U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10K-SB
Annual Report under Section 13 or 15 (d) of the
Securities Exchange Act 1934:
FISCAL YEAR ENDED DECEMBER 31, 2001
Commission File Number: 0-31527
CERTIFIED SERVICES, INC.
(Exact Name of Registrant in its Charter)
NEVADA 88-0444079
(State or other Jurisdiction (IRS Employer Identification No.)
of Incorporation)
10602 TIMBERWOOD CIRCLE, SUITE 9, LOUISVILLE, KY 40223
(Address of Principal executive Offices including Zip Code)
(502) 339-4000
(Registrant's Telephone Number)
Securities registered under Section 12(b) of the Exchange Act: NONE.
Securities registered under Section 12(g) of the Exchange
Act: COMMON STOCK, $.001 PAR.
Check whether Registrant (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days: Yes X No
.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment thereto. [ ].
Registrant's revenues for its most recent fiscal year: $180,149,878.
Market value of Common stock, $.001 par, held by non-affiliates at March 25.
2002: $2,107,490.
Shares of Common Stock, $.001 par, outstanding at December 31, 2001: 3,421,145
SHARES.
Documents incorporated by reference: FORM 8-K DATED NOVEMBER 29, 2001 AND FORM
8-K DATED MARCH 21, 2002.
Transitional Small Business Disclosure Format (check one): Yes [ X ] No [ ]
1
TABLE OF CONTENTS
PART I
PAGE
Item 1. Description of Business 3
Item 2. Description of Property 11
Item 3. Legal Proceedings 11
Item 4. Submissions of Matters to a Vote of Security Holders 11
PART II
Item 5. Market For Common Equity and Related Stockholder Matters 11
Item 6. Management's Discussion and Analysis or Plan of Operation 12
Item 7. Financial Statements F1
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 15
PART III
Item 9. Directors, Executive Officers, Promoter and Control Persons;
Compliance with Section 16(a) of the Exchange Act 15
Item 10. Executive Compensation 16
Item 11. Security Ownership of Certain Beneficial Owners and Management 17
Item 12. Certain Relationships and Related Transactions 18
Item 13. Exhibits and Reports on Form 8K 18
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Certified Services, Inc. is a holding company of professional service
and professional employer organizations ("PEO") throughout the United States.
The Company's headquarters are located in New York, New York.
Through its wholly-owned operating subsidiary, America's PEO Holdings,
Inc. and its subsidiaries, ("APEO"), located in Cherry Hill, New Jersey, the
Company provides clients with a broad range of services including payroll
processing and reporting, payroll tax payments and reporting, human resources
administration, employment regulatory compliance management, risk
management/workers' compensation services, health care programs and other
products and services provided directly to worksite employees. As of December
31, 2001, the Company served an estimated 162 clients with approximately 9,000
work-site employees generating approximately $180 million in gross revenues.
APEO operated primarily in New Jersey, Pennsylvania, New York, Alabama,
Delaware, Georgia, Idaho, Illinois, Kentucky, Indiana, Maryland, Massachusetts,
Mississippi, North Carolina, and Virginia.
COMPANY HISTORY
The Company was incorporated in Nevada on September 15, 1999 to provide
signatory, document preparation and loan processing services to mortgage, real
estate and other financial service firms and their customers. On November 21,
2001, Midwest Merger Management, LLC acquired control of the Company with the
purchase of 52.6% of the issued and outstanding common stock of the Company from
Martin Bothmann, Michael Zuliani, Colin Fidler, Christine Recarey, Brian Paradis
and St. Andrews Venture Capital. Pursuant to the change of ownership and
business direction, the Company focused on acquiring professional service
companies.
On November 21, 2001, the Company consummated a Share Purchase
Agreement with America's PEO Holdings, Inc., a Delaware corporation, to purchase
all of America's PEO Holdings, Inc.'s issued and outstanding common stock.
America's PEO Holdings, Inc. is a holding company whose subsidiaries provide
professional employee staffing and personnel services. APEO's subsidiaries,
which are now wholly owned by the Company, are America's PEO, Inc., Omni
Financial Services, Inc., National Labor Force, Inc., National Labor Force 1,
Inc., American Labor Services, Inc., Western American Labor Force, Inc., Mid
Atlantic Equities, Inc., Delaware Valley Properties, Inc. and Granhill Asset
Management, Inc.
THE INDUSTRY
The professional employer organization industry earmarked its growth
during the late 1980's. The National Association of Professional Employer
Organizations (NAPEO) was formed in 1985 and is the oldest association
representing the interests of professional employer organizations, serving more
than two million employees and growing.
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The last decade has been a period of significant growth in the PEO
industry. APEO believes the trend will continue and points to several factors it
believes are driving the demand for PEO growth including:
o The increasing technical expertise required to manage today's
businesses.
o The increasing complexity of state and federal taxation issues.
o The increasing pressure on companies to manage their resources
better.
o The increasing need for companies to provide employee benefits at
an affordable price.
o The diversity of services offered by PEOs.
o The increased recognition and acceptance of PEOs by regulatory
authorities.
The PEO assumes the responsibility and liability for the "business of
employment," by establishing an employment relationship with the work-site
employees, thereby providing the client the manpower, time and other resources
necessary to better manage the "business of business."
The PEO assumes the responsibility of payment of wages, compliance with
rules and regulations governing the reporting as well as the payment of state
and federal taxes. In addition, the PEO assumes risks in undertaking functions
as it relates to the clients personnel areas.
CLIENT SERVICES
APEO offers a broad range of services including payroll processing and
reporting, payroll tax remittance and reporting, human resources administration,
employee benefit services administration, risk management, workers compensation
services, as well as optional retirement and health care programs.
PAYROLL AND TAX ADMINISTRATION SERVICES: APEO handles the entire
payroll process from the time the employees complete their W-4's until the time
they receive their W-2's. The payroll department located in Cherry Hill, New
Jersey services its clients. APEO assigns clients to payroll service
representatives to ensure quality and timely recognition and completion of a
clients' assigned payroll. The payroll representatives receive payroll
information from the client via the Internet, e-mail and or fax. APEO provides
remote electronic data entry and on-site production of paychecks as well as
required reports for the client. Additional services offered by the payroll
department include: employment verifications, employee benefits reports,
managing compliance with applicable federal, state, and local tax regulations,
direct deposit, maintaining vacation or sick pay accruals, providing payroll
reports such as labor distribution and overtime reports, and overall maintenance
of payroll records. The payroll service center is currently responsible for more
than 10,000 checks per week.
HUMAN RESOURCES SERVICES: APEO handles many human resource functions
for the client as it relates to unemployment matters, personnel matters and
compliance with the ever-changing federal and state laws. APEO provides guidance
on employment-related matters, provides human resources related forms, designs
employee hand-books, and provides guidance as it relates to the Family and
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Medical Leave Act of 1993 ("FMLA") administration. APEO also provides custom
consulting services on such issues as ADA, FMLA, FLSA, EEO, INC and IRS
compliance matters. This is usually done on a client-by-client request basis and
for a fee. Additional services offered by the human resources department
include: administration of human resource records, management of unemployment
claims and the administration of COBRA rights as federally required.
EMPLOYEE BENEFIT SERVICES: APEO is able to offer affordable health care
programs that would be otherwise unavailable to the client and work-site
employee. APEO is able to provide this due to its collective size. APEO's size
provides a certain level of buying power that the clients cannot achieve
themselves. Additional products offered by APEO's benefits department include:
dental insurance, accidental death insurance, short and long-term disability
insurance, health insurance options such as prescription card, and group rates
for legal services. Additional services offered by APEO include: unemployment
claim/contribution management and complete insurance auditing/claims management.
In addition APEO offers a multiple employer 401(k) deferred
compensation plan. As a multiple employer plan, APEO's work-site employees can
customize the plan characteristics such as rules of eligibility and employer
matching contributions to suit their needs.
RISK MANAGEMENT AND CLAIMS MANAGEMENT SERVICES: APEO offers programs
that are designed to control incidence, frequency and severity of work related
injuries. APEO provides complete risk analysis of the client's facilities and
operations and works with the client to remedy problems. APEO's safety engineers
evaluate losses and claims, work with the insurance carriers to create light
duty jobs for individuals to return to work as soon as practical, and focus on
identified problem areas in the client's facility.
APEO provides additional services that include: underwriting for better
control and to determine loss exposure; evaluate internal controls at the client
level making recommendations for improvement; work-site safety programs;
workers' compensation coverage; tracking systems that assure injured employees
receive appropriate and timely treatment; claims investigation; follow-up with
doctors and injured employees; follow-up on claims handling; and preparation of
reports of claims or unemployment status.
UNEMPLOYMENT ADMINISTRATION SERVICES: APEO's unemployment services
department processes state unemployment claims as they relate to the work-site
employees. APEO from time to time determines unemployment claims to be
unwarranted. In those cases, APEO will file the necessary protest as allowed in
the various states regulatory procedures.
CUSTOMERS AND MARKET SEGMENTS
Approximately 90 percent of APEO's current business came as a result of
referrals from clients, insurance program providers and business consultants.
As of December 31, 2001, APEO's customer base consisted of
approximately 162 clients with an average of approximately 55.5 employees for a
total of approximately 9,000 work-site employees at year's end 2001. APEO is
5
striving to become a sales/market driven PEO focused on specific markets that
provide long-term growth with controlled risk. APEO will continue focusing on
its "niche" market (transportation) as well as other "niche" type of markets.
APEO's client base by industry grouping for the year-end 2001 is:
CATEGORY % OF CLIENT REVENUE PER INDUSTRY
-------- --------------------------------
Transportation 49.97%
Longshoreman 10.99%
Staffing 6.43%
Construction 12.83%
Warehousing 4.66%
Service (1) 4.03%
Manufacturing 8.95%
Utility 0.87%
Auto Repair 0.62%
Landscaping 0.49%
Restaurant 0.09%
Clerical 0.07%
(1) Services consist primarily of business in the following: Non-Emergency
Medical, Building Maintenance, Janitorial, Plumbing, Tow Truck Operation,
Driver Training Instruction, and Home Nursing.
CUSTOMER SELECTION: APEO evaluates each potential client before it
begins to provide services for that client. The evaluation includes reviewing
the prospect's financial history, past and current workers compensation risk
history, growth history, industry type, reason the prospect wishes to employ
APEO, APEO's ability to handle the prospect's business adequately and the
assumed or predicted profit the new relationship would provide to APEO. Many
times APEO will determine an on-site visit is required before a final
determination is made to add the prospect to the PEO. Upon the review being
completed, and upon all of the PEO's criteria being met, the PEO and the new
client into a formal Services Agreement, which establishes the co-employer
relationship. The method of payment is generally weekly.
APEO typically markets its service to mid-sized businesses with
work-site employee basis ranging from 10 to 1000. APEO generally avoids
marketing to clients with 5 work-site employees or less. APEO avoids marketing
to industries it feels are high risk including: occupations that require
exterior work performed in excess of 2 stories, transportation companies that
specialize in hazardous materials, amusement parks, circuses, occupations that
pose a significant occupational disease hazard (such as asbestos removal),
construction of dams or bridges, fireman, police officers or armed security
guards, and any occupation that requires working with munitions, explosives,
fireworks, fuses, dynamite, nitroglycerine or any other product used in the
construction of these devices.
APEO reviews all of its clients on a weekly basis. The review process
includes noting workers' compensation risk or loss activity, the client's actual
gross profit to plan comparison, and the client's payment status. In addition to
6
these standard reviews, the payroll and human resources departments provide the
review committee with detail of any peculiar problems that might pertain to a
client.
APEO reviews pricing on a regular basis and may increase or decrease
prices to a client from time to time based on the overall review the client and
based on the business model APEO has established. In addition to possible
increases or decreases in price APEO may choose to terminate the co-employer
relationship, if in the regular reviews of operations major changes or problems
have become the norm or if the desired gross profit margin is in jeopardy.
APEO estimates its retention since inception in 1997 has been
approximately 95%. APEO has enjoyed this estimated high retention due to its
high level of service and controlled growth since 1997. A detailed "account
tracking recap" is being established to keep accurate records of new customers
(adds) and terminated or lost customers (deletes), and the reason i.e. cost of
service, dissatisfaction with the service or other.
CLIENT SERVICES AGREEMENT: APEO requires all clients to enter into an
agreement (Services Agreement) with the PEO. The agreement is for an initial
term of one-year subject to termination by the PEO or the client upon
thirty-days written notice, and subject to immediate termination by the PEO for
non-payment by the client for services, fees or taxes. In some but not all
cases, the PEO may require the owners of a client to personally guarantee the
client's obligation under the Services Agreement.
The fee generally covers the cost of certain employment related taxes,
workers' compensation insurance coverage and administrative services cost, which
includes payroll processing, record keeping, safety and regulatory matters as
set forth in the agreement. The client's portion of health and retirement
benefit plan costs is charge separately and is not included in the weekly fee.
If the client has requested additional consulting on specific matters not
covered by the Services Agreement, that charge would be added as a separate
invoiced item. The fee is determined by and between APEO and the client on a one
by one basis and the components of the pricing includes: number of work-site
employees, the risk and historical losses of the client, credit checks, industry
type and gross profit impact.
CLIENT INDEMNIFICATION AGREEMENT: In addition to the Services Agreement
APEO requires each of its clients to acknowledge that it is the financially
responsible party in those aspects of the relationship where the customer has
retained exclusive control. The client promises to indemnify and hold harmless
the Company for claims, damages and costs associated with the following: damage
to client client's own property by a leased employee under the direction and
control of the client: claims against APEO relating to any person employed by
the client outside the PEO relationship: regulatory violations associated with
EEOC, OSHA, ADA, discrimination and other such laws, where the client has
exclusive control of the workplace: employee benefit matters where the client
has provided the benefit outside the PEO relationship: misappropriation of any
employee funds by client: theft by a leased employee engaged in the client's
business and under the direction and control of the client: and matters
pertaining to collective bargaining agreement(s) to which the PEO is not a
party.
-7-
PRICING
In general, APEO looks to generate approximately $525 per co-employee
per year from each client. The majority of APEO's revenue is generated from the
administration fee charged to the client, with additional revenues generated
from the resale of the worker's compensation insurance coverage. APEO is
investigating additional revenue streams from new and or additional products and
services at this time, which it expects to report on and to capitalize on within
the next several quarters.
SALES AND MARKETING
APEO markets its services through a commission based sales force
located through out the United States and consists of ten, individual
commission-based sales associates, seven insurance agencies and several PEO
consulting firms which provide leads to APEO on a commission basis. At this
time, APEO does not require its various commissioned sales associates to be
exclusive agents, although the some of the larger producers have signed
exclusivity agreements with APEO. In addition, APEO initiates oversight and
marketing meetings with all of its commission-based associates at its
headquarters several times each year.
ADVERTISING AND E-COMMERCE
ADVERTISING: APEO does not engage in significant advertising
activities.
E-COMMERCE: APEO does anticipate expanding the use of its technology in
the very near future. As a marketing tool, APEO plans for its web site to be a
showcase of the prowess of APEO's integrated software systems, as well as the
ability to deliver payroll and human resource services directly to a customer's
desktop. In addition, it is in APEO's near term plans to implement additional
on-line services, product and services purchase capacity with a browser of
integrated services and the use of unique CD Rom business cards to serve as
"audio brochures" offering direct access to the web site. The presentation will
offer a dramatic sampling of the bounty of technological advantages enjoyed by
the customers and employees of APEO's PEO.
TRADE ASSOCIATIONS
APEO is a member of The National Association of Professional Employers
Organizations, the premier trade association for the PEO industry.
INSURANCE VENDOR RELATIONSHIPS
Insurance coverage's and programs play a pivotal role in the PEO
industry. APEO provides benefits and coverage to its clients and its work-site
employees under various arrangements and among several key vendors. The most
significant insurance relationships are as follows:
8
WORKERS COMPENSATION INSURANCE: At December 31, 2001, APEO carried
several insurance policies which collectively covered the workers' compensation
insurance risk of APEO's wholly owned subsidiary, America's PEO and its
affiliated companies.
Legion Insurance Co., CNA, Traveler's Insurance Co., Ohio State Fund,
WV State Fund and IWFI issued the coverage. In addition, through November 10,
2001, the affiliated companies were covered by an insurance policy issued by
Frontier Insurance Co., which was non-renewed due to Frontier Insurance Co.'s
financial difficulties.
HEALTH INSURANCE: At December 31, 2001, APEO sponsored a self-insured
health program applicable to employees in those states where such a plan could
operate. The plan, named America's PEO/OmniStaff Health Benefit Plan had a
limited per-claim monetary exposure, with costs exceeding the loss cap insured
with a policy of re-insurance issued by ING Employee Benefits. Claims were
processed through Consolidated Claims, Inc. and Healthchoice, Inc., which
jointly served as TPA and claims administrator for the program. The plan was
terminated effective January 1, 2002, and replaced with first-dollar insurance
coverage through Physicians' Health Choice (PHS) and Blue Cross/Shield.
At December 31, 2001, dental benefits were available to employees
through ReliaStar Life Insurance Company. The plan offers choice between a
regular dental plan and one providing orthodonture coverage. This is a voluntary
plan, and employees may enroll without participating in APEO's offered health
benefit plan.
MIS & INFORMATION TECHNOLOGY
APEO has invested in the development and maintenance of its integrated
and comprehensive software system with its high-end hardware. The investment has
provided APEO with a superior information system.
The integrated system allows direct access for data entry, report
creation and the ability to print checks from their own location under APEO's'
direction and control. This function is accomplished by means of electronic data
transfer over the Internet.
COMPETITION
The PEO industry consists of approximately 1,000 companies, most of
which serve a single market or region. The Company believes that there are
several PEOs with annual revenue exceeding $500 million. The Company considers
its primary competition to be these large national and regional PEO providers,
as well as the traditional form of employment of employees.
The payroll services industry is characterized by intense competition.
Management believes that Automatic Data Processing, Inc. and Paychex, Inc.,
which have purchased PEOs in Florida, are and will remain competitors in the
future. The Company also competes with manual payroll systems sold by numerous
companies, as well as other providers of computerized payroll services,
including banks, and smaller independent companies.
9
The Company competes with these companies by offering customized
products, personalized service, competitive prices and specialized personnel to
satisfy a client's particular employee requirements.
Management of the Company believes that its broad scope of human
resource management. Management further believes that its concentration on
providing comprehensive outsourcing of human resource management services will
set it apart from its competitors.
CORPORATE EMPLOYEES
As of December 31, 2001, APEO had 38 employees. Thirty-seven of the
internal employees are located at APEO's wholly owned operating subsidiary
America's PEO headquarters in Cherry Hill, New Jersey and one safety engineer is
located in Chattanooga, Tennessee. None of APEO's internal employees is a party
to a collective bargaining agreement.
INDUSTRY REGULATION
Numerous Federal and state laws and regulations relating to employment
matters, benefit plans, tax payments and tax filings affect APEO's operations.
By entering into a co-employer relationship with its clients, APEO assumes
certain obligations and responsibilities as an employer under these laws.
Because many of these Federal and state laws were enacted before the development
of non-traditional employment relationships, such as PEOs, temporary employment
and other employment-related outsourcing arrangements, many of these laws do not
specifically address the obligations and responsibilities of non-traditional
employers. In addition, the definition of "employer" under these laws is not
uniform.
Some governmental agencies that regulate employment have developed
rules that specifically address issues raised by the relationship among PEOs,
clients and work-site employees. Such regulations are relatively new and,
therefore, their interpretation and application by administrative agencies and
Federal and state courts are limited or non-existent. The development of
additional regulations and interpretation of existing regulations can be
expected to evolve over time. In addition, from time to time, states have
considered, and may in the future consider, imposing certain taxes on gross
revenues or service fees of APEO and its PEO industry competitors. Therefore, it
cannot be predicted with certainty the nature or extent or establishment of
Federal, state and local regulations or whether any states will impose such
taxes.
APEO mandates a review of the many and sometimes-complex compliance
matters as is applicable with Federal and state statutes and regulations.
Whether or not a state has licensing, registration or other compliance
requirements, APEO faces a number of other state and local regulations that
could impact its operations. The PEO industry's legal and regulatory foundation
is not codified in all 50 states. Because of that APEO engages outside licensing
professionals to help maintain its working relationships with the state
regulatory authorities in states where it operates as well as keeping APEO
abreast of the on going changes in the licensing, registration and regulatory
matters.
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ITEM 2. DESCRIPTION OF PROPERTY.
APEO rents office space under a five-year non-cancelable operating
lease expiring in November 2005. Under the terms of the lease, the company is
responsible for utilities.
APEO also leases computer equipment and software under a three-year
non-cancelable operating lease, which expires in November 2002, and certain
telephone equipment under a four-year non-cancelable operating lease which
expires in December of 2003.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is party to certain pending claims which
have arisen from the normal course of doing business, none of which, in the
opinion of the Company's management, is expected to have a material adverse
effect on the consolidated financial position or the results of operations if
adversely resolved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On March 25, 2002 pursuant to the provisions of Nevada law, a majority
of the shareholders of the Company consented to increase the number of
authorized Common Stock, $.001 par value, from 25,000,000 shares to 100,000,000
shares and to authorize 5,000,000 Preferred Shares, $.001 par value, which may
be issued in one or more series.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION: The Common Stock is traded on the OTCBB under the
symbol "CSRV". There was no active trading market for the Common Stock before
November 14, 2000. The following table sets forth, for the quarters indicated,
the high and low sale prices of the Common Stock as reported by the OCTBB:
HIGH BID LOW BID
Year Ended December 31, 2000 -
Fourth Quarter (November 14, 2000 through
December 31, 2000) $0.30 $0.06
Year Ended December 31, 2001 -
First Quarter 0.31 0.12
Second Quarter 0.25 0.12
Third Quarter 0.16 0.04
Fourth Quarter 0.40 0.03
Our OTCBB quotations reflect inter-dealer prices, without retail mark-ups,
markdowns or commissions, and may not necessarily represent actual transactions.
11
HOLDERS: As of March 25, 2002, there were 350 shareholders of the Common Stock
including beneficial owners of the Common Stock whose shares are held in the
names of various dealers, clearing agencies, banks, brokers and other
fiduciaries.
DIVIDENDS: There have been no cash dividends paid through March 25, 2002 by the
Company. Any future determination as to the payment of dividends will be made at
the discretion of the Board of Directors of the Company and will be dependent
upon the Company's financial condition and such other factors as the Board of
Directors deems relevant.
Since our shares began trading on the OCTBB, the prices for our shares
have fluctuated widely. There may be many factors that may explain these
variations. We believe that such factors include (a) the demand for our common
stock, (b) the number of shares of our common stock available for sale, (c)
developments in live entertainment industry, and (d) changes in the performance
of the stock market in general, among others.
In recent years, the stock market has experienced extreme price and
volume fluctuations that have had a substantial effect on the market prices for
many small and emerging growth companies such as ours, which may be unrelated to
the operating performances of the specific companies. Some companies that have
experienced volatility in the market place of their stock have been the objects
of securities class action litigation. If our Company became the object of
securities class action litigation, it could result in substantial costs and a
diversion of our management's attention and resources and have an adverse effect
on our business, financial condition and operating results. In addition, holders
of shares of our common stock could suffer substantial losses as a result of
fluctuations and declines in the market price of our common stock.
The trading of our shares is subject to limitations set forth in Rule
15g-9 of the Securities Exchange Act. This rule imposes sales practice
requirements on broker-dealers who sell so-called "penny stocks" to persons
other than established customers, accredited investors or institutional
investors. Accredited investors are generally defined to include individuals
with a net worth in excess of $1,000,000, or individual annual income exceeding
$200,000 ($300,000 with their spouse) during the previous two years and expected
annual income of that amount during the current year. For sales of shares to
other persons, broker-dealers must make special suitability determinations,
obtain written consent from the purchaser prior to consummating the sale, and
are generally prohibited from making cold-calls or other unsolicited inquires to
purchasers without complying with these rules. These rules may adversely affect
the ability broker-dealers and others to sell our shares in the marketplace.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
A. YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues were $180 million for 2001, compared to $112 million for 2000.
This increase was due primarily to an increased number of worksite employees.
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The number of worksite employees increased 69% from 5,637 to 9,023. Revenue
growth exceeded headcount growth by 1%, primarily due to wage inflation and
expansion in higher wage markets. The increase in the number of worksite
employees was the result of continuing sales and marketing efforts in existing
markets as well as the development of new markets. The Company contracted with 3
new commission sales producers in the southeastern market.
Cost of services was $176 million for 2001, compared to $110 million
for 2000, representing an increase of $66 million, or 60%. This increase was due
primarily to an increased number of clients and worksite employees. Cost of
services was 98% of revenues for 2001, compared to 98% for 2000.
Salaries, wages and payroll taxes of worksite employees were $166
million for 2001, compared to $103 million for 2000, representing an increase of
$63 million, of 61%. Salaries, wages and payroll taxes were 92% of revenues for
2001, compared to 92% for 2000.
Benefits, workers' compensation, state unemployment taxes and other
costs were $9.7 million for 2001, compared to $6.8 million for 2000,
representing an increase of $2.9 million, or 42%. Benefits, workers'
compensation, state unemployment taxes and other costs were 5% of revenues for
2001 and 6% of revenues for 2000.
Gross profit was $3.9 million for 2001, compared to $1.8 million for
2000, representing an increase of $2.1 million, or 117%. Gross profit was 2% of
revenues for 2001, compared to 1.6% for 2000. Gross profit margin increased as a
percentage of revenues due to continued expansion in southern states written at
increased pricing over prior years' sales pricing.
Operating expenses were $4.2 million for 2001, compared to $3.7 million
for 2000, representing an increase of $.5 million, or 13%. Operating expenses
were 2.3% of revenues for 2001, compared to 3.3% for 2000.
Salaries, wages and commissions were $2.4 million for 2001, compared to
$2.0 million for 2000, representing an increase of $.4 million, or 20%. This
increase was due to an increase in corporate personnel hired to support the
Company's expanded sales growth and information technology conversions, and
additional sales and sales support personnel. Salaries, wages and commissions
were 1.3% of revenues for 2001, compared to 1.8% for 2000.
Other general and administrative expenses were $1.7 million for 2001,
compared to $1.6 million for 2000, representing an increase of $.1 million, or
6%. This increase was primarily a result of administrative expenses to support
expanded sales growth, information technology conversions, and additional sales
and sales support personnel. Other general and administrative expenses were 1%
of revenues for 2001, compared to 1.4% for 2000.
Depreciation and amortization expenses increased by $4 thousand for
2001 compared to 2000, representing an increase of 7%. This increase was
primarily the result of the Company's investment in management information
systems.
Interest income was $1.9 thousand for 2001, compared to $6.6 thousand
for 2000, representing a decrease of $4.9 thousand.
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Interest expense was $34 thousand for 2001 and $39 for 2000. Interest
expense results from capital leases that funded purchases of furniture and
fixtures.
Other expense in 2001 of $200 thousand resulted in a severance expense
to a former employee of the company.
Net income was $(.5) million for 2001, compared to $(1.9) million for
2000, representing an increase of $1.5 million or 79%.
B. LIQUIDITY AND CAPITAL RESOURCES
The Company had $1.4 million in cash and cash equivalents at December
31, 2001. The company periodically evaluates its liquidity requirements, capital
needs and availability of capital resources in view of its plans for expansion,
including potential acquisitions, anticipated levels of health benefit plan
subsidies and other operating cash needs. The Company has terminated an
unprofitable self-funded health plan as of December 31, 2001. The decision to
end the health plan will return the Company to profitability that will generate
sufficient cash flow to meet its requirements. The Company believes that its
current balances and cash flow from operations will be sufficient to meet its
requirements through 2002. The company may rely on these same sources, as well
as public or private debt and/or equity financing to meet its long-term capital
needs.
C. FORWARD LOOKING STATEMENTS:
This report includes "Forward-Looking Statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Any
statements that express or involve discussions with respect to predictions,
expectations, beliefs, plans, projections, objectives, assumptions or future
events or performance (often, but not always, using words or phrases such as
"expects" or "does not expect", "is expected", "anticipates" or "does not
anticipate", "plans", "estimates" or "intends", or stating that certain actions,
events or results "may", "could", "would", "might" or "will" be taken, occur or
be achieved) are not statements of historical fact and may be considered
"forward looking statements". Such statements are included, among other places
in this registration statement, in the sections entitled "Management's
Discussion and Analysis or Plan of Operation," "Description of Business" and
"Description of Property." Forward-looking statements are based on expectations,
estimates and projections at the time the statements are made that involve a
number of risks and uncertainties which could cause actual results or events to
differ materially from those presently anticipated. See Part I. Item 1. "Risk
Factors Associated with Our Business and Us." Although we believe that the
expectations reflected in such forward-looking statements are reasonable, we can
give no assurance that such expectations will prove to have been correct.
14
ITEM 7. FINANCIAL STATEMENTS
Certified Services, Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 2001 and 2000
Certified Services, Inc. and Subsidiaries
Index to the Consolidated Financial Statements
December 31, 2001 and 2000
Page
Independent Auditor's Report.......................................... 1
Financial Statements
Consolidated Balance Sheet...................................... 2
Consolidated Statements of Operations........................... 3
Consolidated Statement of Stockholder's Equity (Impairment)..... 4
Consolidated Statements of Cash Flows........................... 5-6
Notes to the Consolidated Financial Statements.................. 7-15
Independent Auditors' Report
To the Board of Directors and Stockholders of
Certified Services, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Certified
Services, Inc. and Subsidiaries as of December 31, 2001 and the related
consolidated statements of operations, stockholders' equity (impairment) and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of Certified Services, Inc. as of December 31, 2000 were audited by
other auditors whose report dated March 16, 2001 expressed an unqualified
opinion on those statements. The financial statements of its Subsidiaries as of
December 31, 2000 were audited by other auditors whose report dated November 21,
2001 expressed a qualified opinion as to their ability to continue as a going
concern.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Certified Services,
Inc. and Subsidiaries as of December 31, 2001 and the results of their
operations, cash flows and changes in stockholders' equity (impairment) for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
Bridgewater, New Jersey
March 25, 2002
F-1
Certified Services, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 2001
Assets
Current Assets
Cash $1,459,576
Accounts receivable 857,026
=======
-----------------
Total Current Assets 2,316,602
Property and equipment, at cost, net of $160,902 of accumulated
depreciation 223,915
Excess purchase price over net book value of assets acquired 5,058,890
Deposits 31,728
-----------------
Total Assets 7,631,135
=================
Liabilities and Stockholders' Equity (Impairment)
Current Liabilities
Accounts payable 573,224
Accrued expenses 1,424,729
Accrued health insurance plan claims 1,800,000
Payroll taxes payable 622,577
Customer deposits 241,240
Note payable 86,171
Current portion of acquisition indebtedness 127,243
Current maturities of capital lease 29,568
-----------------
Total Current Liabilities 4,904,752
Acquisition indebtedness, net of current portion 3,344,449
Note payable, net of current portion 28,724
Obligations under capital lease, excluding current maturities 33,520
-----------------
Total Liabilities 8,311,445
-----------------
Commitments and Contingencies -
Stockholders' Equity (Impairment)
Preferred stock, $0.001 par value, 5,000,000 shares authorized
Series A (0 shares issued and outstanding) -
Series B (1,100 shares issued and outstanding) 1
Series C (406.667 shares issued and outstanding) 1
Common stock, $ 0.001 par value, 100,000,000 shares authorized,
3,421,145 shares issued and outstanding 3,421
Additional paid in capital 1,602,550
Accumulated (deficit) (2,286,283)
-----------------
Total Stockholders' Equity (Impairment) (680,310)
-----------------
Total Liabilities and Stockholders' Equity (Impairment) $7,631,135
=================
F-2
See notes to the consolidated financial statements.
Certified Services, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31,
---------------------------------------
2001 2000
------------------ -----------------
Revenue $ 179,966,878 $ 112,515,065
------------------ -----------------
Cost of Services
Payroll 152,689,965 95,380,423
Payroll taxes 13,565,801 8,463,554
Employee benefits 4,299,099 3,090,095
Workers compensation insurance 5,485,824 3,714,315
Owner operator costs 93,655 41,919
------------------ -----------------
Total Cost of Services 176,134,344 110,690,306
------------------ -----------------
Gross Profit 3,832,534 1,824,759
------------------ -----------------
Operating Expenses
Compensation, payroll taxes and benefits 1,474,060 996,874
Commissions and selling expenses 1,062,508 1,048,813
General and administrative expenses 1,736,800 1,612,476
Depreciation 57,567 61,463
------------------ -----------------
Total Operating Expenses 4,330,935 3,719,626
------------------ -----------------
Loss From Operations (498,401) (1,894,867)
------------------ -----------------
Other Income (Expense)
Interest income 1,976 6,599
Interest expense (37,466) (39,759)
Severance expense (200,000) -
------------------ -----------------
Total Other Income (Expense) (235,490) (33,160)
------------------ -----------------
Loss Before Income Taxes (733,891) (1,928,027)
Income Tax Provision (Benefit) - -
------------------ -----------------
$
Net Loss $ (733,891) (1,928,027)
================== =================
Net Loss Per Share $ (0.21) $ (0.56)
================== =================
Weighted Average Number of Common Shares Outstanding 3,421,145 3,421,145
================== =================
See notes to the consolidated financial statements.
F-3
Certified Services, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity (Impairment)
For the Period January 1, 2000 through December 31, 2001
Preferred Shares Preferred Shares
---------------- ----------------
Series B Series C Common Stock
-------- -------- ------------
Number Number Number
of Shares Amount of Shares Amount of Shares Amount
--------- ------ --------- ------ --------- ------
Balance, January 1, 2000 - $ - - $ - 1,500,000 $1,500
January, 2000 -
Donated capital - - - - - -
July, 2000 -
Shares issued for cash
pursuant to Rule 504
offering - - - - 1,821,500 1,821
July, 2000 -
Shares issued for services - - - - 99,645 100
Net Loss for the Year Ended
December 31, 2000 - - - - - -
------------ ----------------- --------- --------- -------------- ---------
Balance, December 31, 2000 - - - - 3,421,145 3,421
November, 2001 -
Series B preferred shares
issued for cash 1,100 1 - - - -
Series C preferred shares
issued for all issued and
outstanding shares of
APEOH - - 406.667 1 - -
Reorganization pursuant to
reverse acquisition - - - - - -
Transitional period net
income of Omni - - - - - -
Net Loss for the Year Ended
December 31, 2001 - - - - - -
------------ ----------------- --------- --------- -------------- ---------
Balance, December 31, 2001 1,100 $ 1 406.667 $ 1 3,421,145 $ $3,421
============ ================= ========= ========= ============== =========
Additional
Paid In Accumulated
Capital (Deficit) Total
------- --------- -----
Balance, January 1, 2000 $ 1,294 $ 239,932 $ 242,726
January, 2000 -
Donated capital 1,500 - 1,500
July, 2000 -
Shares issued for cash
pursuant to Rule 504
offering 88,209 - 90,030
July, 2000 -
Shares issued for services 4,882 - 4,982
Net Loss for the Year Ended
December 31, 2000 - (1,928,027) (1,928,027)
---------------- ------------------ ----------------
Balance, December 31, 2000 95,885 (1,688,095) (1,588,789)
November, 2001 -
Series B preferred shares
issued for cash 1,099,999 - 1,100,000
Series C preferred shares
issued for all issued and
outstanding shares of
APEOH 406,666 - 406,667
Reorganization pursuant to
reverse acquisition - (50,767) (50,767)
Transitional period net
income of Omni - 186,470 186,470
Net Loss for the Year Ended
December 31, 2001 - (733,891) (733,891)
---------------- ------------------ ----------------
Balance, December 31, 2001 $1,602,550 $(2,286,283) $(680,310)
================ ================== ================
See notes to the consolidated financial statements.
F-4
Certified Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31,
---------------------------------------
2001 2000
----------------- ----------------
Cash Flows From Operating Activities
Net Loss $ (733,891) $ (1,928,027)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operations
Transitional Net Income of Omni 186,470 -
Reorganization Pursuant to Reverse Acquisition (50,767) -
Depreciation 57,567 61,463
Bad Debt Expenses 59,555 -
Severance Expense 200,000 -
Decrease (Increase) in Assets
Accounts Receivable (493,666) (107,063)
Deposits 45,639 173,540
Increase in Liabilities
Accounts Payable and Accrued Expenses 1,335,735 1,024,864
Accrued Health Insurance Plan Claims 593,103 1,206,897
Customer Deposits 241,240 -
----------------- ----------------
Net Cash Provided by Operating Activities 1,440,985 431,674
----------------- ----------------
Cash Flows From Investing Activities
Purchase of Property and Equipment (2,437) (137,517)
Proceeds from Deposits 16,520 -
Cash payment of Deposits - (14,458)
Cash paid pursuant to Reverse Merger (1,143,670) -
Proceeds From Stockholder 28,918 16,605
Net proceeds from Affiliates (384,240) 250,417
----------------- ----------------
Net Cash (Used in) Provided By Investing Activities (1,484,909) 115,047
----------------- ----------------
Cash Flows From Financing Activities
Payments of Note Payable (85,105) -
Repayment of Long-Term debt (54,099) (43,804)
Payments of Capital Lease Obligations (41,723) -
Proceeds from Issuance of Series B Preferred Stock 1,100,000 -
----------------- ----------------
Net Cash Provided by (Used in) Financing Activities 919,073 (43,804)
----------------- ----------------
Net Increase in Cash 875,149 502,917
Cash at Beginning of Year 584,427 81,510
----------------- ----------------
Cash at End of Year $ 1,459,576 $ 584,427
================= ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for:
Interest Expense $ 37,466 $ 39,759
Income Taxes $ - $ -
See notes to the consolidated financial statements.
F-5
Certified Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The severance agreement entered into during 2001 was converted to a Note
Payable.
Additional paid in capital was credited in 2001 upon the issuance of 1,100
shares of Series C preferred stock.
In 2001, the Company purchased all of the capital of APEOH in an
acquisition with the following components:
Fair value of assets acquired $ 5,058,890
Cash paid for the capital stock $ 1,188,781
Liabilities assumed $ 3,471,692
Stock issued - 406.667 shares Preferred Class B $ 406,667
Equity of shareholders $ (8,250)
See notes to the consolidated financial statements.
F-6
Certified Services, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Certified Services, Inc. (the "Company") was organized on September 15,
1999 under the laws of the State of Nevada. Through December 31, 1999,
the Company had been in the development stage. Effective January 1, 2000
the Company commenced, albeit insignificant, operations and was no longer
considered to be a development stage enterprise.
On November 21, 2001 the Company acquired all of the issued and
outstanding shares of America's PEO Holdings, Inc. (APEOH). For
accounting purposes, the acquisition has been treated as an acquisition
of the Company by APEOH and a recapitalization of APEOH. The historical
financial statements prior to November 21, 2001 are those of APEOH.
Subsequent to the acquisition, the Company and APEOH remain as two
separate legal entities whereby the operations of the newly combined
entity are comprised solely of the operations of APEOH.
APEOH was incorporated on May 1, 2001. Effective August 1, 2001 the then
existing shareholders contributed all of the issued and outstanding stock
of the following companies (the Companies) in exchange for all of the
issued and outstanding stock of APEOH:
America's PEO, Inc.
American Labor Force, Inc.
American Labor Services, Inc.
Western American Labor Force, Inc.
National Labor Force, Inc.
National Labor Force One, Inc.
Omni Financial Services, Inc.
Mid Atlantic Equities, Inc.
Delaware Valley Properties, Inc.
The Company's operations presently consist exclusively of the operations
of APEOH and its subsidiaries which are engaged in the business of
providing employee leasing and related payroll services.
Basis of Presentation
At and for the year ended December 31, 2001 the consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All material intercompany transactions and balances have
been eliminated in consolidation.
For the year ended December 31, 2000 the consolidated financial
statements include the combined accounts of APEOH's subsidiaries, all of
which were then under common control, including those of Omni Financial
Services, Inc. (Omni) which had a fiscal year ended October 31, 2000. All
material intercompany transactions have been eliminated in consolidation.
Omni's results of operations, which in 2001 are reported on a calendar
year basis, for the two month transitional period from November 1, 2000
through December 31, 2000 are reflected as a credit to retained earnings
in the statement of changes in stockholders' equity.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-7
Certified Services, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
Allowance for Doubtful Accounts
The Companies provide an allowance for doubtful accounts equal to the
estimated losses that will be incurred in the collection of all
receivables. The estimated losses are based on a review of the current
status of the existing receivables. An allowance for doubtful accounts
for 2001 has not been established, as all accounts receivable are
considered to be collectible.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation, which includes amortization of assets under capital leases,
is calculated using the straight-line method over the estimated useful
lives of the assets of 5-7 years for furniture, fixtures and equipment.
Repairs and maintenance expenditures which do not extend the useful lives
of related assets are expensed as incurred.
Evaluation of Long-Lived Assets
Long-lived assets are assessed for recoverability on an ongoing basis. In
evaluating the fair value and future benefits of long-lived assets, their
carrying value would be reduced by the excess, if any, of the long-lived
asset over management's estimate of the anticipated undiscounted future
net cash flows of the related long-lived asset. At December 31, 2001
management believes that the carrying value of excess purchase price over
net book value of assets acquired fairly reflects the future cash flows
to be derived therefrom.
Revenue Recognition
The Company records revenue as services are provided.
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising
expense was $8,518 and $12,524 for the years ended December 31, 2001 and
2000, respectively.
Income Taxes
Effective November 21, 2001 the Company files a consolidated Federal
income tax return with its wholly owned subsidiaries. Income taxes are
provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due and deferred taxes, as
applicable.
Through November 20, 2001 APEOH and Subsidiaries have elected to be taxed
under the provisions of Subchapter S of the Internal Revenue Code and
State Regulations by consent of their shareholders. Under those
provisions, the Companies do not pay federal and state corporate income
taxes on income. Also, the Companies do not receive the benefit of net
operating loss carryforwards or carrybacks. Instead, the stockholders are
liable for (or benefit from) individual federal and state income taxes on
the Companies' taxable income or operating loss on their individual
income tax returns.
Omni Financial Services, Inc. is a C corporation. There is no provision
for income tax expense or benefit, since this amount, based upon Omni's
taxable income/(loss) is considered immaterial.
Loss Per Common Share
Basic and diluted loss per common share are computed by dividing net loss
by the weighted average number of common shares outstanding during the
year. Potential common shares used in computing diluted earnings per
share related to convertible preferred stock which, if exercised, would
have a dilutive effect on earnings per share. The number of potential
common shares outstanding were 18,487,812 for the years ended December
31, 2001 and 2000. Potential common shares were not used in the
computation of diluted loss per common shares as their effect would be
antidilutive.
F-8
Certified Services, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's material financial instruments for which disclosure of
estimated fair value is required by certain accounting standards at
December 31, 2001 consist of cash, accounts receivable, accounts payable,
acquisition indebtedness, long-term debt and capital lease obligations. In
the opinion of management, such items other than acquisition indebtedness
are carried at values that approximate fair values because of liquidity,
short-term maturities or interest rates equivalent to those currently
prevailing for financial instruments with similar characteristics.
Certain non-interest bearing acquisition indebtedness, in the original
principle amount of $4,200,000, has been subjected to an 8% present value
discount in the accompanying consolidated balance sheet at December 31,
2001.
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
At times throughout the year, the Company may maintain certain bank
accounts in excess of FDIC insured limits.
The Company provides credit in the normal course of business. The Company
performs ongoing credit evaluations of its customers and maintains
allowances for doubtful accounts based on factors surrounding the credit
risk of specific customers, historical trends, and other information.
The Company's customers are primarily engaged in the trucking industry and
are located primarily in the eastern United States. As a result it is
dependent upon economic conditions within the trucking industry in this
geographic area.
ACQUISITIONS AND MERGERS
On May 1, 2001 the stockholders of the Companies formed America's PEO
Holdings, Inc. (APEOH). Effective August 1, 2001 the stockholders then
contributed their stock in all of the Companies in exchange for all of the
issued and outstanding stock of APEOH.
On November 21, 2001, the Company executed a Share Purchase Agreement with
APEOH and its sole shareholders to purchase all of APEOH's issued and
outstanding common stock. The acquisition was also consummated on November
21, 2001.
Pursuant to the terms of the Agreement, the purchase price of the
acquisition was comprised thusly:
Cash of $1,100,000.
Loan Consideration:
Two separate non-interest bearing promissory notes in the respective
principal amounts of $3,200,000 and $1,000,000. The former is payable in
four equal annual installments of $800,000 commencing on or about March
31, 2003 and the latter is payable in equal monthly installments of
$16,667 payable over 60 months commencing January 10, 2002.
Stock Consideration:
406.667 shares of Class C Preferred Stock convertible into 4,066,667
common shares of the Company.
Notwithstanding the foregoing the Stock Consideration or Loan
Consideration, at the option of the Company, is subject to reduction at the
rate of $825,000 for each year in calendar years 2002, 2003 and 2004 in
which the Company's net income before taxes is less than $900,000,
excluding consulting fees charged by the Company and its costs incurred to
remain a reporting company with the Securities and Exchange Commission.
However, APEOH's former shareholders may unanimously elect to allocate as
additional net income before taxes certain Incentive Consideration or
amounts otherwise due them.
F-9
Certified Services, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
ACQUISITIONS AND MERGERS, (Continued)
If, as of November 21, 2006, the values realized by any former APEOH
shareholder from the sale of stock of the Company is less than such former
shareholder's pro rata portion of $8,052,000 then, in that event, the
Company shall pay to such former shareholders in shares of its common stock
in an amount equal to the difference between (i) such former shareholders
pro rata portion of $8,052,000 and (ii) the total cash realized by such
former shareholder from the sale of Stock Consideration.
For the above purposes, "value realized" is the cash proceeds from the sale
of Stock Consideration plus any Stock Consideration that has been
registered and is freely transferrable and still held by such former
shareholder on the above date.
Additionally, APEOH's former shareholders are entitled to Incentive
Compensation based upon the following schedule of net income before taxes
(NBTA) of the Company commencing in the year 2002:
25% of NBTA between $ 1 and $ 999,999
20% of NBTA between 1,000,000 and 1,999,999
15% of NBTA between 2,000,000 and 2,999,999
10% of NBTA in excess of 3,000,000
PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following at December 31,
2001:
Furniture and fixtures $ 263,396
Computer equipment 121,421
------------
Total 384,817
Less: accumulated depreciation 160,902
------------
Total $ 223,915
============
Depreciation expense charged to operations amounted to $57,567 and $61,463
for the years ended December 31, 2001 and 2000, respectively.
EXCESS PURCHASE PRICE OVER NET BOOK VALUE OF ASSETS ACQUIRED
The excess cost over net book value of assets acquired as a result of the
reverse acquisition transaction between the Company and APEOH is comprised
thusly:
Cash $ 1,100,000
Issuance of $4,200,000 of non-interest bearing promissory notes
after a present value discount of 8% 3,471,692
Issuance of 406.667 shares of Class C Preferred Stock which is convertible
into 4,066,667 common shares 406,667
Transaction costs 88,781
-----------
5,067,140
Less: Equity of APEOH (8,250)
-----------
$ 5,058,890
===========
F-10
Certified Services, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
ACCRUED EXPENSES
At December 31, 2001, accrued liabilities consisted of the following:
Health benefits insurance expense $ 133,184
Workers compensation insurance 751,570
Professional fees 184,272
Commission and consulting fees 157,824
Other accrued expense 197,879
-----------
Total $ 1,424,729
===========
EMPLOYEE BENEFIT PLANS
Medical Benefit Plans
The Company offers fully-insured and self-insured medical benefits to
employees. Participating employer customers may participate or opt to
offer their own insurance coverage to employees.
The Company's self-insured Plan, established in 1999, is a self-funded
employee welfare benefit Plan pursuant to the Employee Retirement Income
Security Act of 1974, as amended. The Plan administration is provided by
a third party Claims Supervisor for claim form submissions,
correspondence, benefit determinations, claim processing and disbursement
preparation. All eligible employees may participate in the welfare
benefit Plan upon satisfaction of the waiting period, completion of
enrollment documents and meeting eligibility requirements. Participating
employees contribute to the cost of their coverage premiums through
payroll deductions. Such payroll deductions are recorded as revenue when
billed to client employers. The Plan offers Network and Non-Network
Provider Organization medical services, hospital services, inpatient and
outpatient treatment, prescription drug, vision care and dental benefits.
The Company is protected against unanticipated catastrophic claims
through an individual excess insurance risk policy. Any individual
reissurance benefits in excess of $150,000 and $45,000 in 2001 and 2000,
respectively, is paid to the Company.
Accrued Health Insurance Plan Claims as of December 31, 2001 amounted to
$1,800,000 and consist of amounts due to providers based on claims filed
and estimates of claims incurred before December 31, 2001 but not
reported.
During 2001, the Company elected to terminate the self-funded employee
welfare benefit Plan effective December 31, 2001. Notice of intention to
terminate the plan was given to all participating client companies and
COBRA participants. Alternative program options were offered to clients,
however, the Company does not intend to sponsor another medical benefit
program.
Multiple Employer 401(k) Profit Sharing Plan
The Company sponsors a qualified, multiple employer defined contribution
prototype plan. Client employers may adopt the terms and provisions of
this qualified plan. Eligible employees may elect to contribute up to 15%
of their annual compensation to an investment trust. Participating
employers may elect to make matching or discretionary contributions under
the terms of the plan. The Company did not contribute to the accounts of
its participants in either 2001 or 2000.
F-11
Certified Services, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
EMPLOYEE BENEFIT PLANS, (Continued)
Flexible Benefits Plan
The Flexible Benefits Plan, or Internal Revenue Code Section 125
Cafeteria Plan, is maintained by the Company since 1997 to allow eligible
employees to use salary redirection amounts to pay for benefit plan
premiums and other fringe benefits offered by the Plan.
MARKETING AND CONSULTING AGREEMENTS
The Company has engaged in various marketing and consulting agreements with
consultants to promote the services of the Company and engage in other
efforts using independent insurance agents to secure new customers. Terms
of the arrangements include commission payments for accounts enrolled by
the Company due to the agents' efforts, paid on a monthly basis on
collections received by the customer, and provide for thirty day
termination notifications.
RELATED PARTY TRANSACTIONS
For the years ended December 31, 2001 and 2000, management fees were paid
to entities wholly owned by the former shareholders of APEOH in the amounts
of $598,479 and $380,200, respectively.
CAPITAL LEASES
The Company leases certain equipment under capital leases expiring in
various years through 2003. The assets and liabilities under capital leases
are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset at the inception of the lease. The
assets are amortized over the lower of their related lease terms or their
estimated productive lives. Amortization of assets under capital leases is
included in depreciation expense in 2001 and 2000.
Properties under capital leases are as follows:
December 31,
2001
------------------
Furniture and fixtures $ 91,451
Computer equipment 13,300
------------------
Subtotal 104,751
Less accumulated amortization 42,122
------------------
Total $ 62,629
==================
The following is a schedule of minimum lease payments due under capital
leases as of December 31, 2001.
Year Ending December 31,
2002 $ 40,150
2003 34,989
2004 2,916
------------------
Total net minimum capital lease payments 78,055
Less amounts representing interest 14,967
------------------
Present value of net minimum capital lease payments 63,088
Less current maturities of capital lease obligations 29,568
------------------
Obligations under capital leases, excluding current maturities $ 33,520
==================
Certified Services, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
F-12
CAPITAL LEASES, (Continued)
Interest rates on capitalized leases vary from 16% to 21% and are imputed
based on the lower of the Company's incremental borrowing rate at the
inception of each lease or the lessor's implicit rate of return.
The capital leases provide for purchase options. Generally, purchase
options are at prices representing the expected fair value of the property
at the expiration of the lease term.
ACQUISITION INDEBTEDNESS
Acquisition indebtedness incurred incidental to the reverse merger
transaction between the Company and APEOH is comprised thusly:
Non-interest bearing promissory note of $3,200,000 payable in four equal $ 2,649,702
annual installments commencing fifteen days after the Company has
filed each of its annual reports with the Securities and Exchange Commission
commencing with that for the year ended December 31, 2002 (or as promptly
as possible if the Company fails to maintain its status as a reporting
entity), after an 8% present value discount
Non-interest bearing promissory note of $1,000,000 payable in equal
monthly installments over 60 months commencing January 10, 2002,
after an 8% value discount 821,990
---------
3,471,692
Less: Current portion 127,243
---------
$ 3,344,449
=========
Total maturities of acquisition indebtedness are as follows:
Year Ending December 31,
2002 $ 127,243
2003 737,863
2004 797,342
2005 861,616
2006 931,072
Thereafter 16,556
---------
Total $ 3,471,692
=========
NOTE PAYABLE
On April 26, 2001, the Company entered into a termination agreement with a
management company utilized by the Company since March, 1998. Upon
resignation, the management company agreed to certain non-compete and non-
disclosure covenants, and waived any right to receive stock or stock
options of the company in consideration of a severance payment of $200,000
less various loan amounts due to APEOH. The severance is payable in 24
monthly installments beginning April, 2001.
As of December 31, 2001, $85,105 was paid to the management company with
$114,985 remaining payable as of December 31, 2001.
F-13
Certified Services, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE PAYABLE, (Continued)
Total maturities of note payable are as follows:
Year Ending December 31,
2002 $ 86,171
2003 28,724
----------
Total $ 114,895
==========
OPERATING LEASE COMMITMENTS
The Company rents office space under a five year non-cancelable operating
lease expiring in November, 2005. The lease contains provisions for
contingent rental payments based upon increases in taxes, insurance, and
common area maintenance expense. The lease contains a renewal option for an
additional 5 years.
The Company also leases various computer and office equipment, and
furniture expiring over the next five years. The following is a schedule of
future minimum rental payments (exclusive of common area charges) required
under operating leases that have initial or remaining non-cancelable lease
terms in excess of one year as of December 31, 2001.
Year Ending December 31,
2002 $ 374,395
2003 221,889
2004 201,188
2005 174,730
2006 7,376
----------
Total minimum payments required $ 979,578
==========
Rent expense charged to operations was $376,320 and $455,600 in December
31, 2001 and 2000, respectively.
PREFERRED AND COMMON STOCK
The Company is authorized to issue 5,000,000 shares of $0.001 par value
convertible preferred stock.
Prior to, but as a component of, the reverse merger transaction between the
Company and APEOH, the Company agreed to issue 1,100 shares of Series B
Convertible Preferred Stock convertible into 11,000,000 common shares in
exchange for $1,100,000, or $0.10 per common share equivalent.
As a component of the reverse merger transaction between the Company and
APEOH, the Company agreed to issue 406.667 shares of Series C Convertible
Preferred Stock convertible into 4,066,667 common shares of the Company. In
the opinion of management, the share of Series C Convertible Preferred
Stock also had a value of $0.10 per common share equivalent, or an
aggregate value of $406,667.
The Company is authorized to issue 100,000,000 common shares, $0.001 par
value common shares.
F-15
Certified Services, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
INCOME TAXES
The provision (benefit) for income taxes consists of the following:
December 31,
------------
Current (Benefit) 2001 2000
---- ----
Federal $ (20,000) $ -
State (9,000) -
------------ ---------
Subtotal (29,000) -
Less valuation allowance 29,000 -
------------ ---------
Total $ - $ -
============ =========
At December 31, 2001 there were no timing differences between the tax bases
of assets and the financial reporting amount that would give rise to a
deferred tax asset or a liability.
A valuation allowance did not exist in 2000. The effects of the valuation
allowance is immaterial to the financial statement.
Through November 20, 2001, APEOH and its subsidiaries (except for Omni) had
elected to be taxed under the provisions of Subchapter S of the Internal
Revenue Code. Under those provisions, these corporations do not pay federal
and state corporate income taxes on their income.
Omni is a C Corporation. Through November 20, 2001 there is no provision
for income tax expense or benefit since these amounts are considered
immaterial.
At December 31, 2001, the Company has available approximately $100,000 of
unused operating loss carryforward to be applied against future taxable
income and expire in year 2021.
COMMITMENTS
Employment Agreements
On November 21, 2001 the Company entered into four Employment Agreements
with former shareholders and executives of APEOH. Each of these
Agreements is for a five year term and require, in the aggregate, payment
of compensation amounting to $500,000 annually as well as normal and
customary employee benefits.
Such arrangements may be extended by any such employee for an additional
five years if certain revenue and income levels are attained by the
Company.
SUBSEQUENT EVENTS:
The Company has executed a Letter of Intent to acquire an employee leasing
company located in Florida. The Company contemplates purchasing in excess
of 15, 300 shares of the Florida entities' stock, representing 30%
ownership of the consolidated entity, in consideration for loans amounting
to $1,000,000 to the entity before closing, $1,200,000 6% notes payable to
the sellers upon closing as well as the issuance of 2,000,000 shares of
CRSV common stock. These common shares will remain restricted securities as
defined under Rule 144 of the Securities Act of 1933, as amended.
RECENT PRONOUNCEMENT
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets." Under these new standards, all acquisitions subsequent to June 30,
2001 must be accounted for under the purchase method of accounting, and
purchased goodwill is no longer amortized over its useful life. Rather
goodwill will be subject to a periodic impairment test based upon its fair
value.
F-16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with our accountants on
accounting and financial disclosures.
On March 15, 2002, the Company terminated its relationship with G. Brad
Beckstead, CPA and has engaged Rich Baker Berman & Company, P.C. as its
auditors. Reference is hereby made to the Company's report of Form 8-K filed
March 22, 2002.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following persons are our current directors and executive officers:
NAME AGE POSITION HELD TERM
William Kewan 57 President and Director One year
Judson Wagenseller 48 Executive Vice President One year
Scott Zoppoth 41 Secretary, Treasurer and Director One year
William Keywan, age 57, the Company's President and a Director, has
been employed as CEO of Interstate University, Inc., a driver training school
located in Evansville, Indiana, since January 2002. From 1996 through August
2001 Mr. Keywan was Director of Marketing for the Palmer Group, a Kenworth truck
dealers with six locations in the Midwest, where he was primarily responsible
for sales, marketing and public relations. Prior thereto he was Founder and
President of Certified Transport, Inc. and Certified Logistics, Inc. from 1989
through 1995, which businesses were engaged in the transportation of automotive
and airfreight throughout Canada and the U.S.
Judson Wagenseller, age 48, the Company's Executive Vice President, has
served as Executive Vice President for the Company since February 2002. Mr.
Wagenseller's primary employment is as an attorney in private practice, in which
15
he has practiced corporate, mergers and acquisitions and securities law for the
past 20 years. A graduate of Princeton University and the University of Virginia
School of Law, he also had five years business experience in operations
management with Roadway Express, a leading national freight carrier.
Scott Zoppoth, age 41, Secretary, Treasurer and a Director of the
Company, has served as the Secretary, Treasurer and Director of the Company
since November 2001. Mr. Zoppoth is an attorney whose practice centers on
business and corporate law and commercial litigation. Mr. Zoppoth graduated a BS
from St. John Fisher College, MAGNA CUM LAUDE, and South Texas College of Law.
After serving as a partner in the law firm of Zoppoth, Valenti & Hanley, PPLC
until 2001, Mr. Zoppoth formed Scott P. Zoppoth, PLLC.
All of our directors and officers are elected annually to serve for one
year or until their successors are duly elected and qualified. Compensation
levels are, and will continue to be, commensurate with industry standards with
incentive programs extended to the key personnel.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
of the named executive officers and directors from January 1, 2000 through
December 31, 2001:
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYMENTS
------------------- ------ --------
NAME AND POSITION YEAR SALARY BONUSES OTHER STOCK OPTIONS LTIP OTHER
- ----------------- ---- ------ ------- ----- ----- ------- ------- --------
Michael L. Zuliani,
Former President 2000 $ 16,000 - - - - - - -
and Director 2001 16,000 - - - - - -
Martin G. Bothman,
Former Secretary,
Treasurer and 2000 - - - - - - - -
Director 2001 - - - - - - - -
William Keywan,
President and
Director (since 2000 - - - - - - - -
November 21, 2001) 2001 - - - - - - - -
Judson Wagenseller,
Executive Vice
President (since 2000 - - - - - - - -
November 21, 2001) 2001 - - - - - - - -
16
Scott Zoppoth,
Secretary, Treasurer
and Director (since 2000 - - - - - - - -
November 21, 2001) 2001 - - - - - - - -
Totals 2000 $ 16,000 - - - - - -
2001 $ 16,000 $ - - - - - -
No officer or director other than Mr. Zuliani was paid any compensation in 2000
or 2001. No additional payments were made to our officers that served as
directors during the two-year period ending December 31, 2001. The Company does
not have any employee stock option or other compensatory plans.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the common stock as of December 31, 2001 for (1) each
person who is known by us to own beneficially more than five percent (5%) of our
outstanding common stock, (2) each of the current directors and officers; and
(3) all current directors and officers as a group.
SHARES OF APPROXIMATE PERCENT
NAME OF COMMON STOCK OF COMMON SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED ISSUED AND OUTSTANDING
- ---------------- ------------------ ----------------------
Directors and Officers:
William Keywan - 0.0%
10602 Timberwood Circle, Suite 9
Louisville, KY 40223
Judson Wagenseller - 0.0%
10602 Timberwood Circle, Suite 9
Louisville, KY 40223
Scott Zoppoth - 0.0%
10602 Timberwood Circle, Suite 9
Louisville, KY 40223
17
5% Stockholders:
Midwest Merger Management, LLC
10602 Timberwood Circle, Suite 9
Louisville, KY 40223 1,800,000 (A) 52.6%
Officers and directors as a group (three persons) - 00.0%
================ ======
- ----------------------------
(A) On October 22, 2001 the six of the Company's shareholders, including its
officers, directors and founders, sold an aggregate of 1,800,000 (52.6%) of
the Company's 3,421,145 issued and outstanding shares of the Company's
Common Stock for $200,000. For further information respecting this change
in ownership, reference is hereby made to the Company's Report on Form 8-K
dated November 21, 2001.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Midwest Merger Management, LLC provides approximately 800 square feet
of office space to the Company on a month-to-month basis without compensation.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8K.
(A) EXHIBITS: None
(B) REPORTS ON FORM 8K: A change in control of the Company's voting
securities was filed on Form 8K during the last quarter of the fiscal year ended
December 31, 2000. Reference is hereby made to the Company's Report for October
2001 on Form 8K, dated November 21, 2001.
SIGNATURES
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Dated: March 28, 2002
Certified Services, Inc.
By: /s/ William Keywan
William Keywan
President and Director