course of
its business. Although it is possible that losses exceeding amounts already
recorded may be incurred upon ultimate resolution of these matters, as well as
the matters described above, management believes that such losses, if any, will
not have a material adverse effect on IASI's business or financial position;
however, unfavorable resolution of each matter individually or in the aggregate
could affect the consolidated results of operations for the quarterly periods in
which they are resolved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of 1996.
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EXECUTIVE OFFICERS OF IASI
The following table sets forth certain information as of March 28, 1997
regarding the executive officers of IASI. Each executive officer of IASI named
in the following table has been elected to serve until his successor is duly
appointed or elected or until his or her earlier removal or resignation from
office. No arrangement or understanding exists between any executive officer of
IASI and any other person pursuant to which he was selected as an officer.
NAME AGE POSITION(S)
---- --- -----------
Michael G. DeGroote 63 Chairman of the Board
Edward F. Feighan 49 Chief Executive Officer, President and Director
Roswell P. Ellis 62 Senior Vice President - Insurance Group
Douglas R. Gowland 55 Senior Vice President - Environmental Operations
and Director
Keith W. Reeves 40 Senior Vice President - Business Services
Gregory J. Skoda 40 Executive Vice President and
Chief Financial Officer
Craig L. Stout 48 Chief Operating Officer and Director
MICHAEL G. DEGROOTE has served as the Chairman of the Board of IASI
since the Spin-off. Mr. DeGroote also served as President and Chief Executive
Officer of IASI from the Spin-off until the Merger Transactions in October 1996.
Mr. DeGroote has served as Vice Chairman and a director of Republic Industries,
Inc. ("RII") since August 1995. Mr. DeGroote also served as Chairman of the
Board, President and Chief Executive Officer of RII from May 1991 to August 1995
and Senior Chairman of the Board of RII from May 1991 to August 1991. Mr.
DeGroote is a private investor who owned a controlling interest in Laidlaw Inc.,
a Canadian waste services company, from 1959 until he sold his interest to
Canadian Pacific Limited in 1988. Mr. DeGroote also serves as a director of Gulf
Canada Resources, Inc.
EDWARD F. FEIGHAN has served as Chief Executive Officer, President and
a Director of IASI since October 1996. Mr. Feighan is also Vice President of
Alliance Holding Corporation ("Alliance Holding"), a position he has held since
joining Alliance Holding in 1993. From 1983 until 1993, Mr. Feighan served as
the representative from the Ohio 19th Congressional District of the United
States House of Representatives. During his tenure in Congress, Congressman
Feighan served on the Judiciary and the House Foreign Affairs Committee;
Chairman, International Narcotics Control Committee; President, The
Interparliamentary Union; and permanent Representative to the Helsinki
Commission. He currently serves on the board of trustees of the National
Democratic Institute for International Affairs, the Handgun Control Federation
of Ohio, and the Rock and Roll Hall of Fame and Museum.
ROSWELL P. ELLIS has served as the Senior Vice President - Insurance
Group since March 1997. Mr. Ellis serves as Chairman and President of CSC, a
position he has held since 1987, and Chairman of Continental Heritage and
Evergreen, all subsidiaries of IASI.
DOUGLAS R. GOWLAND has served as the Senior Vice President -
Environmental Operations since October 1996 and a Director of IASI. In addition,
Mr. Gowland has served as President of IASI's hazardous waste subsidiaries since
March 1992. From the date of the Spin-off until the Merger Transactions, Mr.
Gowland served as IASI's Executive Vice President and Chief Operating Officer.
From March 1992 until the Spin-off, Mr. Gowland served as President of IASI.
From January 1992 to April 1995, Mr. Gowland served as Vice President -
Hazardous Waste Operations of RII. From March 1991 to January 1992, Mr. Gowland
served as Vice President of DRG Environmental Management, Inc. Prior thereto, he
served as President of Great Lakes Environmental Systems, Ltd.
KEITH W. REEVES has served as the Senior Vice President - Business
Services since March 1997. Mr. Reeves also serves as the President of SMR, a
position of which he has held since December 1996. Mr. Reeves served as Vice
President of SMR from August 1984 until its acquisition by IASI in December
1996. Mr. Reeves is a member of the American Institute of Certified Public
Accountants and the Ohio Society of Certified Public Accountants.
GREGORY J. SKODA has served as the Executive Vice President and Chief
Financial Officer of IASI since December 1996. Mr. Skoda also serves as the Vice
President and Chief Financial Officer of Alliance Holding, a position he has
held since June 1, 1994. Prior to IASI's acquisition of SMR in December 1996,
Mr. Skoda served as President and Chairman of SMR, which Mr. Skoda founded in
1980. Mr. Skoda is an active member of the American Institute of Certified
Public Accountants in the Tax, Employee Benefits, and Management Advisory
Services divisions.
CRAIG L. STOUT has served as Chief Operating Officer and a Director of
IASI since October 1996. Mr. Stout also serves as Chief Operating Officer of
Alliance Holding, a position he has held since the formation of Alliance Holding
in 1987. Prior to the Mergers, Mr. Stout served as President and Chairman of two
other companies which
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he founded, Contract Operations Planning, Inc., a surety claims management firm,
and Contract Surety Reinsurance Corporation, a reinsurance intermediary for
facultative surety reinsurance. These companies were merged into Alliance
Holding prior to the effective date of the Merger Transactions and their
operations are now conducted by IASI.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
IASI's Common Stock is listed on Nasdaq, which is the principal trading
market for these securities, under the symbol "IASI." The following table sets
forth, for the periods indicated, the high and low sales prices for the Common
Stock as listed on Nasdaq.
COMMON STOCK PRICE
RANGE
----------------------
HIGH LOW
---- ---
1995
Second Quarter(1)....................... $2 1/4 $1 1/4
Third Quarter........................... $4 $1 13/16
Fourth Quarter.......................... $2 5/16 $1 9/16
1996
First Quarter........................... $1 19/32 $1 1/4
Second Quarter.......................... $20 7/8 $1 7/16
Third Quarter........................... $18 3/4 $4 3/4
Fourth Quarter.......................... $12 3/4 $7 1/2
(1) Consisted of the period from the date on which the Common Stock was
first listed on Nasdaq, April 27, 1995, through June 30, 1995.
On March 27, 1997, the closing sales price of Common Stock as reported
by Nasdaq was $11.125 per share. The number of record holders of Common Stock as
of March 7, 1997, was 953.
Since the Spin-off, IASI has not declared or paid any dividends on its
Common Stock and the Board of Directors does not currently anticipate paying
dividends on the Common Stock at any time in the foreseeable future. The payment
of future dividends will be determined by IASI's Board of Directors in light of
conditions then existing, including IASI's earnings, financial condition,
capital requirements, restrictions in financing agreements, business conditions
and other factors. The payment of dividends on the Common Stock is presently
prohibited under the terms of IASI's credit facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data for
IASI and are derived from the historical consolidated and combined financial
statements and notes thereto, which are included elsewhere in this Annual Report
of IASI. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated and combined financial statements of IASI and
the notes thereto, which are included elsewhere in this Annual Report.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Premiums earned .......................... $ 27,743 $ 26,962 $ 23,368 $ 17,373 $ 11,534
Net investment income .................... 3,564 3,341 2,477 1,377 1,272
Net realized gains (losses) on investments 1,529 166 80 (91) 210
Other income ............................. 2,933 470 1,385 1,737 269
--------- --------- --------- --------- ---------
Net revenues ............................. $ 35,769 $ 30,939 $ 27,310 $ 20,396 $ 13,285
========= ========= ========= ========= =========
Interest expense ......................... $ 46 -- -- -- --
Other expenses ........................... 4,384 $ 3,157 $ 4,544 $ 3,287 $ 2,039
Income from continuing operations before
income tax expense ..................... 6,062 4,891 4,844 3,485 2,123
Income tax expense ....................... 1,640 1,422 1,344 1,189 751
--------- --------- --------- --------- ---------
Income from continuing operations ........ 4,422 3,469 3,500 2,296 1,372
Loss from discontinued operations ........ (38) -- -- --
--------- --------- --------- --------- ---------
Net income ............................... $ 4,384 $ 3,469 $ 3,500 $ 2,296 $ 1,372
========= ========= ========= ========= =========
Gross written premiums ................... $ 42,888 $ 37,695 $ 37,869 $ 29,992 $ 17,786
Net written premium ...................... 31,149 26,677 27,219 21,173 12,089
Weighted average common and
common share equivalents ............... 32,213 16,956 16,956 16,956 16,956
Earnings per share:
Primary ................................ $ 0.21 $ 0.20 $ 0.20 $ 0.14 $ 0.08
========= ========= ========= ========= =========
Fully diluted .......................... $ 0.16 $ 0.20 $ 0.20 $ 0.14 $ 0.08
========= ========= ========= ========= =========
Loss ratio ............................... 41.3% 39.2% 37.9% 38.0% 34.6%
LAE ratio ................................ 22.5% 16.9% 15.6% 11.6% 11.5%
Expense ratio ............................ 38.0% 39.9% 43.5% 39.7% 48.0%
--------- --------- --------- --------- ---------
Combined ratio ........................... 101.8% 96.0% 97.0% 89.3% 94.1%
========= ========= ========= ========= =========
Invested assets and cash ................. $ 108,523 $ 60,908 $ 57,642 $ 46,670 $ 30,727
Goodwill, net of amortization ............ 6,048 -- -- -- --
Total assets ............................. 167,330 86,735 81,931 68,117 36,926
Loss and loss expense payable ............ 41,099 37,002 34,661 29,528 14,107
Total liabilities ........................ 76,008 59,967 58,100 50,304 23,895
Total Shareholders' equity ............... 91,322 26,768 23,580 18,401 13,031
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is intended to assist in the understanding of
IASI's financial position and results of operations for each of the years ended
December 31, 1996, 1995 and 1994. This discussion should be read in conjunction
with IASI's consolidated and combined financial statements and notes thereto
included herein. In accordance with IASI's intent to sell its environmental
services operations, the results of operations related to such operations have
been reflected as a discontinued operation in IASI's consolidated and combined
financial statements. See "Results of Operations - Discontinued Operations."
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Revenues increased $4.9 million, or 16%, from $30.9 million in 1995
to $35.8 million in 1996 and consist of the following:
YEAR ENDED
DECEMBER 31,
------------------
DOLLAR
1996 1995 CHANGE
------- ------- ------
(in thousands)
Premiums earned............................................... $27,743 $26,962 $781
Net investment income......................................... 3,564 3,341 223
Net realized gains on investments............................. 1,529 166 1,363
Other income.................................................. 2,933 470 2,463
------- ------- ------
Total revenues................................................ $35,769 $30,939 $4,830
------- ------- ------
Premiums earned increased approximately $800,000 on an increase of $4.4
million in net written premiums in 1996. Much of the increase in net written
premiums was recorded in the second half of 1996, which directly impacted IASI's
earned premium. On a gross written basis, IASI reported an increase of $5.1
million in 1996, $5.0 million of which was generated through brokerages and
$800,000 of which was generated through general agencies. These increases were
offset by a $1.3 million decline in IASI's remedial action coverages.
IASI reported increases in net investment income of $223,000 and net
realized gains on investments of $1.5 million in 1996. Net investment income
grew 6.7% on invested assets of $68.6 million in 1996. IASI's $1.4 million
increase in net realized gains on investments from $166,000 in 1995 to $1.5
million in 1996 is attributable to the gains realized on the sale of certain
equity investments.
Other income increased $2.5 million in 1996 over 1995 and is
attributable to non-recurring income of $1.1 million from the American Sentinel
settlement, higher commission income of $400,000 and SMR revenues of $600,000
since its acquisition.
Total expenses increased $3.7 million to $29.7 million in 1996 from
$26.0 million in 1995. Such increase was attributable to the change in loss and
loss adjustment expenses ("LAE") of $2.5 million and other expenses of $1.2
million. While losses incurred have increased $844,000, loss development from
prior years increased $1.4 million and primarily relate to property losses,
which were higher than normal. In addition, IASI has experienced increases in
LAE to $6.2 million in 1996 from $4.5 million in 1995. Such increases are
attributable to IASI's business mix, primarily its casualty lines of business,
and to the general litigation climate. The casualty lines of business generally
have higher loss adjustment costs relative to premium dollars. Another factor
affecting this increase is the court ruling in the case of Montrose Chemical
Corporation v. Admiral Insurance Company. The California Supreme Court adopted a
"continuous trigger of coverage" in cases involving continuous and progressive
third party damage claims. Insurance companies are liable for claims occurring
prior to the policy period for claims which continued to progress during the
course of the policy term. The exposure to IASI does not have a residual impact
on loss reserves but does have a direct effect on IASI's loss adjustment
reserving practices due to a higher potential for claims handling and litigation
costs.
Other expenses increased $1.2 million to $4.4 million in 1996 from $3.2
million in 1995 and primarily were affected by the initial consolidation of SMR
in December and other general corporate expenses incurred in the fourth quarter
of 1996. Other costs attributable to IASI's insurance services business improved
slightly to $2.9 million in 1996 from $3.1 million in 1995.
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Income from continuing operations before taxes increased $1.2 million,
or 23.9%, to $6.1 million in 1996 from $4.9 million in 1995 and net income
increased $915,000, to $4.4 million in 1996 from $3.5 million in 1995 primarily
for the reasons stated above.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
Total revenues increased $3.6 million, or 13% to $30.9 million in 1995
from $27.3 million in 1994. Premiums earned increased $3.6 million to $27.0
million in 1995 from $23.4 million in 1994, while net premiums declined $500,000
to $26.7 million in 1995 from $27.2 million in 1995. The timing of earned
premiums primarily accounted for the increase in total revenues. Timing
differentials reflect the changing mix of products to a substantially greater
concentration in the commercial lines and environmental surety businesses and a
decrease in the private passenger auto physical damage and miscellaneous surety
business. Commercial lines written premiums increased by $1.5 million but were
offset by a reduction in the automotive and miscellaneous surety business
following IASI's decision to withdraw from these markets. Also contributing to
the revenue increase was $864,000 in net investment income during 1995, a 35%
increase over 1994 revenues. Total revenue in 1994 included a gain of $807,000
attributable to the American Sentinel settlement.
Total expenses increased $3.5 million to $26.0 million in 1995 from
$22.5 million in 1994. Such increase was primarily a result of a $2.6 million
increase in loss and LAE. The increase in loss and LAE was a direct result of
increased premium revenue of $3.6 million. Acquisition expenses also increased
$2.3 million in 1995 from 1994. As a percentage of total revenue, total expenses
for 1995 and 1994 were 84% and 82%, respectively.
Primarily for the reasons stated above, 1995 income before income taxes
increased $47,000, or 1%, to $4.9 million in 1995 from $4.8 million in 1994 and
net income decreased $31,000, or 1%, to $3.5 million in 1995 from $3.5 million
in 1994.
BALANCE SHEET SUMMARY
The following tables set forth the key elements of IASI's balance
sheet:
ASSETS:
YEAR ENDED
DECEMBER 31,
--------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Total cash and invested assets................................ $108,523 $60,908 $57,642
Premiums receivable........................................... 7,013 4,467 5,201
Other assets.................................................. 51,794 21,360 19,088
-------- ------- -------
Total assets.................................................. $167,330 $86,735 $81,931
-------- ------- -------
LIABILITIES:
YEAR ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(in thousands)
Total liability for loss/LAE.................................. $41,099 $37,002 $34,661
Unearned premium.............................................. 18,637 15,636 15,453
Other liabilities............................................. 16,272 7,329 8,382
------- ------- -------
Total liabilities............................................. $76,008 $59,967 $58,496
------- ------- -------
CAPITAL AND SURPLUS:
YEAR ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Total shareholders' equity.................................... $91,322 $26,768 $23,580
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COMBINED AND OPERATING RATIOS
The combined ratio is the sum of the loss ratio and expense ratio and
is the traditional measure of underwriting performance for insurance companies.
The operating ratio is the combined ratio less the net investment income ratio
(net investment income to net earned premium) excluding realized and unrealized
capital gains and is used to measure overall company performance.
The following table reflects the loss, LAE, expense, combined, net
investment and operation ratios of IASI on a generally accepted accounting
principles ("GAAP") basis for each of the years ended December 31 1996, 1995 and
1994:
YEAR ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
Loss ratio.................................................... 41.3 39.2 37.9
LAE ratio..................................................... 22.5 16.9 15.6
Expense ratio................................................. 38.0 39.9 43.5
----- ---- ----
Combined ratio................................................ 101.8 96.0 97.0
Net investment ratio.......................................... 12.9 12.4 10.6
Operating ratio............................................... 88.9 83.6 86.4
EXPENSES
The expense ratio reflected in the foregoing table is the relationship of
operating costs to net written premiums on a GAAP basis. The statutory ratio
differs from the GAAP ratio as a result of different treatment of acquisition
costs. Expense ratios have been favorably impacted by reinsurance contingencies.
INVESTMENTS AND INVESTMENT INCOME
Investments of IASI are restricted to certain investments permitted by Ohio and
Utah insurance laws. IASI's investment policy has been established by IASI's
investment committee and is reviewed periodically. IASI has retained an
independent professional investment firm to manage its fixed income portion of
the investment portfolio pursuant to the investment policy and strategy.
IASI accounts for its investment securities in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" which was adopted by the Financial
Accounting Standards Board (the "FASB"). Fixed maturity securities that IASI has
the positive intent and ability to hold to maturity are carried at amortized
cost. As IASI's fixed income securities mature, there can be no assurance that
IASI will be able to reinvest in securities with comparable yields. IASI's other
fixed maturity and all equity securities are classified as available-for-sale
and are carried at market value. The unrealized gains and losses as a result of
the valuation is reported as a separate component of shareholders' equity net of
appropriate deferred income taxes. IASI has no investments classified as trading
securities.
The following table sets forth IASI's investment income for each
of the years ended December 31, 1996, 1995 and 1994:
YEAR ENDED
DECEMBER 31,
------------------------------
1996 1995 1994
------ ------ ------
(in thousands)
Net investment income......................................... $3,564 $3,341 $2,477
Net realized gain on
investments................................................ 1,529 166 80
------ ------ ------
Total investment income....................................... $5,093 $3,507 $2,557
====== ====== ======
Investment yield.............................................. 5.31% 5.56% 4.78%
Net unrealized appreciation
(depreciation) of investments (net of tax)................. $3,696 $3,266 $(1,208)
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LIABILITY FOR LOSSES AND LOSS EXPENSES PAYABLE
As of December 31, 1996, the liability for losses and LAE constituted
54% of IASI's consolidated liabilities. IASI has established reserves that
reflect its estimates of the total losses and LAE it will ultimately be required
to pay under insurance and reinsurance policies. Such reserves include losses
that have been reported but not settled and losses that have been incurred but
not reported ("IBNR"). Loss reserves are established on an undiscounted basis
after reductions for deductibles and estimates of salvage subrogation.
For reported losses, IASI establishes reserves on a "case" basis within
the parameters of coverage provided in the related policy. For IBNR losses, IASI
estimates reserves using established actuarial methods. Case and IBNR loss
reserve estimates reflect such variables as past loss experience, social trends
in damage awards, changes in judicial interpretation of legal liability and
policy coverages, and inflation. IASI takes into account not only monetary
increases in the cost of what is insured, but also changes in societal factors
that influence jury verdicts and case law and, in turn, claim costs. IASI's loss
reserves have been certified in accordance with the requirements of the National
Association of Insurance Commissioners.
The consolidated and combined financial statements of IASI include the
estimated liability for unpaid losses and LAE of IASI's insurance operations.
Reserves for unpaid losses covered by insurance policies and bonds consist of
reported losses and IBNR losses. These reserves are determined by claims
personnel and the use of actuarial and statistical procedures and they represent
undiscounted estimates of the ultimate cost of all unpaid losses and LAE through
year end. Although management uses many resources to calculate reserves, a
degree of uncertainty is inherent in all such estimates. Therefore, no precise
method for determining ultimate losses and LAE exist. These estimates are
subject to the effect of future claims settlement trends and are continually
reviewed and adjusted (if necessary) as experience develops and new information
becomes known. Any such adjustments are reflected in current operations.
Activity in the liability for unpaid losses and loss expense is
summarized in the following table:
YEAR ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Balance at January 1.......................................... $37,002 $34,661 $29,528
Less insurance recoverables................................ (8,914) (9,383) (8,505)
------- ------ -------
Net balance at January 1...................................... $28,088 $25,278 $21,023
------- ------ -------
Incurred related to:
Current year............................................... 17,216 17,297 14,753
Prior years................................................ 408 (2,180) (2,259)
------- ------ -------
Total incurred................................. 17,624 15,117 12,494
------- ------ -------
Paid related to:
Current year............................................... 3,684 5,963 4,269
Prior years................................................ 9,043 6,344 3,970
------- ------ -------
Total paid..................................... 12,727 12,307 8,239
------- ------ -------
Net balance at end of period.................................. 32,985 28,088 25,278
Plus reinsurance recoverables.............................. 8,114 8,914 9,383
------- ------ -------
Balance at end of period...................................... $41,099 37,002 $34,661
======= ====== =======
ANALYSIS OF LOSS AND LAE DEVELOPMENT
Year Ended December 31,
------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
Net liability for losses and
loss expenses................. $2,276 3,484 7,202 8,168 10,428 12,775 14,107 21,023 25,278 28,088 32,985
Cumulative amount of net
liability paid through:
One year later............ 1,262 1,566 2,985 2,404 2,404 2,811 3,026 4,131 6,309 8,785 --
Two years later........... 1,943 2,172 3,876 3,433 4,090 4,894 3,848 7,503 11,161
Three years later......... 2,205 2,623 4,398 4,322 5,239 5,372 4,786 9,346
Four years later.......... 2,482 2,759 4,799 4,984 5,184 6,010 5,119
Five years later.......... 2,562 2,907 5,140 4,880 5,352 6,102
Six years later........... 2,677 2,927 5,147 4,953 5,352
Seven years later......... 2,693 2,935 5,152 4,947
Eight years later......... 2,702 2,935 5,135
Nine years later.......... 2,702 2,917
Ten years later........... 2,700
The retroactively
reestimated net liability
for loss and loss
expenses as of:
One year later............ 2,888 4,277 7,406 8,388 10,674 12,003 12,587 18,910 23,049 28,246 --
Two years later........... 3,375 4,032 7,445 8,504 9,239 10,877 9,829 17,531 22,193
Three years later......... 3,132 4,042 7,419 7,025 8,183 8,419 8,899 16,174
Four years later.......... 3,056 4,028 6,365 6,668 6,631 8,675 7,822
Five years later.......... 3,039 3,420 6,311 5,638 6,320 7,467
Six years later........... 2,849 3,406 5,534 5,243 5,823
Seven years later......... 2,829 3,009 5,308 5,133
Eight years later......... 2,708 2,949 5,230
Nine years later.......... 2,713 2,926
Ten years later........... 2,706
------ ----- ----- ----- ----- ------ ------ ------ ------ ------ ------
Net cumulative redundancy
(deficiency)................ $ (430) 558 1,972 3,035 4,605 5,308 6,285 4,849 3,085 (158) --
====== ===== ===== ===== ===== ====== ====== ====== ====== ====== ======
Gross liability - end of year ...................................................................... $34,661 37,002 41,099
Reinsurance recoverable ............................................................................ 9,383 8,914 8,114
------ ------ ------
Net liability - end of year ........................................................................ 25,278 28,088 32,985
====== ====== ======
The data set forth in the table above does not reflect the adoption of SFAS
No. 113.
DISCONTINUED OPERATIONS
IASI's results of operations related to its environmental services
operations have been reflected as a discontinued operation in IASI's
consolidated and combined financial statements as a result of IASI's execution
of the non-binding Letter of Intent. See Note 15 to the Consolidated and
Combined Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION
IASI had cash and investments, excluding mortgage loans, of $104.8
million, $57.5 million, and $54.7 million at December 31, 1996, 1995 and 1994,
respectively. The $47.3 million increase from 1995 to 1996 is a result of IASI's
generation of proceeds from stock issuances from exercises of outstanding
options and warrants and the Private
24
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Placement (defined herein), profits and additional loss reserves on an
increasing volume of liability coverages which have slower payout patterns than
property coverages.
Net cash provided by operations for the years ended December 31, 1996,
1995, and 1994 was $13.2 million, $3.6 million and $9.7 million, respectively.
These amounts were adequate to meet all of IASI's capital expenditure, operating
and acquisition costs and resulted primarily from earnings and the timing of
reinsurance contingency transactions.
IASI's financing activities provided net cash for the years ended
December 31, 1996, 1995 and 1994 of $35.7 million, $5.6 million and $1.4
million, respectively. During 1996, IASI realized approximately $38.0 million in
cash proceeds from a private placement and from stock issuances, offset in part
by dividends paid to Alliance Holding by CSC and CSU prior to the Merger
Transactions.
SOURCES OF CASH
IASI's principal source of revenue from its specialty insurance
services operations consists of insurance and reinsurance premiums, investment
income, commission and fee income, and proceeds from sales and maturities of
investment securities. Premiums written become premiums earned for financial
statement purposes as the premium is earned incrementally over the term of each
insurance policy and after deducting the amount of premium ceded to reinsurers
pursuant to reinsurance treaties or agreements. The property and liability
operation of IASI generates positive cash flow from operations as a result of
premiums being received in advance of the time when the claim payments are made.
The companies of the CSC Group are subject to regulation and
supervision by state insurance regulatory agencies, applicable generally to each
insurance company in its state of incorporation. Such regulations limit the
amount of dividends or distributions by an insurance company to its
shareholders. If insurance regulators determine that payment of a dividend or
any other payment to an affiliate (such as a payment under a tax allocation
agreement) would, because of the financial condition of the paying insurance
company or otherwise, be detrimental to such insurance company's policyholders
or creditors, the regulators may block payment of such dividend or such other
payment to the affiliates that would otherwise be permitted without prior
approval.
Ohio law limits the payment of dividends to IASI. The maximum dividend
that may be paid without prior approval of the Director of Insurance of the
State of Ohio is limited to the greater of the statutory net income of the
preceding calendar year or 10% of total statutory shareholder's equity as of the
prior December 31. As a result, the maximum dividend CSC may pay to IASI in 1997
without prior approval of the Director of Insurance of the State of Ohio is
approximately $2.6 million.
IASI's principal source of revenue from its business outsourcing
services operation is the collection of fees from professional services rendered
to its clients in the areas of information technology consulting, tax return
preparation and compliance, and business valuations, as well as other areas that
have been previously discussed.
In May 1995, IASI secured a $6.0 million credit facility with a United
States commercial bank to provide IASI with additional liquidity and working
capital. This facility provides for borrowings at the prime lending rate plus
0.5% or adjusted three-month LIBOR rate plus 2.5%, which would be 8.75% and
[7.95%], respectively, at December 31, 1996 and will mature in 1998. Up to $4.5
million of the credit facility is available for the issuance of standby letters
of credit. At December 31, 1996 IASI had issued $2.4 million in standby letters
of credit and had no cash borrowing under the credit facility. The credit
facility contains various affirmative and negative covenants which, among other
things, restrict the payment of dividends and require the maintenance of certain
financial ratios. Borrowings under the credit facility are secured by all of
IASI's United States based assets related to its environmental services
operations.
In December 1996, IASI issued and sold 3,251,888 units of IASI (the
"Units") for $9.00 per Unit (the "Private Placement"). Each Unit consisted of
one share of Common Stock and one warrant to purchase one share of Common Stock
of IASI at an exercise price of $11.00 per share exercisable, in whole or in
part, for a three year period from the date of issuance. The Private Placement
resulted in net proceeds of approximately $27.6 million, after deducting the
placement agent fee and other estimated expenses associated with the Private
Placement.
In addition, MGD Holdings, the Harve A. Ferrill Trust U/A 12/31/69 (the
"Ferrill Trust") and WeeZor I Limited Partnership ("WeeZor"), affiliates of each
of Messrs. Michael G. DeGroote, Chairman of the Board of IASI, Harve A. Ferrill
and Richard C. Rochon, directors of IASI, respectively, have entered into
agreements to purchase an aggregate of 616,611 Units, subject to stockholder
approval. On January 6, 1997, the issuance of such Units was approved by written
consent of the holders of a majority of the outstanding shares of Common Stock.
In accordance with Rule 14c-2 under the Exchange Act, on or about April 1997,
IASI will distribute a Schedule 14C Information Statement (the "Information
Statement") to holders of IASI's Common Stock as of the date of such written
consent. The Information Statement will be used to notify such holders of Common
Stock of the action by written consent approving the issuance of Units to MGD
Holdings, the Ferrill Trust and WeeZor. In accordance with the requirements of
the Exchange Act, the issuance of Units to MGD Holdings and Messrs. Ferrill and
Rochon will close no earlier than
25
27
20 days following the distribution of the Information Statement to such holders.
Upon the closing of the issuance of such Units, IASI will receive an additional
$5.3 million in proceeds.
USES OF CASH AND LIQUIDITY OUTLOOK
OPERATIONS. IASI's capital expenditures from continuing operations
totaled $286,000, $223,000 and $340,000 for the years ended December 31, 1996,
1995 and 1994, respectively, which included expenditures for fixed assets for
normal replacement, compliance with regulations and market development. During
the year ended December 31, 1996, IASI funded capital expenditures from cash on
hand and operating cash flow. IASI anticipates that during 1997, it will
continue to fund expenditures from operating cash flow supplemented by borrowing
under its revolving credit facility, as necessary. Management believes that IASI
currently has sufficient cash and lines of credit to fund current operations and
expansion thereof.
Cash used in investing activities for the years ended December 31,
1996, 1995 and 1994 primarily came as the result of differences in the purchases
and sales of investments.
IASI is required to establish a reserve for unearned premiums. IASI's
principal costs and factors in determining the level of profit is the difference
between premiums earned and losses, LAE and agent commissions. Loss and LAE
reserves are estimates of what an insurer expects to pay on behalf of claimants.
IASI is required to maintain reserves for payment of estimated losses and LAE
for both reported claims and for IBNR claims. Although the ultimate liability
incurred by IASI may be different from current reserve estimates, management
believes that the reserves are adequate.
IASI believes its cash flow from operations and available financial
resources provide for adequate liquidity to fund existing and anticipated
capital and operational requirements as well as to fund future growth and
expansion. Management is not aware of any current recommendations by regulatory
authorities that, if implemented, could have a material impact on IASI's
liquidity, capital resources and operations.
ACQUISITIONS. IASI's strategy is to aggressively expand its specialty
insurance and business outsourcing services operations through internal growth
and by acquiring and integrating existing businesses. IASI makes its decision to
acquire or invest in businesses based on financial and strategic considerations.
See "Business and Properties -- Business Strategy." Businesses acquired to date
have been accounted for under the purchase method of accounting and,
accordingly, are included in the financial statements from the date of
acquisition.
Management believes that IASI currently has sufficient resources,
including cash on hand, cash flow from operating activities, credit facilities
and access to financial markets to fund current and planned operations, service
any outstanding debt and make certain acquisitions. However, substantial
additional capital may be necessary to fully implement IASI's aggressive
acquisition program. There can be no assurance that additional financing will be
available on a timely basis, if at all, or that it will be available in the
amounts or on terms acceptable to IASI.
STOCK REPURCHASE PROGRAM
In April 1995, IASI's Board of Directors authorized IASI to repurchase
up to 500,000 shares or 4.6% of Common Stock during 1995 as deemed appropriate
by management and authorized an additional repurchase of 500,000 shares or 4.6%
of Common Stock in February 1996. Repurchases were effected at prevailing market
prices from time to time on the open market prior to the negotiation of the
Merger Transactions. The last repurchase was effected by IASI on March 4, 1996
and as of such date IASI had repurchased approximately 695,842 shares of Common
Stock for an aggregate cost of approximately $1,040,000. The repurchased shares
have been retired and the repurchase program has been discontinued.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS
This Annual Report contains various forward-looking statements and
information that are based on management's belief as well as assumptions made
by, and information currently available to, management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"projects," "management believes," "IASI believes" and words or phrases of
similar import. Such statements are subject to certain risks, uncertainties or
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. Among the key factors
that may have a direct bearing on IASI's results of operations and financial
condition are: (i) demand for IASI's services; (ii) IASI's ability to integrate
the operations of acquired businesses; (iii) IASI's ability to expand into new
markets; (iv) the consummation of IASI's disposition of its environmental
services operations; (v) environmental liabilities to which IASI may become
subject in the future which are not covered by an indemnity or insurance; (vi)
the impact of current and future laws and governmental regulations affecting
IASI's operations; (vii) competitive practices in the specialty insurance and
bonding industries; (viii) competitive practices in the reinsurance markets
utilized by IASI; (ix) judicial, legislative, and regulatory changes of law
relating to risks covered by IASI or to the operations of insurance companies in
general; (x) market fluctuations in the values or
26
28
returns on assets in IASI's investment portfolios; (xi) pricing of IASI
insurance products; and (xii) adverse loss development.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and Supplementary Data required hereunder are
included in this Annual Report as set forth in Item 14(a) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Described in IASI's Form 8-K dated February 19, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information appearing under the caption "Election of Directors" in
IASI's definitive proxy statement (the "Proxy Statement") relating to the 1997
Annual Stockholders Meeting (the "Annual Meeting"), is incorporated herein by
reference. The information regarding executive officers of IASI is contained in
Part I of this Annual Report under a separate item captioned "Executive Officers
of IASI."
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under the caption "Executive Compensation" in
the Proxy Statement relating to the Annual Meeting is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under the captions "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual
Report or incorporated by reference:
1. Financial Statements.
As to financial statements and supplementary information,
reference is made to "Index to Financial Statements" on
page F-1 of this Annual Report.
2. Financial Statement Schedules.
As to financial statement schedules, reference is made to
"Index to Financial Statements" on page F-1 of this Annual
Report.
3. Exhibits.
The following documents are filed as exhibits to this Form 10-K
pursuant to Item 601 Regulation S-K.
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of
IASI (filed as Exhibit 3.1 to IASI's Registration Statement on
Form 10, file no. 0-25890, and incorporated herein by
reference).
3.2* Certificate of Amendment of the Certificate of Incorporation
of IASI dated October 18, 1996.
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29
3.3 Amended and Restated Bylaws of IASI (filed as Exhibit 3.2
to IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
4.1 Form of Stock Certificate of Common Stock of IASI (filed
as Exhibit 4.1 to IASI's Registration Statement on Form 10,
file no. 0-25890, and incorporated herein by reference)
4.2 Promissory Note, dated October 18, 1996, in the aggregate
principal amount of $4.0 million issued by IASI payable to
Alliance Holding (filed as Exhibit 99.7 to IASI's Current
Report on Form 8-K dated October 18, 1996, and incorporated
herein by reference).
9.1 Voting Agreement, dated as of October 18, 1996, by and between
MGD Holdings and Alliance Holding (filed as Exhibit 99.6 to
IASI's Current Report on Form 8-K dated October 18, 1996, and
incorporated herein by reference).
10.1 Spin-off Agreement (filed as Exhibit 10.1 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.2 Alternative Dispute Resolution Agreement (filed as
Exhibit 10.2 to IASI's Registration Statement on Form 10, file
no. 0-25890, and incorporated herein by reference)
10.3 Assumption of Liabilities and Indemnification Agreement
(filed as Exhibit 10.3 to IASI's Registration Statement on
Form 10, file no. 0-25890 and incorporated herein by
reference)
10.4 Corporate Services Agreement (filed as Exhibit 10.4 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.5 Employee Benefits Agreement (filed as Exhibit 10.5 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.6 Insurance and Indemnification Agreement (filed as Exhibit
10.6 to IASI's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference)
10.7 Tax Sharing Agreement (filed as Exhibit 10.7 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.8 IASI's Adjustment Plan (filed as Exhibit 10.8 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.9 Form of Warrant to purchase 200,000 shares of IASI's
Common Stock issued to MGD Holdings Ltd. (filed as Exhibit
10.9 to IASI's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference)
10.10 Form of Warrant to purchase 5,000 shares of IASI's Common
Stock issued to Douglas R. Gowland (filed as Exhibit 10.11 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.11 Form of Warrant to purchase 55,000 shares of IASI's Common
Stock issued for Douglas R. Gowland (filed as Exhibit 10.12 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.12 Credit Agreement dated as of May 11, 1995 by and among IASI
and its Subsidiaries, as Borrowers, and CoreStates Bank, N.A.
(filed as Exhibit 10.12 to IASI's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein
by reference)
10.13 Agreement and Plan of Merger by and among IASI, Republic/CSA
Acquisition Corporation, Republic/CSU Acquisition Corporation,
Alliance Holding, CSC and CSU (filed as Appendix I to IASI's
Definitive Schedule 14C Information Statement dated September
23, 1996 and incorporated herein by reference).
10.14 Amendment No. 1 to Agreement and Plan of Merger by and among
IASI, Republic/CSA Acquisition Corporation, Republic/CSU
Acquisition Corporation, Alliance Holding, CSC and CSU (filed
as Appendix IV to IASI's Definitive Schedule 14C Information
Statement dated September 23, 1996 and incorporated herein by
reference).
10.15 Amendment No. 2 to Agreement and Plan of Merger by and among
IASI, Republic/CSA Acquisition Corporation, Republic/CSU
Acquisition Corporation, Alliance Holding, CSC and CSU (filed
as
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Appendix V to IASI's Definitive Schedule 14C Information
Statement dated September 23, 1996 and incorporated herein by
reference).
10.16 Stock Purchase Agreement by and between IASI and H. Wayne
Huizenga (filed as Appendix II to IASI's Definitive Schedule
14C Information Statement dated September 23, 1996 and
incorporated herein by reference).
10.17 Stock Purchase Agreement by and between IASI and MGD Holdings
(filed as Appendix III to IASI's Definitive Schedule 14C
Information Statement dated September 23, 1996 and
incorporated herein by reference).
10.18* Agreement and Plan of Merger by and among IASI, IASI/SMR
Acquisition Co., SMR and its shareholders dated November 30,
1996.
10.19* Agreement and Plan of Merger by and among IASI, IASI/ECI
Acquisition Co., ECI and its shareholders dated November 5,
1996.
11.1* IASI Earnings per Common Share Data.
21.1* List of Subsidiaries of IASI.
24.1* Consent of KPMG Peat Marwick LLP
99.1 Information Statement (filed as Exhibit 99.1 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
*Indicates documents filed herewith.
(b) Reports on Form 8-K
IASI filed the following Current Reports on Form 8-K during the fourth
quarter of 1996:
Current Report on Form 8-K dated October 18, 1996. Current Report on
Form 8-K dated December 30, 1996.
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31
INTERNATIONAL ALLIANCE SERVICES, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SUBSIDIARIES
Independent Auditors' Report.................................................F-2
Consolidated and Combined Balance Sheets
December 31, 1996 and 1995.............................................F-3
Consolidated and Combined Statements of Income
Years Ended December 31, 1996, 1995 and 1994...........................F-4
Consolidated and Combined Statements of Shareholders' Equity
Years Ended December 31, 1996, 1995 and 1994...........................F-5
Consolidated and Combined Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994...........................F-6
Notes to the Consolidated and Combined Financial
Statements.............................................................F-7
Schedule I - Summary of Investments -- Other Than
Investments in Related Parties, December 31, 1996.....................F-31
Schedule IV - Reinsurance
Years Ended December 31, 1996, 1995 and 1994..........................F-32
Schedule III - Supplementary Insurance Information
For the Years Ended December 31, 1996, 1995 and 1994..................F-33
F-1
32
INDEPENDENT AUDITORS' REPORT
----------------------------
BOARD OF DIRECTORS
INTERNATIONAL ALLIANCE SERVICES, INC.
We have audited the accompanying consolidated and combined financial statements
of International Alliance Services, Inc. and Subsidiaries as listed in the
accompanying index on page F-1. In connection with our audits of the
consolidated and combined financial statements, we have also audited the
financial statement schedules as listed in the accompanying index on page F-1.
These consolidated and combined financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated and combined
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 and combined financial statements referred to
above present fairly, in all material respects, the financial position of
International Alliance Services, Inc. and Subsidiaries at December 31, 1996 and
1995, and the results of their operations, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic consolidated and combined financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
Cleveland, Ohio
March 25, 1997
F-2
33
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31, 1996 AND 1995
1996 1995
------------- --------------
ASSETS
Investments (Note 4):
Fixed maturities held to maturity, at amortized cost $ 15,481 $ 15,309
Securities available for sale, at fair value:
Fixed maturities 35,471 33,153
Equity securities 9,213 5,426
Mortgage loans 3,685 3,393
Short-term investments 4,799 843
Other long-term investments - 90
------------- --------------
Total investments 68,649 58,214
Cash and cash equivalents 39,874 2,694
Premiums receivable, less allowance for doubtful
accounts of $284 and $138, respectively 7,013 4,467
Deferred policy acquisition costs (Note 8) 4,345 3,428
Reinsurance recoverables (Note 7) 11,185 12,647
Excess of cost over net assets of businesses
acquired , net of accumulated amortization of $33 (Note 2) 6,048 -
Net assets held for disposal (Note 15) 22,999 -
Other assets 7,217 5,285
------------- --------------
TOTAL ASSETS $ 167,330 $ 86,735
============= ==============
LIABILITIES
Losses and loss expenses payable (Note 6) $ 41,099 $ 37,002
Unearned premiums 18,637 15,636
Note payable and capitalized leases (Note 11) 3,211 47
Income taxes (Note 10) 1,994 1,375
Accrued expenses 5,355 2,672
Other liabilities 5,712 3,235
------------- --------------
TOTAL LIABILITIES 76,008 59,967
------------- --------------
SHAREHOLDERS' EQUITY
Common stock, par value $.01 per share (Note 5)
Authorized - 100,000,000 shares at December 31, 1996;
- 20,000,000 shares at December 31, 1995
Issued and outstanding - 33,764,506 shares at December 31, 1996;
- 14,760,000 shares at December 31, 1995 338 148
Additional paid-in capital 80,446 19,146
Retained earnings 6,842 4,208
Net Unrealized appreciation of investments (net of tax) 3,696 3,266
------------- --------------
TOTAL SHAREHOLDERS' EQUITY 91,322 26,768
------------- --------------
Commitments and contingencies (Note 12)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 167,330 $ 86,735
============= ==============
See the accompanying notes to the consolidated and combined financial
statements.
F-3
34
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(In thousands, except per share data)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
-------------- ------------- ---------
Revenues:
Premiums earned (Note 7) $ 27,743 $ 26,962 $ 23,368
Net investment income (Note 4) 3,564 3,341 2,477
Net realized gain on investments (Note 4) 1,529 166 80
Other income 2,933 470 1,385
-------------- ------------- --------------
Net revenues 35,769 30,939 27,310
-------------- ------------- --------------
Expenses:
Losses and loss adjustment expenses (Note 7) 17,624 15,117 12,494
Policy acquisition expenses (Note 8) 7,699 7,774 5,428
Other expenses 4,384 3,157 4,544
-------------- ------------- --------------
Total expenses 29,707 26,048 22,466
-------------- ------------- --------------
Income from continuing operations
before income tax expense 6,062 4,891 4,844
Income tax expense (Note 10) 1,640 1,422 1,344
-------------- ------------- --------------
Income from continuing operations 4,422 3,469 3,500
Loss from discontinued operations
(net of income tax expense of $91) (Note 15) (38) - -
-------------- ------------ -------------
Net income $ 4,384 $ 3,469 $ 3,500
============== ============= ==============
Earnings per common and common share equivalents (Note 3):
Primary:
Income from continuing operations $ 0.21 $ 0.20 $ 0.20
Loss from discontinued operations - - -
------------- ------------- --------------
Net income per share $ 0.21 $ 0.20 $ 0.20
============= ============= ==============
Fully Diluted:
Income from continuing operations $ 0.16 $ 0.20 $ 0.20
Loss from discontinued operations - - -
------------- ------------- --------------
Net income per share $ 0.16 $ 0.20 $ 0.20
============= ============= ==============
Weighted average common and common share
equivalents, primary and fully diluted: 32,213 16,956 16,956
============== ============= ==============
See the accompanying notes to the consolidated and combined financial
statements.
F-4
35
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED APPRECIATION
SHARES STOCK CAPITAL EARNINGS (DEPRECIATION)
------ ----- ------- -------- --------------
December 31, 1993 14,760,000 $ 148 $ 14,744 $ 3,589 $ (80)
Net income - - - 3,500 -
Pre-merger capital contribution
from parent - - 3,807 - -
Pre-merger dividends paid
to parent - - - (1,000) -
Change in unrealized
appreciation (depreciation) - - - - (1,164)
Cumulative effect of change
in accounting for investments - - - - 36
-------------- ---------- ------------ ----------- -----------
December 31, 1994 14,760,000 148 18,551 6,089 (1,208)
Net income - - - 3,469 -
Pre-merger capital contribution
from parent - - 595 - -
Pre-merger dividends paid
to parent - - - (5,350) -
Change in unrealized
appreciation (depreciation) - - - - 4,474
-------------- ---------- ------------ ----------- -----------
December 31, 1995 14,760,000 148 19,146 4,208 3,266
Net income - - - 4,384 -
Pre-merger capital contribution
from parent - - 595 - -
Pre-merger dividends paid
to parent - - - (1,750) -
Change in unrealized
appreciation (depreciation) - - - - 430
Reverse merger 10,858,158 108 16,136 - -
Stock issuances 7,251,888 73 38,164 - -
Stock options 101,960 1 1,153 - -
Business acquisitions 792,500 8 5,252 - -
-------------- ---------- ------------ ----------- -----------
December 31, 1996 33,764,506 $ 338 $ 80,446 $ 6,842 $ 3,696
============== ========== ============ =========== ===========
See the accompanying notes to the consolidated and combined financial
statements.
F-5
36
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 4,422 $ 3,469 $ 3,500
Adjustments to reconcile net income to net cash
provided by operating activities:
Net loss from discontinued operations (38) - -
Deprecation and amortization 7,969 8,143 5,866
Deferred income taxes (27) (699) 55
Income on participation transaction - - (807)
Cash provided by (used in) changes in assets and liabilities, net of
acquisition:
Premiums receivable, net (915) (62) (348)
Deferred policy acquisition costs (8,616) (7,476) (6,748)
Reinsurance recoverables, net 1,462 (1,671) (1,150)
Other assets (1,540) (527) (313)
Losses and loss expenses payable 4,097 2,341 5,133
Unearned premiums 3,001 183 3,287
Income taxes 646 725 170
Accrued expenses 1,105 533 (82)
Other liabilities 3,292 1,242 1,273
Other, net (1,693) (2,599) (146)
-------- ------- -------
Net cash provided by operating activities 13,165 3,602 9,690
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities, held to maturity (1,318) (269) (1,805)
Purchase of fixed maturities, available for sale (12,408) (9,552) (8,857)
Purchase of equity securities (2,921) (228) (223)
Redemption of fixed maturities, held to maturity 1,000 1,281 2,009
Sale of fixed maturities, available for sale 9,333 7,089 1,155
Sale of equity securities 675 150 201
Increase in mortgage loans (1,275) (1,342) (1,893)
Principal receipts on mortgage loans 983 910 780
Change in short-term investments (3,956) 27 5,968
Business acquisitions, net of cash acquired 912 - 538
Acquisition of property and equipment (286) (223) (340)
-------- ------- -------
Net cash used in investing activities (9,261) (2,157) (2,467)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Pre-merger dividends paid to parent (1,750) (5,350) (1,000)
Repayment of debt (836) (295) (380)
Proceeds from stock issuances 38,237 - -
-------- ------- -------
Net cash provided by (used in) financing activities 35,651 (5,645) (1,380)
-------- ------- -------
Net increase (decrease) in cash and cash equivalents 39,555 (4,200) 5,843
Cash and cash equivalents at beginning of year 2,694 6,894 1,051
-------- ------- -------
Cash and cash equivalents at the end of year:
Continuing operation 39,874 2,694 6,894
Discontinued operations 2,375 - -
-------- ------- -------
Total cash and cash equivalents at end of year $ 42,249 $ 2,694 $ 6,894
======== ======= =======
See the accompanying notes to the consolidated and combined financial
statements.
F-6
37
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
International Alliance Services, Inc. and subsidiaries (the "Company") is
a diversified services organization which provides specialty insurance
services and business consulting and management services. The Company
markets its specialty insurance and bonding products and business
services in the United States.
RESI Transaction
----------------
On October 18, 1996, Republic Environmental Services, Inc. ("RESI") issued
(a) an aggregate of 14,760,000 shares of RESI common stock, par value
$0.01 per share ("RESI Common Stock"), (b) warrants to purchase an
aggregate of 4,200,000 additional shares of RESI Common Stock at
exercise prices ranging from $2.625 to $3.875 per share, expiring in
two to four years and (c) a promissory note in principal amount of
$4,000,000 in exchange for the stock of Century Surety Company ("CSC")
and Commercial Surety Agency, Inc. d.b.a. Commercial Surety
Underwriters ("CSU") (together the "Alliance Companies") ("the RESI
Transaction"). The RESI transaction was accounted for as a reverse
merger whereby the Alliance Companies gained a controlling interest in
the stock of RESI. Contemporaneously, RESI changed its name to
International Alliance Services, Inc. On June 24, 1996, the Company
began trading under the symbol "IASI" in anticipation of the name
change.
The consolidated and combined financial statements presented herein are as
follows:
i. Consolidated and Combined Balance Sheets of the Company at
December 31, 1996 and the Alliance Companies at December 31,
1995;
ii. Consolidated Statement of Income for the year ended December
31, 1996 of the Alliance Companies and RESI for the period
October 1, 1996 to December 31, 1996. The Combined Statements
of Income for the years ended December 31, 1995 and 1994 are
of the Alliance Companies;
iii. Consolidated and Combined Statements of Shareholders' Equity
of the Company for the years ended December 31, 1996, 1995
and 1994 reflecting the number of shares received in the RESI
Transaction as if the shares had been issued at January 1,
1994;
iv. Consolidated and Combined Statements of Cash Flows of the
Company for the year ended December 31, 1996, and the
Alliance Companies for the years ended December 31, 1995 and
1994.
The following are significant accounting policies followed by the Company.
Basis of Consolidation
----------------------
The Company's consolidated and combined financial statements include the
accounts of all wholly owned subsidiaries. Significant subsidiaries of
the Company include CSC in continuing operations and RESI in
discontinued operations. All significant intercompany accounts and
transactions have been eliminated.
F-7
38
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Estimates
--------------------
In preparing the consolidated and combined financial statements,
management is required to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities as of the date of the
consolidated and combined financial statements and the reported amounts
of revenues and expenses for the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near-term relate to the
determination of losses and loss expenses payable, the recoverability
of deferred policy acquisition costs, and the net realizable value of
reinsurance recoverables and net assets held for disposal.
Management believes that the recorded liability for losses and loss
expenses is adequate. While management uses available information to
estimate losses and loss expenses payable, future changes to the
liability may be necessary based on claims experience and changing
claims frequency and severity of conditions. Management also believes
that deferred policy acquisition costs are recoverable, however, future
costs that are associated with the business in the unearned premium
liability could exceed management's estimates, causing the recorded
asset to be unrecoverable in whole or in part. In addition,
management's estimates of amounts recoverable from reinsurers, net of
valuation allowance, are believed to be consistent with the claim
liability, but the actual amounts recoverable could differ from those
estimates. The amounts the Company will ultimately realize from the
sale of the net assets held for disposal could differ from management's
estimates of their realizable value.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents consists of funds held on deposit and short-term
highly liquid investments with an original maturity of three months or
less at the date of purchase. At various times during the year, the
Company had deposits with financial institutions in excess of the
$100,000 federally insured limit.
Excess of Cost over Net Assets of Businesses Acquired
-----------------------------------------------------
The excess of cost over the fair value of net assets of businesses
acquired is being amortized on a straight-line basis over periods
ranging from twenty to twenty-three years. It is the Company's policy
to evaluate the excess of cost over the net assets of businesses
acquired based on an evaluation of such factors as the occurrence of a
significant adverse event or change in the environment in which the
business operates or if the expected future net cash flows,
undiscounted and without interest, would become less than the carrying
amount of the asset. An impairment loss would be recorded in the period
such determination is made based on the fair value of the related
businesses. Amortization expense from continuing operations in 1996 was
$33,000 and $0 in 1995 and 1994, respectively.
Property and Equipment
----------------------
Property and equipment, which is included in other assets in the
consolidated and combined balance sheets, are recorded at cost, less
accumulated depreciation and amortization. The Company uses an
accelerated method of depreciation, which approximates the straight
line depreciation method, over the estimated useful lives of the
assets, which are 5 years.
F-8
39
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
------------
The Company uses the asset and liability method of accounting for income
taxes. Deferred taxes are determined based on the estimated future tax
effects of differences between the financial accounting and tax bases
of assets and liabilities using the applicable tax laws in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Deferred income tax provisions and
benefits are based on the changes in the deferred tax asset or tax
liability from period to period.
Earnings per Common and Common Share Equivalents
------------------------------------------------
The earnings per common share calculation for the years ended December 31,
1996, 1995 and 1994 was based upon the weighted average number of
common and common share equivalents outstanding and the incremental
number of outstanding common share equivalents computed under the
modified treasury stock method. Because the aggregate number of common
shares obtainable upon exercise of the outstanding options and warrants
exceeded 20% of the number of common shares outstanding, all options
and warrants were assumed to have been exercised and the aggregate
proceeds were applied first, to repurchase outstanding common shares at
the average market price for primary earnings per share and at the
ending market price for fully diluted earnings per share during the
period, but not to exceed 20% of the outstanding shares; second, to
reduce borrowings; and third, to invest the remaining funds in U.S.
government securities or commercial paper. Appropriate recognition
relating to the effect of all interest savings and benefits and the
respective tax effect was applied.
Investments
-----------
The Company adopted the provisions of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities as of January 1, 1994. Fixed
maturity securities that the Company has the positive intent and
ability to hold to maturity are classified as held to maturity and are
stated at amortized cost; other fixed maturity securities and all
equity securities are classified as available for sale and are stated
at fair value, with the unrealized gains and losses, net of deferred
income tax, reported as a separate component of shareholders' equity.
The Company has no investment securities classified as trading.
Pursuant to a Financial Accounting Standards Board Special Report, A
Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities, the Company reassessed the
classification of all its investment securities. Effective December 20,
1995, the Company reclassified certain of its held to maturity
securities to available for sale (see Note 4). Realized gains and
losses on the sale of investments are determined on the basis of
specific security identification and also includes other than temporary
declines, if any. Interest income is recognized on the accrual basis
and dividend income is recognized on the ex-dividend date.
Deferred Policy Acquisition Costs
---------------------------------
Acquisition costs, consisting of commissions, premium taxes and certain
underwriting expenses that vary with and are primarily related to the
production of business, are deferred and amortized ratably over the
policy term. The method used limits the amount to its estimated
realizable value which gives effect to the premium to be earned, the
incurrence of loss and loss expenses and certain other costs expected
to be incurred as premium is earned.
F-9
40
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options
-------------
The Company accounts for stock option plans under the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees. The Company has adopted the disclosure only provisions
of SFAS No. 123, Accounting for Stock-Based Compensation.
Losses and Loss Expenses Payable
--------------------------------
The liability for losses and loss expenses is provided based upon case
basis estimates for losses reported in respect to direct business;
estimates of unreported losses based on estimated loss experience;
estimates received and supplemental amounts provided relating to
assumed reinsurance; and deduction for estimated salvage and
subrogation recoverable. The liability for loss expenses is established
by estimating future expenses to be incurred in settlement of the
claims provided for in the liability for losses. The liability for
losses and loss expenses is not discounted.
Premium Recognition
-------------------
Premiums are recognized as revenue in proportion to the insurance coverage
provided, which is generally ratable over the terms of the policies.
Unearned premiums are generally computed on the daily pro rata basis
and include amounts relating to assumed reinsurance.
Reinsurance Ceded
-----------------
In accordance with SFAS No. 113, Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts, reinsurance receivables
are accounted for and reported separately as assets, net of valuation
allowance. Amounts recoverable from reinsurers are estimated in a
manner consistent with the claim liability. Contracts not resulting in
the reasonable possibility that the reinsurers may realize a
significant loss from the insurance risk assumed generally do not meet
the conditions for reinsurance accounting and are accounted for as
deposits. Reinsurance premiums ceded and reinsurance recoveries on
claims incurred are deducted from the respective revenue and expense
accounts. The Company is not relieved of its primary obligation in a
reinsurance transaction.
Business Risk
-------------
The following is a description of the most significant risks facing
property and casualty insurers and how the Company mitigates those
risks:
Inadequate Pricing Risk are the risks that the premium charged for
insurance and insurance related products are insufficient to cover the
costs associated with the distribution of such products which include:
claim and loss costs, loss adjustment expenses, acquisition expenses,
and other corporate expenses. The Company utilizes a variety of
actuarial and other qualitative methods to set such levels.
F-10
41
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Business Risk (Continued)
-------------------------
Adverse Loss Development and Incurred But Not Reported ("IBNR") Risk is
the risk inherent in the handling and settling of claims whose ultimate
costs, which include loss costs, loss adjustment expenses, and other
related expenses, are unknown at the time the claim is presented. An
associated risk relates to claims which have been incurred, but for
which the Company has no knowledge. The Company makes judgments as to
the ultimate costs of presented claims and makes a provision for their
future payment by establishing reserves for existing claims (case
reserves) and for IBNR claims, however, there can be no assurance that
the amounts reserved will be adequate to ultimately make all required
payments.
Legal/Regulatory Risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will occur and create
additional loss costs or expenses not anticipated by the insurer in
pricing its products. That is, regulatory initiatives designed to
reduce insurer profits or new legal theories may create costs for the
insurer beyond those recorded in the financial statements. The Company
is exposed to this risk by writing approximately 26% of its business in
Ohio and surrounding states and 41% in California, thus increasing its
exposure in these particular regions. This risk is reduced by
underwriting and loss adjusting practices that identify and minimize
the adverse impact of this risk.
Credit Risk is the risk that issuers of securities and mortgagors of the
mortgages owned by the Company will default, or other parties,
including reinsurers that owe the Company money, will not pay. The
Company minimizes this risk by adhering to a conservative investment
strategy, by maintaining sound reinsurance and credit and collection
policies, and by providing for any amounts deemed uncollectible.
Interest Rate Risk is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. The Company
mitigates this risk by attempting to match the maturity schedule of its
assets with the expected payouts of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer would
have to sell assets prior to maturity and recognize a gain or loss.
Management believes that the Company's positive cash flow from
investment income and operations will enable the Company to operate
without having to recognize significant losses from the sale of
investments that have an unrealized holding loss as of December 31,
1996.
Reclassifications
-----------------
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
2. ACQUISITIONS
In 1996, the Company made the following acquisitions:
On November 6, 1996, the Company acquired all of the outstanding shares of
Environmental and Commercial Insurance Agency, Inc. ("ECI"), an
insurance agency based in Columbus, Ohio for $1,000,000 in cash and
192,500 shares of the Company's Common Stock. The shares issued are
subject to a six month lock-up restriction.
F-11
42
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
2. ACQUISITIONS (Continued)
On December 3, 1996, the Company completed the acquisition of SMR & Co.
("SMR"), a business services and consulting firm in Mayfield Village,
Ohio. Under the terms of the acquisition, the Company acquired all of
the outstanding shares of SMR for 600,000 shares of the Company's
Common Stock and three-year warrants to acquire an additional 900,000
shares at $10.375 per share. Of the 600,000 shares issued, 90,000
shares are subject to a six-month lock-up restriction and 510,000
shares are subject to a two-year lock-up restriction.
These acquisitions have been accounted for by the purchase method of
accounting. The difference of $6,081,000 between the fair value of net
assets acquired and the purchase consideration of $1,000,000 in cash
and $5,260,000 of the Company's Common Stock has been allocated to
goodwill. The assets, liabilities and operating results of these
companies are reflected in the Company's financial statements from
their respective dates of acquisition forward. As a result of the
nature of the assets and liabilities acquired there are no material
identifiable intangible assets or liabilities.
The following data summarizes, on an unaudited pro forma basis, the
combined results of continuing operations of the Company and the
businesses acquired for the two years ended December 31,1996. The pro
forma amounts give effect to appropriate adjustments resulting from the
combination, but are not necessarily indicative of future results of
operations or of what results would have been for the combined
companies (in thousands):
1996 1995
------------- --------------
Net revenues - pro forma $ 44,900 $ 39,848
============= ==============
Net income - pro forma $ 5,084 $ 3,979
============= ==============
Earnings per common and common
share equivalent - pro forma
- primary $ .24 $ .23
============= ==============
- fully diluted $ .18 $ .23
============= ==============
3. CALCULATION OF EARNINGS PER COMMON AND COMMON SHARE EQUIVALENTS
Income from continuing operations for the year ended December 31, 1996 was
adjusted to reflect the effect of all interest savings and benefits and
the tax effects under the modified treasury stock method. Modifications
to income were not required for the years ended December 31, 1995 and
1994.
Fully
Primary Diluted
------------- --------------
(in thousands)
Income from continuing operations $ 4,422 $ 4,422
Interest expense reduction less 34% tax rate 30 30
Interest income less 34% tax rate 2,165 626
------------- --------------
Adjusted income from continuing operations 6,617 5,078
------------- --------------
Loss from discontinued operations (38) (38)
------------- --------------
Adjusted net income $ 6,579 $ 5,040
============= ==============
F-12
43
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
3. CALCULATION OF EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENTS
(Continued)
For the three years ended December 31, 1996, the Company computed earnings
per common and common share equivalents under the modified treasury
stock method as follows (in thousands):
Fully
Primary Diluted
------------- --------------
Weighted common shares - 1996:
Weighted average common shares 17,863 17,863
Additional stock equivalents less 20% limitation
on assumed repurchase 14,350 14,350
------------- --------------
32,213 32,213
============= ==============
Weighted common shares - 1995 and 1994:
Weighted average common shares 14,760 14,760
Additional share equivalents less 20% limitation
on assumed repurchase 2,196 2,196
------------- --------------
16,956 16,956
============= ==============
During February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, Earnings per Share, which is effective for financial
statements for annual periods ending after December 15, 1997. However,
disclosure of pro forma earnings per share amounts computed using the
provisions of SFAS No. 128 is permissible. The unaudited pro forma
earnings per share of the Company based on SFAS No. 128 are as follows:
1996 1995 1994
------------- ------------- -------------
Basic EPS:
Continuing operations $ .25 $ .24 $ .24
Discontinued operations - - -
------------ ------------- -------------
Net income per share $ .25 $ .24 $ .24
============ ============= =============
Diluted EPS from:
Continuing operations $ .18 $ .24 $ .24
Discontinued operations - - -
------------ ------------- -------------
Net income per share $ .18 $ .24 $ .24
============ ============= =============
F-13
44
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
4. INVESTMENTS
The amortized cost and estimated fair value of fixed maturities held to
maturity at December 31, 1996 were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- ----------------
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 6,136 $ 28 $ (65) $ 6,099
Corporate securities 8,850 18 (96) 8,772
Mortgage-backed securities 495 10 - 505
--------------- ------------- ------------- ----------------
Totals $ 15,481 $ 56 $ (161) $ 15,376
=============== ============= ============= ================
The amortized cost and estimated fair value of securities available for
sale at December 31, 1996 were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- ----------------
Fixed Maturities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 16,067 $ 224 $ (93) $ 16,198
Corporate securities 10,962 87 (66) 10,983
Mortgage-backed securities 8,092 207 (9) 8,290
--------------- ------------- ------------- ----------------
35,121 518 (168) 35,471
Equity securities 4,349 5,022 (158) 9,213
--------------- ------------- ------------- ----------------
Totals $ 39,470 $ 5,540 $ (326) $ 44,684
=============== ============= ============= ================
Expected maturities will differ from contractual maturities because the
issuers may have the right to call or prepay obligations with or
without call or prepayment penalties. The amortized cost and estimated
fair value of fixed maturities held to maturity at December 31, 1996,
by contractual maturity, were as follows (in thousands):
Amortized Estimated
Cost Fair Value
--------------- ----------------
Due in one year or less $ 1,633 $ 1,626
Due after one year through five years 12,921 12,811
Due after five years through ten years 356 347
Due after ten years 76 87
--------------- ----------------
14,986 14,871
Mortgage-backed securities 495 505
--------------- ----------------
$ 15,481 $ 15,376
=============== ================
F-14
45
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
4. INVESTMENTS (Continued)
The amortized cost and estimated fair value of fixed maturities available
for sale at December 31, 1996, by contractual maturity, were as follows
(in thousands):
Amortized Estimated
Cost Fair Value
--------------- ----------------
Due in one year or less $ 1,182 $ 1,182
Due after one year through five years 21,904 21,969
Due after five years through ten years 3,701 3,795
Due after ten years 242 235
--------------- ----------------
27,029 27,181
Mortgage-backed securities 8,092 8,290
--------------- ----------------
$ 35,121 $ 35,471
=============== ================
The amortized cost and estimated fair value of fixed maturities held to
maturity at December 31, 1995 were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- ---------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 6,159 $ 81 $ (9) $ 6,231
Corporate securities 8,654 27 (62) 8,619
Mortgage-backed securities 496 18 - 514
--------------- ------------- ------------- ---------------
Totals $ 15,309 $ 126 $ (71) $ 15,364
=============== ============= ============= ===============
The amortized cost and estimated fair value of securities available for
sale at December 31, 1995 were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- ---------------
Fixed Maturities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 6,522 $ 303 $ (7) $ 6,818
Obligations of states and political
subdivisions 8,339 167 (3) 8,503
Corporate securities 14,990 439 (15) 15,414
Mortgage-backed securities 2,244 174 - 2,418
--------------- ------------- ------------ ----------------
32,095 1,083 (25) 33,153
Equity securities 1,999 3,589 (162) 5,426
--------------- ------------- ------------ ----------------
$ 34,094 $ 4,672 $ (187) $ 38,579
=============== ============= ============ ================
On December 20, 1995, the Company reclassified a portion of their held to
maturity securities to available for sale. The amortized cost and
estimated fair value of the securities reclassified were $5,733,000 and
$5,897,000, respectively, as of the date of reclassification.
F-15
46
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
4. INVESTMENTS (Continued)
Net investment income was comprised of the following for the years ended
December 31 as follows (in thousands):
1996 1995 1994
------- ------- -------
Interest $ 3,652 $ 3,455 $ 2,588
Dividends 142 96 96
------- ------- -------
Total investment income 3,794 3,551 2,684
Less: Investment expense (230) (210) (207)
------- ------- -------
Net investment income $ 3,564 $ 3,341 $ 2,477
======= ======= =======
Realized gains and losses on investments for the years ended December 31 are as follows (in thousands):
1996 1995 1994
------- ------- -------
Realized gains:
Available for sale:
Fixed maturities $ 117 $ 114 $ -
Equity securities 1,381 9 146
Other 125 73 -
------- ------- -------
Total realized gains 1,623 196 146
------- ------- -------
Realized losses:
Available for sale:
Fixed maturities 32 27 42
Equity securities 35 3 24
Other 27 - -
------- ------- -------
Total realized losses 94 30 66
------- ------- -------
Net realized gains on investments $ 1,529 $ 166 $ 80
======= ======= =======
The change in net unrealized appreciation (depreciation) of investments is summarized as follows (in thousands):
1996 1995 1994
------- ------- -------
Available for sale:
Fixed maturities $ (709) $ 2,147 $(1,088)
Equity securities 1,437 3,583 (76)
------- ------- -------
$ 728 $ 5,730 $(1,164)
======= ======= =======
The components of unrealized appreciation (depreciation) on securities available for sale at December 31 were as follows
(in thousands):
1996 1995 1994
------- ------- -------
Gross unrealized appreciation (depreciation) $ 5,214 $ 4,485 $(1,208)
Deferred income tax (1,518) (1,219) -
------- ------- -------
Net unrealized appreciation (depreciation) $ 3,696 $ 3,266 $(1,208)
======= ======= =======
F-16
47
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
4. INVESTMENTS (Continued)
Fixed maturities held to maturity and certificates of deposit with a
carrying value of approximately $8,939,000 and $8,909,000 at December
31, 1996 and December 31, 1995, respectively, were on deposit with
regulatory authorities as required by law. At December 31, 1996 and
1995 all mortgage loans were secured by properties in the states of
California, Michigan and Ohio.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents, short-term investments and premiums receivable:
The carrying amounts reported in the consolidated and combined balance
sheets for these instruments are at cost, which approximates fair
value.
Investment securities: Fair values for investments in fixed maturities are
based on quoted market prices, where available. For fixed maturities
not actively traded, fair values are estimated using values obtained
from independent pricing services. The fair values for equity
securities are based on quoted market prices. Fair values for fixed
maturities available for sale and equity securities are recognized in
the consolidated and combined balance sheets.
Mortgage loans: The carrying amounts reported in the consolidated and
combined balance sheets are the aggregate unpaid balance of the loans,
which approximates fair value.
5. COMMON STOCK
The Company's authorized common stock consists of 100,000,000 (20,000,000
at December 31, 1995) shares of common stock, par value $0.01 per
share. The holders of the Company's Common Stock are entitled to one
vote for each share held on all matters voted on by shareholders. On
January 22, 1997, the Company completed the registration of 32,126,076
shares of common stock (the "Shares") of which up to 17,925,888 are
issuable upon exercise of outstanding warrants. The Shares were
registered under the Securities Act of 1933 on behalf of certain
selling shareholders in order to permit the public or private sale or
other public or private distribution of the Shares. Accordingly, the
Company will not receive any proceeds for these Shares.
On October 18, 1996, the Company issued 4,000,000 shares of the Company's
Common Stock and warrants to purchase an additional 12,000,000 shares
of the Company's Common Stock at exercise prices ranging from $2.625 to
$3.875 per share, expiring in two to four years, for an aggregate
purchase price of $10,500,000.
In December 1996, the Company completed a private placement in which the
Company offered 3,251,888 units (the "Units") to qualified investors at
an aggregate purchase price of $9.00 per Unit. Each Unit consisted of
one share of common stock and one warrant to purchase one share of
common stock at an exercise price of $11.00 per share, exercisable for
a three year period from the date of issuance. The Company realized net
proceeds of $ 27,737,000.
F-17
48
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
5. COMMON STOCK (Continued)
Prior to the RESI Transaction, certain options were granted to employees,
directors and affiliates of RESI's former parent company. When RESI was
spun-off in April 1995 (the "Distribution Date"), optionees received
options to acquire RESI Common Stock at the ratio of one RESI option
for each five options under the former parent's 1990 and 1991 Stock
Option plans. The outstanding options at the Distribution Date and the
RESI options granted with respect thereto are stapled and are only
exercisable if exercised together. Unvested options held and unvested
RESI options granted, vest in accordance with the original vesting
schedule as long as the optionee is employed by the former parent, RESI
or their affiliates. Options granted under these plans expire ten years
from the date of grant, and vest over varying periods. The option price
is based on the fair market value of the common shares on the date of
grant.
RESI agreed to issue to holders of unexpired warrants of its former
parent, additional RESI warrants to acquire shares of RESI's Common
Stock equal to one fifth of the number of shares available. At the
Distribution Date, RESI adjusted the per share exercise price of the
RESI warrants to reflect the effect of the distribution on the market
prices of RESI and its former parent's common stock. These warrants are
designated as stapled warrants and expire at various dates through May
2003. In connection with the RESI Transaction, the holders of these
warrants are able to exercise under the original terms of the warrants
and will receive Company stock. At December 31, 1996 and 1995, there
were outstanding unexercised warrants to acquire 434,000 and 622,000
shares of the Company's Common Stock, respectively. During 1996,
188,000 RESI warrants were exercised at $3.60 with no cancellations. In
1995, 250,000 RESI warrants were exercised ranging in price from $1.08
to $5.10 with no cancellations.
Under the Company's 1995 Employee Stock Option Plan, a maximum of 500,000
options may be awarded. Such options are granted at no less than fair
market value at the date of grant, become exercisable in increments of
20% over a five-year vesting period and expire ten years from the date
of grant. In the event of a change of control, as defined in the plan,
all outstanding employee options shall become immediately exercisable
and the prescribed time limits for exercise will run from such vesting.
Information relating to the above stock option plans is summarized below:
1996 1995
------------- ------------
Outstanding at beginning of year 190,200 -
Granted at Distribution Date - 420,400
Granted (a) 230,000 31,000
Exercised (b) (101,960) (257,800)
Expired or canceled (1,168) (3,400)
------------- ------------
Outstanding at end of year (c) 317,072 190,200
------------- ------------
Exercisable at end of year (d) 22,320 70,000
============= ============
Available for future grant at the
end of year (e) 273,000 502,000
============= ============
(a) Options were granted at average costs of $2.31 and $1.50 in 1996 and
1995, respectively.
(b) Options were exercised at prices ranging from $1.08 to $3.60 and
averaging $3.43 in 1996 and $1.08 to $5.80 and averaging $5.07 in
1995.
(c) Prices for options outstanding at December 31, 1996 ranged from $1.08
to $4.10 and averaged $2.11 with expiration dates ranging from May
1997 to May 2006. Prices for options outstanding at December 31, 1995,
ranged from $1.08 to $5.80 and averaged $2.25 with expiration dates
ranging from May 1996 to May 2004.
(d) Options exercisable at December 31, 1996 and 1995 averaged $2.18 and
$3.15, respectively
(e) Includes stapled options and options relating to the Company's 1995
Employee Stock Option Plan.
F-18
49
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
5. COMMON STOCK (Continued)
The Company is currently seeking shareholder approval with regards to the
1996 Employee Stock Option Plan. Under the 1996 Employee Stock Option
Plan, the Company will reserve 1,000,000 shares of Company Common
Stock. The options awarded will be subject to a 20% incremental vesting
schedule over a five-year period commencing from the date of grant. The
options will be awarded at a price not less than fair market value at
the time of the award and will expire six years from the date of grant.
Subject to shareholder approval, 251,000 options were granted on
December 26, 1996 at a cost of $11.00. Shareholders will also vote on
grants to non-employee directors of 150,000 options granted under the
1996 Employee Stock Option Plan, exercisable immediately, with a five
year expiration term from the date of grant. The price of these options
is $11.00 for 100,000 of the options and $12.00 for the remaining
50,000.
Had the cost of stock option plans been determined based on the provision
of SFAS No. 123, the Company's net income and earnings per share pro
forma amounts would be as follows (in thousands):
As Reported Pro Forma
(unaudited)
Primary Fully Diluted Primary Fully Diluted
-------------- ------------- ------------- ------------
1996
Adjusted net income (1) $ 6,579 $ 5,040 $ 6,553 $ 5,014
============== ============= ============= ============
Net income per common share $ .21 $ .16 $ .20 $ .16
============= ============= ============= ============
1995
Net income $ 3,469 $ 3,469 $ 3,468 $ 3,468
============= ============= ============= ============
Net income per common share $ .20 $ .20 $ .20 $ .20
============= ============= ============= ============
(1) See Note 3
The above results may not be representative of the effects of SFAS No. 123
on net income for future years.
The Company applied the Black-Scholes option-pricing model to determine
the fair value of each option granted in 1996 and 1995. Below is a
summary of the assumptions used in the calculation:
Dividend Yield 0%
Expected Volatility 35%
Risk-free interest rate 6.01%, 6.03% and 6.21%
Expected option life 3.75 years
The stock options issued to key employees in 1996 were assumed to vest at
a rate of 100%.
F-19
50
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
6. LIABILITY FOR UNPAID LOSSES AND LOSS EXPENSES
Activity in the liability for unpaid losses and loss expenses is
summarized as follows (in thousands):
1996 1995 1994
-------------- ------------- ---------
Balance at January 1 $ 37,002 $ 34,661 $ 29,528
Less: Reinsurance recoverables, net (8,914) (9,383) (8,505)
-------------- ------------- --------------
Net balance at January 1 28,088 25,278 21,023
-------------- ------------- --------------
Incurred related to:
Current year 17,216 17,297 14,753
Prior years 408 (2,180) (2,259)
-------------- ------------- --------------
Total incurred 17,624 15,117 12,494
-------------- ------------- --------------
Paid related to:
Current year 3,684 5,963 4,269
Prior years 9,043 6,344 3,970
-------------- ------------- --------------
Total paid 12,727 12,307 8,239
-------------- ------------- --------------
Net balance at December 31 32,985 28,088 25,278
Plus: reinsurance recoverables, net 8,114 8,914 9,383
-------------- ------------- --------------
Balance at December 31 $ 41,099 $ 37,002 $ 34,661
============== ============= ==============
In 1995 and 1994, the Company experienced lower than anticipated ultimate
losses on prior years due primarily to a reduction in claims severity
from that assumed in establishing the liability for losses and loss
expenses payable. The Company's environmental exposure from continuing
operations relates primarily to its coverage of remediation related
risks, thus management believes the Company's exposure to historic
pollution situations is minimal. The Company's non-insurance
environmental exposure from discontinued operations is discussed in
Note 15.
7. REINSURANCE
In the ordinary course of business, the Company assumes and cedes
reinsurance with other insurers and reinsurers. These arrangements
provide the Company with a greater diversification of business and
generally limit the maximum net loss potential on large risks. Excess
of loss reinsurance contracts in effect through December 31, 1996,
generally protect against individual property and casualty losses over
$200,000 and contract surety and miscellaneous bond losses over
$500,000. In addition to the excess of loss contract in effect for
contract surety business, a 50% quota share contract on the first
$500,000 in losses is in effect. Asbestos abatement, lead abatement,
environmental consultants professional liability and remedial action
contractors business is 75% ceded on a quota share basis to reinsurers.
Catastrophe coverage is also maintained.
F-20
51
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
7. REINSURANCE (Continued)
The impact of reinsurance is as follows (in thousands):
1996 1995 1994
-------------- ------------- --------------
Premiums written:
Direct $ 42,420 $ 36,278 $ 37,127
Assumed 468 1,417 742
Ceded (11,739) (11,018) (10,650)
-------------- ------------- --------------
Net $ 31,149 $ 26,677 $ 27,219
============== ============= ==============
Premiums earned:
Direct $ 39,388 $ 36,005 $ 34,255
Assumed 591 1,507 414
Ceded (12,236) (10,550) (11,301)
-------------- ------------- --------------
Net $ 27,743 $ 26,962 $ 23,368
============== ============= ==============
Losses and loss expense incurred:
Direct $ 18,618 $ 16,342 $ 15,088
Assumed 210 1,223 (65)
Ceded (1,204) (2,448) (2,529)
-------------- ------------- --------------
Net $ 17,624 $ 15,117 $ 12,494
============== ============= ==============
The reinsurance payables were $2,869,000, $2,259,000 and $2,056,000 at
December 31, 1996, 1995 and 1994, respectively.
Reinsurance recoverables were comprised of the following as of December 31
(in thousands):
1996 1995 1994
-------------- ------------- --------------
Receivables on unpaid losses and loss expenses $ 8,113 $ 8,914 $ 9,383
Receivables on ceding commissions and other 2,703 2,892 1,026
Receivables on paid losses and expenses 369 841 478
-------------- ------------- --------------
$ 11,185 $ 12,647 $ 10,887
============== ============= ==============
The Company evaluates the financial condition of its reinsurers and
establishes a valuation allowance as reinsurance receivables are deemed
uncollectible. During 1996, the majority of ceded amounts were ceded to
Republic Western Insurance Company and Reliance Insurance Company. The
Company monitors concentrations of risks arising from similar
geographic regions or activities to minimize its exposure to
significant losses from catastrophic events.
F-21
52
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
8. DEFERRED POLICY ACQUISITION COSTS
At December 31, 1996 changes in deferred policy acquisition costs were as
follows (in thousands):
1996 1995 1994
-------------- ------------- --------------
Balance, beginning of year $ 3,428 $ 3,726 $ 2,406
Policy acquisition costs deferred 8,616 7,476 6,748
Amortized to expense during the year (7,699) (7,774) (5,428)
-------------- ------------- --------------
Balance, end of year $ 4,345 $ 3,428 $ 3,726
============== ============= ==============
9. STATUTORY SURPLUS AND DIVIDEND RESTRICTION
Ohio law limits the payment of dividends by a company to its parent. The
maximum dividend that may be paid without prior approval of the
Director of Insurance is limited to the greater of the statutory net
income of the preceding calendar year or 10% of total statutory surplus
as of the prior December 31.
The consolidated and combined financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP"). The
Company's insurance subsidiaries have filed annual financial statements
with the Ohio Department of Insurance and Utah Department of Insurance,
respectively, and are prepared on the basis of accounting practices
prescribed by such regulatory authorities, which differ from GAAP.
Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners
("NAIC"), as well as state laws, regulations and general administrative
rules. Permitted statutory accounting practices encompass all
accounting practices not prescribed. All material transactions recorded
by the Company's insurance subsidiaries are in accordance with
prescribed practices.
In December 1993, the NAIC adopted the property and casualty Risk-Based
Capital ("RBC") formula. This model act requires every property and
casualty insurer to calculate its total adjusted capital and RBC
requirement, and provides for an insurance commissioner to intervene if
the insurer experiences financial difficulty. The model act became law
in Ohio in March 1996, and in Utah in April 1996, states where certain
subsidiaries of the Company are domiciled. The RBC formula includes
components for asset risk, liability risk, interest rate exposure and
other factors. The Company's insurance subsidiaries exceeded all
required RBC levels for December 31, 1996 and 1995.
CSC's statutory net income for the three years ended December 31, 1996,
was $1,916,000, $3,681,000 and $1,804,000, respectively, and the
statutory capital and surplus was $25,954,000, $22,034,000 and
$20,123,000, respectively.
F-22
53
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
10. INCOME TAXES
A summary of income tax expense (benefit) included in the Consolidated
and Combined Statements of Income is as follows (in thousands):
1996 1995 1994
-------------- ------------- -----------
Continuing operations
Current:
Federal $ 1,654 $ 2,121 $ 1,289
State and Local 13 - -
-------------- ------------- -------------
1,667 2,121 1,289
Deferred:
Federal (27) (699) 55
-------------- ------------- -------------
Total continuing operations 1,640 1,422 1,344
Discontinued operations 91 - -
-------------- ------------- -------------
$ 1,731 $ 1,422 $ 1,344
============== ============= =============
The provision for income taxes attributable to earnings from continuing
operations differed from the amount obtained by applying the federal
statutory income tax rate to income from continuing operations before
income taxes, as follows (in thousands):
1996 1995 1994
-------------- ------------- -------------
Tax at statutory rate (34%) $ 2,061 $ 1,663 $ 1,647
Change in valuation allowance (589) (169) 434
Tax exempt interest and dividends
received deduction (33) (106) (123)
Nontaxable income on participation
transaction - - (274)
Change in estimated liabilities 196 - -
Other, net 5 34 (340)
-------------- ------------- -------------
Provision for income tax from continuing
operations $ 1,640 $ 1,422 $ 1,344
============== ============= =============
Effective income tax rate 27.1% 29.1% 27.7%
============== ============= =============
F-23
54
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
10. INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995, are as follows (in thousands):
1996 1995
-------------- -----------
Deferred tax assets:
--------------------
Loss expenses payable discounting $ 2,176 $ 1,957
Net operating loss carryforwards 1,136 1,235
Unearned premiums not deductible 1,105 1,063
Other deferred tax assets 151 143
-------------- -------------
Total gross deferred tax assets 4,568 4,398
Less: valuation allowance (1,379) (1,968)
-------------- -------------
Net deferred tax assets 3,189 2,430
-------------- -------------
Deferred tax liabilities:
-------------------------
Unrealized appreciation on investments 1,518 1,219
Deferred policy acquisition costs 1,477 1,165
Reinsurance recoverable 302 -
Other deferred tax liabilities 219 99
-------------- -------------
Total gross deferred tax liabilities 3,516 2,483
-------------- -------------
Net deferred tax liability, included in income
taxes in the consolidated and combined
balance sheets $ 327 $ 53
============== =============
Net deferred tax liability attributable to
discontinued operations, included in net
assets held for disposal $ 1,340 $ -
============== =============
The company had net operating loss ("NOL") carryforwards of approximately
$3,300,000 and $3,600,000 at December 31, 1996 and 1995, respectively,
from the separate return years of Evergreen National Indemnity
Corporation ("ENIC"). These losses are subject to limitations regarding
the offset of the company's future taxable income and will begin to
expire in 2007.
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
The Company determines a valuation allowance based on their analysis of
amounts available in the statutory carryback period, consideration of
future deductible amounts, and assessment of ENIC's separate company
profitability. The Company has established valuation allowances for
portions of ENIC's NOL carryforwards and other deferred tax assets. The
net change in the valuation allowance for the years ended December 31,
1996 and 1995 was a decrease of $589,000 and $169,000, respectively.
Even though the Company has had taxable income over the last several
years, significant income in some instances has been attributable to
non-recurring transactions and thus there is no assurance that the
Company will remain profitable in future years. However, during 1996,
ENIC obtained all licenses necessary to fully operate, commenced
underwriting insurance, and reported two consecutive years of
profitability. As a result, management determined that a portion of the
valuation allowance related to ENIC's NOL carryforwards was no longer
required. Otherwise, the Company maintains a policy of recognizing
other deferred tax assets recoverable in the carryback period and does
not consider future taxable income in excess.
F-24
55
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
11. SHORT-TERM BORROWINGS, NOTE PAYABLE AND CAPITALIZED LEASES
Short-Term Borrowings
---------------------
The Company secured a $6,000,000 credit facility used for additional
working capital and other funding needs. Up to $4,500,000 of the credit
facility is available for the issuance of standby letters of credit. At
December 31, 1996, the Company had issued $2,400,000 in standby letters
of credit. The unused portion of the facility is available for cash
borrowings. There were no cash borrowings under the credit facility
during 1996 and 1995.
The credit facility provides for the maintenance of certain restrictive
covenants including, among others, minimum working capital levels,
maintaining current and fixed charges ratios and a predetermined level
of interest coverage. The Company is also restricted from making any
dividend payments and incurring additional debt. This facility is
collateralized by certain Company assets.
Note Payable and Capitalized Leases
-----------------------------------
Note payable and capitalized leases, consists of the following (in
thousands):
December 31
--------------------------------
1996 1995
------------- --------------
Promissory note payable to a shareholder in quarterly installments of
$400,000 plus interest, based on 3 month LIBOR (5.51% at December 31,
1996) compounded daily, through December 15, 1999 $ 3,200 $ -
Capitalized leases, secured by equipment, payable
monthly through 1997 11 47
------------- --------------
$ 3,211 $ 47
============= ==============
At December 31, 1996, aggregate maturities of note payable and capitalized
leases, were as follows (in thousands):
YEARS ENDING
DECEMBER 31,
------------
1997 $ 1,611
1998 1,600
-------------
$ 3,211
=============
Management believes that the carrying amounts of short-term borrowings,
note payable and capitalized leases recorded at December 31, 1996 were
not impaired and approximate fair values.
F-25
56
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
----------------
The Company leases certain of its premises and equipment under various
operating lease agreements. At December 31, 1996, future minimum rental
commitments becoming payable under all operating leases from continuing
operations are as follows (in thousands):
YEARS ENDING
DECEMBER 31,
------------
1997 $ 1,277
1998 1,202
1999 583
2000 563
2001 563
Thereafter 2,793
-------------
$ 6,981
=============
Total rental expense incurred under operating leases was $454,000,
$411,000 and $331,000 in 1996, 1995 and 1994, respectively.
Other
-----
In the ordinary course of business, the Company is a defendant in various
lawsuits. In the opinion of management, the effects, if any, of such
lawsuits are not expected to be material to the Company's results of
operations or financial position.
The Company has profit sharing plans covering substantially all of its
employees. Participating employees may elect to contribute, on a tax
deferred basis, a portion of their compensation, in accordance with
Section 401(k) of the Internal Revenue Code. Employer contributions
made to the plan for 1996, 1995 and 1994, amounted to $240,000,
$141,000 and $111,000, respectively.
13. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company recorded the acquisition of RESI as a non-cash transaction
consisting of a $4,000,000 promissory note and recapitalization of
shareholders' equity of $16,244,000. Additionally, during 1996, the
Company acquired, in exchange for 792,500 shares of its common stock,
and other consideration, 100% of SMR and ECI, which were also recorded
as non-cash transactions.
F-26
57
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
13. SUPPLEMENTAL CASH FLOW DISCLOSURES (Continued)
In December 1994, ENIC participated in a transaction whereby ENIC obtained
an agreed upon amount of net assets of an unrelated party as
consideration in completing the sale and the related settlements of
debt of two unrelated parties. The transaction included a contingent
receivable of up to $2,900,000 due ENIC from the unrelated party. Based
on the performance of the insurance operations sold, it was determined
that $807,000 and $1,150,000 be recognized as revenue during 1994 and
1996, respectively. ENIC does not have any future obligations with
respect to the insurance operations under the terms of the transaction
agreements.
CASH PAID DURING THE YEAR FOR:
1996 1995 1994
-------------- ------------- --------------
INTEREST $ 60 $ 216 $ 469
============== ============= =============
INCOME TAXES $ 1,290 $ 128 $ 64
============== ============= =============
14. RELATED PARTIES
In October 1996, the Company's Chairman purchased 1,900,000 shares of
common stock, and warrants to purchase an additional 5,700,000 shares
of common stock at exercise prices ranging from $2.625 to $3.875 per
share, for an aggregate price of $4,988,000. Additionally, the Chairman
held warrants to purchase 240,000 shares of common stock at $3.60 per
share
The Company's Chief Financial Officer ("CFO") was a one-third owner of
SMR. Among the liabilities assumed in connection with the SMR
acquisition is a deferred compensation arrangement to which the CFO is
entitled to receive 40% of the collections from the acquired
receivables of SMR. In addition, in connection with the SMR
transaction, the CFO received 195,600 shares of common stock and
293,400 warrants to purchase additional shares of common stock at an
exercise price of $10.375. The office building utilized by SMR is
leased under a ten-year lease from a partnership in which the CFO is
indirectly, a one-third owner.
The Company has issued six $500,000 bonds covering certain loans obtained
by an unrelated party, maturing from 1996 and 2002. Collateral for
these bonds includes the personal indemnification of an indirect
shareholder of the Company.
The Company's investment portfolios include loans to business
organizations associated with a relative of a shareholder of the
Company, which aggregate $2,900,000. These loans provide for interest
payments only until maturity, which range from December 31, 1997
through April 30, 1999.
The stock of ECI, which was acquired by the Company, was 45% owned by the
spouse of an officer of a subsidiary of the Company.
F-27
58
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
15. SUBSEQUENT EVENTS
In February 1997, the Company signed a letter of intent to sell the
Company's Environmental Services business. The sale is subject to a
definitive agreement and various governmental and regulatory approvals.
The Company anticipates that the sale will be completed during 1997 and
will realize the net carrying value of the net assets held for
disposal.
In accordance with the Company's intent to sell the environmental services
business, the related results of operations have been reflected in the
Company's results of operations as a discontinued operation for the
year ended December 31, 1996. Included in discontinued operations is
the following (in thousands):
Revenues $ 9,202
=============
Income before taxes $ 53
Income tax provision 91
-------------
Net loss $ (38)
=============
Net assets of the discontinued operations at December 31, 1996 consists of
(in thousands):
Cash $ 2,375
Accounts receivable, net 7,218
Property, plant and equipment, net 20,598
Excess of cost over net assets of businesses acquired, net 3,305
Other assets 1,074
Accounts payable (3,959)
Accrued environmental costs (3,203)
Accrued expenses and other liabilities (4,409)
-------------
$ 22,999
=============
Accruals for investigatory and remediation costs are recorded when it is
probable that a liability has been incurred and the amount of loss can
be reasonably estimated. Accrued costs include investigative,
administrative, legal and remediation costs associated with site
clean-up. Environmental compliance costs including maintenance,
monitoring and similar costs are expensed as incurred.
F-28
59
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
15. SUBSEQUENT EVENTS (Continued)
The measurement of environmental liabilities is based on an evaluation of
currently available facts with respect to each individual site and
considers factors such as existing technology, presently enacted laws
and regulations, and prior experience in remediation of contaminated
sites. While the current law potentially imposes joint and several
liability upon each party at any Superfund site, the Company's
contribution to clean up these sites is expected to be limited, given
the number of other companies which have also been named as potentially
responsible parties, the volumes of waste involved, and that most of
these matters are indemnified by the previous owners of certain RESI
facilities. A reasonable basis for apportionment of costs among
responsible parties is determined and the likelihood of contribution by
other parties is established. If it is considered probable that the
Company will only have to pay its expected share of the total site
cleanup, the liability reflects the Company's expected share. In
determining the probability of contribution, the Company considers the
solvency of the parties, whether responsibility is being disputed, the
terms of any existing agreements, and experience to date regarding
similar matters. These liabilities do not take into account any claims
for recoveries from insurance or third parties and are not discounted.
As assessments and remediation progress at individual sites, these
liabilities are reviewed periodically and adjusted to reflect
additional technical and legal information which becomes available.
Actual costs to be incurred at identified sites in future periods may
vary from the estimates, given inherent uncertainties in evaluating
environmental exposures. The Company believes it has sufficiently
reserved for all costs of remediation.
On January 7, 1997, the Company completed the acquisition of the assets
and business of Midwest Indemnity Corporation ("Midwest") located in
Skokie, Illinois for a total cost of approximately $9,900,000,
consisting of 407,256 shares of restricted common stock, $3,250,000 in
cash and $1,750,000 in non-interest bearing notes. Midwest markets
environmental and surety bond products throughout the United States
through a distribution system of agents and subagents.
On February 24, the Company completed the acquisition of Midland
Consultants, Inc. ("Midland"), located in Brooklyn, Ohio, for 87,500
shares of restricted common stock, $208,000 in cash and warrants to
purchase 20,000 shares of common stock at an exercise price of $11.625
per share exercisable through January 31, 2000. Midland provides
specialized employment services.
On March 3, 1997, the Company consummated its acquisition of M&N Risk
Management, Inc. and M&N Enterprises, Inc. (the "M&N Companies") and
MFC, Inc. of Cleveland, Ohio for 384,600 shares of restricted common
stock, $1,000,000 cash and 900,000 warrants at $13 per share
exercisable until March 3, 2000. The M&N Companies provide employers
with a turn-key approach to integrate workers' compensation actuarial
analysis and underwriting capabilities with claims administration.
On March 3, 1997, the Company announced it had entered into an agreement
to acquire The Benefits Group Agency, Inc. ("The Benefits Group"),
located in Cleveland, Ohio, for 395,000 shares of restricted common
stock, $2,500,000 in cash and 500,000 warrants to purchase common stock
at $12.50 per share over a three year period. The transaction is
subject to a definitive agreement and is expected to close by March 31,
1997. The Benefits Group is a full-service corporate benefits
administration company.
F-29
60
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
16. UNAUDITED QUARTERLY FINANCIAL DATA
Quarterly financial data are summarized as follows (amounts in thousands,
except per share amounts):
1996 March 31, June 30, September 30, December 31,
--------- -------------- ------------- -------------- --------------
Revenues $ 9,320 $ 7,346 $ 9,389 $ 9,714
============== ============= ============= ==============
Income from continuing operations $ 655 $ 771 $ 839 $ 2,157
Loss from discontinued operation - - - (38)
-------------- ------------- ------------- --------------
Net income $ 655 $ 771 $ 839 $ 2,119
============== ============= ============= ==============
Earnings per common share:
Primary -
Continuing operations $ .04 $ .04 $ .05 $ .08
Discontinued operations - - - -
-------------- ------------- ------------- --------------
Net income per share $ .04 $ .04 $ .05 $ .08
============== ============= ============= ==============
Earnings per common share:
Fully Diluted -
Continuing operations $ .04 $ .04 $ .04 $ .04
Discontinued operations - - - -
-------------- ------------- ------------- --------------
Net income per share $ .04 $ .04 $ .04 $ .04
============== ============= ============= ==============
Weighted average common and
common share equivalents, primary
and fully diluted: 16,956 16,956 16,956 32,213
============== ============= ============= =============
1995 March 31, June 30, September 30, December 31,
-------- -------------- ------------- -------------- -------------
Revenues $ 7,971 $ 8,309 $ 6,496 $ 8,163
============== ============= ============= =============
Net income (loss) $ 508 $ (220) $ 101 $ 3,080
============== ============= ============= =============
Earnings per common share:
Primary $ .03 $ (.01) $ .01 $ .17
============== ============= ============= =============
Fully diluted $ .03 $ (.01) $ .01 $ .17
============== ============= ============= =============
Weighted average common and
common share equivalents, primary
and fully diluted: 16,956 16,956 16,956 16,956
============== ============= ============= =============
The increase in net income in the fourth quarter of 1996 and 1995 are a
result of the Company's historical policy of engaging an independent
actuary to calculate the loss reserves at year end and settling the
Company's reinsurance treaties in the fourth quarter. For future
periods, this analysis will be completed by management on a
quarterly basis.
F-30
61
INTERNATIONAL ALLIANCE SERVICES, INC.
SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
(In thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
-------- -------- -------- -----------
AMOUNT AT
WHICH SHOWN
IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
------------------ ---- ----- -------------
Fixed maturities--held to maturity:
Bonds:
U.S. government and government
agencies and authorities $ 6,136 $ 6,099 $ 6,136
States, municipalities and
political subdivisions -- -- --
Corporate securities 8,850 8,772 8,850
Mortgage-backed securities 495 505 495
Fixed maturities--available for sale:
Bonds:
U.S. government and government
agencies and authorities 16,067 16,198 16,198
Corporate securities 10,962 10,983 10,983
Mortgage-backed securities 8,092 8,290 8,290
------- ------- -------
Total fixed maturities 50,602 50,847 50,952
------- ------- -------
Equity securities:
Common stock:
Public utilities 209 189 189
Banks, trust and insurance
companies 225 252 252
Industrial, miscellaneous and
all other 1,178 6,014 6,014
Nonredeemable preferred stocks 2,737 2,758 2,758
------- ------- -------
TOTAL EQUITY SECURITIES 4,349 9,213 9,213
------- ------- -------
Mortgage loans 3,685 3,685
Short-term investments 4,799 4,799
------- -------
Total investments $63,435 $68,649
======= =======
See accompanying Independent Auditors' Report
F-31
62
INTERNATIONAL ALLIANCE SERVICES, INC.
SCHEDULE IV--REINSURANCE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------- -------- -------- -------- --------
PERCENTAGE
CEDED TO ASSUMED FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------- --------- ------------ ------ ----------
Year ended December 31, 1996
Property--Casualty Earned
Premiums $39,388 $12,236 $591 $27,743 2.13%
Year ended December 31, 1995
Property--Casualty Earned
Premiums $36,005 $10,550 $1,507 $26,962 5.59%
Year ended December 31, 1994
Property--Casualty Earned
Premiums $34,255 $11,301 $ 414 $23,368 1.77%
See accompanying Independent Auditors' Report
F-32
63
INTERNATIONAL ALLIANCE SERVICES, INC.
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
-------- -------- -------- -------- -------- -------- --------
FUTURE POLICY
DEFERRED BENEFITS, LOSSES OTHER POLICY
POLICY CLAIMS AND CLAIMS AND NET
ACQUISITION LOSS UNEARNED BENEFITS PREMIUM INVESTMENT
SEGMENT COST EXPENSES PREMIUMS PAYABLES REVENUE INCOME
------- ---- -------- -------- -------- ------- ------
Year Ended:
December 31, 1996 $4,345 $41,099 $18,637 N/A $27,743 $3,564
December 31, 1995 $3,428 $37,002 $15,636 N/A $26,962 $3,341
December 31, 1994 $3,725 $34,661 $15,453 N/A $23,368 $2,477
COLUMN H COLUMN I COLUMN J COLUMN K
-------- -------- -------- --------
AMORTIZATION OTHER DIRECT
LOSSES AND OF DEFERRED POLICY OPERATING PREMIUMS
LOSS EXPENSES ACQUISITION COSTS EXPENSES WRITTEN
------------- ----------------- --------- --------
Year Ended:
December 31, 1996 $17,624 $7,699 $4,384 $42,420
December 31, 1995 $15,117 $7,774 $3,157 $36,278
December 31, 1994 $12,494 $5,428 $4,544 $37,127
See accompanying Independent Auditor's Report
F-33
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, IASI has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL ALLIANCE SERVICES, INC.
(Registrant)
By: /s/ Edward F. Feighan
------------------------------
Edward F. Feighan
Chief Executive Officer
and President
March 31, 1997
KNOW ALL MEN BY THESE PRESENTS that each person whose signature
appears below on this Annual Report hereby constitutes and appoints Edward F.
Feighan, Gregory J. Skoda and Craig L. Stout, and each of them, with full power
to act without the other, his true and lawful attorney-in-fact and agent, with
full power of substitution for him and his name, place and stead, in any and all
capacities (until revoked in writing), to sign any and all amendments to this
Annual Report of International Alliance Services, Inc. and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each said attorneys-in-fact
and agents, full power and authority to do and perform each and every act and
thing requisite and necessary fully to all intents and purposes as he might or
could do in person, thereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this Annual Report has been signed below the following persons on
behalf of International Alliance Services, Inc. and in the capacities and on the
dates indicated.
/s/ Michael G. DeGroote
- ------------------------------------ -----------------------------------------
Michael G. DeGroote Harve A. Ferrill
Chairman of the Board and Director Director
March 31, 1997
/s/ Edward F. Feighan /s/ Douglas R. Gowland
- ------------------------------------ -----------------------------------------
Edward F. Feighan Douglas R. Gowland
Chief Executive Officer, President Vice President - Environmental Operations
and Director (Principal Executive Officer) and Director
March 31, 1997 March 31, 1997
/s/ Hugh P. Lowenstein /s/ Richard C. Rochon
- ------------------------------------ -----------------------------------------
Hugh P. Lowenstein Richard C. Rochon
Director Director
March 31, 1997 March 31, 1997
/s/ Gregory J. Skoda /s/ Craig L. Stout
- ------------------------------------ -----------------------------------------
Gregory J. Skoda Craig L. Stout
Executive Vice President and Chief Operating Officer
Chief Financial Officer and Director
(Principal Financial and Accounting Officer) March 31, 1997
March 31, 1997
65
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of
IASI (filed as Exhibit 3.1 to IASI's Registration Statement on
Form 10, file no. 0-25890, and incorporated herein by
reference).
3.2* Certificate of Amendment of the Certificate of Incorporation
of IASI dated October 18, 1996.
3.3 Amended and Restated Bylaws of IASI (filed as Exhibit 3.2
to IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
4.1 Form of Stock Certificate of Common Stock of IASI (filed
as Exhibit 4.1 to IASI's Registration Statement on Form 10,
file no. 0-25890, and incorporated herein by reference)
4.2 Promissory Note, dated October 18, 1996, in the aggregate
principal amount of $4.0 million issued by IASI payable to
Alliance Holding (filed as Exhibit 99.7 to IASI's Current
Report on Form 8-K dated October 18, 1996, and incorporated
herein by reference).
9.1 Voting Agreement, dated as of October 18, 1996, by and between
MGD Holdings and Alliance Holding (filed as Exhibit 99.6 to
IASI's Current Report on Form 8-K dated October 18, 1996, and
incorporated herein by reference).
10.1 Spin-off Agreement (filed as Exhibit 10.1 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.2 Alternative Dispute Resolution Agreement (filed as
Exhibit 10.2 to IASI's Registration Statement on Form 10, file
no. 0-25890, and incorporated herein by reference)
10.3 Assumption of Liabilities and Indemnification Agreement
(filed as Exhibit 10.3 to IASI's Registration Statement on
Form 10, file no. 0-25890 and incorporated herein by
reference)
10.4 Corporate Services Agreement (filed as Exhibit 10.4 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.5 Employee Benefits Agreement (filed as Exhibit 10.5 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.6 Insurance and Indemnification Agreement (filed as Exhibit
10.6 to IASI's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference)
10.7 Tax Sharing Agreement (filed as Exhibit 10.7 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.8 IASI's Adjustment Plan (filed as Exhibit 10.8 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.9 Form of Warrant to purchase 200,000 shares of IASI's
Common Stock issued to MGD Holdings Ltd. (filed as Exhibit
10.9 to IASI's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference)
10.10 Form of Warrant to purchase 5,000 shares of IASI's Common
Stock issued to Douglas R. Gowland (filed as Exhibit 10.11 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
66
10.11 Form of Warrant to purchase 55,000 shares of IASI's Common
Stock issued for Douglas R. Gowland (filed as Exhibit 10.12 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.12 Credit Agreement dated as of May 11, 1995 by and among IASI
and its Subsidiaries, as Borrowers, and CoreStates Bank, N.A.
(filed as Exhibit 10.12 to IASI's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein
by reference)
10.13 Agreement and Plan of Merger by and among IASI, Republic/CSA
Acquisition Corporation, Republic/CSU Acquisition Corporation,
Alliance Holding, CSC and CSU (filed as Appendix I to IASI's
Definitive Schedule 14C Information Statement dated September
23, 1996 and incorporated herein by reference).
10.14 Amendment No. 1 to Agreement and Plan of Merger by and among
IASI, Republic/CSA Acquisition Corporation, Republic/CSU
Acquisition Corporation, Alliance Holding, CSC and CSU (filed
as Appendix IV to IASI's Definitive Schedule 14C Information
Statement dated September 23, 1996 and incorporated herein by
reference).
10.15 Amendment No. 2 to Agreement and Plan of Merger by and among
IASI, Republic/CSA Acquisition Corporation, Republic/CSU
Acquisition Corporation, Alliance Holding, CSC and CSU (filed
as
Appendix V to IASI's Definitive Schedule 14C Information
Statement dated September 23, 1996 and incorporated herein by
reference).
10.16 Stock Purchase Agreement by and between IASI and H. Wayne
Huizenga (filed as Appendix II to IASI's Definitive Schedule
14C Information Statement dated September 23, 1996 and
incorporated herein by reference).
10.17 Stock Purchase Agreement by and between IASI and MGD Holdings
(filed as Appendix III to IASI's Definitive Schedule 14C
Information Statement dated September 23, 1996 and
incorporated herein by reference).
10.18* Agreement and Plan of Merger by and among IASI, IASI/SMR
Acquisition Co., SMR and its shareholders dated November 30,
1996.
10.19* Agreement and Plan of Merger by and among IASI, IASI/ECI
Acquisition Co., ECI and its shareholders dated November 5,
1996.
11.1* IASI Earnings per Common Share Data.
21.1* List of Subsidiaries of IASI.
24.1* Consent of KPMG Peat Marwick LLP
99.1 Information Statement (filed as Exhibit 99.1 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
*Indicates documents filed herewith.