Attached files
file | filename |
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EX-4.76 - National Investment Managers Inc. | v182675_ex4-76.htm |
EX-4.79 - National Investment Managers Inc. | v182675_ex4-79.htm |
EX-4.75 - National Investment Managers Inc. | v182675_ex4-75.htm |
EX-4.81 - National Investment Managers Inc. | v182675_ex4-81.htm |
EX-4.77 - National Investment Managers Inc. | v182675_ex4-77.htm |
EX-4.82 - National Investment Managers Inc. | v182675_ex4-82.htm |
EX-32.1 - National Investment Managers Inc. | v182675_ex32-1.htm |
EX-31.2 - National Investment Managers Inc. | v182675_ex31-2.htm |
EX-32.2 - National Investment Managers Inc. | v182675_ex32-2.htm |
EX-31.1 - National Investment Managers Inc. | v182675_ex31-1.htm |
EX-4.80 - National Investment Managers Inc. | v182675_ex4-80.htm |
EX-4.78 - National Investment Managers Inc. | v182675_ex4-78.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-K
x ANNUAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2009
o TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
Commission
File Number: 333-160488
NATIONAL
INVESTMENT MANAGERS INC.
(Exact
name of registrant as specified in its charter)
Florida
|
59-2091510
|
|
State
or other jurisdiction of
|
I.R.S.
Employer Identification Number
|
|
incorporation
or organization
|
485 Metro
Place South, Suite 275, Dublin, Ohio 43017
(Address
of principal executive office)
Issuer's
telephone number: (614) 923-8822
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act: Common Stock, $0.001 par
value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15 (d) of the Act. Yes x No o
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the 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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No x
Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and will be contained, to the best of
the 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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “accelerated filer, large accelerated filer or smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
|
Accelerated filer o
|
Non-accelerated filer o
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Smaller Reporting Company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes o No x
As of
June 30, 2009, the last business day of the Company’s most recently completed
second fiscal quarter, the market value of our common stock held by
non-affiliates was approximately $5.2 million which is computed using the last
sales price on June 30, 2009 of $0.17.
As of
April 26, 2010, 39,826,929 shares of common stock, $.001 par value per share, of
the registrant were outstanding.
Documents
incorporated by reference: None
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009
INDEX
Page
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PART
I
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|||
ITEM
1.
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BUSINESS
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4
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|
ITEM
1A.
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RISK
FACTORS
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12
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|
ITEM
1B.
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UNRESOLVED
STAFF COMMENTS
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12
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ITEM
2.
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PROPERTIES
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12
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ITEM
3.
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LEGAL
PROCEEDINGS
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13
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ITEM
4.
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(REMOVED
AND RESERVED)
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13
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PART
II
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|||
ITEM
5.
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MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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14
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|
ITEM
6.
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SELECTED
FINANCIAL DATA
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15
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ITEM
7.
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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16
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ITEM
7A.
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QUANITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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42
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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42
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ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
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42
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ITEM
9A.
|
CONTROLS
AND PROCEDURES
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42
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ITEM
9A(T).
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CONTROLS
AND PROCEDURES
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43
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ITEM
9B.
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OTHER
INFORMATION
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44
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PART
III
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|||
ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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45
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ITEM
11.
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EXECUTIVE
COMPENSATION
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48
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ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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50
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ITEM
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
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54
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|
ITEM
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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55
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ITEM
15.
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EXHIBITS
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56
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STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
In this
annual report, references to "National Investment Managers," "NIVM," "the
Company," "we," "us," and "our" refer to National Investment Managers
Inc.
Except
for the historical information contained herein, some of the statements in this
report contain forward-looking statements that involve risks and uncertainties.
These statements are found in the sections entitled "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Quantitative and Qualitative Disclosures about Market Risk." They include
statements concerning: our business strategy; expectations of market and
customer response; liquidity and capital expenditures; future sources of
revenues; expansion of our proposed product line; and trends in industry
activity generally. In some cases, you can identify forward-looking statements
by words such as "may," "will," "should," "expect," "plan," "could,"
"anticipate," "intend," "believe," "estimate," "predict," "potential," "goal,"
or "continue" or similar terminology. These statements are only predictions and
involve known and unknown risks, uncertainties and other factors, including, but
not limited to, the risks outlined under "Risk Factors," that may cause our or
our industry's actual results, levels of activity, performance or achievements
to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward-looking
statements. For example, assumptions that could cause actual results to vary
materially from future results include, but are not limited to our ability to
successfully develop and market our products to customers; our ability to
generate customer demand for our products in our target markets; the development
of our target markets and market opportunities; our ability to manufacture
suitable products at a competitive cost; market pricing for our products and for
competing products; the extent of increasing competition; technological
developments in our target markets and the development of alternate, competing
technologies in them; and sales of shares by existing shareholders. Although we
believe that the expectations reflected in the forward looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Unless we are required to do so under U.S. federal securities
laws or other applicable laws, we do not intend to update or revise any
forward-looking statements.
3
ITEM
1. BUSINESS
General
We are a
Florida corporation organized in April 1981. Our principal executive office is
located at 485 Metro Place South, Suite 275 Dublin, Ohio 43017. Our telephone
number is (614) 923-8822. Our company, formerly known as "Fast Eddie Racing
Stables, Inc." was originally formed for the purpose of acquiring, racing,
breeding and selling standard bred race horses (trotters and pacers). We
commenced business operations in September 1983. We completed a public offering
of our common stock pursuant to a Registration Statement on Form S-18 during
October 1985.
During
the year ended December 31, 1989, we sold or otherwise disposed of all race
horses in order to settle then-outstanding indebtedness. From December 31, 1989
until March 9, 2005, we had no operations, and nominal assets or liabilities.
From 1990 to March 2005, our principal business activity was to seek a suitable
reverse acquisition candidate through acquisition, merger or other suitable
business combination method. In March 2005, we acquired Duncan Capital Financial
Group, Inc. ("Duncan Capital") and focused our business operations providing
financial services including third party retirement plan administration services
and selling insurance and annuity products.
Overview
Our
strategy, since the acquisition of Duncan Capital, has been to continue to grow
our business organically and to purchase majority interests in small to
medium-sized retirement plan administration, investment management and insurance
organizations with recurring revenue streams and consolidate these businesses to
take advantage of synergies, economies of scale, efficiencies and where
appropriate, consolidation of overhead. To grow organically, we seek to increase
our client base and to expand the services we offer to them through relationship
management and on-going administration, emphasizing services with recurring
revenues and long-term relationships. Specifically, we seek to increase our
business base through the following:
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·
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sales of additional products and
services to existing
clients;
|
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·
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sales to new clients;
and
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·
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acquisitions of businesses that
provide similar and/or complementary
solutions.
|
Consistent
with our strategy to grow through acquisitions, since March 2005, we have
completed the following acquisitions:
|
·
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Duncan
Capital;
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·
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Pension Administration Services,
Inc. (“PAS”);
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·
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Complete Investment Management,
Inc. of Philadelphia
(“CIM”);
|
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·
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Asset Preservation Corp. (f/k/a
MD Bluestein, Inc; “Asset Preservation” and collectively with PAS and CIM,
the “Duncan Entities”);
|
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·
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Haddon Strategic Alliance
(“Haddon”);
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·
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Stephen H. Rosen &
Associates, Inc. (“SHRA”);
|
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·
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Certain assets of American
Benefit Resources Inc. (“ABR”), principally the operating subsidiaries of
National Associates, Inc. N.W. (“National”), Benefit Management, Inc.
(“BMI”), VEBA Administrators, Inc. dba Benefit Planning, Inc. (“VEBA”),
and Doyle Barnett;
|
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·
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Valley Forge Enterprises, Ltd.
(“Valley Forge”);
|
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·
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Lamoriello & Co., Inc.
(“Lamco”);
|
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·
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Circle Pension, Inc.
(“CPI”);
|
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·
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Southeastern Pension Services,
Inc. (“SPSI”);
|
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·
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Benefit Dynamics, Inc.
(“BDI”);
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4
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·
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National Actuarial Pension
Services, Inc. (“NAPS”);
|
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·
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Pentec, Inc.
(“Pentec”);
|
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·
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Pentec Capital Management, Inc.
(“PCM”);
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·
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The Pension Alliance, Inc.
(“TPA”);
|
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·
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California Investment and Annuity
Sales, Inc. (“CIAS”);
|
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·
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Alaska Pension Services, Ltd.
(“Alaska Pension”);
|
|
·
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Alan N. Kanter & Associates,
Inc. (“Kanter &
Associates”);
|
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·
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Certain assets of Retirement
& Employee Benefit Services, Inc.
(“REBS”);
|
|
·
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Pension Technical Services, Inc.
d/b/a REPTECH Corp.
(“REPTECH”);
|
|
·
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The
Pension Group, Inc. (“TPG”);
|
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·
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Certain
assets of Standard Retirement Services, Inc. (“Standard”);
and
|
|
·
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Certain
assets and liabilities of Custom K, Inc. (“Custom K”) (management
considers the asset purchase to be immaterial for further financial
disclosure)
|
The
services we offer, through our subsidiaries, are as follows:
|
·
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Retirement
plan design, creation, termination, compliance, and
administration;
|
|
·
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Retirement plan consulting and
pension actuarial services;
|
|
·
|
Investment advisor for retirement
plan sales, implementation and
service;
|
|
·
|
Investment management of non-plan
assets for high net worth
individuals;
|
|
·
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Quarterly asset monitoring
reports;
|
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·
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Record-keeping through an
in-house daily valuation
platform;
|
|
·
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The sale of life
insurance;
|
|
·
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The sale of fixed and variable
annuities; and
|
|
·
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The sale of limited
hospitalization and long-term care
insurance.
|
We view
our company as independent retirement planning consultants for our clients,
recommending third party products and investment platforms that we believe serve
our clients' best interests.
The
retirement and pension consulting and administration services for our retirement
plan clients include the following:
|
·
|
preparation of plan feasibility
and design studies, including the fields of contribution
maximization/reduction, retirement planning and distribution, executive
compensation, new comparability, 401(k) plans, plan terminations,
governmental compliance and coverage, participation and discrimination
testing; and
|
|
·
|
administration of existing plans,
including: preparation of government forms and summary plan descriptions,
maintaining employee data maintenance systems, maintaining detailed asset
reconciliation data, providing periodic reports, determining plan
contributions and benefits, loans, distributions to plan participants and
coordination with other benefit
programs.
|
5
Our
financial advisory services provided through our subsidiaries are focused on
small businesses and high net worth individuals. Representatives of our
subsidiaries are FINRA-licensed registered representatives who work in
conjunction with registered broker dealers and registered investment advisers to
provide investment advisory services to corporations, individuals, retirement
plan trustees and charitable foundations in the following areas:
|
·
|
review of assets and investments,
including investment
allocations;
|
|
·
|
determination of investment goals
and strategies in light of the client's objectives, degree of risk and
time horizon;
|
|
·
|
implementation of investment
programs from among a broad spectrum of investment choices, including
domestic and international mutual funds, certificates of deposit,
treasuries, fixed and variable annuities, and specialty investments;
and
|
|
·
|
monitoring performance results of
investments and advising the client of any recommended
adjustments.
|
Through
our subsidiaries, we are also engaged in the business of insurance and annuity
product sales as well as estate planning services highlighting wealth
accumulation, preservation and transfer needs. Revenue is generated through
fee-based services and commissions on product sales.
Acquisition
Strategy
Our
strategy is to purchase majority interests in small to medium-sized retirement
plan administration, investment management and insurance organizations with
recurring revenue streams and consolidate these businesses to take advantage of
synergies, economies of scale, efficiencies and where appropriate, consolidation
of overhead. These businesses will typically have a sole proprietorship or
partnership structure, and will typically have stable revenue growth and cash
flow with low client attrition rates.
Management
of our company believes there are numerous such businesses in the United States,
individually maintaining more than $500 million in assets under administration.
Many of these entities have part or all of their business dedicated to
retirement plan administration, known as third party administration. These
businesses compete very effectively on a local level by offering a high degree
of personalized service to local businesses and high net worth
individuals. Management of our company believes that
many of these businesses are attractive acquisition candidates as stand-alone
businesses due to their high profitability margins and strong cash flows,
long-term client relationships, and consistent fee based income streams. Most of
the businesses we seek to acquire have a majority of their revenue derived from
recurring sources and not transaction based revenue. However, due to their size,
structure, and capital expenditure constraints, they have not taken advantage of
the industries' best practices around information technology, operational
efficiencies and administrative processing.
As
stand-alone businesses, many cannot grow and diversify beyond their current
levels due to resource limitations and personnel issues. Since these businesses
do not have large staffs or marketing budgets, their ability to develop new
products and diversify into other product categories is limited. Their ability
to cross sell additional retirement planning services is limited not only by
their product offerings, but also by the lack of expertise required to be a
subject matter expert in many retirement facets, and therefore, much of the
products and services they do not or cannot offer is referred elsewhere. In many
cases, current cash flows provide stable businesses and adequate compensation to
current owners and partners who have little incentive to invest their own
capital in the future growth of the business.
We
believe that these dynamics create an opportunity for industry consolidation.
Our goal is to create an organization that can assimilate these businesses,
minimizing execution risk while preserving the strong client relationships that
make these firms valuable. The technology platforms available for use today
could allow our company to compete effectively against larger institutional
platforms in terms of offering sophisticated administrative functionality and
systems support. This would enable us to offer clients greater value, while
becoming more competitive against other local service providers who continue to
operate on a smaller scale.
6
Seller
retention is an important aspect of any such consolidation. We intend to promote
seller retention at the acquired entity level by utilizing some or all of the
following:
|
·
|
issuing our stock as a portion of
the purchase price of each
subsidiary;
|
|
·
|
having the seller/owner finance a
portion of the purchase price in the form of a seller's
note;
|
|
·
|
holding back a portion of the
purchase price to ensure compliance with stated goals and objectives,
including client retention;
|
|
·
|
offering employment contracts to
retain key employees;
|
|
·
|
entering into non-competition and
non-solicitation agreements with selling owners and key
employees;
|
|
·
|
providing bonus incentives for
former owners to expand and grow the business;
and
|
|
·
|
offering stock options to key
employees.
|
We plan
to enhance revenues in the acquired businesses through cross-selling to existing
clients where no such services are currently provided and by offering a more
diversified service and product base, the introduction of higher-margin,
non-traditional investment management services and insurance products and higher
client retention through improved service. For those acquired businesses that do
not offer a full suite of products, we plan to expand their product lines as
soon as practicable upon acquisition. For those acquired companies that already
offer a broad line of products, we plan to emphasize cross-marketing and
referral services to expand market penetration. We believe that we can also
improve operating margins in the acquired businesses primarily through increased
purchasing power created by economies of scale, increased fees due to a greater
base of assets under management, decreased sales expense associated with
cross-selling, elimination of certain redundant back office support functions
and where appropriate, centralized customer services support and consolidation
of overhead.
Operations
We
believe that preserving the entrepreneurial culture of our subsidiaries is
important to their continued growth. We do not typically integrate the sales,
marketing and client service/relationship management operations of our acquired
firms. Recognizing that the principals have established personal relationships
with their businesses' clients, we allow the principals to continue to operate
in the same entrepreneurial environment that made them successful before the
acquisition, subject to our oversight and control at the corporate level in the
areas of accounting, planning and budgeting, legal, human resources, sales and
information technology. We provide sales support as well as assistance in
branding and public relations. The business unit managers report to John Davis,
our President and Chief Operating Officer, who in turn reports to Steven Ross,
our Chief Executive Officer, and to our Board of Directors.
The
Company completed the following acquisitions in 2008 and 2009:
2008
Acquisitions:
California
Investment and Annuity Sales
On
April 3, 2008, we entered into and closed a Stock Purchase Agreement (the “CIAS
Agreement”) with Richard Kaplan and Anthony Delfino (“CIAS Sellers”) and
California Investment and Annuity Sales, Inc. (“CIAS”). The CIAS Agreement was
effective as of March 31, 2008. Pursuant to the CIAS Agreement, the Company
acquired and the Sellers sold, 100% of the common stock of CIAS.
In
consideration for 100% of the outstanding securities of CIAS, the Company paid
the CIAS Sellers $1,425,000 in cash, issued the CIAS Sellers promissory notes
for an aggregate of $950,000 with the first promissory notes in the amount of
$475,000 payable June 3, 2009 and the second promissory notes in the amount of
$475,000 payable June 3, 2010. In the event that certain revenue targets are not
achieved by CIAS during the 24 months following the closing date, the
promissory notes will be reduced by the amount of such shortfall.
In
connection with the acquisition of 100% of the outstanding securities in CIAS
described above, we entered into the following agreements:
7
|
·
|
a Non-Competition, Non-Disclosure
and Non-Solicitation Agreement between the Company and the CIAS
Sellers;
|
|
·
|
an
Employment Agreement with Richard Kaplan for a period of one year with
compensation of $90,000 per year plus a bonus of up to 50% of his base
salary at the discretion of the Board of Directors;
and
|
|
·
|
a
Consulting Agreement with Anthony Delfino for a period of one year with a
compensation of $100,000 per year.
|
CIAS is a
distributor of securities and insurance contracts, primarily qualified
retirement plans in the small and medium-sized market through its office located
in Marina Del Rey, California.
Alaska
Pension Services, Ltd.
On June
30, 2008, we entered into and closed a Stock Purchase Agreement (the “Alaska
Pension Agreement”) with Karen Jordan and Duane Mayer (“APS Sellers”) to
purchase 100% of the outstanding common stock of Alaska Pension Services, Ltd.
(“Alaska Pension”).
In
consideration for 100% of the outstanding common stock of Alaska Pension, the
Company paid the APS Sellers $430,766 in cash at closing, with an additional
$165,000 due at December 31, 2008, paid indebtedness, and other obligations of
Alaska Pension of $192,073, issued 369,128 shares of common stock of the Company
valued at $220,000 (the value of the common stock was determined by an average
of the closing stock price of the last 5 days prior to the announced
acquisition), issued the APS Sellers promissory notes for an aggregate of
$220,000 with the first set of promissory notes in the amount of $110,000
payable August 31, 2009 and the second set of promissory notes in the amount of
$110,000 payable August 31, 2010. In the event that certain EBITDA targets are
not achieved by Alaska Pension during the 24 months following the closing
date, the promissory notes will be reduced by the amount of such
shortfall.
In
connection with the acquisition of 100% of the outstanding securities in Alaska
Pension described above, we entered into the following agreements:
|
·
|
a Non-Competition, Non-Disclosure
and Non-Solicitation Agreement between the Company and the APS
Sellers;
|
|
·
|
an
Employment Agreement with Karen Jordan for a period of two years with
compensation of $100,000 per year;
and
|
|
·
|
an
Employment Agreement with Duane Mayer for a period of two years with a
compensation of $100,000 per year.
|
Alaska
Pension is engaged in the business of retirement plan design, consulting,
administration and actuarial services. Alaska Pension currently serves
approximately 240 plans through its offices located in Anchorage,
Alaska.
Alan
N. Kanter & Associates, Inc.
On July
16, 2008, we entered into and closed a Stock Purchase Agreement (“Kanter
Agreement”) to purchase 100% of the common stock of Alan N. Kanter &
Associates, Inc. (“Kanter & Associates”).
In
consideration for 100% of the outstanding common stock of Kanter &
Associates, the Company paid cash of $1,732,467. In addition, the Company will
make contingency payments based on Kanter & Associates completing pension
plan document restatement work in accordance with the terms of a side letter to
the Kanter Agreement.
In
connection with the acquisition of 100% of the outstanding securities in Kanter
& Associates described above, we entered into the following
agreements:
|
·
|
a Non-Competition, Non-Disclosure
and Non-Solicitation Agreement between the Company and the Kanter &
Associates seller; and
|
|
·
|
an
Employment Agreement with Alan Kanter for a period of two years with
compensation of $1 per year.
|
Kanter
& Associates is engaged in the business of retirement plan design,
consulting, and administration. Kanter & Associates currently serves
approximately 380 plans through its offices located in Baltimore,
Maryland.
8
Retirement
& Employee Benefit Services, Inc.
On August
5, 2008, we entered into an Asset Purchase Agreement (“REBS Agreement”) to
purchase the customer accounts, rights and records of Retirement & Employee
Benefit Services, Inc. (“REBS”). The Company paid $164,943 in cash.
The
Company’s strategy in purchasing the assets of REBS was to acquire
the customer relationships of a retirement plan administration
organization without incurring additional overhead expense. REBS was merged into
the workflow at Pentec.
Pension
Technical Services, Inc.
On
October 2, 2008, we entered into a Stock Purchase Agreement (“REPTECH
Agreement”) with Ralph W. Shaw and Eileen A. Baldwin-Shaw (“REPTECH Sellers”) to
purchase 100% of the common stock of Pension Technical Services, Inc. d/b/a
REPTECH Corp. (“REPTECH”).
In
consideration for 100% of the outstanding common stock of REPTECH, the Company
paid the REPTECH Sellers $1,787,760 in cash at closing, with an additional
$150,000 due at December 31, 2008, issued 1,430,208 shares of common stock of
the Company valued at $715,104, issued the REPTECH Sellers promissory notes for
an aggregate of $922,656 with the first set of promissory notes in the amount of
$461,328 payable December 2, 2009 and the second set of promissory
notes in the amount of $461,328 payable December 2, 2010. In the event that
certain EBITDA targets are not achieved by REPTECH during 24 months following
the closing date, the promissory notes will be reduced by the amount of the
shortfall.
In
connection with the acquisition of 100% of the outstanding securities in REPTECH
described above, we entered into the following agreements:
|
·
|
a Non-Competition, Non-Disclosure
and Non-Solicitation Agreement between the Company and the REPTECH
Sellers;
|
|
·
|
an
Employment Agreement with Ralph W. Shaw for a period of two years with
compensation of $195,000 per year;
and
|
|
·
|
an
Employment Agreement with Eileen A. Baldwin-Shaw for a period of two years
with compensation of $185,000 per
year.
|
REPTECH
is engaged in the business of retirement plan design, consulting, and
administration. REPTECH currently serves approximately 580 plans through its
offices located in Denver, Colorado.
The
Pension Group, Inc.
On
November 26, 2008, we entered into and closed a Stock Purchase Agreement (“TPG
Agreement”) with Peter Stephan, James Norman and Rise Spiegel (“TPG Sellers”) to
purchase 100% of the common stock of The Pension Group, Inc.
(“TPG”).
In
consideration for 100% of the outstanding common stock of TPG, the Company paid
the TPG Sellers $2,141,869 in cash at closing, with an additional $935,000 due
at February 24, 2009 and an additional $446,657, as adjusted, due at March 26,
2009, issued 1,448,854 shares of common stock of the Company valued at $467,500,
issued the TPG Sellers promissory notes for an aggregate of $467,500 with the
first set of promissory notes in the amount of $233,750 payable January 26, 2010
and the second set of promissory notes in the amount of $233,750 payable January
26, 2011. In the event that certain EBITDA targets are not achieved by TPG
during 24 months following the closing date, the promissory notes will be
reduced by the amount of the shortfall.
In
connection with the acquisition of 100% of the outstanding securities in TPG
described above, we entered into the following agreements:
|
·
|
a Non-Competition, Non-Disclosure
and Non-Solicitation Agreement between the Company and the TPG
Sellers;
|
|
·
|
an
Employment Agreement with Peter Stephan for a period of two years with
compensation of $100,000 per year;
|
|
·
|
an
Employment Agreement with James Norman for a period of two years with
compensation of $100,000 per year;
and
|
|
·
|
an
Employment Agreement with Rise Spiegel for a period of two years with
compensation of $125,763 per year.
|
9
TPG is
engaged in the business of retirement plan design, consulting and
administration. TPG currently serves approximately 800 plans through its offices
located in Laguna Hills, California.
2009
Acquisitions:
Standard
Retirement Services, Inc.
On
October 28, 2009, the Company entered into an Asset Purchase Agreement
(“Standard Agreement”) to purchase certain assets of Standard Retirement
Services, Inc (“Standard”). The final purchase price will be determined based on
retention rates as of February 28, 2011 and annual revenues of the acquired
assets. The Company paid $68,653 in cash at closing, which represented 10% of
the purchase price. An additional 25% of the purchase price is due on August 15,
2010, and the final 65% of the purchase price due on March 15, 2011, less any
adjustments in accordance with the Standard Agreement. The Company accrued
$522,347 as an estimate for settling the remaining contingent
payments.
The
Company’s strategy in purchasing certain assets of Standard was to acquire the
customer relationships of a retirement plan administration organization without
incurring additional overhead expense. Standard was merged into the workflow at
several of the Company’s subsidiaries.
None of
the companies that we acquired since the formation of Duncan Capital in 2004
were or are in bankruptcy proceedings or have filed for bankruptcy protection
during the last five years.
Clients
and Customers
The
customers of our firms' retirement plan administration services are generally
small and medium-size corporations with 10 to 200 employees. We consider this
segment our target market.
The
customers of our life insurance wealth transfer and investment advisory products
and services are generally high net worth individuals. We believe that the
current economic and stock market environment may lead high net worth persons to
increase their demand for the specialized services we offer in order to continue
to meet their financial goals as the financial markets begin to recover from the
dramatic downturn in late 2008.
Competition
We
believe that the markets for our products and services are highly competitive.
We believe that we remain competitive due to several factors, including our
overall company strategy and commitment, high-level expertise in plan design,
consulting, and actuarial services, product quality, reliability of service,
strategic and financial relationships with industry-leading firms, the personal
relationships between our key employees and clients, local presence, duration of
client relationships, duration of employee service and competitive pricing. We
believe that, by virtue of our range of product and service offerings, and our
overall commitment to client service and relationships, we compete favorably in
these categories at the local, regional and national level. In addition, we
believe that we have a competitive advantage as a result of our position as an
independent vendor, rather than as a cooperative, an affiliate of a financial
institution, a payroll vendor or competitor to our clients.
Our
principal competitors are third-party administration firms, brokerage firms,
distributors of insurance products, registered investment advisors, financial
planners and bundled insurance providers.
Corporate
Headquarters
Our
headquarters in Dublin, Ohio provides support for our acquired firms. Corporate
activities include strategic tactical planning, national arrangements with
industry partners, oversight of sales, acquisitions, integration of the acquired
entities, legal, information technology, and finance and accounting. Our mergers
and acquisitions team identifies targets, performs due diligence and negotiates
acquisitions. Finance and accounting is responsible for working with each firm
to ensure timely and accurate reporting. In addition, finance and accounting is
responsible for consolidation of our financial statements at the corporate
level.
10
Government
Regulation
Our
personnel are subject to extensive regulation. Our personnel are licensed to
conduct business in various states and are subject to regulation and supervision
both federally and at the state level in each of these jurisdictions. The
ability of our personnel to conduct business in the jurisdictions in which they
operate depends on their compliance with the rules and regulations promulgated
by federal regulatory bodies and the regulatory authorities in each of these
jurisdictions. Failure to comply with all necessary regulatory requirements,
including the failure to be properly licensed or registered, can subject our
operating companies to sanctions or penalties.
Each
jurisdiction has enacted laws and regulations governing the sale of insurance
products. State insurance laws grant supervisory agencies, including state
insurance departments, broad regulatory authority. State insurance regulators
and the National Association of Insurance Commissioners continually reexamine
existing laws and regulations which affect the Acquired Companies. These
supervisory agencies regulate, among other things, the licensing of insurance
brokers and agents and the marketing practices of insurance brokers and agents,
in the context of curbing unfair trade practices. Violations of state insurance
laws or failure to maintain applicable state insurance licenses can result in
revocation of such licenses.
Providing
investment advice to clients is also regulated on both the federal and state
level. Our personnel are permitted to conduct investment advisory activities
through unaffiliated broker dealers and investment advisers registered with the
National Association of Securities Dealers, Inc. and with the SEC under the
Investment Advisers Act. The Investment Advisers Act imposes numerous
obligations on registered investment advisers, including disclosure obligations,
record keeping and reporting requirements, marketing restrictions and general
anti-fraud prohibitions which affect the conduct of the acquired companies and
their personnel. In addition, certain of our subsidiaries' personnel are
regulated by state securities regulators under applicable state securities laws.
Violations of applicable federal or state laws or regulations can result in the
imposition of fines or censures and disciplinary actions, including the
revocation of licenses or registrations previously issued to our subsidiaries or
their personnel.
To the
extent that we engage in any brokerage activities, we will be subject to
broker-dealer regulations, both at the federal as well as the state level.
Neither we nor our affiliates are registered as broker-dealers. Unless and until
we acquire a registered broker-dealer or become registered as a broker-dealer,
we intend to utilize the services of unaffiliated broker-dealers to process all
securities transactions for the accounts of our clients. Broker-dealer
regulations impose numerous obligations on persons covered by the regulations,
including disclosure obligations, record keeping and reporting requirements,
marketing restrictions and general anti-fraud prohibitions. Violations of
applicable federal or state laws or regulations can result in the imposition of
fines or censures and disciplinary actions, including the revocation of licenses
or registrations.
Employees
As of
March 10, 2010, we had approximately 300 full-time employees. None of our
employees are represented by a labor union or are subject to
collective-bargaining agreements. We believe that we maintain good relationships
with our employees.
Liquidity
The
Company’s existing commitments for term notes from senior and subordinated
lenders are currently exhausted.
As
previously reported in its Form 10-Q for the quarter ended September 30, 2009,
the Company was not then in compliance with certain financial covenants in the
loan agreements and, as a result, the lenders had delivered reservation of
rights letters that notified the Company of such covenant defaults and reserved
all of the lenders' rights and remedies with respect thereto. Financial and
other covenant defaults have also occurred subsequent to September 30,
2009.
On April
26, 2010, the Company and its lenders entered into amendments in which the
lenders have agreed to forbear from accelerating or otherwise enforcing their
rights and remedies with respect to currently existing covenant defaults under
the loan agreements until January 2, 2011.
In
return, the Company has agreed in the amendments to adhere to specified cash
flow tests and maintain minimum cash balances. Failure to do so could result in
either lender terminating its forbearance agreements.
11
The
Company has engaged a financial advisor to, among other things, advise and
assist the Company in exploring, evaluating and implementing one or more
strategic alternatives for the recapitalization of the Company, including
refinancing its current debt, raising capital and/or selling the Company to a
third party.
In the
amendments, the Company has agreed that its senior or subordinated lenders may
terminate its forbearance agreements if, in the lender’s reasonable judgment,
the Company has not made satisfactory progress toward a reasonably satisfactory
recapitalization initiative by July 15, 2010 or any date thereafter through the
forbearance period. If the Company is not successful in its recapitalization or
refinancing efforts, it will not have the ability to pay the senior and
subordinated senior debt at the end of the forbearance period.
ITEM
1A. RISK FACTORS
As a
Smaller Reporting Company, the Company is not required to include the disclosure
under this Item 1A. Risk Factors.
ITEM
1B. UNRESOLVED STAFF COMMENTS
As a
Smaller Reporting Company, the Company is not required to include the disclosure
under this Item 1B. Unresolved Staff Comments.
ITEM
2. PROPERTIES
CIM
leases 5,237 square feet of office space in Horsham, Pennsylvania under a lease
agreement which expires on September 30, 2010 at a monthly cost that ranges from
$2,400 to $3,273.
Valley
Forge leases 6,600 square feet of office space in Wayne, Pennsylvania. Under the
five-year lease, which expires in September 2012, Valley Forge pays a monthly
rent of $8,560.
Benefit
Management, Inc. leases 7,406 square feet of office space in North Attleboro,
Massachusetts under a lease agreement which expires May 31, 2012 at a monthly
cost of $7,800.
Doyle
Barnett leases 1,500 square feet of office space in Yorktown Heights, New York
under a lease agreement which expires August 31, 2012 at a monthly cost that
ranges from $2,500 to $2,925.
Benefit
Planning, Inc. leases 15,666 square feet of office space in Marina del Rey,
California under a lease agreement which expires May 31, 2012 at a monthly cost
that ranges from $30,762 to $47,781.
National
Associates, Inc. leases 6,134 square feet of office space in Seattle, Washington
under a lease agreement which expires May 31, 2010 at a monthly cost that ranges
from $9,584 to $11,629. Additionally, National Associates, Inc. leases 5,722
square feet of office space in Beaverton, Oregon under a lease agreement which
expires September 30, 2012 at a monthly cost that ranges from $4,172 to
$9,298.
SHRA
leases 6,682 square feet of office space in Haddonfield, New Jersey. Under the
10-year lease, which expires on February 21, 2011, the monthly rent ranges from
$9,750 to $12,351. Stephen H. Rosen is the former owner of SHRA and is now an
employee of National Investment Managers Inc., and owns an interest in 89 Haddon
Avenues Associates, L.L.C. (“HAA”). SHRA is a lessee under a lease agreement
with HAA, for property located in Haddonfield, New Jersey. Benefit Dynamics,
Inc. (BDI) was a sub-tenant of SHRA, and had an informal inter-office lease
arrangement. BDI was allocated $850 per month for rent which ended in August
2009. Additionally, SHRA leases 1,075 square feet of office space in
Haddonfield, New Jersey under a lease agreement which expires on February 21,
2011 at a monthly cost that ranges from $1,981 to $2,164.
Lamoriello
& Co., Inc. leases 4,699 square feet of office space in Warwick, Rhode
Island. The monthly rent for such space ranges from $7,144 to $7,887. The lease
expires in December 2011. Circle Pension, Inc. leases 1,500 square feet of
office space in New York, New York. The monthly rent for such space ranges from
$4,183 to $4,743. The lease expires in November 2015.
12
National
Actuarial Pension Services, Inc. leases 5,848 square feet of office space in
Houston, Texas under a lease agreement which expires on June 30, 2015 at a
monthly cost that ranges from $7,554 to $8,528.
Pentec
and PCM lease 4,600 square feet and 1,533 square feet of office space,
respectively, in Southington, Connecticut under a lease agreement which expires
on September 30, 2011. The monthly rent ranges from $5,942 to $7,222 for Pentec
and $1,980 to $2,407 for PCM. Michael Callahan is a former owner of Pentec and
PCM and is now an employee of National Investment Managers Inc., and owns 100%
of MJM MILESTONE, LLC (“MJM”). Pentec and PCM are lessees under a lease
agreement with MJM, for property located in Southington,
Connecticut.
TPA
leases office space in Lansdale, Pennsylvania and Harrisburg, Pennsylvania. The
rent for 1,251 square feet of office space in Lansdale, Pennsylvania is $2,467
per month and is on a month to month lease, which was not renewed after March
31, 2010. Renee Conner and William Renninger are the former owners of TPA and
are now employees of National Investment Managers Inc., and collectively own
100% of Conner Management Group, LLC (“CMG”). TPA is the lessee under
a lease agreement with CMG, for property located at 2578 Interstate Drive, Suite
102, Harrisburg, PA. The rent for 5,886 square feet of office space
in Harrisburg, Pennsylvania ranges from $10,200 to $11,259 per month. The lease
expires on October 31, 2010.
Alaska
Pension Services, Ltd. leases 3,400 square feet of office space in Anchorage,
Alaska under a lease agreement which expires on May 31, 2013 at a monthly cost
that ranges from $6,460 to $7,059.
Kanter
& Associates leases 7,000 square feet of office space in Pikesville,
Maryland under a lease agreement which expires on April 30, 2011 at a monthly
cost that ranges from $9,333 to $10,103.
REPTECH
leases 6,980 square feet of office space in Denver, Colorado under a lease
agreement which expires on February 28, 2015 at a monthly cost that ranges from
$9,743 to $12,215.
TPG
leases 8,426 square feet of office space in Laguna Hills, California under a
lease agreement which expires on June 30, 2011 at a monthly cost that ranges
from $16,431 to $18,453.
In the
opinion of our management, the leased properties are adequately insured. Our
existing properties are in good condition and suitable for the conduct of our
business.
ITEM
3. LEGAL PROCEEDINGS
The
Company is from time to time subject to claims and suits arising in the ordinary
course of business. Although the ultimate disposition of such proceedings is not
presently determinable, management does not believe that the ultimate resolution
of these matters will have a material adverse effect on the financial condition,
results of operations or cash flows of the Company.
13
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Our
common stock trades on the OTC Bulletin Board under the symbol "NIVM.OB". The
following table sets forth quarterly high and low bid prices of a share of our
common stock as reported by the OTC Bulletin Board for the years 2009 and 2008.
The quotations listed below reflect inter-dealer prices, without mark-ups,
mark-downs or commissions and may not necessarily reflect actual transactions.
Price
|
||||||||
High $
|
Low $
|
|||||||
2009
|
||||||||
First
quarter ended March 31, 2009
|
$ | 0.34 | $ | 0.17 | ||||
Second
quarter ended June 30, 2009
|
$ | 0.25 | $ | 0.16 | ||||
Third
quarter ended September 30, 2009
|
$ | 0.24 | $ | 0.12 | ||||
Fourth
quarter ended December 31, 2009
|
$ | 0.26 | $ | 0.09 | ||||
2008
|
||||||||
First
quarter ended March 31, 2008
|
$ | 0.71 | $ | 0.61 | ||||
Second
quarter ended June 30, 2008
|
$ | 0.75 | $ | 0.55 | ||||
Third
quarter ended September 30, 2008
|
$ | 0.69 | $ | 0.35 | ||||
Fourth
quarter ended December 31, 2008
|
$ | 0.50 | $ | 0.21 |
As of
April 26, 2010, 39,826,929 shares of common stock were issued and outstanding.
As of that date there were (i) 27,597,519 outstanding options and warrants to
purchase common stock; however, only 27,383,323 shares of authorized common
stock were available to purchase, and (ii) 7,236,171 shares of preferred stock
convertible into an aggregate of 32,789,748 shares of common stock.
The
number of holders of record for our common stock as of April 26, 2010 was
approximately 110. This number excludes individual stockholders holding stock
under nominee security position listings.
Dividends
We have
not paid any cash dividends on our common stock and do not anticipate declaring
or paying any cash dividends in the foreseeable future. Holders of our common
stock are entitled to dividends when and if declared by our board of directors
from legally available funds. However, before any dividends may be paid to
holders of our common stock, cumulative dividends must be paid to our holders of
Series A, Series B, Series C, Series D and Series E Preferred Stock, either in
cash or in registered shares of our common stock. We have 2,420,000 shares of
Series A Cumulative Convertible Preferred Stock, 3,615,000 shares of Series B
Cumulative Convertible Preferred Stock, 770,834 shares of Series C Cumulative
Convertible Preferred Stock, 409,500 shares of Series D Cumulative Convertible
Preferred Stock and 29,350 shares of Series E Cumulative Convertible Preferred
Stock outstanding. If and when declared by our Board of Directors, we are
obligated to pay an annual preferred dividend of $0.24 per share in connection
with our shares of Series A Cumulative Convertible Preferred Stock, $0.24 per
share in connection with our shares of Series B Cumulative Convertible Preferred
Stock, $0.72 per share in connection with our shares of Series C Cumulative
Convertible Preferred Stock, $1.20 per share in connection with our shares of
Series D Cumulative Convertible Preferred Stock and $12.00 per share in
connection with our shares of Series E Cumulative Convertible Preferred Stock.
Dividends payable under the Series A Cumulative Convertible Preferred Stock,
Series B Cumulative Convertible Preferred Stock, the Series C Cumulative
Convertible Preferred Stock, the Series D Cumulative Convertible Preferred Stock
and the Series E Cumulative Convertible Preferred Stock have accrued to each of
the respective holders. To date, the Company has accrued but not declared or
paid any dividends. As of December 31, 2009 and 2008 the aggregate amounts
accrued under all series of preferred stock were $7,849,920
and $5,872,320, respectively.
14
Recent
Issuances of Unregistered Securities
Alaska
Pension Services, Ltd.
On June
30, 2008, the Company entered into a Stock Purchase Agreement (the “Alaska
Pension Agreement”) with Karen Jordan and Duane Mayer (“APS Sellers”) to
purchase 100% of the outstanding common stock of Alaska Pension Services, Ltd.
(“Alaska Pension”). As part of the transaction, the Company issued 369,128
shares of common stock of the Company valued at $220,000.
Pension
Technical Services, Inc.
On
October 2, 2008, the Company entered into a Stock Purchase Agreement (“REPTECH
Agreement”) with Ralph W. Shaw and Eileen A. Baldwin-Shaw (“REPTECH Sellers”) to
purchase 100% of the common stock of Pension Technical Services, Inc. d/b/a
REPTECH Corp. (“REPTECH”). As part of the transaction, the Company issued
1,430,208 shares of common stock of the Company valued at $715,104.
The
Pension Group, Inc.
On
November 26, 2008, the Company entered into a Stock Purchase Agreement (“TPG
Agreement”) with Peter Stephan, James Norman and Rise Spiegel (“TPG Sellers”) to
purchase 100% of the common stock of The Pension Group, Inc. (“TPG”). As part of
the transaction, the Company issued 1,448,854 shares of common stock of the
Company valued at $467,500.
Employee
Compensation
On
January 2, 2008, the Company issued Steve Ross, Chief Executive Officer, 700,000
shares of common stock in conjunction with his November 2007 employment
agreement.
On April
1, 2008, the Company issued John Davis, President and Chief Operating Officer,
350,000 shares of common stock in conjunction with his March 2007 employment
agreement.
On July
16, 2008, the Company issued John Davis, President and Chief Operating Officer,
50,000 shares of common stock in conjunction with his November 2007 employment
agreement.
On
December 31, 2008, the Company issued Steve Ross, Chief Executive Officer,
100,000 shares of common stock in conjunction with his November 2007 employment
agreement.
On
December 31, 2009, the Company issued Steve Ross, Chief Executive Officer,
100,000 shares of common stock in conjunction with his November 2007 employment
agreement.
Conversion
of Preferred Stock
On March
10, 2008, a preferred shareholder converted 100,000 of Series B Preferred Stock
into 200,000 shares of common stock.
The above
issuances were made in reliance upon exemptions from registration pursuant to
Section 4(2) under the Securities Act of 1933 and/or Rule 506 promulgated under
Regulation D there under. The holders of the above securities are accredited
investors as defined in Rule 501 of Regulation D promulgated under the
Securities Act of 1933.
Issuer
Purchases of Equity Securities
The
Company did not repurchase any of its securities during the year ended December
31, 2009.
ITEM
6. SELECTED FINANCIAL DATA
As a
Smaller Reporting Company, the Company is not required to include the disclosure
under this Item 6. Selected Financial Data.
15
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The
following discussion should be read in conjunction with our consolidated
financial statements and the related notes included elsewhere in this report. In
addition to historical information, this discussion includes forward-looking
information that involves risks and assumptions which could cause actual results
to differ materially from management's expectations. See "Forward-Looking
Statements" included elsewhere in this report.
General
Overview
The
Company is in the principal business of acquiring and managing operating
entities that offer administration services of retirement plans, financial and
investment advisory services and the sale of various insurance products to small
and medium sized businesses and high-net worth individuals in the United States
of America. As of December 31, 2009, the Company owned 22 operating units in
fourteen states. The wholly-owned subsidiaries are based in Lake Mary, FL; North
Attleboro, MA; Haddonfield, NJ; Yorktown Heights, NY; New York, NY; Beaverton,
OR; Horsham, PA; Wayne, PA; Warwick, RI; Houston, TX; Marina Del Rey, CA;
Seattle, WA; Harrisburg, PA; Southington, CT; Pikesville, MD; Anchorage, AK;
Denver, CO and Laguna Hills, CA. The Company’s corporate headquarters are
located in Dublin, Ohio.
Acquisitions
and Divestitures
Under our
typical acquisition structure, we acquire 100% of the equity of retirement plan
administration and investment management organizations, with recurring revenue
streams, and consolidate these businesses to take advantage of economies of
scale, efficiencies, operational best practices and cross-selling opportunities
of retirement services. All of our previous acquisitions have demonstrated
stable revenue growth and cash flow with low client attrition rates. The Company
plans to enhance revenues in the group through the formulation of national
relationships with business partners and numerous joint sales strategies and
tactics, cross-selling within a more diversified service and product base, the
introduction of higher-margin, non-traditional investment management services
and products and higher client retention through improved price and
service.
On
December 13, 2004, Duncan Capital, an incorporated company with no operations,
acquired 100% of the issued and outstanding securities of Pension Administration
Services, Inc., Complete Investment Management Inc. of Philadelphia and MD
Bluestein, Inc. ("PAS Group").
On August
2, 2005, the Company acquired 100% of the issued and outstanding securities of
Stephen H. Rosen & Associates, Inc., ("SHRA") and Haddon Strategic Alliance,
Inc. ("Haddon") (collectively, the "SHRA Group").
On
November 30, 2005, the Company acquired certain assets and liabilities of
American Benefit Resources, Inc. ("ABR") and 100% of the capital stock of the
wholly-owned subsidiaries of ABR, National Associates, Inc. N.W. ("National"),
ABR Advisors, Inc. ("Advisors"), BPI/PPA, Inc. ("BPI"), Benefit Management, Inc.
("BMI"), MLK Capital Management, Inc. ("MLK Capital"), VEBA Administrators, Inc.
dba Benefit Planning, Inc. ("VEBA") and AFC Enterprises, Inc. ("AFC"),
(collectively the "ABR Group").
On
January 4, 2006, the Company acquired 100% of the issued and outstanding
securities of Valley Forge Enterprises, Ltd. ("Valley Forge").
On March
24, 2006, the Company sold to M. Lane Kerns, Billie Kerns, and Kerns Asset
Management, LLC (i) 100% of the issued and outstanding shares of MLK Capital
Management, Inc. and (ii) certain assets, client relationships and liabilities
of BMI related to the third party administration business.
On
October 3, 2006, the Company acquired 100% of the issued and outstanding
securities of Lamoriello & Co., Inc., Circle Pension, Inc., and Southeastern
Pension Services, Inc.
On
December 1, 2006, the Company acquired 100% of the issued and outstanding
securities of National Actuarial Pension Services, Inc.
On
January 2, 2007, the Company acquired 100% of the issued and outstanding
securities of Benefit Dynamics, Inc.
16
On
February 28, 2007, the Company acquired 100% of the issued and outstanding
securities of The Pension Alliance Inc.
On
February 28, 2007, the Company acquired 100% of the issued and outstanding
securities of Pentec Inc. and Pentec Capital Management Inc.
On April
3, 2008, the Company acquired 100% of the issued and outstanding securities of
California Investment and Annuity Sales, Inc.
On June
30, 2008, the Company acquired 100% of the issued and outstanding securities of
Alaska Pension Services, Ltd.
On July
16, 2008, the Company acquired 100% of the issued and outstanding securities of
Alan N. Kanter & Associates, Inc.
On August
5, 2008, the Company acquired certain assets of Retirement & Employee
Benefit Services, Inc.
On
October 2, 2008, the Company acquired 100% of the issued and outstanding
securities of Pension Technical Services, Inc. d/b/a REPTECH Corp.
On
November 26, 2008, the Company acquired 100% of the issued and outstanding
securities of The Pension Group, Inc.
On
October 28, 2009, the Company acquired certain assets of Standard Retirement
Services, Inc.
On
December 31, 2009, the Company acquired certain assets and liabilities of Custom
K, Inc.
Although
management believes that we will continue to have opportunities to complete
future acquisitions such as those we have completed in the past year, there can
be no assurance that we will be successful in identifying and completing
acquisitions in 2010 given the Company’s capital position and lack of borrowing
capacity as described in Liquidity and Capital Resources.
17
2009
vs. 2008 Results of Operations:
December 31,
|
% of
|
December 31,
|
% of
|
$ Change
|
% Change
|
|||||||||||||||||||
2009
|
Revenue
|
2008
|
Revenue
|
2009 to 2008
|
2009 to 2008
|
|||||||||||||||||||
Revenues
|
$ | 48,149,363 | 100.0 | % | $ | 41,680,122 | 100.0 | % | $ | 6,469,241 | 15.5 | % | ||||||||||||
Operating
expenses:
|
||||||||||||||||||||||||
Selling,
general and administrative expenses
|
39,038,488 | 81.1 | % | 33,703,829 | 80.9 | % | 5,334,659 | 15.8 | % | |||||||||||||||
Depreciation
and amortization
|
7,250,168 | 15.1 | % | 6,911,995 | 16.6 | % | 338,173 | 4.9 | % | |||||||||||||||
Stock-based
compensation
|
433,126 | 0.9 | % | 1,002,599 | 2.4 | % | (569,473 | ) | -56.8 | % | ||||||||||||||
Total
operating expenses
|
46,721,782 | 97.0 | % | 41,618,423 | 99.9 | % | 5,103,359 | 12.3 | % | |||||||||||||||
Net
operating income (loss)
|
1,427,581 | 3.0 | % | 61,699 | 0.1 | % | 1,365,882 | 2213.8 | % | |||||||||||||||
Other
income (expenses):
|
||||||||||||||||||||||||
Change
in fair value of derivative financial instruments
|
786,645 | 1.6 | % | 1,865,033 | 4.5 | % | (1,078,388 | ) | -57.8 | % | ||||||||||||||
Interest
expense
|
(4,593,641 | ) | -9.5 | % | (4,018,743 | ) | -9.6 | % | (574,898 | ) | 14.3 | % | ||||||||||||
Debt
and other restructuring charges
|
(60,000 | ) | -0.1 | % | - | 0.0 | % | (60,000 | ) | |||||||||||||||
Interest,
dividend and rental income
|
28,769 | 0.1 | % | 48,301 | 0.1 | % | (19,532 | ) | -40.4 | % | ||||||||||||||
Total
other expense, net
|
(3,838,227 | ) | -8.0 | % | (2,105,409 | ) | -5.1 | % | (1,732,818 | ) | -40.4 | % | ||||||||||||
Net
income (loss) before income tax benefit (expense)
|
(2,410,646 | ) | -5.0 | % | (2,043,710 | ) | -4.9 | % | (366,936 | ) | 82.3 | % | ||||||||||||
Income
tax benefit (expense)
|
1,934,390 | 4.0 | % | 1,913,685 | 4.6 | % | 20,705 | 18.0 | % | |||||||||||||||
Net
income (loss) before preferred stock dividends
|
(476,256 | ) | -1.0 | % | (130,025 | ) | -0.3 | % | (346,231 | ) | 1.1 | % | ||||||||||||
Preferred
stock dividends
|
(1,977,600 | ) | (1,979,900 | ) | ||||||||||||||||||||
Net
income (loss) available to common stockholders
|
$ | (2,453,856 | ) | $ | (2,109,925 | ) |
Revenues
for the year ended December 31, 2009 increased $6,469,241 to $48,149,363
compared to the year ended December 31, 2008, as shown in the table above. The
increase in revenues was due to an increase of $9,051,954 generated by firms
that were acquired during 2008 (CIAS, Alaska Pension, Kanter & Associates,
REPTECH and TPG), offset in part by a decrease in revenue of $2,582,713 at our
existing subsidiaries. This decrease is due to a reduction in the asset based
revenue resulting from the decline in the equity markets and a decrease in
recurring plan administration revenues resulting from plan terminations and
reductions in pension plan participants, as well as a decrease in one-time
consulting revenue, resulting from the downturn in the U.S. economy, offset in
part by document restatement fees related to the Economic Growth and Tax Relief
Reconciliation Act (“EGTRRA”). The 2009 revenue was generated from three
sources; third party administration, $44,554,772; financial planning and
investment advisory fees, $3,069,465; and insurance commissions, $525,126. The
2008 revenue was generated from three sources; third party administration,
$37,206,008; financial planning and investment advisory fees, $4,004,920; and
insurance commissions, $469,194.
Operating
expenses for the year ended December 31, 2009 increased $5,103,359, to
$46,721,782 over the prior year ended December 31, 2008. As a percentage of
revenue, operating expenses decreased to 97.0% for the year ended December 31,
2009 as compared to 99.9% for the year ended December 31, 2008.
Selling,
general and administrative expenses for the year ended December 31, 2009
increased $5,334,659 to $39,038,488 over the prior year ended December 31, 2008.
The increase is the result of an additional $5,687,536 of selling, general and
administrative expenses incurred by firms that were acquired during 2008 (CIAS,
Alaska Pension, Kanter & Associates, REPTECH and TPG) and an increase of
$310,343 in bad debt expense due to a downturn in the U.S. economy, offset in
part by decreases at corporate headquarters and existing subsidiaries of
$663,220 resulting from the Company’s efforts to enhance operating
efficiencies.
18
The 2009
and 2008 selling, general and administrative expenses consisted of the
following:
December 31,
|
December 31,
|
$ Change 2009
|
||||||||||
2009
|
2008
|
to 2008
|
||||||||||
Selling,
general and administrative expenses:
|
||||||||||||
Salaries
and related payroll costs
|
$ | 26,176,608 | $ | 22,095,694 | $ | 4,080,914 | ||||||
Rent
and utilities
|
3,255,590 | 2,757,360 | 498,230 | |||||||||
Professional
fees
|
2,512,050 | 2,282,388 | 229,662 | |||||||||
Office
expenses
|
2,153,693 | 1,689,854 | 463,839 | |||||||||
Insurance
expense
|
2,010,323 | 1,727,284 | 283,039 | |||||||||
Computer
related expense
|
691,511 | 634,988 | 56,523 | |||||||||
Bad
debt expense
|
409,566 | 99,223 | 310,343 | |||||||||
Travel
and entertainment
|
405,349 | 587,295 | (181,946 | ) | ||||||||
Commission
expense
|
310,618 | 350,791 | (40,173 | ) | ||||||||
Miscellaneous
other expenses
|
1,113,180 | 1,478,952 | (365,772 | ) | ||||||||
Total
selling, general and administrative expenses
|
$ | 39,038,488 | $ | 33,703,829 | $ | 5,334,659 |
As a
percentage of revenue, selling, general and administrative expenses increased to
81.1% for the year ended December 31, 2009 as compared to 80.9% for the year
ended December 31, 2008.
Depreciation
and amortization for the year ended December 31, 2009 increased $338,173 to
$7,250,168 over the prior year ended December 31, 2008 primarily due to
amortization of intangible assets acquired in connection with acquisitions
during 2008. As a percentage of revenue, depreciation and amortization decreased
to 15.1% for the period ended December 31, 2009 as compared to 16.6% for the
period ended December 31, 2008.
Stock-based
compensation for the year ended December 31, 2009 decreased $569,473 to $433,126
over the prior year ended December 31, 2008 due primarily to the prior period
issuance of 700,000 shares of common stock to the Chief Executive Officer as
part of his November 30, 2007 employment agreement, the prior period issuance of
350,000 shares of common stock to the President and Chief Operating Officer as
part of his May 2007 revised employment agreement and the prior period issuance
of 200,000 stock options to the President and Chief Operating Officer as part of
his April 2008 employment agreement, offset in part by a current period issuance
of 2,502,000 shares of stock options to certain employees of the Company. As a
percentage of revenue, stock based compensation decreased to 0.9% for the year
ended December 31, 2009 as compared to 2.4% for the year ended December 31,
2008.
Net other expenses were $3,838,227 for
the year ended December 31, 2009 as compared to $2,105,409 for the year ended
December 31, 2008. The change was due primarily to a decrease in the change of
the fair value of derivative financial instruments of $1,078,388, an increase in
interest expense of $574,898, an increase in debt and other restructuring
charges of $60,000 and a decrease in interest and rental income of $19,532. The
change in the fair value of derivative financial instruments decreased as a
result of the relative change in the value of the Company’s stock price.
Interest expense increased as a
result of an increase in amortization of debt discount resulting from the use of
the effective interest rate method of amortization, additional borrowings on the
Revolving Line of Credit, additional borrowings on the Subordinated Senior Term
Note resulting from the capitalization of interest and a 3% increase in the
borrowing rate on the Subordinated Senior Term Note from failing debt covenants
at September 30, 2009, offset in part by lower average interest rates on the
Senior Term Note.
Preferred
stock dividends were $1,977,600 for the year ended December 31, 2009 as compared
to $1,979,900 for the year ended December 31, 2008. The decrease was due
primarily to conversion of 100,000 shares of Series B cumulative preferred stock
to common stock during the first quarter 2008.
19
Liquidity
and Capital Resources
At
December 31, 2009 and 2008, the Company's working capital deficit was
approximately $9.3 million and $11.2 million, respectively and its accumulated
deficit was approximately $23.6 million and $21.1 million, respectively.
Further, for the years ended December 31, 2009 and 2008, the Company generated
losses before preferred stock dividends of approximately $0.5 million and $0.1
million, respectively and its cash flows from operations were approximately $5.4
million and $4.2 million, respectively.
In 2009,
cash generated from operating activities increased as a result of annualized
results from the Company’s 2008 acquisitions. In addition, through its senior
lending arrangements, the Company has access to a Revolving Line of Credit of up
to $2.0 million, which was temporarily increased to $2.5 million through
December 31, 2009 and further extended through February 28, 2010, to supplement
its cash generated from operations. At December 31, 2009, the Company had $2.5
million of principal outstanding under this arrangement. At December 31, 2008,
the Company had approximately $0.3 million of principal outstanding and $1.7
million available under this arrangement. Effective April 26, 2010, the maximum
principal amount available under the Revolving Line of Credit was increased to
$4.0 million as a result of an amendment to its current senior lending
arrangement as disclosed in ITEM 7.
On April
12, 2010, in order to alleviate a lack of short-term liquidity, the Company
obtained an additional loan of $0.5 million for short term working capital
purposes from its subordinated lenders due on May 15, 2010. The Company intends
to use funds available from the increased Revolving Line of Credit to pay off
the short-term working capital loan.
The
Company’s existing commitments for term notes from senior and subordinated
lenders are currently exhausted. The Company has amended its current lending
arrangements, with its existing lenders, beyond 2010. In the
amendments, the Company has agreed that its senior or subordinated lenders may
terminate its forbearance agreements if, in the lender’s reasonable judgment,
the Company has not made satisfactory progress toward a reasonably satisfactory
recapitalization initiative by July 15, 2010 or any date thereafter through the
forbearance period. If the Company is not successful in its recapitalization or
refinancing efforts, it will not have the ability to pay the senior and
subordinated senior debt at the end of the forbearance period.
Management
establishes an annual plan for operations and then utilizes the operating plan,
current financial results, equity and credit market conditions, and other
factors to forecast its quarterly and annual financial results and related cash
flows from operations. Based upon management's cash forecast for revenues,
operating expenses and debt services, the Company believes its cash resources
will be adequate to fund operations through December 31, 2010.
As a
result of the dramatic decrease in the availability of credit in the marketplace
and general liquidity constraints, the Company engaged in limited acquisition
activity in 2009. The Company did complete two asset purchase transactions, most
notably the acquisition of a book of business consisting of approximately 500
balance forward plans from Standard Retirement Services, Inc. Beyond these two
acquisitions, management’s primary focus in 2009 has been to enhance operating
efficiencies and increase the effectiveness of the existing operating
subsidiaries through the implementation of technology and operational
upgrades.
20
Detail of
the changes in 2009 and 2008 cash flow data is as follows:
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss) before preferred stock dividends
|
$ | (476,256 | ) | $ | (130,025 | ) | ||
Adjustments
to reconcile net income (loss) before preferred stock
|
||||||||
dividends
to net cash provided by (used in) operating activities:
|
||||||||
Depreciation
and amortization
|
7,250,168 | 6,911,995 | ||||||
Change
in allowance for doubtful accounts
|
295,281 | (33,672 | ) | |||||
Noncash
interest
|
1,995,717 | 1,634,682 | ||||||
Stock-based
compensation
|
433,126 | 1,002,599 | ||||||
Deferred
income tax benefit
|
(2,119,075 | ) | (2,061,051 | ) | ||||
Change
in fair value of derivative financial instruments
|
(786,645 | ) | (1,865,033 | ) | ||||
Increase
(decrease) in cash attributable to changes in operating assets and
liabilities
|
||||||||
Accounts
receivable, net
|
(537,079 | ) | (878,837 | ) | ||||
Prepaid
expenses and other current assets
|
371,567 | (345,523 | ) | |||||
Accounts
payable
|
785,746 | 87,401 | ||||||
Unearned
revenues
|
(1,208,328 | ) | (113 | ) | ||||
Accrued
expenses and other current liabilities
|
(633,085 | ) | (146,933 | ) | ||||
Net
cash provided by (used in) operating activities
|
5,371,137 | 4,175,490 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of property and equipment
|
(1,237,883 | ) | (323,457 | ) | ||||
Acquisition
of Alaska Pension Services
|
(40,200 | ) | (895,561 | ) | ||||
Acquisition
of Lamoriello Entities
|
(50,810 | ) | - | |||||
Acquisition
of National Actuarial Pension Services, Inc.
|
(64,318 | ) | (184,054 | ) | ||||
Acquisition
of Alan N. Kanter & Associates
|
(206,863 | ) | (1,886,913 | ) | ||||
Acquisition
of Benefit Dynamics
|
- | (8,770 | ) | |||||
Acquisition
of Pentec and Pentec Capital Management
|
- | (40,246 | ) | |||||
Acquisition
of The Pension Alliance
|
- | (1,396,299 | ) | |||||
Acquisition
of California Investment and Annuity Services
|
- | (1,535,929 | ) | |||||
Acquisition
of the assets of REBS
|
- | (178,257 | ) | |||||
Acquisition
of REPTECH Corp
|
(190,514 | ) | (1,846,138 | ) | ||||
Acquisition
of The Pension Group, Inc.
|
(1,355,380 | ) | (2,281,427 | ) | ||||
Acquisition
of the assets of Standard Retirement Services, Inc.
|
(68,653 | ) | - | |||||
Acquisition
of the assets of Custom K, Inc.
|
(15,000 | ) | - | |||||
Net
cash provided by (used in) investing activities
|
(3,229,621 | ) | (10,577,051 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from short-term debt
|
3,404,908 | - | ||||||
Proceeds
from long-term debt
|
- | 7,060,895 | ||||||
Payments
on long-term debt and notes
|
(4,510,305 | ) | (1,650,194 | ) | ||||
Payments
on short-term debt and notes
|
(1,232,900 | ) | (672,008 | ) | ||||
Payments
to repurchase common stock
|
- | (1,000,000 | ) | |||||
Payment
of deferred financing costs
|
(59,709 | ) | (60,445 | ) | ||||
Net
cash provided by (used in) financing activities
|
(2,398,006 | ) | 3,678,248 | |||||
Net
increase (decrease) in cash
|
$ | (256,490 | ) | $ | (2,723,313 | ) |
21
2009
Cash Flow Analysis
The
Company had cash as of December 31, 2009 of $274,956, a decrease of $256,490
from December 31, 2008.
Net cash
provided by operating activities of $5,371,137 was primarily due to a net loss
before preferred stock dividends of $476,256, non-cash expenses of $7,068,572, a
decrease in prepaid expenses of $371,567 and an increase in accounts payable of
$785,746, offset by an increase in accounts receivables of $537,079, a decrease
in accrued expenses and current liabilities of $633,085 and a decrease in
unearned revenues of $1,208,328.
The
non-cash items were primarily composed of depreciation and amortization of
$7,250,168, noncash interest of $1,995,717, stock-based compensation of $433,126
and an increase in the allowance of doubtful account of $295,281, offset by a
decrease in the deferred tax liability of $2,119,075 and a decrease in the
fair value of derivative financial instruments of $786,645.
Net cash
of $3,229,621 used in investing activities was utilized in three major areas. A
total of $1,858,837 in funds expended in the acquisitions of Alaska Pension
Services Ltd, Alan N. Kanter & Associates, REPTECH Corp., The Pension Group,
Inc., Standard Retirement Services, Inc., and Custom K, $132,901 in funds
expended in contingency payments for the Lamoriello Entities, National Actuarial
Pension Services, Inc., Alaska Pension Services Ltd., REPTECH Corp., and The
Pension Group, Inc., and $1,237,883 were used in the purchase of property and
equipment.
Net cash
of $2,398,006 used in financing activities was due to $3,404,908 in proceeds
from short-term debt offset by $4,510,305 in payments of long-term debt,
$1,232,900 in payments of short-term debt and $59,709 in payments of deferred
financing costs.
2008
Cash Flow Analysis
The
Company had cash as of December 31, 2008 of $531,446, a decrease of $2,723,313
from December 31, 2007.
Net cash
provided by operating activities of $4,175,490 was primarily due to a net loss
before preferred stock dividends of $130,025, non-cash expenses of $5,589,520,
and an increase in accounts payable of $87,401, offset by an increase in
accounts receivables of $878,837, an increase in prepaid expenses of $345,523, a
decrease in accrued expenses and current liabilities of $146,933 and a decrease
in unearned revenues of $113.
The
non-cash items were primarily composed of depreciation and amortization of
$6,911,995, noncash interest of $1,634,682, stock-based compensation of
$1,002,599, and offset by a decrease in the deferred tax liability of
$2,061,051, a decrease in the fair value of derivative financial instruments of
$1,865,033, and a decrease in the allowance for doubtful accounts of
$33,672.
Net cash
of $10,577,051 used in investing activities was utilized in three major areas. A
total of $8,624,225 in funds expended in the acquisitions of Alaska Pension
Services Ltd, California Investment and Annuity Services, Alan N. Kanter &
Associates, the assets of Retirement & Employment Benefit Services, Inc.,
REPTECH and The Pension Group, Inc. Funds of $1,629,369 were expended in
contingency payments for National Actuarial Pension Services, Inc., Benefit
Dynamics, Pentec and Pentec Capital Management, and The Pension Alliance and
$323,457 were used in the purchase of property and equipment.
Net cash
of $3,678,248 provided by financing activities was due to $7,060,895 in proceeds
from long-term debt, offset by $1,650,194 in payments of long-term debt
(primarily seller notes), $672,008 in payments of short-term debt, $1,000,000 in
repurchase of common stock and $60,445 in the payment of deferred financing
costs.
22
Debt
Financing Arrangements
Revolving
Line of Credit and Senior Term Note
On
November 30, 2007, the Company entered into (i) a Revolving Line of Credit and
Term Loan Agreement (the "Senior Loan Agreement") with RBS Citizens Bank
(“Senior Lender”) and (ii) a Securities Purchase and Loan Agreement (the
"Subordinated Senior Agreement") with Woodside Capital Partners IV, LLC,
Woodside Capital Partners IV QP, LLC and Lehman Brothers Commercial Bank (the
“Subordinated Senior Lenders”). A principal amount of the proceeds generated
from the two financings were used to retire existing debt. Pursuant to the
Senior Loan Agreement, the Company entered into a Revolving Line of Credit in
the initial amount of $1,000,000 (the "Revolver") and a Term Loan Promissory
Note in the initial amount of $8,000,000 (the "Term Loan"). If certain
conditions are satisfied, the Company may utilize additional financing under the
Revolver up to $1,000,000 (the "Additional Revolver") and additional term loans
up to $7,000,000 (the "Additional Term Loan") to fund future acquisitions (the
Term Loan and the Additional Term Loan are collectively referred to as the
“Senior Term Note”). On July 15, 2008, the Company borrowed an additional
$2,358,375 on the Senior Term Note. As part of the transaction, the Company paid
$22,992 in deferred financing costs which will be amortized over the remaining
life of the loan. On October 2, 2008, the Company borrowed an additional
$1,937,760 on the Senior Term Note. On November 26, 2008, the Company borrowed
the remaining $2,703,865 on the Senior Term Note exhausting the availability of
funds under the Senior Term Note. The Senior Term Note and the Revolving Line of
Credit bear interest at the applicable LIBOR rate of interest. The Senior Term
Note and the Revolving Line of Credit mature on July 31, 2010; but, were
extended under the April 26, 2010 amendment discussed further in the Subsequent
Events - Debt Amendments section of this ITEM 7. From closing through November
30, 2008, the Company was required to pay interest accruing on the Senior Term
Note and the Revolving Line of Credit on the last day of the applicable LIBOR
interest period. Subsequent to November 30, 2008, the Company is required to pay
the applicable amount of interest owed on the Senior Term Note and the Revolving
Line of Credit as well as a portion of the principal of the Senior Term Note
based upon a five year straight line amortization schedule of $250,000 in
principal on a monthly basis with the remaining outstanding principal balance to
be paid in one lump sum on the date of maturity. Commencing January 1, 2008, the
Company is obligated to pay an unused commitment fee on the first business day
of each quarter for any amounts not used by the Company under the Additional
Term Loan. The unused commitment fee to be paid is equal to one-quarter
multiplied by the applicable basis point level, which is contingent upon the
Company's ratio of total debt funded to EBITDA. The Senior Lender has a secured
lien on all assets of the Company and its subsidiaries. The Company may prepay
the Senior Term Note and the Revolving Line of Credit at anytime.
As of
December 31, 2009, the outstanding principal balance on the Revolving Line of
Credit and Senior Term Note was approximately $2.5 million and $12.0 million,
respectively and the interest rate was 4.73%. As of December 31, 2008, the
outstanding principal balance on the Revolving Line of Credit and Senior Term
Note was approximately $0.3 million and $14.8 million, respectively and the
interest rate was 4.18% and 4.68%, respectively.
Subordinated
Senior Term Note
The
Subordinated Senior Note bears interest at 15% of which 12% is due and payable
on a monthly basis and 3% (the "Compounded Rate") is compounded monthly and
added to the principal amount of the Subordinated Senior Note. The Subordinated
Senior Note matures on the earlier of January 31, 2011, the occurrence of a
capital transaction, or an event of default. A capital transaction includes the
sale, disposition, dissolution or liquidation of the Company's assets or
subsidiaries, the acquisition by any person of 30% or more of the Company's
common stock or a public offering in the minimum amount of $20,000,000 (a
"Capital Transaction"). The Subordinated Senior Lenders have a secured lien on
all assets of the Company and its subsidiaries and would be entitled to
foreclose on the Company's assets in the event of default, subject to the rights
of the Senior Lender. The Company may prepay the Subordinated Senior Notes at
any time after May 30, 2009.
At
closing, the Company issued the Subordinated Senior Warrants to purchase an
aggregate 5,742,789, 3,828,527 and 1,914,262 shares of common stock at $0.50,
$1.00 and $1.50 per share, respectively. The Subordinated Senior Warrants are
exercisable through November 2017 on a cash or cashless basis. Subsequent to
January 31, 2011, the consummation of a Capital Transaction or an event of
default, the Subordinated Senior Lenders may elect to sell to the Company all or
a portion of the shares issuable upon exercise of the Subordinated Senior
Warrants (the "Put"). The cash payment to be made by the Company shall be
determined by dividing the value of the Company's common stock equity by the
number of shares outstanding on a fully diluted basis (the "Repurchase Price").
In the event that a Capital Transaction is entered into during the six months
following the closing of the Put, then the Company is obligated to make an
additional payment to the Subordinated Senior Lenders to reflect the difference
of the amount initially paid in connection with the Put and the amount that
would have been paid had the Put been exercised pursuant to the second Capital
Transaction.
23
The
Subordinated Senior Lenders may elect to require the Company to pay an
additional fee (the "Fee Agreement") as well as the Conditional Interest Payment
("CIP Payment") at (i) January 31, 2011, (ii) the date of consummation of a
Capital Transaction, or (iii) an event of default. The Fee Agreement is based
upon the Subordinated Senior Lenders ownership in the Company and the per share
price of the Company's common stock. The CIP Payment is equal to 5% of the
Company's equity value which is payable on the 90th day following receipt of
such notice from the Subordinated Senior Lenders and an additional payment equal
to 1.5% of the Company's equity value is payable on the end of each calendar
quarter thereafter. The aggregate CIP Payment may not exceed 15% of the
Company's equity value. At any time after the Subordinated Senior Lenders
deliver notice with respect to the CIP Payment, the Company may elect to
purchase the shares of common stock underlying the Subordinated Senior Warrants
at the Repurchase Price.
The
Subordinated Senior Lenders have both demand and piggyback registration rights
with respect to shares issuable upon conversion of the Subordinated Senior
Warrants or any other shares held at the time of the request. The
Company must use its best efforts in good faith to affect the registration of
these shares.
On
November 3, 2008, Woodside Capital Partners V, LLC and Woodside Capital Partners
V QP, LLC (“Woodside Purchasers”) acquired all of the Subordinated Senior Notes
and Subordinated Senior Warrants held by Lehman Brothers Commercial Bank
(“Lehman”). Concurrent with the sale of the Subordinated Senior Notes and
Subordinated Senior Warrants by Lehman, the Company and the Woodside Purchasers
entered into a side letter agreement whereby the Woodside Purchasers agreed that
in the event that a capital transaction is consummated on or prior to May 4,
2009, the Woodside Purchasers shall surrender each of the assigned Subordinated
Senior Warrants held by it to the Company for cancellation and forfeit its right
to receive its portion of the conditional interest payment and fee arrangement
assigned to it by Lehman.
As of
December 31, 2009 and 2008, approximately $13.0 million and $12.4 million,
respectively, were outstanding under the Subordinated Senior
Agreement.
In connection with the April 26, 2010 amendments, described
further in the Subsequent Events - Debt Amendments section of this ITEM 7, the
Subordinated Senior Lenders agreed to surrender the Subordinated Senior Warrants
and relinquish their rights to the CIP Payment and the Fee Agreement.
Covenant
Compliance and Related Debt Amendments
Under the
terms of the Senior Loan Agreement and the Subordinated Senior Agreement, the
Company is subject to meeting certain restrictive quarterly financial covenants
which, among other things, require the Company to maintain certain minimum
Adjusted EBITDA and certain leverage and fixed charge coverage ratios. Adjusted
EBITDA is a financial performance metric which is not recognized by accounting
principles generally accepted in the United States of America.
As of
December 31, 2008, the Company was not in compliance with certain covenants
under the Senior Loan Agreement and the Subordinated Senior Agreement. The
Company’s decline in asset based revenues, as a result of the dramatic decline
in the U.S. equity markets in the second half of 2008, negatively impacted its
ability to achieve Adjusted EBITDA targets as planned and three out of five
related debt covenants presented below. As a result, management entered into
Waiver and Amendment Agreements to the Senior Loan Agreement and the
Subordinated Senior Agreement (“Waiver and Amendment Agreements”) in March 2009.
Under the terms of the Waiver and Amendment Agreements, the Senior Lender and
Subordinated Senior Lenders waived the existing defaults on the debt covenants
at December 31, 2008 and revised future covenant calculations. In
exchange, the Company is subject to an increase in the interest rates of 1.25%
on the Senior Term Note and 1.75% on the outstanding Revolving Line of Credit,
over the remaining term of the Senior Loan Agreement. In addition, the Company
incurred one-time amendment fees totaling $100,625 (of which $60,000 was added
to the Subordinated Senior Note) upon the effective date and is now subject to a
0.25% unused commitment fee on the Revolver which the Company does not expect to
be material. The Senior Lender and the Subordinated Senior Lenders will also
have approval rights for all future acquisitions and the Company will be subject
to more frequent and timely compliance and reporting requirements with the
Senior Lender.
On
September 29, 2009, the Company and Senior Lender agreed to temporarily increase
the maximum principal amount available under the Revolving Line of Credit to
$2,500,000 through December 31, 2009 and later extended through February 28,
2010. At February 28, 2010, the Company is required to repay any amounts
outstanding under the Revolving Line of Credit in excess of $2,000,000. As part
of the transaction, the Company paid or accrued $61,583 as of December 31, 2009
in deferred financing costs associated with the original increase in the
Revolving Line of Credit dated September 29, 2009, which will be amortized over
the remaining life of the loan. The agreement was further amended as part of the
April 26, 2010 amendment described further in the Subsequent Events – Debt
Amendments section of this ITEM 7.
As of
September 30, 2009, the Company was not in compliance with certain restrictive
covenants in the Waiver and Amendment Agreements. As a result, the Senior Lender
and the Subordinated Senior Lenders issued the Company reservation of rights
letters, which notifies the Company of default under the Waiver and Amendment
Agreements. The document indicates that this default entitles the Senior Lender
and the Subordinated Senior Lenders to exercise certain rights and remedies
under the Senior Loan Agreement and the Subordinated Senior Agreement through
issuance of a Reservation of Rights letter. The Senior Lender and Subordinated
Senior Lenders agreed to not exercise all their rights and remedies at this
time; but, reserve the right to do so in the future. The Subordinated Senior
Lenders exercised their right to increase the interest rate by 3% on the
Subordinated Senior Note effective November 15, 2009. The increased interest is
compounded monthly and added to the Subordinated Senior Note.
24
As of
December 31, 2009, the Company was not in compliance with certain restrictive
covenants in the Waiver and Amendment Agreements. As a result, the Company and
the Senior and Subordinated Senior Lenders worked through an amendment process
that culminated in amendments to the lending agreements at April 26, 2010. Under
the amendments, the Senior and Subordinated Senior Lenders agreed to
forbear from exercising their rights and remedies for identified events of
default at December 31, 2009 and anticipated events of default during the
forbearance period subject to certain terms and conditions which are discussed
further in the Subsequent Events – Debt Amendments section of this ITEM
7.
The
tabular presentation sets forth the Company’s most restrictive covenants for the
trailing twelve month periods ended December 31, 2008, as originally defined,
and December 31, 2009, as amended by quarter for 2009.
Amended
|
||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||
Q1
|
Q2
|
Q3
|
Q4
|
|||||||||||||||||
Minimum
Adjusted EBITDA (1)
|
||||||||||||||||||||
Actual
|
$ | 8,798,069 | $ | 9,638,281 | $ | 8,780,797 | ** | $ | 8,884,905 | *** | $ | 7,935,070 | * | |||||||
Covenant
|
$ | 8,400,000 | $ | 9,000,000 | $ | 9,050,000 | $ | 10,100,000 | $ | 8,000,000 | ||||||||||
Maximum
Leverage Ratio (2)
|
||||||||||||||||||||
Actual
|
3.11 | 3.05 | 3.48 | ** | 3.42 | *** | 3.28 | * | ||||||||||||
Covenant
|
3.25 | 3.25 | 3.25 | 2.75 | 3.00 | |||||||||||||||
Minimum
Fixed Charge Coverage Ratio (3)
|
||||||||||||||||||||
Actual
|
1.12 | 1.02 | 0.95 | ** | 1.16 | *** | 1.12 | * | ||||||||||||
Covenant
|
1.05 | 1.00 | 1.00 | 1.20 | 1.25 | |||||||||||||||
Minimum
Interest Coverage Ratio (4)
|
||||||||||||||||||||
Actual
|
3.09 | 3.27 | 2.93 | 2.94 | 2.82 | |||||||||||||||
Covenant
|
2.25 | 2.25 | 2.25 | 2.50 | 2.00 | |||||||||||||||
Maximum
Ratio of Total Funded Debt to Net Worth (5)
|
||||||||||||||||||||
Actual
|
1.45 | 1.21 | 1.17 | 1.18 | 1.51 | |||||||||||||||
Covenant
|
2.00 | 2.00 | 2.00 | 2.00 | 2.50 |
* Waived
as a part of the Waiver and Amendment Agreement dated March 2009.
**
Reservation of rights issued by the Senior Lender and Subordinated Senior
Lenders dated November 13, 2009.
*** Under
the Senior Loan Amendment and Subordinated Senior Amendment entered into on
April 26, 2010, the Senior and Subordinated Senior Lenders agreed
to forbear from accelerating or otherwise enforcing their rights and remedies
with respect to the above covenant defaults under the
Senior Loan and Subordinated Senior Amendments until January 2011.
(1)
Minimum Adjusted EBITDA includes, for the trailing twelve month period, net loss
plus the following items: consolidated interest expense, income
taxes, depreciation, amortization, non-cash charges for stock based
compensation, contractually specific charges to goodwill, and any non-cash
extraordinary and unusual or non-recurring write downs or write
offs.
(2)
Maximum Leverage Ratio is total funded debt divided by the sum of Minimum
Adjusted EBITDA and the trailing twelve months Adjusted EBITDA
for acquisitions.
(3)
Minimum Fixed Charge Coverage Ratio is the quotient of Operating cash flow and
Debt Service. Operating cash flow is the sum of Minimum Adjusted
EBITDA and the trailing twelve months of Adjusted EBITDA from acquisitions less
taxes paid and capital expenditures during the trailing
twelve month period. Debt Service is the sum of the current portion of all long
term debt and the trailing twelve months of interest expense.
(4)
Minimum Interest Coverage Ratio is the quotient of Minimum Adjusted EBITDA
divided by the trailing twelve month interest expense.
(5)
Maximum Ratio of Total Funded Debt to Net Worth is the quotient of funded debt
divided by the total of assets, less liabilities plus the accumulated
amortization of intangible assets recorded since November 30, 2007 (the date of
debt agreement).
25
Following
is a reconciliation of Minimum Adjusted EBITDA to net loss available to common
stockholders:
Year Ended
|
||||
December 31, 2009
|
||||
Minimum
Adjusted EBITDA for the trailing twelve months
|
$ | 8,884,905 | ||
Depreciation
and amortization
|
(7,250,168 | ) | ||
Stock
based compensation
|
(433,126 | ) | ||
Change
in fair value of derivative financial
instruments
|
786,645 | |||
Contractually
specific charges to goodwill
|
254,739 | |||
Interest
expense
|
(4,593,641 | ) | ||
Debt
and other restructuring charges
|
(60,000 | ) | ||
Income
tax expenses
|
(184,686 | ) | ||
Deferred
income tax benefit
|
2,119,076 | |||
Preferred
stock dividends
|
(1,977,600 | ) | ||
Net
loss available to common stockholders
|
$ | (2,453,856 | ) |
Subsequent
Events – Debt Amendments
On April
12, 2010, the Company entered into an agreement with the Subordinated Senior
Lenders to receive an additional loan (“Short-Term Working Capital Loan”) of
$500,000 to be used for short-term working capital needs. For use of the funds,
the Company paid a fee of $5,000. The Short-Term Working Capital Loan accrues
interest at 12% per annum. The principal amount and any accrued and unpaid
interest is due on May 15, 2010. Any unpaid amounts at maturity will continue to
accrue interest at 18% per annum.
On April
26, 2010, the Company entered into an amendment (“Senior Loan Amendment”) to the
Senior Loan Agreement. In the Senior Loan Amendment, the Senior Lender agreed to
forbear from accelerating or otherwise enforcing its rights and remedies with
respect to currently existing covenant defaults and anticipated events of
covenant defaults under the Senior Loan Agreement until January 2, 2011 (the
“Forbearance Period”) and, in addition, extend the maturity of the indebtedness
until January 2, 2011. The Senior Lender agreed to increase the maximum
principal amount available under the Revolving Line of Credit to $4,000,000
during the Forbearance Period. All advances on the Revolving Line of Credit
after the date of the Senior Loan Amendment, including any outstanding draws,
will incur interest, payable on a monthly basis, at a rate of prime plus 6%. The
Senior Lender also agreed to suspend the monthly principal payments of
$250,000 on the Senior Term Note during the Forbearance Period. The Company will
continue to pay the applicable amount of interest owed on the Senior Term Note
on the last day of each month.
In
return, the Company agreed as part of the Senior Loan Amendment that, among
other things, the Senior Lender may terminate the Senior Loan Amendment during
the Forbearance Period if the Company does not (i) meet specified cash flow
tests of its cash receipts and disbursements measured weekly on a rolling six
week and forbearance period-to-date basis as defined in the agreements during
the Forbearance Period or (ii) maintain a specified minimum cash and available
Revolving Line of Credit balance of $500,000 during the Forbearance
Period.
The
Company engaged a financial advisor to assist in exploring, evaluating and
implementing one or more strategic alternatives for the recapitalization of the
Company (“Recapitalization Initiative”), including refinancing its current debt,
raising capital, and/or sale of the Company to a third party. The Senior Lender
may terminate the Forbearance Period if, in the Senior Lender’s reasonable
judgment, the Company has not made satisfactory progress regarding a reasonably
satisfactory Recapitalization Initiative by July 15, 2010 or any date
thereafter. The Company agreed to pay the financial advisor $60,000 upon
the execution of an amendment to the loan agreements with Senior and
Subordinated Senior Lenders and a monthly service fee of $30,000. In the event
of a sale to a third party, the Company will pay the financial advisor a
transaction fee of $950,000. In the case of a refinancing, the Company will pay
the financial advisor a fee equal to (i) 1.5% of the total amount of senior debt
raised, plus (ii) 3.0% of the total amount of any one-stop debt raised, plus
(iii) 4.0% of the total amount of junior debt raised.
26
The
Company agreed to pay the Senior Lender an amendment fee (“Amendment Fee”) of
$250,000, of which $50,000 was paid on the amendment date with the remainder to
be paid in $25,000 monthly installments beginning May 31, 2010 and ending
December 31, 2010. The Company also agreed to pay the Senior Lender a
monthly fee (“Monitoring Fee”) of $2,000 per month throughout the duration of
the Forbearance Period and reimburse the Senior Lender for any legal fees in
connection with the Senior Loan Amendment.
In
addition, upon closing of a capital transaction, the Company is required to pay
an additional fee to its Senior Lender. In the event of a sale to a third party,
the Company will pay the Senior Lender a fee (“Borrower Sale Fee”) equal to the
sum of $300,000 plus 0.75% of the excess of the gross purchase price paid for
the Company over the Company’s outstanding indebtedness less any exit fees paid
to the Subordinated Senior Lenders. In the case of a repayment in full or
maturity, the Company will pay the Senior Lender a fee (“Borrower Refinancing
Fee”) equal to 4% of the outstanding indebtedness to the Senior Lender. If a
Company sale were to take place within six months after the maturity date or the
repayment in full and if that sale transaction would result in a Borrower Sale
Fee greater than $300,000, then the Company would pay the Senior Lender an
amount equal to the difference between the Borrower Sale Fee and
$300,000.
On April
26, 2010, in addition to the Senior Loan Amendment, the Company entered into an
amendment (“Subordinated Senior Amendment”) to the Subordinated Senior Agreement
with the Subordinated Senior Lenders. In the Subordinated Senior Amendment, the
Subordinated Senior Lenders agreed to forbear from accelerating or
otherwise enforcing its rights and remedies with respect to currently existing
covenant defaults and anticipated events of covenant defaults under the
Subordinated Senior Agreement until January 2, 2011 (the “Forbearance Period”).
In addition, the Subordinated Senior Lenders agreed to surrender the
Subordinated Senior Warrants, and relinquish their rights to the CIP Payment and
the Fee Agreement.
In
return, the Company agreed as part of the Subordinated Senior Amendment
that, among other things, the Subordinated Lenders may terminate the
Subordinated Senior Amendment during the Forbearance Period if the Company does
not (i) meet specified cash flow tests of its cash receipts and disbursements
measured weekly on a rolling six week and forbearance period-to-date basis as
defined in the agreements during the Forbearance Period or (ii) maintain a
specified minimum cash and available Revolving Line of Credit balance of
$500,000 during the Forbearance Period.
The
Company engaged a financial advisor to assist in exploring, evaluating and
implementing one or more strategic alternatives for the recapitalization of the
Company ("Recapitalization Initiative"), including refinancing its current debt,
raising capital, and/or sale of the Company to a third party. The Subordinated
Senior Lenders may terminate the Forbearance Period if, in the Subordinated
Senior Lenders’ reasonable judgment, the Company has not made satisfactory
progress toward a Recapitalization Initiative by July 15, 2010 or any date
thereafter. The Company has agreed to pay the financial advisor as discussed
above.
The
Subordinated Senior Note continues to bear interest at 18%; however,
only 6% is due and payable on a monthly basis and 12% is compounded monthly
and added to the principal amount of the Subordinated Senior Note. The Company
agreed to pay the Subordinated Senior Lenders a fee (“Modification Fee”) of
$250,000, which is to be paid on the earlier of January 31, 2011, a
capitalization transaction, or an event of default. The Modification Fee shall
constitute an additional debt obligation and accrue interest at 18% per annum,
compounded monthly, payable at the date the Modification Fee is
due.
In
addition, the Company agreed to pay the Subordinated Senior Lenders a fee (“Exit
Fee”) payable on the earlier of (i) a sale of the Company to a third party, (ii)
repayment of all amounts due the Subordinated Senior Lenders (“Repayment
Event”), or (iii) January 31, 2011 (“Maturity”). In the event of a sale
transaction occurring prior to a Repayment Event, the Exit Fee will be $450,000
plus 1.5% of the excess of the gross purchase price paid for the Company over
the Company’s outstanding indebtedness less any Borrower Sale Fee paid to the
Senior Lender. Upon a Repayment event or Maturity, the Exit Fee shall be
$450,000. If a Company sale were to take place within six months
after a Repayment Event or Maturity and if that sale transaction would have
resulted in an Exit Fee greater than $450,000, then the Company would pay the
Subordinated Senior Lenders an amount equal to the difference between the
greater Exit Fee and $450,000.
27
Seller
Financing
In
connection with the Company’s acquisition strategy, part of the purchase price
is paid through seller financed instruments. As of December 31, 2009, total
funds due to former owners were $2,868,489. Of this amount, $2,327,187 is due in
2010 and $541,302 in 2011. Seller financed instruments bear interest at 6% to 8%
per annum. All seller financed instruments are uncollateralized. Under the terms
of the Senior Loan Amendment and the Subordinated Senior Amendment, any
subordinated payments, including seller financing, are not to be paid during the
forbearance period unless otherwise approved by the Senior and Subordinated
Senior Lenders. The Company will seek to amend and restructure any unpaid seller
notes during the forbearance period, although, there is no guarantee that this
can be accomplished. In the event that the Company is unsuccessful in amending
the seller financing agreements or meet its obligations therein, the Company
could realize negative variances relative to its financial plans in certain
subsidiaries, especially new business and client retention, as the holders of
the notes are employees and managers of certain operating units.
On
February 24, 2009, the Company executed a Restructured Promissory Note (the “TPA
Restructured Note Agreement”) with the sellers of The Pension Alliance, Inc.
(“TPA”) under which the parties agreed to execute replacement notes superseding
and terminating all existing promissory notes with the sellers of TPA. Under the
TPA Restructured Note Agreement, the Company agreed to issue promissory notes
for an aggregate of $837,500 payable in nine equal principal monthly
installments of $93,056, plus accrued interest, beginning on July 1, 2009 and
ending March 1, 2010 at an interest rate of 8% per annum. Interest accrued on
superseded promissory notes was paid to the sellers within fifteen business days
after the effective date of the TPA Restructured Note Agreement.
On
February 28, 2009, the Company executed a Restructured Promissory Note (the
“Pentec Restructured Note Agreement”) with the seller of Pentec, Inc. (“Pentec”)
and Pentec Capital Management, Inc. (“PCM”) under which the parties agreed to
execute replacement notes superseding and terminating, the prior unpaid notes
between the parties dated February 28, 2007. Under the Pentec Restructured Note
Agreement, the Company agreed to issue a promissory note of $600,000 payable in
six equal principal monthly installments of $100,000, plus accrued interest,
beginning on July 1, 2009 and ending December 1, 2009 at an interest rate of 8%
per annum. Any accrued interest on the remaining February 28, 2007 promissory
notes was paid to the seller within fifteen business days after the effective
date of the Pentec Restructured Note Agreement. At December 31, 2009, the
restructured promissory note was paid in full.
On March
16, 2009, the Company executed restructured promissory notes with the sellers of
CIAS (see Acquisitions section of ITEM 7).
On March
24, 2009, the Company executed promissory notes with the sellers of TPG (see
Acquisitions section of ITEM 7).
On
September 24, 2009, the Company executed an amendment to the promissory notes
with the sellers of TPG (see Acquisitions section of ITEM 7).
On
September 25, 2009, the Company executed an amendment to the promissory notes
with the sellers of REPTECH (see Acquisitions section of ITEM 7).
On
September 28, 2009, the Company executed an amendment to the restructured
promissory notes with the sellers of CIAS (see Acquisitions section of ITEM
7).
On
September 29, 2009, the Company executed Amendment No. 1 to the TPA Restructured
Note Agreement with the sellers of TPA under which the sellers of TPA agreed to
replace the remaining monthly principal installments of $93,056 plus accrued
interest under the TPA Restructured Note Agreement, dated February 24, 2009,
with a single principal payment of $558,333 on March 1, 2010 plus interest
accrued from August 31, 2009. The Senior and Subordinated Senior Lenders have
not authorized payment of the principal or accrued interest of this note as of
April 26, 2010.
28
Sources
of Capital Prior to 2009
Series
A Cumulative Convertible Preferred Stock Private Placement
During
December, 2004, Duncan Capital sold securities in a private placement to
accredited investors (“A Investors”) for gross proceeds of $3.5 million. The
offering consisted of the sale of 9,540,000 shares of common stock at a price
per share of one sixth of a dollar. In addition, 3,820,000 shares of Series A
Convertible Preferred Stock (“A Preferred Stock”) were sold at a price of $.50
per share. The purchasers of A Preferred Stock were also issued warrants to
purchase one share of common stock for every two shares of A Preferred Stock
purchased (1,910,000 warrants were issued) at an exercise price of one sixth of
a dollar for a period of five years from the date of the closing of the
placement. Each share of A Preferred Stock is convertible into one share of
common stock. Subsequent to the Acquisition, 3,820,000 shares of A Preferred
Stock and 1,910,000 common stock purchase warrants issued in connection with the
A Preferred Stock offering of Duncan Capital were surrendered in exchange for an
equivalent number of A Preferred Stock and common stock purchase warrants of the
Company containing identical terms. In December 2009, the remaining 847,500
unexercised stock warrants expired.
Each
share of A Preferred Stock is convertible, at any time at the option of the
holder, into one share of common stock of the Company ("Common Stock"). The A
Preferred Stock will be automatically converted into Common Stock upon (i) the
approval of the holders of a majority of the then outstanding A Preferred Stock
or (ii) the closing of a firm commitment underwritten public offering of the
Company's securities in which the aggregate gross proceeds to the Company are
not less than $10,000,000 at a price equal to or higher than $2.00 per share of
Common Stock. Holders of the A Preferred Stock are entitled to receive, when
declared by the Company's board of directors, annual dividends of $0.06 per
share of A Preferred Stock paid semi-annually (equates to a 12% annualized
return). Such dividends may be paid, at the election of the Company, either (i)
in cash, (ii) in registered Common Stock or (iii) in restricted shares of Common
Stock with piggyback registration rights. In the event that the Company elects
to issue shares of Common Stock in connection with the dividend on the A
Preferred Stock, such dividend shares shall be determined by dividing the
dividend amount by 98% of the volume-weighted average price of the Common Stock
for the 20 trading days immediately preceding the record date for payment of
such dividend (the "Dividend VWAP"); provided, however, if the Company is unable
to determine the Dividend VWAP, then such dividend shall be determined by
dividing the dividend amount by the average of the three highest closing bid
prices during the 20 trading days immediately preceding the record date for
payment of such dividend. The Company granted the A Investors piggyback
registration rights and filed a registration statement for shares of Common
Stock issuable upon conversion of the A Preferred Stock within 60 days of
closing. In addition, the relevant subscription agreement provides that if a
registration statement is not filed or made effective, then until the
registration statement is filed or made effective, the Company will pay the
holder a fee. The Company filed a registration statement, however it was not
declared effective by the SEC.
In
addition to any voting rights provided by law, holders of the A Preferred Stock
will have the right to vote together with holders of Common Stock as a single
class on all matters upon which stockholders are entitled to vote, including
election of the members of the Company's Board of Directors. Each share of A
Preferred Stock will have the number of votes corresponding to the number of
shares of Common Stock into which the A Preferred Stock may be converted on the
record date for determining stockholders entitled to vote.
In the
event of any liquidation or winding up of the Company, the holders of A
Preferred Stock will be entitled to receive, in preference to holders of Common
Stock but subject to preferential liquidation rights of A Preferred Stock, an
amount equal to two times the original purchase price per share, plus any
previously declared and unpaid dividends.
The
shares of A Preferred Stock were offered and sold to the A Investors in a
private placement transaction made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506
promulgated there under. Each of the A Investors is an accredited investor as
defined in Rule 501 of Regulation D promulgated under the Securities Act of
1933.
Series
B Cumulative Convertible Preferred Stock Private Placement
On
October 18, 2005, 23 accredited investors ("B Investors") purchased an aggregate
of 2,965,000 shares of Series B Cumulative Convertible Preferred Stock ("B
Preferred Stock") at $1.00 per share for an aggregate purchase price of
$2,965,000. On November 11, 2005, 12 Investors purchased an aggregate of 850,000
shares of B Preferred Stock at $1.00 per share for an aggregate purchase price
of $850,000.
29
Each
share of B Preferred Stock is convertible, at any time at the option of the
holder, into two shares of Common Stock. The B Preferred Stock will be
automatically converted into Common Stock upon (i) the approval of the holders
of a majority of the then outstanding B Preferred Stock or (ii) the closing of a
firm commitment underwritten public offering of the Company's securities in
which the aggregate gross proceeds to the Company are not less than $10,000,000
at a price equal to or higher than $2.00 per share of Common Stock. Holders of
the B Preferred Stock are entitled to receive, when declared by the Company's
board of directors, annual dividends of $0.12 per share of B Preferred Stock
paid semi-annually (equates to a 12% annualized return). Such dividends may be
paid, at the election of the Company, either (i) in cash, (ii) in registered
Common Stock or (iii) in restricted shares of Common Stock with piggyback
registration rights. In the event that the Company elects to issue shares of
Common Stock in connection with the dividend on the B Preferred Stock, such
dividend shares shall be determined by dividing the dividend amount by 98% of
the volume-weighted average price of the common stock for the 20 trading days
immediately preceding the record date for payment of such dividend (the
"Dividend VWAP"); provided, however, if the Company is unable to determine the
Dividend VWAP, then such dividend shall be determined by dividing the dividend
amount by the average of the three highest closing bid prices during the 20
trading days immediately preceding the record date for payment of such dividend.
The Company granted the B Investors piggyback registration rights.
In
addition to any voting rights provided by law, holders of the B Preferred Stock
will have the right to vote together with holders of Common Stock and the A
Preferred Stock as a single class on all matters upon which stockholders are
entitled to vote, including election of the members of the Company's Board of
Directors. Each share of B Preferred Stock will have the number of votes
corresponding to the number of shares of Common Stock into which the B Preferred
Stock may be converted on the record date for determining stockholders entitled
to vote.
In the
event of any liquidation or winding up of the Company, the holders of B
Preferred Stock will be entitled to receive, in preference to holders of Common
Stock but subject to preferential liquidation rights of A Preferred Stock, an
amount equal to two times the original purchase price per share, plus any
previously declared and unpaid dividends.
The
shares of B Preferred Stock were offered and sold to the B Investors in a
private placement transaction made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506
promulgated there under. Each of the B Investors is an accredited investor as
defined in Rule 501 of Regulation D promulgated under the Securities Act of
1933.
Series
C Cumulative Convertible Preferred Stock Private Placement
On
November 11, 2005, three accredited investors ("C Investors") purchased an
aggregate of 833,334 shares of Series C Cumulative Convertible Preferred Stock
("C Preferred Stock") at $6.00 per share for an aggregate purchase price of
$5,300,004.
Each
share of C Preferred Stock is convertible, at any time at the option of the
holder, into 12 shares of Common Stock. The C Preferred Stock will be
automatically converted into Common Stock upon (i) the approval of the holders
of a majority of the then outstanding C Preferred Stock or (ii) the closing of a
firm commitment underwritten public offering of the Company's securities in
which the aggregate gross proceeds to the Company are not less than $10,000,000
at a price equal to or higher than $2.00 per share of Common Stock. Holders of
the C Preferred Stock are entitled to receive, when declared by the Company's
board of directors, annual dividends of $0.72 per share of C Preferred Stock
paid semi-annually (equates to a 12% annualized return). Such dividends may be
paid, at the election of the Company, either (i) in cash, (ii) in registered
Common Stock or (iii) in restricted shares of Common Stock with piggyback
registration rights. In the event that the Company elects to issue shares of
Common Stock in connection with the dividend on the C Preferred Stock, such
dividend shares shall be determined by dividing the dividend amount by the
Dividend VWAP; provided, however, if the Company is unable to determine the
Dividend VWAP, then such dividend shall be determined by dividing the dividend
amount by the average of the three highest closing bid prices during the 20
trading days immediately preceding the record date for payment of such dividend.
The Company granted the C Investors piggyback registration rights and filed a
registration statement for shares of common stock issuable upon conversion of
the C Preferred Stock within 60 days of closing. In addition, the relevant
subscription agreement provides that if a registration statement is not filed or
made effective, then until the registration statement is filed or made
effective, the Company will pay the holder a fee. The Company filed a
registration statement, however it was not declared effective by the
SEC.
30
In
addition to any voting rights provided by law, holders of the C Preferred Stock
will have the right to vote together with holders of Common Stock and the Series
A and B Preferred Stock as a single class on all matters upon which stockholders
are entitled to vote, including election of the members of the Company's Board
of Directors. Each share of C Preferred Stock will have the number of votes
corresponding to the number of shares of Common Stock into which the C Preferred
Stock may be converted on the record date for determining stockholders entitled
to vote. In the event of any liquidation or winding up of the Company, the
holders of C Preferred Stock will be entitled to receive, in preference to
holders of Common Stock but subject to preferential liquidation rights of the A
and B Preferred Stock, an amount equal to two times the original purchase price
per share, plus any previously declared and unpaid dividends.
The B
Investors and C Investors have contractually agreed to restrict their ability to
convert the preferred stock and receive shares of Common Stock such that the
number of shares of Common Stock held by them and their affiliates after such
conversion or exercise does not exceed 4.99% of the Company's then issued and
outstanding shares of Common Stock.
The
shares of C Preferred Stock were offered and sold to the C Investors in private
placement transactions made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506
promulgated there under. Each of the C Investors is an accredited investor as
defined in Rule 501 of Regulation D promulgated under the Securities Act of
1933.
Series
D Cumulative Convertible Preferred Stock Private Placement
On
September 21, 2006, six accredited investors purchased 226,500 shares of Series
D Cumulative Convertible Preferred Stock ("D Preferred Stock") from the Company
at $10.00 per share for a purchase price of $2,265,000. On November 8, 2006,
seven additional investors purchased 135,000 shares of D Preferred Stock from
the Company at $10.00 per share for a purchase price of $1,350,000. On December
11, 2006, five additional investors (collectively with the other thirteen
investors defined as “D Investors”) purchased 48,000 shares of D Preferred Stock
from the Company at $10.00 per share for a purchase price of $480,000. As a
result of the three aforementioned closings, the Company has sold an aggregate
of 409,500 shares of D Preferred Stock to the D Investors for an aggregate
purchase price of $4,095,000.
For each
share of D Preferred Stock purchased, each D Investor received a common stock
purchase warrant to purchase ten shares of common stock of the Company ("Series
D Warrants"). The Series D Warrants shall be exercisable for a period of seven
years at an exercise price of $0.50 per share. The funds raised were utilized by
the Company for working capital, future acquisitions and the payment of debt in
connection with previous acquisitions.
Each
share of D Preferred Stock is convertible, at any time at the option of the
holder, into 20 shares of Common Stock. Holders of the D Preferred Stock are
entitled to receive, when declared by the Company's board of directors, annual
dividends of $1.20 per share of D Preferred Stock paid quarterly (equates to a
12% annualized return). Such dividends may be paid, at the election of the
Company, either (i) in cash, (ii) in registered Common Stock or (iii) in
restricted shares of Common Stock with piggyback registration rights. In the
event that the Company elects to issue registered shares of Common Stock in
connection with the dividend on the D Preferred Stock, such dividend shares
shall be determined by dividing the dividend amount by 95% of the average
closing sale price of the common stock for the 20 trading days immediately
preceding the record date for payment of such dividend (the "Average Closing
Price"). In the event that the Company elects to issue restricted shares of
common stock in connection with the dividend on the D Preferred Stock, such
dividend shares shall be determined by dividing the dividend amount by 80% of
the Average Closing Price. If the Company and the D Investors are unable to
determine the Average Closing Price, then such dividend shall be determined by
dividing the dividend amount by the average of the three highest closing bid
prices during the 20 trading days immediately preceding the record date for
payment of such dividend.
The
Company is required to file a registration statement registering the shares of
common stock issuable upon conversion or exercise of the shares of D Preferred
Stock, Series D Warrants and upon declaration of the dividend within 60 days of
closing. Further, the Company is required to use its best efforts to have such
registration statement declared effective within 180 days of the first
closing.
In
addition to any voting rights provided by law, holders of the D Preferred Stock
will have the right to vote together with holders of Common Stock and the A, B
and C Preferred Stock as a single class on all matters upon which stockholders
are entitled to vote, including election of the members of the Company's Board
of Directors. Each share of D Preferred Stock will have the number of votes
corresponding to the number of shares of Common Stock into which the D Preferred
Stock may be converted on the record date for determining stockholders entitled
to vote.
31
In the
event of any liquidation or winding up of the Company, the holders of D
Preferred Stock will be entitled to receive, in preference to holders of Common
Stock but subject to preferential liquidation rights of the A, B and C Preferred
Stock, an amount equal to two times the original purchase price per share, plus
any previously declared and unpaid dividends.
The
shares of D Preferred Stock were offered and sold to the D Investors in a
private placement transaction made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506
promulgated there under. Each of the D Investors is an accredited investor as
defined in Rule 501 of Regulation D promulgated under the Securities Act of
1933.
Series
E Cumulative Convertible Preferred Stock Private Placement
On
December 21, 2006, the accredited investors purchased an aggregate of 16,750
shares of Series E Cumulative Convertible Preferred Stock ("E Preferred Stock")
to accredited investors at $100.00 per share for an aggregate purchase price of
$1,675,000. On January 31, 2007, the Company sold 7,600 shares of E Preferred
Stock to accredited investor at $100.00 per share for an aggregate purchase
price of $760,000. On February 27, 2007, the Chairman of the Board of
the Company (collectively with the other investors defined as “E Investors”)
purchased 5,000 shares of E Preferred Stock at $100.00 per share for an
aggregate purchase price of $500,000 from the Company. For each share
of E Preferred Stock purchased, each E Investor received a common stock purchase
warrant to purchase 100 shares of Common Stock ("Series E Warrants"). The Series
E Warrants shall be exercisable for a period of seven years at an exercise price
of $0.50 per share. The funds raised will be utilized by the Company for working
capital and acquisitions.
Each
share of E Preferred Stock is convertible, at any time at the option of the
holder, into 200 shares of Common Stock. Holders of the E Preferred Stock are
entitled to receive, when declared by the Company's board of directors, annual
dividends of $12.00 per share of E Preferred Stock paid quarterly (equates to a
12% annualized return). Such dividends may be paid, at the election of the
Company, either (i) in cash, (ii) in registered Common Stock or (iii) in
restricted shares of Common Stock with piggyback registration rights. In the
event that the Company elects to issue registered shares of Common Stock in
connection with the dividend on the E Preferred Stock, such dividend shares
shall be determined by the Average Closing Price. In the event that the Company
elects to issue restricted shares of Common Stock in connection with the
dividend on the E Preferred Stock, such dividend shares shall be determined by
dividing the dividend amount by 80% of the Average Closing Price. If the Company
and the investors are unable to determine the Average Closing Price, then such
dividend shall be determined by dividing the dividend amount by the average of
the three highest closing bid prices during the 20 trading days immediately
preceding the record date for payment of such dividend.
The
Company is required to file a registration statement registering the shares of
Common Stock issuable upon conversion or exercise of the shares of E Preferred
Stock, Series E Warrants and upon declaration of the dividend. Further, the
Company is required to use its best efforts to have such registration statement
declared effective within 180 days of the first closing.
In
addition to any voting rights provided by law, holders of the E Preferred Stock
will have the right to vote together with holders of Common Stock and the A, B,
C and D Preferred Stock as a single class on all matters upon which stockholders
are entitled to vote, including election of the members of the Company's Board
of Directors. Each share of E Preferred Stock will have the number of votes
corresponding to the number of shares of Common Stock into which the E Preferred
Stock may be converted on the record date for determining stockholders entitled
to vote.
In the
event of any liquidation or winding up of the Company, the holders of E
Preferred Stock will be entitled to receive, in preference to holders of Common
Stock but subject to preferential liquidation rights of the A, B, C and D
Preferred Stock and any amount of secured convertible debt, an amount equal to
two times the original purchase price per share, plus any previously declared
and unpaid dividends.
The
shares of E Preferred Stock were offered and sold to the E Investors in a
private placement transaction made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506
promulgated there under. Each of the E Investors is an accredited investor as
defined in Rule 501 of Regulation D promulgated under the Securities Act of
1933.
Dividends
The
Company accrued an annual cash dividend of 12% per share on the A, B, C, D, and
E Preferred Stock for the year ended December 31, 2009.
32
Critical
Accounting Policies and Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires that management make a number
of assumptions and estimates that affect the reported amounts of assets,
liabilities, revenues and expenses in our consolidated financial statements and
accompanying notes. Management bases its estimates on historical information and
assumptions believed to be reasonable. Although these estimates are based on
management’s best knowledge of current events and circumstances that may impact
the Company in the future, actual results may differ from these
estimates.
Revenue
Recognition
The
Company generates revenue primarily from the following sources:
|
·
|
Third
party administration – The Company earns fees for the development and
implementation of corporate and executive benefit programs, as well as
fees for the duration that these programs are
administered.
|
|
·
|
Financial
planning and investment advisory fees and securities commissions – The
Company receives commissions related to the sale of securities and certain
investment-related insurance products as well as fees for offering
financial advice through financial intermediaries and related services.
These fees are based on a percentage of assets under management and are
generally paid quarterly. The Company also charges fees for evaluations of
the performance of portfolios.
|
|
·
|
Insurance
commissions - Insurance and annuity commissions paid by insurance
companies are paid to the Company for policies sold based on a percentage
of the premium that the insurance company charges to the policyholder.
First-year commissions are calculated as a percentage of the first twelve
months premium on the policy and earned in the year that the policy is
originated. In many cases, the Company receives renewal commissions for
periods following the first year, if the policy remains in
force.
|
Revenue
is recognized only when all of the following are present: persuasive evidence of
an arrangement exists, delivery has occurred or services have been rendered, the
fee to the client is fixed or determinable, and collectability is reasonably
assured. These criteria are in accordance with GAAP and the Revenue Recognition
Topic of the FASB ASC.
The
Company recognizes revenue from the above sources as follows:
Third
party administration:
|
·
|
Persuasive
evidence of an arrangement between the Company and a client
exists;
|
|
·
|
Delivery
of a completed product to the client has occurred or the service has been
provided to the customer;
|
|
·
|
The
price to the client is fixed and
determinable;
|
|
·
|
Collectability
of the sales price is reasonably
assured.
|
Financial
planning and investment advisory fees and securities commissions:
|
·
|
As
services are rendered;
|
|
·
|
Contingent
commissions are recorded as revenue when earned and determinable and
collection is reasonably assured.
|
Insurance
commissions:
|
·
|
The
policy application is substantially
complete;
|
|
·
|
The
premium is paid;
|
|
·
|
The
insured party is contractually committed to the purchase of the insurance
policy.
|
Share
Based Payments
The
Company complies with the fair value recognition provisions of the Compensation
and Equity Topics of the FASB ASC. This guidance requires that compensation cost
for all stock awards be calculated and recognized over the service period
(generally equal to the vesting period). This compensation cost is determined
using option pricing models intended to estimate the fair value of the awards at
the grant date. An offsetting increase to stockholders' equity is recorded equal
to the amount of the compensation expense charge. The fair value of issued stock
options and warrants are estimated on the date of grant using the Black-Scholes
option-pricing model including the following assumptions: expected volatility of
25.0% to 60.0%, expected dividend yield rate of 0%, expected life over the term,
generally, 5 or 7 years, and a range of risk-free interest rates of 1.55% to
4.19% which coincides with the expected life of the options and warrants at the
time of issuance.
33
Amortization
and Depreciation
We incur
amortization expense related to the intangible assets recorded as a result of
the acquisition of our firms. We incur depreciation expense related to capital
assets, such as investments in technology, office furniture and equipment as
well as amortization for our leasehold improvements. Depreciation expense
related to our firms as well as our corporate office is recorded within this
line item.
Goodwill
and Other Intangible Assets
Goodwill
represents the excess of cost over the fair value of net assets of businesses
acquired. The Company accounts for goodwill under the guidance of the
Intangibles - Goodwill and Other Topic of the FASB ASC. Goodwill and other
intangible assets acquired in a purchase business combination and determined to
have an indefinite useful life are not amortized, but instead tested for
impairment, at least annually, in accordance with this guidance. This guidance
also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with the Property, Plant, and
Equipment Topic of the FASB ASC.
In
accordance with the guidance of the Property, Plant, and Equipment Topic of the
FASB ASC, long-lived assets, such as property and equipment and purchased
intangible assets subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
No
impairment losses have been recognized to date on goodwill. In December 2008,
the remaining $166,667 in unamortized customer list intangible asset for Haddon
was written off due to a previously unanticipated loss in customer
base.
Contingent
Consideration
The
Company has incorporated contingent consideration into the structure of certain
acquisitions completed. These arrangements generally result in the payment of
additional consideration to the sellers upon the satisfaction of certain
events.
For
acquisitions prior to 2009, the additional cash payments or share issuances are
contingent considerations and are considered to be additional purchase
consideration and will be accounted for as part of the purchase price of the
firms when the outcome of the contingency is determinable beyond a reasonable
doubt.
For
acquisitions beginning in 2009, the additional cash payments or share issuances
are contingent consideration accounted for under the Business Combinations Topic
of the FASB ASC and are considered to be additional purchase consideration as
part of the purchase price of the firms at the time of acquisition. These
contingencies will be reassessed on a periodic basis until the final outcome of
the contingency is determinable, but not longer than the measurement period,
with the change recorded to goodwill or identifiable intangibles.
Property
and Equipment
Property
and equipment are recorded at cost and depreciated using the straight-line
method over their estimated useful lives, generally 3 to 7 years. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
the terms of the leases. Betterments and improvements are capitalized while
repairs and maintenance are expensed as incurred.
Income
Taxes
The
Company complies with the Income Taxes Topic of the FASB ASC, which requires an
asset and liability approach to financial accounting and reporting for income
taxes. Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and liabilities that
will result in future taxable or deductible amounts, based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when necessary, to
reduce deferred income tax assets to the amount expected to be
realized.
34
In
accordance with the guidance of the Income Taxes Topic of the FASB ASC, there
were no unrecognized tax benefits as of December 31, 2009 and 2008. This
guidance prescribes a recognition threshold and a measurement attribute for the
financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. For those benefits to be recognized, a tax
position must be more-likely-than-not sustainable upon examination by taxing
authorities. The Company recognizes accrued interest and penalties related to
unrecognized tax expense or benefits as income tax expense. No amounts were
accrued for the payment of interest and penalties at December 31, 2009 and 2008.
Management is currently unaware of any issues under review that could result in
significant payments, accruals or material deviations from its position. The
adoption of the provisions of this guidance did not have a material impact on
the Company's consolidated financial position, results of operations and cash
flows.
Fair
Value of Financial Instruments
The fair
value of the Company's assets and liabilities, which qualify as financial
instruments under the Financial Instruments Topic of the FASB ASC, approximate
the carrying amounts presented in the accompanying consolidated balance
sheets.
Derivative
Financial Instruments
The
Company accounts for non-hedging contracts that are indexed to, and potentially
settled in, its own common stock in accordance with the provisions of the
Derivatives and Hedging Topic of the FASB ASC. These non-hedging contracts
accounted for in accordance with this guidance include freestanding warrants and
options to purchase the Company's common stock as well as embedded conversion
features that have been bifurcated from the host financing contract. Under
certain circumstances that could require the Company to settle these equity
items in cash or stock, and without regard to probability, this guidance could
require the classification of all or part of the item as a liability and the
adjustment of that reclassified amount to fair value at each reporting date,
with such adjustments reflected in the Company's consolidated statements of
operations.
Business
Acquisitions, Purchase Price Allocations and Intangible Assets
As of
December 31, 2009, the Company had completed 16 groups of acquisitions. All of
these acquisitions have been accounted for using the acquisition method, and
their related net assets and results of operations were included in our
consolidated financial statements commencing on their respective acquisition
dates. Certain acquisitions have provisions for contingent additional
consideration based upon their financial results. For acquisitions prior to
2009, this additional consideration is reflected as an increase in goodwill or
identifiable intangibles when results are achieved and the outcome of the
contingency is determinable beyond a reasonable doubt. For acquisitions
beginning in 2009, the fair value of the contingency is estimated at the time of
acquisition. It is reassessed on a periodic basis until the final outcome is
determinable but not longer than the measurement period, with the change
recorded to goodwill or identifiable intangibles. We allocate the excess of
purchase price over net assets acquired to customer relationships, covenants not
to compete, employment contracts, trade name, and goodwill. We amortize
intangibles such as customer lists/ relationships, trade names, covenants not to
compete and employment agreements over their estimated useful lives. In
accordance with the Intangibles-Goodwill and Others Topic of the FASB ASC, we do
not amortize goodwill.
Goodwill
The
changes in the carrying amount of goodwill for the years ended December 31, 2009
and 2008 are as follows:
Balance
as of January 1, 2008
|
$ | 20,705,032 | ||
Goodwill
acquired during the year
|
5,693,649 | |||
Purchase
Price Adjustment
|
2,075,433 | |||
Balance
as of December 31, 2008
|
28,474,114 | |||
Goodwill
acquired during the year
|
276,216 | |||
Purchase
Price Adjustment
|
75,843 | |||
Balance
as of December 31, 2009
|
$ | 28,826,173 |
35
Other
intangible assets recognized in connection with the Company's acquisitions
include the following:
Gross
|
|||||||||||||
Carrying
|
Accumulated
|
Estimated
|
|||||||||||
Amount
|
Amortization
|
Net
|
Lives
|
||||||||||
Customer
lists / relationships
|
$ | 35,413,444 | $ | 10,716,417 | $ | 24,697,027 |
5 -
15 years
|
||||||
Covenants
not to compete
|
10,786,540 | 8,705,567 | 2,080,973 |
1 -
4 years
|
|||||||||
Trade
name
|
2,574,000 | 514,543 | 2,059,457 |
7 -
15 years
|
|||||||||
Employment
agreements
|
2,207,000 | 2,108,250 | 98,750 |
1 -
2 years
|
|||||||||
Other
intangibles
|
25,403 | 5,997 | 19,406 |
6
years
|
|||||||||
$ | 51,006,387 | $ | 22,050,774 | $ | 28,955,613 |
The
Company defines customer lists/relationships as the acquired firm's existing
client relationships that provide a significant source of income through
recurring revenue over the course of the economic life of the relationships. The
Company and its valuation experts generally use the historical attrition rate of
the customer list/relationships acquired, any unique circumstances associated
with the acquisition of the firm, and industry experience to determine the
estimated lives of the assets. Industry experience indicates that customer
retention is typically 95% or better due to the complexity and costs associated
with a transfer of a plan to a competitor and the long term consulting
relationship between the administrator and the client.
These
other intangible assets will be amortized by use of the straight-line method
over the estimated lives of the assets. During the years ended December 31, 2009
and 2008, amortization expense related to customer lists/relationships and other
intangible assets were approximately $6,528,000 and $6,412,000, respectively.
Management periodically evaluates the recoverability of intangible assets,
taking into account events or circumstances that may warrant a revision to
estimated useful lives or impairment conditions.
Estimated
amortization expense for future years will change primarily as the Company
continues to acquire firms.
Acquisitions
California
Investment and Annuity Sales
On April
3, 2008, the Company signed a Stock Purchase Agreement (“CIAS Agreement”) with
Richard Kaplan and Anthony Delfino (“CIAS Sellers”) and CIAS. The CIAS Agreement
was effective as of March 31, 2008. Pursuant to the CIAS Agreement, the Company
acquired and the CIAS Sellers sold, 100% of the common stock of CIAS. In
consideration for 100% of the common stock of CIAS, the Company paid the CIAS
Sellers $1,425,000 in cash, issued the CIAS Sellers promissory notes for an
aggregate of $950,000 with the first promissory notes in the amount of $475,000
payable June 3, 2009 and the second promissory notes in the amount of $475,000
payable June 3, 2010. In the event that certain revenue targets are not achieved
by CIAS during the 24 months following the closing date, the promissory
notes will be reduced by the amount of such shortfall. The total consideration
paid was $2,375,000.
As part
of the terms of the sale of CIAS, Richard Kaplan was awarded one-year employment
agreement and Anthony Delfino a one-year consulting agreement, and agreed to be
bound by non-disclosure and non-solicitation agreements.
On March
16, 2009, the Company executed a Restructured Promissory Note (“CIAS
Restructured Note Agreement”) with the sellers of California Investment and
Annuity Sales, Inc. (“CIAS”) under which the parties executed replacement notes
superseding and terminating, the prior note between the parties dated April 3,
2008. Under the CIAS Restructured Note Agreement, the Company issued two
promissory notes for an aggregate of $950,000 payable in eight monthly principal
only installments of $70,000 beginning on August 15, 2009 and ending March 15,
2010, and three monthly installments of $130,000 plus all accrued interest, less
any adjustments to the promissory notes under the CIAS Agreement, beginning on
April 15, 2010 and ending on June 15, 2010. The notes pay interest at 8% per
annum. Accrued interest on the April 3, 2008 promissory notes was paid to the
CIAS Sellers within ten business days of the original scheduled payment date of
June 3, 2009.
36
On
September 28, 2009, the Company executed Amendment No. 1 to the CIAS
Restructured Note Agreement with the CIAS Sellers under which the CIAS Sellers
agreed to replace the remaining monthly installment payments under the
Promissory Notes, dated March 16, 2009, with installment payments to be made in
six monthly principal only installments of $70,000 beginning on April 15, 2010
and ending September 15, 2010, and three monthly principal installments of
$130,000, plus all accrued interest, less any adjustments to the promissory
notes under the CIAS Agreement, beginning on October 15, 2010 and ending
December 15, 2010. The Senior and Subordinated Senior Lenders have not
authorized payment of the principal or accrued interest of this note as of April
26, 2010.
The total
purchase price for the acquisition of CIAS of $2,485,929 (including $112,956 of
acquisition costs and net of cash received of $2,027), which is being accounted
for under the acquisition method of accounting in accordance with the Business
Combinations Topic of the FASB ASC, is allocated as indicated in the table
included in the Acquisitions section of ITEM 7.
The
identifiable intangible assets listed in ITEM 7 are amortized for book
purposes over the estimated useful lives of the assets. The amortization of most
of the identifiable intangible assets and goodwill are not deductible for tax
purposes. Additional consideration under the stock purchase agreements, if any,
will be recorded in the consolidated financial statements as an adjustment to
goodwill.
Alaska
Pension Services, Ltd.
On June
30, 2008, the Company entered into a Stock Purchase Agreement (“Alaska Pension
Agreement”) with Karen Jordan and Duane Mayer (“APS Sellers”) to purchase 100%
of the outstanding common stock of Alaska Pension Services, Ltd. (“Alaska
Pension”). In consideration for 100% of the outstanding common stock of Alaska
Pension, the Company paid the APS Sellers $430,766 in cash at closing and an
additional $165,000 in cash on December 31, 2008. The Company also paid
indebtedness and other obligations of Alaska Pension of $223,141; issued the APS
Sellers 369,128 shares of common stock of the Company valued at $220,000 (the
value of the common stock was determined by an average of the closing stock
price of the last 5 days prior to the announced acquisition); issued the APS
Sellers promissory notes for an aggregate of $220,000 with the first set of
promissory notes in the amount of $110,000 paid on August 31, 2009 and the
second set of promissory notes in the amount of $110,000 payable August 31,
2010. In the event that certain EBITDA targets are not achieved by Alaska
Pension during the 24 months following the closing date, the promissory notes
will be reduced by the amount of such shortfall. Under the terms of the Alaska
Pension Agreement, if certain EBITDA targets are met during the first two years
of the Alaska Pension Agreement, the Company agreed to pay 10% of the amount in
excess of the EBITDA targets. In 2009, the Company paid $6,656 in contingency
payments based on Alaska Pension meeting certain EBITDA targets. The total
consideration paid was $1,265,563.
As part
of the terms of the sale of Alaska Pension, Karen Jordan and Duane Mayer were
awarded two-year employment agreements and agreed to be bound by non-compete and
non-solicitation agreements.
The total
purchase price for the acquisition of Alaska Pension of $1,375,761 (including
$114,069 of acquisition costs and net of cash received of $3,871), which is
being accounted for under the acquisition method of accounting in accordance
with the Business Combinations Topic of the FASB ASC, is allocated as indicated
in the table included in the Acquisitions section of ITEM 7.
The
identifiable intangible assets listed in ITEM 7 are amortized for book purposes
over the estimated useful lives of the assets. The amortization of most of the
identifiable intangible assets and goodwill are not deductible for tax purposes.
Additional consideration under the stock purchase agreements, if any, will be
recorded in the consolidated financial statements as an adjustment to
goodwill.
Alan
N. Kanter & Associates, Inc.
On July
16, 2008, the Company entered into a Stock Purchase Agreement (“Kanter
Agreement”) to purchase 100% of the common stock of Alan N. Kanter &
Associates, Inc. (“Kanter & Associates”). In consideration for 100% of the
outstanding common stock of Kanter & Associates, the Company paid cash of
$1,732,467. In addition, under the terms of a side letter to the Kanter
Agreement, the Company has agreed to pay the seller a portion of the revenue
generated by Kanter & Associates for completing pension plan document
restatement work during the first two years of the Kanter
Agreement. As of December 31, 2009, the Company paid $255,925 and
accrued an additional $65,938 under the terms of the side letter. The total
consideration paid was $2,054,330.
37
As part
of the terms of the sale of Kanter & Associates, Alan N. Kanter was awarded
a two-year employment agreement, and agreed to be bound by non-compete and
non-solicitation agreements.
The total
purchase price for the acquisition of Kanter & Associates of $2,159,714
(including $106,923 of acquisition costs and net of cash received of $1,539),
which is being accounted for under the acquisition method of accounting in
accordance with the Business Combinations Topic of the FASB ASC, is allocated as
indicated in the table included in the Acquisitions section of ITEM
7.
The
identifiable intangible assets listed in ITEM 7 are amortized for book purposes
over the estimated useful lives of the assets. The amortization of most of the
identifiable intangible assets and goodwill are not deductible for tax purposes.
Additional consideration under the stock purchase agreements, if any, will be
recorded in the consolidated financial statements as an adjustment to
goodwill.
Retirement
& Employee Benefit Services, Inc.
On August
5, 2008, the Company entered into an Asset Purchase Agreement (“REBS Agreement”)
to purchase the assets of Retirement & Employee Benefit Services, Inc.
(“REBS”). The Company paid $164,943 in cash.
The total
purchase price for the acquisition of assets of REBS of $178,257 (including
$13,314 of acquisition costs), which is being accounted for under the
acquisition method of accounting in accordance with the Business Combinations
Topic of the FASB ASC, is allocated as indicated in the table included in the
Acquisitions section of ITEM 7.
The
identifiable intangible assets listed in the table below are amortized for book
purposes over the estimated useful lives of the assets.
The
Company’s strategy in purchasing the assets of REBS was to acquire
the customer relationships of a retirement plan administration
organization without incurring additional overhead expense. REBS was merged into
the workflow at Pentec.
Pension
Technical Services, Inc.
On
October 2, 2008, the Company entered into a Stock Purchase Agreement (“REPTECH
Agreement”) with Ralph W. Shaw and Eileen A. Baldwin-Shaw (“REPTECH Sellers”) to
purchase 100% of the common stock of REPTECH. In consideration for 100% of the
outstanding common stock of REPTECH, the Company paid the REPTECH Sellers
$1,787,760 in cash at closing, $150,000 on January 2, 2009, issued 1,430,208
shares of common stock of the Company valued at $715,104 (the value of the
common stock was determined by an average of the closing stock price of the last
five days prior to the announced acquisition), issued the REPTECH Sellers
promissory notes for an aggregate of $922,656 with the first set of promissory
notes in the amount of $461,328 payable December 2, 2009 and the second set of
promissory notes in the amount of $461,328 payable December 2, 2010. In the
event that certain EBITDA targets are not achieved by REPTECH during the 24
months following the closing date, the promissory notes will be reduced by the
amount of the shortfall. Under the terms of the REPTECH Agreement, if certain
EBITDA targets are met during the first two years of the REPTECH Agreement, the
Company agreed to pay 10% of the amount in excess of the EBITDA targets. In
2009, the Company paid $10,416 in contingency payments based on REPTECH meeting
certain EBITDA targets. The total consideration paid was
$3,585,936.
As part
of the terms of the sale of REPTECH, Ralph W. Shaw and Eileen A. Baldwin-Shaw
were awarded two-year employment agreements, and agreed to be bound by
non-compete and non-solicitation agreements.
On
September 25, 2009, the Company executed Amendment No. 1 to Promissory Notes
with the REPTECH Sellers under which the REPTECH Sellers agreed to replace the
payments due under the Promissory Notes, dated October 2, 2008, with installment
payments to be made in twelve monthly principal installments of $76,888, plus
accrued interest, beginning on May 15, 2010 and ending April 15, 2011 at an
interest rate of 8% per annum beginning on October 1, 2009. Interest accrued on
the Promissory Notes through September 30, 2009 was paid to the REPTECH Sellers
within fifteen business days of December 1, 2009.
38
The total
purchase price for the acquisition of REPTECH was $3,674,412 (including $165,791
of acquisition costs and net of cash received of $56,638 and an adjustment to
assets acquired and liabilities assumed of $20,677), which is being accounted
for under the acquisition method of accounting in accordance with the Business
Combinations Topic of the FASB ASC, is allocated as indicated in the table
included in the Acquisitions section of ITEM 7.
The
identifiable intangible assets listed in ITEM 7 are amortized for book purposes
over the estimated useful lives of the assets. The amortization of most of the
identifiable intangible assets and goodwill are not deductible for tax purposes.
Additional consideration under the stock purchase agreements, if any, will be
recorded in the consolidated financial statements as an adjustment to
goodwill.
The
Pension Group, Inc.
On
November 26, 2008, the Company entered into a Stock Purchase Agreement (“TPG
Agreement”) with Peter Stephan, James Norman and Rise Spiegel (“TPG Sellers”) to
purchase 100% of the common stock of TPG. In consideration for 100% of the
outstanding common stock of TPG, the Company paid the TPG Sellers $2,141,869 in
cash at closing, with an additional $935,000 paid on February 24, 2009 and an
additional $467,500, prior to any adjustments, paid on March 26, 2009, issued
1,488,854 shares of common stock of the Company valued at $467,500 (the value of
the common stock was determined by an average of the closing stock price of the
last five days prior to the announced acquisition), issued the TPG Sellers
promissory notes for an aggregate of $467,500 with the first set of promissory
notes in the amount of $233,750 payable January 26, 2010 and the second set of
promissory notes in the amount of $233,750 payable January 26, 2011. In the
event that certain EBITDA targets are not achieved by TPG during the 24 months
following the closing date, the promissory notes will be reduced by the amount
of the shortfall. Under the terms of the TPG Agreement, if certain EBITDA
targets are met during the first two years of the TPG Agreement, the Company
agreed to pay 10% of the amount in excess of the EBITDA targets plus bonuses or
incentive compensation not to exceed 8.5% of the company’s aggregate payroll or
$156,000 during the first year of the TPG Agreement and not to exceed 8.5% of
the company’s aggregate payroll during the second year of the TPG Agreement. In
2009, the Company paid $700 in contingency payments based on TPG meeting certain
EBITDA targets. The total consideration paid was $4,480,069.
As part
of the terms of the sale of TPG, Peter Stephan, James Norman and Rise Spiegel
were awarded two-year employment agreements, and agreed to be bound by
non-compete and non-solicitation agreements.
On March
24, 2009, the Company executed two promissory notes each for $75,000 payable to
the TPG Sellers in lieu of full payment of their portion of the additional
payment for $467,500, prior to any adjustments, due at March 26, 2009 under the
TPG Agreement and was subject to interest of 8% per annum. The notes were paid
on June 26, 2009.
On
September 24, 2009, the Company executed Amendment No. 1 to Promissory Notes
with the TPG Sellers under which the TPG Sellers agreed to replace the maturity
date and payment terms under the promissory notes, dated November 26, 2008, with
installment payments to be made in twelve monthly principal installments of
$38,958, plus accrued interest, beginning on July 25, 2010 and ending June 25,
2011 at an interest rate of 8% per annum beginning on October 1, 2009. Interest
accrued on the promissory notes through September 30, 2009 was paid to the TPG
Sellers within fifteen business days of January 25, 2010.
The total
purchase price for the acquisition of TPG was $4,721,807 (including $277,666 of
acquisition costs and net of cash received of $2,394 and an adjustment to assets
acquired and liabilities assumed of $33,534), which is being accounted for under
the acquisition method of accounting in accordance with the Business
Combinations Topic of the FASB ASC, is allocated as indicated in the table
included in the Acquisitions section of ITEM 7.
The
identifiable intangible assets listed in ITEM 7 are amortized for book purposes
over the estimated useful lives of the assets. The amortization of most of the
identifiable intangible assets and goodwill are not deductible for tax purposes.
Additional consideration under the stock purchase agreements, if any, will be
recorded in the consolidated financial statements as an adjustment to
goodwill.
Standard
Retirement Services, Inc.
On
October 28, 2009, the Company entered into an Asset Purchase Agreement
(“Standard Agreement”) to purchase certain assets of Standard Retirement
Services, Inc (“Standard”). The final purchase price will be determined based on
retention rates as of February 28, 2011 and annual revenues of the acquired
assets. The Company paid $68,653 in cash at closing, which represented 10% of
the purchase price. An additional 25% of the purchase price is due on August 15,
2010, and the final 65% of the purchase price due on March 15, 2011, less any
adjustments in accordance with the Standard Agreement. The Company accrued
$522,347 as an estimate for settling the remaining contingent
payments.
39
The total
purchase price for the acquisition of Standard was estimated to be about
$591,000. It is being accounted for under the acquisition method of accounting
in accordance with the Business Combinations Topic of the FASB ASC and is
allocated as indicated in the table included in the Acquisitions section of ITEM
7.
The
identifiable intangible assets listed in ITEM 7 are amortized for book purposes
over the estimated useful lives of the assets. Additional contingent
consideration under the asset purchase agreement, if any, is considered to be
additional purchase consideration as part of the purchase price of the firms at
the time of acquisition. These contingencies will be reassessed on a periodic
basis until the final outcome of the contingency is determinable but not longer
than the measurement period, with the change recorded to identifiable
intangibles.
The
Company’s strategy in purchasing certain assets of Standard was to acquire the
customer relationships of a retirement plan administration organization without
incurring additional overhead expense. Standard was merged into the workflow at
several of the Company’s subsidiaries.
40
2008:
|
California
Investment
|
Alaska
Pension
|
Alan
N. Kanter
|
|||||||||
Annuity
Sales
|
Services,
Ltd.
|
&
Associates, Inc.
|
||||||||||
Assets
acquired:
|
||||||||||||
Property
and equipment
|
$ | - | $ | 23,616 | $ | 13,006 | ||||||
Accounts
receivable
|
- | 198,634 | 113,769 | |||||||||
Customer
lists/relationships
|
880,000 | 440,000 | 710,000 | |||||||||
Covenant
not to compete
|
550,000 | 300,000 | 497,185 | |||||||||
Trade
name
|
- | 70,000 | 110,000 | |||||||||
Employment
contracts
|
280,000 | 125,000 | 270,000 | |||||||||
Plan
life documents
|
- | - | 25,403 | |||||||||
Goodwill
|
1,239,929 | 462,359 | 897,940 | |||||||||
Other
assets
|
- | 43,834 | 26,376 | |||||||||
2,949,929 | 1,663,443 | 2,663,679 | ||||||||||
Liabilities
assumed:
|
||||||||||||
Deferred
tax liability
|
464,000 | 254,000 | 446,161 | |||||||||
Other
liabilities
|
- | 33,682 | 57,804 | |||||||||
Net
purchase price
|
$ | 2,485,929 | $ | 1,375,761 | $ | 2,159,714 | ||||||
2008:
|
Retirement
& Employee
|
|||||||||||
Benefit
Services Inc.
|
REPTECH
Corp.
|
The
Pension Group, Inc.
|
||||||||||
Assets
acquired:
|
||||||||||||
Property
and equipment
|
$ | - | $ | 17,907 | $ | 79,878 | ||||||
Accounts
receivable
|
24,943 | 137,243 | 115,835 | |||||||||
Customer
lists/relationships
|
98,559 | 2,170,000 | 2,320,000 | |||||||||
Covenant
not to compete
|
54,755 | 720,000 | 1,040,000 | |||||||||
Trade
name
|
- | 540,000 | 750,000 | |||||||||
Goodwill
|
- | 1,386,469 | 1,989,945 | |||||||||
Other
assets
|
- | 29,599 | 20,044 | |||||||||
178,257 | 5,001,218 | 6,315,702 | ||||||||||
Liabilities
assumed:
|
||||||||||||
Deferred
tax liability
|
- | 1,084,000 | 1,228,000 | |||||||||
Unearned
revenue
|
- | 171,401 | 328,992 | |||||||||
Other
liabilities
|
- | 71,405 | 36,903 | |||||||||
Net
purchase price
|
$ | 178,257 | $ | 3,674,412 | $ | 4,721,807 | ||||||
2009:
|
Standard
Retirement
|
|||||||||||
Services,
Inc.
|
||||||||||||
Assets
acquired:
|
||||||||||||
Customer
lists/relationships
|
$ | 591,000 | ||||||||||
591,000 | ||||||||||||
Liabilities
assumed:
|
||||||||||||
Unearned
revenue
|
- | |||||||||||
Net
purchase price
|
$ | 591,000 |
Segment
Information
In June
1997, the FASB issued guidance in the Segment Reporting Topic of the FASB ASC.
This guidance establishes standards for the way companies report information
about operating segments in financial statements. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. In accordance with the guidance, we have determined that we operate
in a single segment within the financial services industry entirely within the
United States of America and its territories.
41
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
economic and market factors, such as changes in interest rates or declines or
significant volatility in the securities markets, will affect our commission and
fee income. These factors can affect the volume of new investment sales and the
extent to which clients keep their investments and maintain funds in accounts we
manage. Equity returns and interest rates can have a significant effect on the
sale of many employee benefit programs whether they are financed by life
insurance or other financial instruments. For example, if interest rates
increase, competing products offering higher returns could become more
attractive to potential purchasers than the programs and policies we market and
distribute. Further, a decrease in stock prices can have a significant effect on
the sale of financial services products that are linked to the stock market,
such as variable life insurance, variable annuities, mutual funds and managed
accounts. In addition, a portion of our earnings are derived from fees,
typically based on a percentage of assets under management, for offering
financial advice and related services to clients. A decrease in stock prices
would reduce fees that are based on a percentage of assets under management.
Furthermore, we earn recurring commission revenue on certain products over a
period after the initial sale, provided the customer retains the product. These
factors may lead customers to surrender or terminate their products, ending
these recurring revenues. A portion of our earnings are derived from commissions
and override payments from manufacturers of financial services products that are
based on the volume and profitability of business generated by us. If investors
seek alternatives to our investment advice and services or to our insurance
products and services, it could have a negative impact on our revenue. We cannot
guarantee that we will be able to compete with alternative products if these
market forces make our products and services unattractive to clients. Finally,
adverse general economic conditions may cause potential customers to defer or
forgo the purchase of products that we sell, for example investing more
defensively or surrendering products to increase personal cash
flow.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
information required by Item 8 appears at Page F-1, which appears after the
signature page to this report.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There has
been no change or disagreements with accountants during the previous two fiscal
years.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As of the end of the period covered by
this report, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the
end of the applicable period to ensure that the information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act (i) is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and (ii) is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosures. Our Chief Executive Officer and Chief Financial
Officer concluded our disclosure controls and procedures were effective for the
reporting period ending December 31, 2009. Prior to the Company’s remediation in
the fourth quarter of 2008, our disclosure controls and procedures were not
effective as three of our subsidiaries were utilizing a shared network supported
by a related party of the Company. In order to remediate this weakness, during
the third quarter of 2008, the Company developed a plan, acquired the equipment
and began installing and testing the network. During the fourth quarter of 2008,
the Company fully migrated data and began using the new network. As a
result, the control deficiency was resolved at the end of 2008; however, it was
not in place for the entire reporting period ending December 31,
2008.
42
Managements
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
|
·
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and disposition of our
assets;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and
directors; and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. All internal control systems,
no matter how well designed, have inherent limitations and provide only
reasonable assurance, not absolute assurance, with respect to financial
statement preparation and presentation. The design of an internal control system
reflects resource constraints and the benefits must be considered relative to
the costs of implementing and maintaining the system.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2009. This assessment was based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our assessment, we
believe that as of December 31, 2009 the Company’s internal control over
financial reporting was effective based on those criteria.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this
annual report.
Changes
in Internal Control over Financial Reporting
There
were no changes in the Company’s internal controls over financial reporting
during the fourth quarter of 2009 that materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
ITEM
9A(T). CONTROLS AND PROCEDURES
Not
applicable.
43
ITEM
9B. OTHER INFORMATION
The
Company is providing the following information called for by Items 1.01 (Entry
into a Material Definitive Agreement) and 2.03 (Creation of a Direct Financial
Obligation or an Obligation under an Off-Balance Sheet Arrangement of a
Registrant) of Form 8-K, in lieu of reporting it in a separate Form 8-K filing
with the Securities and Exchange Commission.
The
Company is a party to (i) a Revolving Line of Credit and Term Loan Agreement, as
amended (the "Senior Loan Agreement"), with RBS Citizens Bank (the "Senior
Lender") and (ii) a Securities Purchase and Loan Agreement, as amended (the
"Subordinated Senior Agreement" and, together with the Senior Loan Agreement,
the "Loan Agreements")) with Woodside Capital Partners IV, LLC, Woodside Capital
Partners IV QP, LLC, Woodside Capital Partners V, LLC and Woodside Capital
Partners V QP, LLC (collectively, the "Subordinated Senior Lenders"
and, together with the Senior Lender, the "Lenders"). At December 31,
2009, the Company had approximately $14.5 million of borrowings outstanding
under the Senior Loan Agreement that by their terms mature on July 31, 2010 and
approximately $13.0 million of borrowings outstanding under the Subordinated
Senior Agreement that by their terms mature on January 31, 2011.
As
previously reported in its Form 10-Q for the quarter ended September 30,
2009, the Company was not then in compliance with certain financial
covenants in the Loan Agreements and, as a result, the Lenders had delivered
letters that notified the Company of such covenant defaults and reserved all of
the Lenders' rights and remedies with
respect thereto. Financial and other covenant
defaults have also occurred subsequent to September 30, 2009.
On April
26, 2010, the Company and the Senior Lender entered into an Eleventh Amendment
to the Senior Loan Agreement with the Senior Lender (the "Senior Loan
Amendment") and an Eighth Amendment to the Subordinated Senior Agreement with
the Subordinated Senior Lenders (the "Subordinated Senior Amendment" and,
together with the Senior Loan Amendment, the "Amendments"). In the Amendments,
the Lenders agreed to forbear from accelerating or otherwise enforcing their
rights and remedies with respect to currently existing covenant defaults and
anticipated events of covenant defaults under the Loan Agreements until January
2, 2011 (the "Forbearance Period"). The Senior Lender agreed to extend the
maturity of Senior Term Note and Revolving Line of Credit until January 2, 2011.
The Senior Lender also agreed to increase the maximum availability of the
Revolving Line of Credit under the Senior Loan Agreement from $2.5 million to
$4.0 million and the Subordinated Senior Lenders agreed to surrender all
Subordinated Senior Warrants and relinquish their rights under the CIP Payment
and Fee Agreements in conjunction with the Subordinated Senior
Agreement.
In
return, the Company has agreed in the Amendments that, among other things,
either Lender may terminate its forbearance agreements if the Company has not
(i) met specified cash flow tests during the Forbearance Period or (ii)
maintained a minimum cash availability of $500,000 during the Forbearance
Period.
The
Company has engaged a financial advisor to, among other things, advise and
assist the Company in exploring, evaluating and implementing one or more
strategic alternatives for the recapitalization of the Company (a
"Recapitalization Initiative"), including refinancing its current debt, raising
capital and/or selling the Company to a third party. In the Amendments, the
Company has agreed that either Lender may terminate its forbearance agreements
if, in such Lender's reasonable judgment, the Company has not made satisfactory
progress toward a Recapitalization Initiative by July 15, 2010 or any date
thereafter through the Forbearance Period.
The
Senior Loan Amendment and a letter agreement related to the Subordinated Senior
Amendment (the "Subordinated Senior Lender Fee Letter") provide for the Company
to pay certain fees to the Lenders upon execution of the Amendments and upon
consummation of a transaction resulting from the Recapitalization
Initiative.
Copies of
the two Amendments and the Subordinated Senior Lender Fee Letter are filed as
Exhibits 4.75, 4.78 and 4.80 to this Annual Report on Form 10-K.
44
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERANCE.
Below are
the names and certain information regarding our executive officers and
directors:
Name
|
Age
|
Position
with the Company
|
||
Steven
J. Ross
|
52
|
Chief
Executive Officer and Director
|
||
Richard
J. Berman (1, 2, 3)
|
67
|
Chairman
of the Board and Director
|
||
Jeff
Cooke (1, 3)
|
49
|
Director
|
||
Arthur
D. Emil
|
85
|
Director
|
||
Steven
B. Ruchefsky (2)
|
48
|
Director
|
||
Steven
Virany
|
54
|
Director
|
||
John
M. Davis
|
49
|
President
and Chief Operating Officer
|
||
Christopher
W. Larkin
|
|
49
|
|
Chief
Financial Officer
|
1) Member
of the Audit Committee
2) Member
of the Compensation Committee
3) Member
of the Governance Committee
Set forth
below is a biographical description of each of our directors and senior
executive officers based on information supplied by each of them.
Steven J.
Ross has served as a director since April 15, 2005. On March 1, 2006, Mr. Ross
was appointed Chief Executive Officer. Since September 2005, Mr. Ross has served
as a Managing Director for Duncan Capital Partners, LLC, a private investment
fund based in New York, New York and a shareholder of our
company. From June 2001 to June 2005, Mr. Ross was President, Chief
Executive Officer and Chairman of the Board of DynTek, Inc. (OTCBB: DYNK). Prior
to joining DynTek, Inc., Mr. Ross served as General Manager of Toshiba's
Computer System Division, responsible for sales, marketing, and operations in
North and South America from 1998 to 1999. From 1996 to 1998, Mr. Ross was
President and General Manager of the Reseller Division and President of
Corporate Marketing at Inacom Corporation. Mr. Ross' other positions have
included responsibility for sales and marketing, operations, strategic planning,
and other senior executive activities.
Richard
Berman has served as Chairman and as a director since March 9, 2005. Mr.
Berman’s business career spans over 35 years of venture capital, senior
management and merger and acquisitions experience. In the last five years, Mr.
Berman has served as a director and/or officer of over a dozen public and
private companies. He is currently serving as a director of five other public
companies including Broadcaster Inc. (OTC: BCSR.PK), Easylink Services
International, Inc. ((NASDAQ: ESIC), Advaxis, Inc. (OTC: ADXS.OB), NeoStem, Inc.
(AMEX: NBS), and NexMed, Inc. (NASDAQ: NEXM). From 1998 to 2000 he was employed
by Easylink Services International Inc. as Chairman and
CEO. Previously, Mr. Berman worked for Goldman Sachs, was Senior Vice
President of Bankers Trust Company, where he started the M&A and Leveraged
Buyout Departments, created the largest battery company in the world by merging
Prestolite, General Battery and Exide to form Exide Technologies (NASDAQ: XIDE).
He helped create what is now SOHO (NYC) by developing five buildings and advised
on over $4 billion of M&A transactions. He is past Director of the Stern
School of Business of NYU where he obtained his BS and MBA. He also has US and
foreign law degrees from Boston College and The Hague Academy of International
Law, respectively. Mr. Berman formerly served as director of Superfly
Advertising, Inc. (OTC: SPFL.PK) and Dyadic International, Inc. (NASDAQ: DYAI)
within the last five years.
Jeff
Cooke has served as a director since April 15, 2005. Mr. Cooke is managing
partner for Granite Ventures, LLC which provided interim leadership services for
early stage companies and those undergoing a significant change in
direction. From January 2002 until June of 2007, Mr.
Cooke was President and CEO of FDI Collateral Management, which
provides electronic lien and titling and other services for automotive lenders.
From March 2000 to December 2001, Mr. Cooke served as managing partner for
Granite Ventures, LLC. From November 1998 to March 2000, Mr. Cooke was
President and COO of NEC Computers, Inc. Prior to joining NEC Computers, Mr.
Cooke held several positions at Hewlett Packard.
45
Arthur D.
Emil, Esq. has served as a director since April 15, 2005. Mr. Emil has been a
practicing attorney in New York City for over fifty years, including with Kramer
Levin Naftalis & Frankel, from 1994 to 2003 and with Jones Day Reavis &
Pogue prior to that. In 2003, Mr. Emil joined Cohen Tauber Spievack & Wagner
LLP. Mr. Emil is a principal owner and Chairman of Night Sky Holdings LLC, a
company which owns several restaurants now operating in the New York area, which
included Windows on the World, and operated the Rainbow Room from 1986 until
December 1998. Mr. Emil is the founding principal and shareholder of two real
estate development firms with commercial, residential and mixed-use properties
in Connecticut and New York. Mr. Emil is a director of NexMed, Inc. (NASDAQ:
NEXM). Mr. Emil has also served as a director of other publicly held
corporations including some in the financial services sector. Mr. Emil has
served as trustee for various non-profit organizations including The American
Federation of Arts and the Montefiore Medical Center. Mr. Emil received his LLB
from Columbia University.
Steven B.
Ruchefsky has served as a director since April 15, 2005. Mr. Ruchefsky, a
graduate of The George Washington University Law School, practiced law in New
York City for fifteen years. Through 2000, he was a partner of an 80-attorney
New York City law firm, chair of its specialized litigation department and
member of the firm's management group. In 2000, he left his law firm to
establish a family office for one of his high net worth clients. There, Mr.
Ruchefsky was responsible for the diversification out of that family's single
stock holding, the development and implementation of an investment strategy and
for the establishment of operating controls and procedures. In addition, Mr.
Ruchefsky was a principal of an early stage/seed venture capital firm
established by the family and sat on the boards of several of its portfolio
companies. Since September 2001, Mr. Ruchefsky has been working with the founder
and chief executive officer of a prominent multi-strategy hedge fund and is
responsible for this executive's personal finance, tax and investment decisions
in addition to performing special projects for the hedge fund. Since that time,
Mr. Ruchefsky has been employed by Caremi Partners Ltd., a significant
shareholder of the Company. He currently sits on the boards of several private
and not-for-profit companies.
Steven
Virany was appointed as a director on November 17, 2009. Mr. Virany's career
spans over 25 years of principal, advisory, and mergers and acquisition
experience in the financial services industry. From 1983 to 2008, Mr. Virany
spent over 20 years at Lehman Brothers in New York where he was a Managing
Director in the Fixed Income Division. His experience focused on a broad range
of financial product areas including insurance, commercial and residential real
estate, and specialty finance. From 1996 to 1998, Mr. Virany was a principal in
Boston Capital Mortgage Corporation, a commercial real estate finance
company. Currently, Mr. Virany is engaged in capital raising for new
specialty finance entities. Mr. Virany received his MBA from Columbia University
and graduated with a B.S. in Economics from the Wharton School of the University
of Pennsylvania.
John
Davis was named Chief Financial Officer on February 1, 2007 and served in this
position until May 21, 2007. On March 15, 2007 Mr. Davis was named
President and on May 21, 2007 Mr. Davis was named our President and Chief
Operating Officer. Prior to joining National Investment Managers, Mr.
Davis was employed with Nationwide Mutual Insurance Company since 1987. From
1999 through 2001, Mr. Davis served as an Assistant Vice President of Financial
Operations and then as Vice President of Financial Operations from 2001 through
2003. From 2003 through 2004, Mr. Davis served as the Vice President of Finance
and Chief Operating Officer for the pensions division and then from 2004 through
2005 as Vice President and Chief Financial Officer of the retirement plans
division. Prior to joining the Company, Mr. Davis served as the president of the
private sector retirement plans division from 2005 through 2006.
Christopher
W. Larkin joined the Company in May 2008 to lead the execution of all Mergers
and Acquisitions. On January 30, 2009, Mr. Larkin was named Chief Financial
Officer. Prior to joining the Company, Mr. Larkin served for 15 years in a
variety of progressive financial roles for Nationwide Insurance. The most recent
of which was as the Controller for the ultimate parent company, Nationwide
Mutual Insurance Company. Prior to his career with Nationwide Insurance, Mr.
Larkin was a Senior Manager with KPMG, an international accounting firm, where
he served insurance and financial services clients in both their Assurance and
Tax Advisory Divisions. Mr. Larkin received a B.S.B.A – Accounting from The Ohio
State University. He is a Certified Public Accountant licensed in the State of
Ohio and is a member of the AICPA and the Ohio Society of CPAs.
Our
directors are elected for a term of one year or until their successors are
elected and qualified. There is no family relationship between any of our
officers and directors.
Audit
Committee Financial Expert
The Board
of Directors has determined that Mr. Berman is an "audit committee financial
expert," as such term is defined in Item 401(e) of Regulation S-B, and is
independent as defined in rule 4200(a) (15) of the listing standards of the
National Association of Securities Dealers.
46
Board
Committees
Our
business, property and affairs are managed by or under the direction of the
Board of Directors. Members of the board are kept informed of our business
through discussion with the chief executive and financial officers and other
officers, by reviewing materials provided to them and by participating at
meetings of the board and its committees.
The Board
of Directors has established an Audit Committee, a Compensation Committee, and a
Governance Committee.
The
Compensation Committee did not meet during the year ended December 31, 2009. The
function of the Committee is to approve stock plans and option grants and review
and make recommendations to the Board of Directors regarding executive
compensation and benefits.
The
Governance Committee did not meet during the year ended December 31, 2009. The
function of the Governance Committee is to (a) oversee the evaluation of the
Board and management and (b) develop, recommend and revise a set of corporate
governance principles.
As of
April 26, 2010, the Audit Committee consisted of the following members: Messrs
Berman and Cooke. Mr. Berman has been appointed to sit on the Audit Committee to
serve as its audit committee financial expert. The Audit Committee met four
times in fiscal year 2009. Responsibilities of the Committee include (1)
reviewing financial statements and consulting with the independent auditors
concerning the Company's financial statements, accounting and financial
policies, and internal controls, (2) reviewing the scope of the independent
auditors' activities and the fees of the independent auditors, and (3) reviewing
the independence of the auditors. All of the members of the Audit Committee meet
the independence standards established by the National Association of Securities
Dealers.
The total
number of meetings of the Board of Directors during the fiscal year ended
December 31, 2009 was two. The Board of Directors also passed several
resolutions by written consent. Each of the incumbent directors attended a
majority of (i) the meetings of the Board during the year and (ii) the total
number of meetings of all committees of the Board on which the incumbent
directors served.
Compliance
with Section 16(a) of the Securities Exchange Act of 1934
Section
16(a) of the Securities Exchange Act of 1934, requires our directors, executive
officers and persons who own more than 10% of our common stock to file with the
SEC initial reports of ownership and reports of changes in ownership of common
stock and other of our equity securities. During the fiscal year ended December
31, 2009, each of our officers, directors and 10% stockholders were late in
their filings.
Code
of Ethics
We have
adopted a Code of Ethics that applies to all officers, directors and employees.
The Company will provide to any person without charge a copy of such code of
ethics upon written request to the Company at 485 Metro Place South, Suite 275,
Dublin, Ohio 43017, Attn: Chief Financial Officer.
47
ITEM
11. EXECUTIVE COMPENSATION
The
following tables set forth all compensation paid in respect of our Chief
Executive Officer and our most highly compensated three executive officers
(collectively, the "Named Executive Officers") for the last two fiscal
years.
Summary
Compensation Table
Name and Principal
Position
|
Year
|
Salary ($)
|
Bonus ($)
|
(5)
Stock
Awards ($)
|
(6)
Stock
Options ($)
|
Non-equity
Incentive Plan
Compensation
($)
|
Non-Qualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation
($)
|
Total ($)
|
|||||||||||||||||||||||||
Steven
J. Ross (1)
|
2009
|
$ | 475,000 | $ | - | $ | 15,000 | $ | 49,453 | $ | - | $ | - | $ | 51,797 | $ | 591,250 | |||||||||||||||||
Chief
Executive Officer and Director
|
2008
|
$ | 475,000 | $ | 100,000 | $ | 492,000 | $ | - | $ | - | $ | - | $ | 142,613 | $ | 1,209,613 | |||||||||||||||||
John
M. Davis (2)
|
2009
|
$ | 306,375 | $ | - | $ | - | $ | 57,712 | $ | - | $ | - | $ | 26,397 | $ | 390,484 | |||||||||||||||||
President,
Chief Operating Officer
|
2008
|
$ | 294,791 | $ | 126,042 | $ | 258,500 | $ | 65,210 | $ | - | $ | - | $ | 27,946 | $ | 772,489 | |||||||||||||||||
Christopher
W. Larkin (3)
|
2009
|
$ | 194,792 | $ | - | $ | - | $ | 24,047 | $ | - | $ | - | $ | 2,763 | $ | 221,602 | |||||||||||||||||
Chief
Financial Officer
|
||||||||||||||||||||||||||||||||||
Robert
C. Thompson (4)
|
2009
|
$ | 125,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 1,255 | $ | 126,255 | |||||||||||||||||
Senior
Vice President, National Sales Director
|
2008
|
$ | 200,000 | $ | 10,000 | $ | - | $ | - | $ | - | $ | - | $ | 3,174 | $ | 213,174 |
(1)
|
On
July 7, 2009, Mr. Ross was granted 5-year options to purchase 600,000
shares of common stock of the Company at $0.20 per share of which 300,000
shares vested on July 7, 2009, 150,000 shares vested on January 7, 2010
and 150,000 shares will vest on July 7, 2010. These options may
be exercised only if authorized shares are available. Mr. Ross' 2008 all
other compensation included executive health care reimbursements of
$60,747, in accordance with his employment agreement and a $50,000
prepayment of 2009 Board fees.
|
(2)
|
Mr.
Davis' 2009 salary reflects $6,375 in earned compensation that he
voluntarily agreed to forego in
2009.
|
(3)
|
Mr.
Larkin was appointed Chief Financial Officer on January 30,
2009. His 2009 salary reflects $10,625 in earned compensation
that he voluntarily agreed to forego in
2009.
|
(4)
|
Mr.
Thompson entered into a separation agreement on May 14,
2009.
|
(5)
|
This
column represents the fair market value, on the date of grant, of the
restricted common stock awarded to the executive for the current year, as
well as all prior years reported. The fair market value is
determined by taking the closing price of the Company's stock on the date
of grant times the number of shares awarded. These amounts do
not correspond to the actual value that will be realized by the named
executive.
|
(6)
|
This
column represents the fair market value, on the date of grant, of stock
options awarded to the executive for the current year, as well as all
prior years reported. The fair market value calculation is
based on the Black-Scholes option pricing model. These amounts
do not correspond to the actual value that will be realized by the named
executives. For information on the valuation assumptions used,
refer to the section on Share Based Payments in the Management's
Discussion and Analysis.
|
Outstanding
Equity Awards at Fiscal Year-End
Option Awards
|
Stock Awards
|
||||||||||||||||||||||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned Options
(#)
|
Option
Exercise
Price ($)
|
Option
Expiration
Date
|
Number of
Shares or Units
of
Stock that
have
not Vested
(#)
|
Market Value of
Shares or Units of
Stock that have not
Vested ($)
|
Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or Other
Rights that have not
Vested (#)
|
Equity Incentive
Plan Awards:
Market or Payout
Value of Unearned
Shares, Units, or
Other Rights that
have not Vested (#)
|
||||||||||||||||||||||||
Steven
J. Ross
|
40,000 | - | - | $ | 0.167 |
3/8/2010
|
1,000,000 | $ | 150,000 | - | - | ||||||||||||||||||||||
400,000 | - | - | $ | 1.000 |
2/28/2011
|
- | - | - | - | ||||||||||||||||||||||||
80,000 | - | - | $ | 0.520 |
3/12/2012
|
- | - | - | - | ||||||||||||||||||||||||
800,000 | - | - | $ | 0.650 |
11/30/2012
|
- | - | - | - | ||||||||||||||||||||||||
300,000 | 300,000 | - | $ | 0.200 |
7/7/2014
|
||||||||||||||||||||||||||||
John
M. Davis
|
200,000 | - | - | $ | 0.610 |
4/17/2013
|
- | - | - | - | |||||||||||||||||||||||
450,000 | 150,000 | $ | 0.200 |
4/14/2014
|
- | - | - | - | |||||||||||||||||||||||||
Christopher
W. Larkin
|
200,000 | 50,000 | - | $ | 0.200 |
4/15/2014
|
- | - | - | - |
48
Director
Compensation
The
Company prepaid Mr. Berman’s 2009 compensation of $54,000 as Chairman of the
Board in 2008. Furthermore, in 2008, the Company prepaid 2009
Directors’ fees in the amount of $50,000 to Messrs. Berman and Rushefsky and
$30,000 to Messrs. Cooke and Emil. There were no director fees paid in
2009.
Employment
and Other Agreements
On
November 30, 2007, the Company entered into a new employment agreement with
Steven J. Ross, the Company's CEO. The agreement provides for a term through
December 31, 2009, which is automatically renewable for a period of one year
unless either party provides the other with notice 30 days prior to the end of
the term that the term shall not be extended. The employment agreement was
extended through December 31, 2010 under the existing terms. The CEO is entitled
to the following compensation pursuant to the employment agreement:
|
·
|
annual
compensation in the amount of
$475,000;
|
|
·
|
a
bonus of 50% of the base salary if certain targets set by the Board of
Directors are satisfied (the bonus shall be 65% during year two of the
agreement);
|
|
·
|
700,000
shares of common stock issued on January 2, 2008, 100,000 shares of common
stock issued on December 31, 2008 and 100,000 shares of common stock
issued on December 31, 2009;
|
|
·
|
an
option to receive 800,000 shares of common stock at an exercise price of
$0.65 per share vesting half on December 31, 2008 and half on December 31,
2009; and
|
|
·
|
a
housing and office allowance of $5,000 per
month
|
On April
14, 2009, the Company entered into a new employment agreement with John M.
Davis, the Company’s President and Chief Operating Officer. The employment
agreement provides for a term through December 31, 2010, which is automatically
renewable for a period of one year unless either party provides the other with
notice 30 days prior to the end of the term that the term shall not be extended.
Mr. Davis is entitled to receive the following compensation in accordance with
his employment agreement:
|
·
|
Annual
salary of $309,000;
|
|
·
|
For
each year under the term of the employment agreement, Mr. Davis is
eligible to receive a bonus equal to 50% of his annual salary based upon
the achievement of performance targets and objectives as established by
the Company’s Board of Directors.
|
|
·
|
Option
grant to purchase 600,000 shares of common stock of the Company at $0.20
per share of which 300,000 shares vested on April 14, 2009, 150,000 shares
vested on December 31, 2009 and 150,000 shares will vest on December 31,
2010. These options may be exercised only if authorized shares are
available.
|
|
·
|
A
home office and car allowance of $1,000 per
month.
|
|
·
|
Continuation
of health, life and disability
insurance.
|
In 2009,
Mr. Davis volunteered to temporarily forego receiving the salary increase and
the $1,000 monthly home office and car allowance to be consistent with policies
and procedures implemented throughout the Company.
On April
15, 2009, the Company entered into an employment agreement with Christopher W.
Larkin, the Company’s Chief Financial Officer. The employment agreement provides
for a term through December 31, 2010, which is automatically renewable for a
period of one year unless either party provides the other with notice 30 days
prior to the end of the term that the term shall not be extended. Mr. Larkin is
entitled to receive the following compensation in accordance with his employment
agreement:
|
·
|
Annual
salary of $200,000;
|
|
·
|
For
each year under the term of the employment agreement, Mr. Larkin is
eligible to receive a bonus equal to 35% of his annual salary based upon
the achievement of performance targets and objectives as established by
the Company’s Board of
Directors.
|
49
|
·
|
Option
grant to purchase 250,000 shares of common stock of the Company at $0.20
per share of which 150,000 shares vested on April 15, 2009, 50,000 shares
vested on December 31, 2009 and 50,000 shares will vest on December 31,
2010. These options may be exercised only if authorized shares are
available.
|
|
·
|
Continuation
of health, life and disability
insurance.
|
In 2009,
Mr. Larkin volunteered to temporarily forego receiving the salary increase to be
consistent with policies and procedures implemented throughout the
Company.
On
January 30, 2009, the Company entered into a Separation Agreement with John
Schroepfer, Interim Chief Financial Officer, under which the parties agreed that
Mr. Schroepfer would resign as Interim Chief Financial Officer. The Agreement
called for a continuation of his salary, as well as, his life, health and
disability insurance through July 21, 2009.
On May
14, 2009, the Company entered into a Separation Agreement with Robert C.
Thompson, Senior Vice President and National Sales Manager, under which the
parties agreed that Mr. Thompson would resign as Senior Vice President and
National Sales Manager. The Agreement called for a continuation of his salary,
as well as, his life, health and disability insurance through August 15,
2009.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table sets forth the beneficial ownership of our company's common
stock as of April 26, 2010, as to
|
·
|
each
person known to beneficially own more than 5% of the Company's common
stock
|
|
·
|
each
of our directors
|
|
·
|
each
executive officer
|
|
·
|
all
directors and officers as a group
|
Unless
otherwise indicated, each of the stockholders can be reached at our principal
executive offices located at 485 Metro Place South, Suite 275 Dublin, Ohio
43017.
50
Shares
benficially owned (1)
|
||||||||
Beneficial
Owners of more than 5% of common stock (other than directors and executive
officers)
|
Number
|
%
|
||||||
Caremi
Partners Ltd. (2)
|
3,600,000 | 8.77 | % | |||||
Laurus
Master Fund, Ltd (3)
|
9,215,838 | 21.95 | % | |||||
CCM
Master Qualified Fund Ltd (4)
|
2,124,720 | 5.06 | % | |||||
Steven
R. Eyer (5)
|
2,185,000 | 5.47 | % | |||||
Jack
C. Holland (6)
|
2,375,000 | 5.92 | % | |||||
Nicholas
J. Lamoriello (7)
|
3,100,000 | 7.73 | % | |||||
Directors
and Executive Officers:
|
||||||||
Richard
Berman (8)
|
2,712,963 | 6.38 | % | |||||
Steven
B. Ruchefsky (9)
|
3,680,000 | 8.95 | % | |||||
Jeff
Cooke (10)
|
80,000 | * | ||||||
Arthur
D. Emil (11)
|
683,591 | 1.70 | % | |||||
Steven
J. Ross (12)
|
2,955,000 | 7.10 | % | |||||
John
M. Davis (13)
|
1,150,000 | 2.84 | % | |||||
Christopher
W. Larkin (14)
|
200,000 | * | ||||||
All
directors and executive officers as a group (8 persons)
|
11,461,554 | 24.39 | % |
*
|
Less
than 1%
|
1) Gives
effect to the shares of Common Stock issuable upon the exercise of all options,
warrants and convertible securities exercisable within 60 days of April 26, 2010
and other rights beneficially owned by the indicated stockholders on that date.
Shares of Common Stock issuable pursuant to warrants or options or upon
conversion of convertible securities, to the extent such warrants or options or
convertible securities are currently exercisable or convertible within 60 days
of April 26, 2010, are treated as outstanding for computing the ownership
percentage of the person holding such securities, but are not treated as
outstanding for computing the ownership percentage of any other person.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power with
respect to shares. Unless otherwise indicated, the persons named in the table
have sole voting and sole investment control with respect to all shares
beneficially owned. Percentage ownership is calculated based on 39,826,929
shares of the Common Stock outstanding as of April 26, 2010. All information is
based upon information furnished by the persons listed or otherwise available to
the Company.
2) The
address of Caremi Partners Ltd. ("Caremi") is Two American Lane, Greenwich
Connecticut 06836. Steven Ruchefsky, one of our directors, is employed by
Caremi. Mr. Ruchefsky, who has voting and investment control over such
securities, disclaims beneficial ownership of the securities of Caremi. In
addition, Caremi purchased shares of B Preferred Stock and D Preferred Stock,
which are convertible into 1,600,000 shares and 800,000 shares of common stock,
respectively. In addition, as part of the purchase of the D Preferred Stock,
Caremi received 400,000 Series D Warrants to purchase 400,000 shares of common
stock. The terms of the B Preferred Stock restricts the ability of
the shareholder to hold in excess of 4.99% of the issued and outstanding shares
of common stock of the Company as determined in accordance with Section 13(d) of
the Exchange Act. As the amount of shares of common stock currently held by
Caremi are in excess of 4.99%, such shares of common stock issuable upon
conversion of the B Preferred Stock are not included in the calculation of its
beneficial ownership.
3)
Includes 3,186,429 shares of common stock held by Valens Offshore SPV I, Ltd.
(“Valens Offshore I”) and 2,996,398 shares of Common Stock are held by Valens US
SPV I LLC (“Valens US”). Both of these funds are managed by Valens
Capital Management, LLC (“VCM”).
51
On March
9, 2005, we entered into a series of agreements with Laurus Master Fund, Ltd., a
Cayman Islands company (“Laurus”), pursuant to which we issued a note and a
warrant (“2005 Warrant”) and an option (the “2005 Option”). The 2005
Warrant provides for the purchase of up to 1,084,338 shares of common stock at a
price of $0.50 each, subject to customary adjustments, until March 9, 2012, and
the 2005 Option provides for the purchase of up to 643,700 shares of common
stock at a price of $0.01 per share, subject to customary adjustments, until
March 9, 2013. Laurus purchased 268,707 shares under the 2005 Option
during 2007.
On May
30, 2006, we entered into agreements with Laurus pursuant to which we sold debt
and a warrant (“May 2006 Warrant”) to purchase common stock of the Company to
Laurus in a private offering pursuant to exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended. Under the May
2006 Warrant, Laurus can purchase 700,000 shares of common stock of the Company,
at a purchase price of $0.01 per share exercisable until May 30,
2011.
On June
12, 2006, we entered into an agreement with Laurus pursuant to which the May
2006 Warrant was rescinded, a new common stock purchase warrant (the "New
Warrant") was issued to Laurus. The New Warrant is exercisable to purchase up to
700,000 shares of common stock of the Company, at an exercise price of $0.1667
per share, exercisable until May 30, 2011.
On August
10, 2006, we entered into an Amendment Agreement with Laurus pursuant to which
Laurus agreed to remove its contractual ability to waive its ownership
limitation of 4.99% of our issued and outstanding shares of common stock as
provided under the 2005 Warrant and the 2005 Option and the New
Warrant.
Eugene
Grin and David Grin are the controlling principals of VCM and Laurus and share
sole voting and investment power over all securities held by these
funds.
4) CCM
Master Qualified Fund Ltd purchased (i) 317,782 shares of C Preferred Stock,
which are convertible into 3,813,384 shares of common stock, (ii) 70,824 shares
of D Preferred Stock, which are convertible into 1,416,480 shares of common
stock, and (iii) 708,240 D Warrants, which are convertible into 708,240 shares
of common stock at an exercise price of $0.50. The terms of the Series C
Preferred Stock restricts the ability of the shareholder to hold in excess of
4.99% of the issued and outstanding shares of common stock of the Company as
determined in accordance with Section 13(d) of the Exchange Act. As
the amount of shares of common stock currently held by CCM Master Qualified
Master Fund Ltd is in excess of 4.99%, all shares of common stock issuable upon
conversion of the Series C Preferred Stock are not included in the calculation
of their beneficial ownership.
5)
Includes 2,045,000 shares of common stock and 50,000 shares of common stock
issuable upon exercising of currently exercisable stock options at a price of
$1.00 per share price, plus 60,000 shares of common stock issuable upon
conversion of 3,000 shares of D Preferred Stock and 30,000 shares of common
stock issuable upon conversion of 30,000 D Warrants exercisable at $0.50 per
share.
6)
Includes 2,075,000 shares of common stock, plus 200,000 shares of common stock
issuable upon conversion of 10,000 shares of D Preferred Stock and 100,000
shares of common stock issuable upon conversion of 100,000 D Warrants at an
exercise price of $0.50 per share. The amount does not include 50,000
shares of common stock issuable upon conversion of 25,000 shares of B Preferred
Stock. The terms of the Series B Preferred Stock restricts the ability of the
shareholder to hold in excess of 4.99% of the issued and outstanding shares of
common stock of the Company as determined in accordance with Section 13(d) of
the Exchange Act. As the amount of shares of common stock currently held by Mr.
Holland is in excess of 4.99%, such shares of common stock issuable upon
conversion of the Series B Preferred Stock are not included in the calculation
of his beneficial ownership.
7) In
connection with the acquisition of the Lamoriello Entities, the Company issued
3,000,000 shares of common stock and 300,000 stock options to purchase 300,000
shares of common stock, exercisable at a price of $0.50 per share; to The LAMCO
Group, Inc. Nicholas Lamoriello is the principal executive officer and
shareholder of The LAMCO Group, Inc. In 2009, the 3,000,000 shares of
common stock were taken out of the name of The LAMCO Group, Inc. and 2,800,000
were put directly in the name of Nicholas Lamoriello.
52
8)
Includes 532,963 shares of common stock issuable upon exercising currently
exercisable stock options at a price of $1.00 per share. In addition, Mr. Berman
purchased (i) 250,000 shares of B Preferred Stock, which are convertible into
500,000 shares of common stock, (ii) 20,000 shares of D Preferred Stock, which
are convertible into 400,000 shares of common stock, (iii) 5,000 shares of E
Preferred Stock, which are convertible into 1,000,000 shares of common stock,
(iv) 200,000 D Warrants which are convertible into 200,000 shares of common
stock at an exercise price of $0.50, (v) 500,000 E Warrants which are
convertible into 500,000 shares of common stock exercisable at a price of $0.50
per share and (vi) 80,000 shares of common stock that may be purchased upon
exercising currently exercisable stock options issued as remuneration for
services as a director at an exercise price of $0.52 per share. The terms of the
Series B and E Preferred Stock restricts the ability of the shareholder to hold
in excess of 4.99% of the issued and outstanding shares of common stock of the
Company as determined in accordance with Section 13(d) of the Exchange Act.
However, there is a stipulation in the Series E Preferred Stock that allows the
holder to increase the beneficial ownership limitation to 9.99% by written
notice at least 61 days prior to conversion. As the amount of shares
of common stock currently held by Mr. Berman is in excess of 4.99%, all shares
of common stock issuable upon conversion of the Series B Preferred Stock are not
included in the calculation of his beneficial ownership. The Series E
Preferred Stock and the E Warrants were included in the calculation as we
assumed Mr. Berman would exercise his right to increase the
limitation.
9)
Consists of (i) 2,400,000 shares of common stock, (ii) 1,600,000 shares of
common stock issuable upon conversion of 800,000 shares of B Preferred Stock,
(iii) 800,000 shares of common stock issuable upon conversion of 40,000 shares
of D Preferred Stock, (iv) 400,000 D Warrants which are convertible into 400,000
shares of common stock at a price of $0.50 per share and (v) 80,000 shares of
common stock that may be purchased upon exercising currently exercisable stock
options issued as remuneration for services as a director at an exercise price
of $0.52 per share. Mr. Ruchefsky, who has voting and investment control over
such securities of Caremi Partners Ltd., disclaims beneficial ownership of such
securities. The terms of the Series B Preferred Stock restricts the ability of
the shareholder to hold in excess of 4.99% of the issued and outstanding shares
of common stock of the Company as determined in accordance with Section 13(d) of
the Exchange Act. As the amount of shares of common stock and exercisable stock
options currently held are in excess of 4.99%, such shares of common stock
issuable upon conversion of the Series B Preferred Stock are not included in the
calculation of its beneficial ownership.
10)
Consists of 80,000 shares of common stock that may be purchased upon exercising
currently exercisable stock options issued in March 2007 as remuneration for
services as a director at an exercise price of $0.52 per share.
11)
Consists of (i) 253,591 shares of common stock, (ii) 200,000 shares of common
stock issuable on conversion of 100,000 shares of B Preferred Stock, (ii)
100,000 shares of common stock issuable on conversion of 5,000 shares of D
Preferred Stock, (iii) 50,000 shares of common stock issuable upon conversion of
D Warrants at a price of $0.50 per share, and (iv) 80,000 shares of common stock
that may be purchased upon exercising currently exercisable stock options issued
as remuneration for services as a director at an exercise price of $0.52 per
share.
12)
Consists of (i) 1,150,000 shares of common stock (ii) 50,000 shares of common
stock issuable on conversion of 25,000 shares of B Preferred Stock, (iii) 50,000
shares of common stock issuable on conversion of 2,500 shares of D Preferred
Stock, (iv) 25,000 shares of common stock issuable upon conversion of D Warrants
at a price of $0.50 per share. (v) 400,000 shares of common stock that may be
purchased upon exercising currently exercisable stock options issued in March
2006 at an exercise price of $1.00 per share, (vi) 80,000 shares of common stock
that may be purchased upon exercising currently exercisable stock options issued
as remuneration for services as a director at an exercise price of $0.52 per
share, (vii) 800,000 shares of common stock that may be purchased upon
exercising currently exercisable stock options issued November 30, 2007 as a
part of his employment agreement as CEO at an exercise price of $0.65 per share,
and (viii) 450,000 shares of common stock issuable upon exercising currently
exercisable stock options issued in July 2009 at an exercise price of $0.20 per
share. The terms of the Series B Preferred Stock restricts the ability of the
shareholder to hold in excess of 4.99% of the issued and outstanding shares of
common stock of the Company as determined in accordance with Section 13(d) of
the Exchange Act. As the amount of shares of common stock and exercisable stock
options currently held are in excess of 4.99%, such shares of common stock
issuable upon conversion of the Series B Preferred Stock are not included in the
calculation of its beneficial ownership.
13)
Consists of (i) 500,000 shares of common stock (ii) 200,000 shares of common
stock that may be purchased upon exercising currently exercisable stock options
at an exercise price of $0.61 per share related to his employment agreement as
President and COO, and (iii) 450,000 shares of common stock that may be
purchased upon exercising currently exercisable stock options at an exercise
price of $0.20 per share related to his employment agreement as President and
COO.
53
14)
Represents 200,000 shares of common stock issuable upon exercising currently
exercisable stock options at an exercise price of $0.20 per share related to his
employment agreement as Chief Financial Officer.
Equity
Compensation Plan Information
The
following table sets forth information about the shares of the Company's common
Stock that may be issued upon the exercise of options granted to employees and
consultants under the 2005 Stock Incentive Plan, which were approved by the
Board of Directors, as well as shares that may be issued upon the exercise of
options under the 2005 Stock Incentive Plan, which were not approved by the
Board of Directors.
(a)
|
(b)
|
(C)
|
||||||||||
Plan Category
|
Number of
securities
to be
issued upon
exercise of
outstanding
options,
warrants
and rights
|
Weighted-average
exercise price of
outstanding
options,
warrants
and rights
|
Number of
securities
remaining
available
for future
issuance
under
equity
compensation plans
excluding securities
reflected in column
(a)
(1)
|
|||||||||
Equity
compensation plans approved by security holders
|
- | - | - | |||||||||
Equity
compensation plans not approved by security holders
|
5,844,963 | $ | 0.54 | 4,155,037 | ||||||||
Total
|
5,844,963 | $ | 0.54 | 4,155,037 |
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
In
November 2005, the Company granted Duncan Capital Group LLC (an entity
controlled by Michael Crow, one of the Company’s shareholders) and DCI Master
LDC ("Optionees") a five-year option to purchase up to 250,000 shares of common
stock in the Company at an exercise price of $1.00 per share, in consideration
for Optionee's agreeing, in connection with the Company’s acquisition of
American Benefit Resources, Inc. ("ABR"), to enter into a put agreement with ABR
and IBF Fund Liquidating LLC whereby Optionees may become obligated, between the
second and third anniversaries of the closing of the acquisition, to repurchase,
for up to $1 million, the shares delivered to IBF Fund Liquidating LLC as a
portion of the purchase price of ABR. On December 20, 2006, the Company and the
Optionees entered into an agreement (the "Optionee Agreement") pursuant to which
the Company agreed to make a payment to the Optionees of $1.49 less the market
value per share (as defined in the Optionee Agreement) for each share purchased
by the Optionees from Sellers in the event that the Sellers exercise their put
with the Optionees. In November 2007, the Company and DC Associates terminated
the Optionee Agreement. As part of the terms of the termination of
this agreement, the Company became liable directly to ABR and IBF Fund
Liquidating LLC for the put agreement. On August 21, 2008, IBF
notified the Optionees that it intended to exercise their put. On September 26,
2008, in accordance with the amendment to the Optionee Agreement dated November
30, 2007, the Company communicated its intent to exercise its right to buy back
the shares directly from IBF at $1.49 per share. On November 3, 2008, the
Company acquired the 671,141 shares of common stock from IBF Funding Liquidating
LLC for $1,000,000 ($1.49 per share).
On
October 1, 2008, the Company entered into an Advisory Agreement with MODC
Holdings, Inc. (“MODC”) to evaluate several equity transaction opportunities
that may involve a change in control. For their services, MODC was paid a
retainer of $75,000 and would receive a fee of $150,000 upon a successful close
of the transaction. MODC is controlled by Michael Crow, a shareholder of the
Company.
Richard
Berman, the Chairman of the Board of Directors (“Chairman”), receives $4,500 per
month as compensation for serving as Chairman of the Board. On October 16, 2008,
the Company’s Board of Directors authorized the Company to pay $54,000 to the
Chairman as an advance on his 2009 salary. In the event that the Chairman
was to be terminated, resign or retire, or for any reason whatsoever, including
a change of control in which the Chairman is terminated, the Chairman would not
have been required to repay the 2009 advance.
54
On
November 6, 2008, the Company entered into a two year Management Agreement
beginning October 1, 2008 with Nicholas J. Lamoriello and Stephen R. Zito
(“Managers”) under which the Managers will provide business management services
for three wholly-owned subsidiaries of the Company for a 24 month period. In
exchange for the business management services, the Company will pay the Managers
a management fee of $30,000 per month, plus out of pocket expenses while
providing services to the Company. Both Nicholas J. Lamoriello and Stephen R.
Zito are shareholders of the Company.
LAMCO
Advisory Services, Inc. is the investment advisor on the Company’s 401(k)
retirement plan and owned by Nicholas J. Lamoriello, a shareholder of the
Company. The Company paid approximately $15,000 and $13,000 in advisor fees to
LAMCO Advisory Service, Inc. in 2009 and 2008, respectively.
Renee
Conner and William Renninger, former owners of TPA and current employees of the
Company, collectively own 100% of Conner Management Group, LLC (“CMG”). TPA is a
lessee under an office lease agreement with CMG and paid approximately
$132,000 and $129,000 in rent to CMG in 2009 and 2008, respectively, which
approximates fair market value.
Stephen
H. Rosen, former owner of SHRA and current employee of the Company, owns an
interest in 89 Haddon Avenue Associates, L.L.C. (“HAA”). SHRA is a lessee under
an office lease agreement with HAA and paid approximately $168,000 and
$163,000 in rent to HAA in 2009 and 2008, respectively, which approximates fair
market value.
Michael
Callahan, former owner of Pentec and PCM and current employee of the Company,
owns 100% of MJM MILESTONE, LLC (“MJM”). Pentec and PCM are lessees under an
office lease agreement with MJM and paid approximately $106,000 and
$101,000 in rent to MJM in 2009 and 2008, respectively, which approximates fair
market value.
Director
Independence
Five of
our directors, Messrs. Berman, Cooke, Emil, Virany, and Ruchefsky, are
independent directors, using the NASDAQ definition of independence. Messrs.
Berman, Cooke, and Ruchefsky comprise the audit, compensation and governance
committees.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
We have
engaged Rothstein, Kass & Company, P.C. as our registered independent public
accounting firm for the fiscal year ended December 31, 2009.
Audit
Fees. The aggregate fees billed by our auditors, for professional services
rendered for the audit of our annual financial statements for the years ended
December 31, 2009 and 2008 and for the reviews of the financial statements
included in our Quarterly Reports on Form 10-Q during these fiscal years were
$392,500 and $370,000, respectively.
Audit
Related Fees. We incurred fees to auditors of $126,385 for audit related fees in
connection with the audit of acquisition targets during the fiscal year ended
December 31, 2008.
Tax Fees.
We incurred fees to auditors of $189,950 and $124,000 for tax advice and tax
compliance services during the fiscal years ended December 31, 2009 and 2008,
respectively.
Other.
None.
The Audit
Committee has considered whether the provision of non-audit services is
compatible with maintaining the principal accountant’s
independence.
55
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Exhibit
|
||
Number
|
Description
|
|
3.1
|
Articles
of Incorporation of the Company, as amended (Incorporated by reference to
Form S-18 filed with the Securities and Exchange Commission on October 7,
1985))
|
|
3.2
|
Amended
and Restated Bylaws of the Company (Incorporated by reference to Form
8-K_filed with the Securities and Exchange Commission on April 19, 2005.
(File No.333-124161))
|
|
3.3
|
Certificate
of Designation of Preferences, Rights and Limitations of Series B
Cumulative Convertible Preferred Stock (Incorporated by reference to Form
8-K filed with the Securities and Exchange Commission on October 19, 2005.
(File No.000-51252))
|
|
3.4
|
Certificate
of Designation of Preferences, Rights and Limitations of Series C
Cumulative Convertible Preferred Stock (Incorporated by reference to Form
8-K filed with the Securities and Exchange Commission on November 14,
2005. (File No.000-51252))
|
|
3.5
|
Articles
of Amendment to the Articles of Incorporation dated August19, 2004
(Incorporated by reference to Form SB-2 filed with the Securities and
Exchange Commission on November 21, 2006 (File No.
333-136790))
|
|
3.6
|
Articles
of Amendment to the Articles of Incorporation dated March 2, 2005
(Incorporated by reference to Form SB-2 filed with the Securities and
Exchange Commission on November 21, 2006 (File No.
333-136790))
|
|
3.7
|
Articles
of Amendment to the Articles of Incorporation dated March 15, 2005
(Incorporated by reference to Form SB-2 filed with the Securities and
Exchange Commission on November 21, 2006 (File No.
333-136790))
|
|
3.8
|
Articles
of Amendment to the Articles of Incorporation dated March 21, 2005
(Incorporated by reference to Form SB-2 filed with the Securities and
Exchange Commission on November 21, 2006 (File No.
333-136790))
|
|
3.9
|
Certificate
of Designation of Preferences, Rights and Limitations of Series D
Cumulative Convertible Preferred Stock (Incorporated by reference to Form
8-K filed with the Securities and Exchange Commission on March 27, 2006.
(File No. 002-98138-A))
|
|
3.10
|
Certificate
of Designation of Preferences, Rights and Limitations of Series E
Cumulative Convertible Preferred Stock (Incorporated by reference to Form
8-K filed with the Securities and Exchange Commission on December 26,
2006. (File No. 002-98138-A))
|
|
4.1
|
Securities
Purchase Agreement dated March 9, 2005 by and between the Company and
Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with
the Securities and Exchange Commission on March 15, 2005. (File No.
002-98138-A))
|
|
4.2
|
Secured
Convertible Term Note dated March 9, 2005 issued by the Company to Laurus
Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on March 15, 2005. (File No.
002-98138-A))
|
|
4.3
|
Secured
Convertible Term Note dated March 9, 2005 issued by the Company to Laurus
Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on March 15, 2005. (File No.
002-98138-A))
|
56
4.4
|
Common
Stock Option dated March 9, 2005 issued by the Company to Laurus Master
Fund, Ltd. (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on March 15, 2005. (File No.
002-98138-A))
|
|
4.5
|
|
Master
Security Agreement dated March 9, 2005 among Fast Eddie Racing Stables,
Inc., Duncan Capital Financial Group, Inc., Pension Administration
Services, Inc., Complete Investment Management Inc. of Philadelphia, MD
Bluestein, Inc. and Laurus Master Fund, Ltd .(Incorporated by reference to
Form 8-K filed with the Securities and Exchange Commission on March 15,
2005. (File No. 002-98138-A))
|
4.6
|
Stock
Pledge Agreement dated March 9, 2005 among Fast Eddie Racing Stables,
Inc., Duncan Capital Financial Group, Inc., Pension Administration
Services, Inc., Complete Investment Management Inc. of Philadelphia, MD
Bluestein, Inc. and Laurus Master Fund, Ltd.(Incorporated by reference to
Form 8-K filed with the Securities and Exchange Commission on March 15,
2005. (File No. 002-98138-A))
|
|
4.7
|
Subsidiary
Guaranty dated March 9, 2005 executed by Duncan Capital Group, Inc.,
Pension Administration Services, Inc., Complete Investment Management Inc.
of Philadelphia, MD Bluestein, Inc. and Laurus Master Fund, Ltd.
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on March 15, 2005. (File No.
002-98138-A))
|
|
4.8
|
Registration
Rights Agreement dated March 9, 2005 by and between Fast Eddie Racing
Stables, Inc. and Laurus Master Fund, Ltd. (Incorporated by reference to
Form 8-K filed with the Securities and Exchange Commission on March 15,
2005. (File No. 002-98138-A))
|
|
4.9
|
Common
Stock Purchase Warrant dated March 9, 2005 issued by Duncan Capital
Financial Group, Inc. to Richard E. Stierwalt. (Incorporated by reference
to Form 8-K filed with the Securities and Exchange Commission on March 15,
2005. (File No. 002-98138-A))
|
|
4.10
|
Common
Stock Purchase Warrant dated March 9, 2005 issued by Duncan Capital
Financial Group, Inc. to Leonard Neuhaus. (Incorporated by reference to
Form 8-K filed with the Securities and Exchange Commission on March 15,
2005. (File No. 002-98138-A))
|
|
4.11
|
Form
of Stock Option Agreement, dated March 9, 2005, between the Company and
certain non-management directors. (Incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on April 19,
2005.))
|
|
4.12
|
Securities
Purchase Agreement dated November 30, 2005 entered by and between National
Investment Mangers Inc. and Laurus Master Fund, Ltd. (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
December 6, 2005. (File No.000-51252))
|
|
4.13
|
Securities
Purchase Agreement dated November 30, 2005 entered by and between National
Investment Mangers Inc. and Laurus Master Fund, Ltd. (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
December 6, 2005. (File No.000-51252))
|
|
4.14
|
Securities
Purchase Agreement dated November 30, 2005 entered by and between National
Investment Mangers Inc. and Laurus Master Fund, Ltd. (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
December 6, 2005. (File No.000-51252))
|
|
4.15
|
Convertible
Promissory Note, dated August 2, 2005, issued by the Company to Stephen H.
Rosen. (Incorporated by reference to Form 8-K filed with the Securities
and Exchange Commission on August 5, 2005.(File
No.000-51252))
|
57
4.16
|
Convertible
Promissory Note, dated August 2, 2005, issued by the Company to Elizabeth
Davies. (Incorporated by reference to Form 8-K filed with the Securities
and Exchange Commission on August 5, 2005. (File
No.000-51252))
|
|
4.17
|
Common
Stock Option, dated August 2, 2005, issued by the Company to Stephen H.
Rosen. (Incorporated by reference to Form 8-K filed with the Securities
and Exchange Commission on August 5, 2005. (File
No.000-51252))
|
|
4.18
|
Common
Stock Option, dated August 2, 2005, issued by the Company to Stephen H.
Rosen. (Incorporated by reference to Form 8-K filed with the Securities
and Exchange Commission on August 5, 2005. (File
No.000-51252))
|
|
4.19
|
|
Form
of Subscription Agreement for Series B Cumulative Convertible Preferred
Stock (Incorporated by reference to the Form 8-K Current Report filed with
the Securities and Exchange Commission on October 20, 2005 (File
No.000-51252))
|
4.20
|
Form
of Subscription Agreement for Series C Cumulative Convertible Preferred
Stock (Incorporated by reference to the Form 8-K Current Report filed with
the Securities and Exchange Commission on November 14, 2005 (File
No.000-51252))
|
|
4.21
|
Amendment
Agreement entered by and between the Company and Laurus Master Fund Ltd.
dated August 2006
|
|
4.22
|
Securities
Purchase Agreement dated May 30, 2006 by and between National Investment
Managers Inc. and Laurus Master Fund, Ltd. (Incorporated by reference to
the Form 8-K Current Report filed with the Securities and Exchange
Commission on June 5, 2006 (File No.000-51252))
|
|
4.23
|
Secured
Non-Convertible Term Note payable to Laurus Master Fund, Ltd.
(Incorporated by reference to the Form 8-K Current Report filed with the
Securities and Exchange Commission on June 5, 2006 (File
No.000-51252))
|
|
4.24
|
Secured
Non-Convertible Term Note payable to Laurus Master Fund, Ltd.
(Incorporated by reference to the Form 8-K Current Report filed with the
Securities and Exchange Commission on June 5, 2006 (File
No.000-51252))
|
|
4.25
|
Registration
Rights Agreement dated May 30, 2006 by and between National Investment
Managers Inc. and Laurus Master Fund, Ltd. (Incorporated by reference to
the Form 8-K Current Report filed with the Securities and Exchange
Commission on June 5, 2006 (File No.000-51252))
|
|
4.26
|
Letter
Agreement dated May 30, 2006 by and between National Investment Managers
Inc. and Laurus Master Fund, Ltd. (Incorporated by reference to the Form
8-K Current Report filed with the Securities and Exchange Commission on
June 5, 2006 (File No.000-51252))
|
|
4.27
|
Amendment
dated May 30, 2006 by and between National Investment Managers Inc. and
Laurus Master Fund, Ltd. (Incorporated by reference to the Form 8-K
Current Report filed with the Securities and Exchange Commission on June
5, 2006 (File No.000-51252))
|
|
4.28
|
Agreement
dated June 14, 2006 by and between National Investment Managers Inc. and
Laurus Master Fund, Ltd. (Incorporated by reference to the Form 8-K
Current Report filed with the Securities and Exchange Commission on June
16, 2006 (File No.000-51252))
|
|
4.29
|
Common
Stock Purchase Warrant dated May 30, 2006 issued to Laurus Master Fund,
Ltd. (Incorporated by reference to the Form 8-K Current Report filed with
the Securities and Exchange Commission on June 16, 2006 (File
No.000-51252))
|
58
4.30
|
Letter
from Laurus Master Fund, Ltd. to National Investment Managers Inc., dated
June 14, 2006 (Incorporated by reference to the Form 8-K Current Report
filed with the Securities and Exchange Commission on June 16, 2006 (File
No.000-51252))
|
|
4.31
|
Form
of Subscription Agreement for Series D Cumulative Convertible Preferred
Stock (Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on March 27, 2006. (File No.
002-98138-A))
|
|
4.32
|
Form
of Common Stock Purchase Warrant (Incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on March 27, 2006. (File
No. 002-98138-A))
|
|
4.33
|
Form
of Common Stock Purchase Warrant (Incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on March 27, 2006. (File
No. 002-98138-A))
|
|
4.34
|
|
Form
of Common Stock Purchase Warrant (Incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on December 26, 2006.
(File No. 002-98138-A))
|
4.35
|
Revolving
Line of Credit and Term Loan Agreement by and between National Investment
Managers Inc. and RBS Citizens, National Association dated November 30,
2007 (Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on December 4, 2007. (File No.
000-51252))
|
|
4.36
|
Revolving
Line of Credit Note issued by National Investment Managers Inc. issued to
RBS Citizens, National Association dated November 30, 2007 (Incorporated
by reference to Form 8-K filed with the Securities and Exchange Commission
on December 4, 2007. (File No. 000-51252))
|
|
4.37
|
Term
Promissory Note issued by National Investment Managers Inc. issued to RBS
Citizens, National Association dated November 30, 2007 (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
December 4, 2007. (File No. 000-51252))
|
|
4.38
|
Stock
Pledge Agreement by and between National Investment Managers Inc. and RBS
Citizens, National Association dated November 30, 2007 (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
December 4, 2007. (File No. 000-51252))
|
|
4.39
|
Security
Agreement by and between National Investment Managers Inc. and RBS
Citizens, National Association dated November 30, 2007 (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
December 4, 2007. (File No. 000-51252))
|
|
4.40
|
Form
of Stock Pledge Agreement by and between the subsidiaries of National
Investment Managers Inc. and RBS Citizens, National Association dated
November 30, 2007 (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on December 4, 2007. (File No.
000-51252)
|
|
4.41
|
Form
of Security Agreement by and between the subsidiaries of National
Investment Managers Inc. and RBS Citizens, National Association dated
November 30, 2007 (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on December 4, 2007. (File No.
000-51252))
|
|
4.42
|
Form
of Guaranty by and between the subsidiaries of National Investment
Managers Inc. and RBS Citizens, National Association dated November 30,
2007 (Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on December 4, 2007. (File No.
000-51252))
|
|
4.43
|
Securities
Purchase and Loan Agreement by and between National Investment Managers
Inc. and Woodside Capital Partners IV, LLC, Woodside Capital Partners IV
QP, LLC, Lehman Brothers Commercial Bank and Woodside Agency Services,
LLC, as collateral agent, dated November 30, 2007 (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
December 4, 2007. (File No.
000-51252))
|
59
4.44
|
Securities
Purchase and Loan Agreement by and between National Investment Managers
Inc. and Woodside Capital Partners IV, LLC, Woodside Capital Partners IV
QP, LLC, Lehman Brothers Commercial Bank and Woodside Agency Services,
LLC, as collateral agent, dated November 30, 2007 (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
December 4, 2007. (File No. 000-51252))
|
|
4.45
|
Form
of Warrant exercisable at $0.50 per share issued by National Investment
Managers Inc. to Woodside Capital Partners IV, LLC, Woodside Capital
Partners IV QP, LLC, and Lehman Brothers Commercial Bank dated November
30, 2007 (Incorporated by reference to Form 8-K filed with the Securities
and Exchange Commission on December 4, 2007. (File No.
000-51252))
|
|
4.46
|
Form
of Warrant exercisable at $1.00 per share issued by National Investment
Managers Inc. to Woodside Capital Partners IV, LLC, Woodside Capital
Partners IV QP, LLC, and Lehman Brothers Commercial Bank dated November
30, 2007 (Incorporated by reference to Form 8-K filed with the Securities
and Exchange Commission on December 4, 2007. (File No.
000-51252))
|
|
4.47
|
|
Form
of Warrant exercisable at $1.50 per share issued by National Investment
Managers Inc. to Woodside Capital Partners IV, LLC, Woodside Capital
Partners IV QP, LLC, and Lehman Brothers Commercial Bank dated November
30, 2007 (Incorporated by reference to Form 8-K filed with the Securities
and Exchange Commission on December 4, 2007. (File No.
000-51252))
|
4.48
|
Registration
Rights Agreement by and between National Investment Managers Inc. and
Woodside Capital Partners IV, LLC, Woodside Capital Partners IV QP, LLC,
and Lehman Brothers Commercial Bank dated November 30, 2007 (Incorporated
by reference to Form 8-K filed with the Securities and Exchange Commission
on December 4, 2007. (File No. 000-51252))
|
|
4.49
|
Contingent
Interest Payment Agreement by and between National Investment Managers
Inc. and Woodside Capital Partners IV, LLC, Woodside Capital Partners IV
QP, LLC, and Lehman Brothers Commercial Bank dated November 30, 2007
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on December 4, 2007. (File No.
000-51252))
|
|
4.50
|
Fee
Agreement by and between National Investment Managers Inc. and Woodside
Capital Partners IV, LLC, Woodside Capital Partners IV QP, LLC, and Lehman
Brothers Commercial Bank dated November 30, 2007 (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
December 4, 2007. (File No. 000-51252))
|
|
4.51
|
Securities
Pledge Agreement by and between National Investment Managers Inc. and
Woodside Capital Partners IV, LLC, Woodside Capital Partners IV QP, LLC,
and Lehman Brothers Commercial Bank dated November 30, 2007 (Incorporated
by reference to Form 8-K filed with the Securities and Exchange Commission
on December 4, 2007. (File No. 000-51252))
|
|
4.52
|
Security
Agreement by and between National Investment Managers Inc., its
subsidiaries and Woodside Agency Services, LLC dated November 30, 2007
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on December 4, 2007. (File No.
000-51252))
|
|
4.53
|
Guaranty
by and between National Investment Managers Inc., its subsidiaries and
Woodside Agency Services, LLC dated November 30, 2007 (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
December 4, 2007. (File No. 000-51252))
|
|
4.54
|
Securities
Purchase Agreement by and between National Investment Managers Inc. and
Valens U.S. SPV I, LLC and Valens Offshore SPV I, Ltd. (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
December 4, 2007. (File No.
000-51252))
|
60
4.55
|
Amendment
No., 1 to Revolving Line of Credit and Term Loan Agreement by and between
Citizens RBS, National Association, and National Investment Managers Inc.
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on April 8, 2008 (File No.
000-51252))
|
|
4.56
|
Consent
and Amendment No. 1 to Securities Purchase and Loan Agreement by and among
National Investment Managers Inc., Woodside Capital Partners IV, LLC,
Woodside Capital Partners IV QP, LLC, Lehman Brothers Commercial Bank and
Woodside Agency Services, LLC as collateral agent (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
April 8, 2008 (File No. 000-51252))
|
|
4.57
|
Amendment
No., 4 to Revolving Line of Credit and Term Loan Agreement by and between
Citizens RBS, National Association, and National Investment Managers
Inc.
|
|
4.58
|
Amendment
No. 4 to Intercreditor and Subordination Agreement by and between RBS
Citizens, National Association, and National Investment Managers
Inc.
|
|
4.59
|
Letter
Agreement entered into by and between National Investment Managers Inc.,
Woodside Capital Partners V, LLC, Woodside Capital Partners V QP, LLC,
Woodside Capital Partners IV, LLC, Woodside Capital Partners IV QP, LLC
and Woodside Agency Services LLC (Incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on November 7, 2008
(File No. 000-51252))
|
|
4.60
|
Letter
Agreement entered into by and between National Investment Managers Inc.,
Woodside Capital Partners V, LLC, Woodside Capital Partners V QP, LLC,
Woodside Capital Partners IV, LLC and Woodside Capital Partners IV QP, LLC
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on November 7, 2008 (File No.
000-51252))
|
|
4.61
|
Stock
Transfer Agreement dated November 3, 2008 among IBF Fund Liquidating LLC,
National Investment Managers Inc., DCI Master LDC and Duncan Capital Group
LLC (Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on November 7, 2008 (File No.
000-51252))
|
|
4.62
|
Amendment
No. 1 and Allonge to Revolving Line of Credit Note by and between Citizens
RBS, National Association, and National Investment Managers Inc.
(Incorporated by reference to Form 10-K filed with the Securities and
Exchange Commission on March 31, 2009. (File No.
000-51252))
|
|
4.63
|
Amendment
No. 3 and Allonge to Term Promissory Note by and between Citizens RBS,
National Association, and National Investment Managers Inc. (Incorporated
by reference to Form 10-K filed with the Securities and Exchange
Commission on March 31, 2009. (File No. 000-51252))
|
|
4.64
|
Amendment
No. 7 to Revolving Line of Credit and Term Loan Agreement by and between
Citizens RBS, National Association, and National Investment Managers Inc.
(Incorporated by reference to Form 10-K filed with the Securities and
Exchange Commission on March 31, 2009. (File No.
000-51252))
|
|
4.65
|
Amendment
No. 7 to Intercreditor and Subordination Agreement by and between RBS
Citizens, National Association, Woodside Capital Partners IV, LLC,
Woodside Capital Partners IV QP, LLC, Woodside Capital Partners V, LLC as
assignee of Woodlands Commercial Bank (f/k/a Lehman Brothers Commercial
Bank), Woodside Capital Partners V QP, LLC as assignee of Woodlands
Commercial Bank (f/k/a Lehman Brothers Commercial Bank), and Woodside
Agency Services, LLC, as collateral agent and National Investment Managers
Inc. (Incorporated by reference to Form 10-K filed with the Securities and
Exchange Commission on March 31, 2009. (File No.
000-51252))
|
61
4.66
|
Securities
Purchase and Loan Agreement by and between National Investment Managers
Inc. and Woodside Capital Partners IV, LLC, Woodside Capital Partners IV
QP, LLC, Woodside Capital Partners V, LLC as assignee of Woodlands
Commercial Bank (f/k/a Lehman Brothers Commercial Bank), Woodside Capital
Partners V QP, LLC as assignee of Woodlands Commercial Bank (f/k/a Lehman
Brothers Commercial Bank), and Woodside Agency Services, LLC, as
collateral agent. (Incorporated by reference to Form 10-K filed with the
Securities and Exchange Commission on March 31, 2009. (File No.
000-51252))
|
|
4.67
|
Amendment
No. 2 and Allonge to Revolving Line of Credit Note by and between RBS
Citizens, National Association, and National Investment Managers Inc.
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on October 2, 2009. (File No.
333-160488))
|
|
4.68
|
Amendment
No. 9 to Revolving Line of Credit and Term Loan Agreement by and between
RBS Citizens, National Association, and National Investment Managers Inc.
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on October 2, 2009. (File No.
333-160488))
|
|
4.69
|
Consent
and Amendment No. 8 to Securities Purchase and Loan Agreement by and
between Woodside Capital Partners IV, LLC, Woodside Capital Partners IV
QP, LLC, Woodside Capital Partners V, LLC as assignee of Woodlands
Commercial Bank (f/k/a Lehman Brothers Commercial Bank), Woodside Capital
Partners V QP, LLC as assignee of Woodlands Commercial Bank (f/k/a Lehman
Brothers Commercial Bank), and Woodside Agency Services, LLC, as
collateral agent and National Investment Managers Inc. (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
October 2, 2009. (File No. 333-160488))
|
|
4.70
|
Reservation
of rights by RBS Citizens, National Association (Incorporated by reference
to Form 10Q Quarterly Report filed with the Securities and Exchange
Commission on November 16, 2009 (File No. 333-160488))
|
|
4.71
|
Reservation
of rights by Woodside Capital Partners IV, LLC, Woodside Capital Partners
IV QP, LLC, Woodside Capital Partners V, LLC as assignee of Woodlands
Commercial Bank (f/k/a Lehman Brothers Commercial Bank), Woodside Capital
Partners V QP, LLC as assignee of Woodlands Commercial Bank (f/k/a Lehman
Brothers Commercial Bank), and Woodside Agency Services, LLC, as
collateral agent (Incorporated by reference to Form 10-Q Quarterly Report
filed with the Securities and Exchange Commission on November 16, 2009
(File No. 333-160488))
|
|
4.72
|
Amendment
No. 3 and Allonge to Revolving Line of Credit Note and Amendment No. 10 to
Revolving Line of Credit and Term Loan Agreement by and between RBS
Citizens, National Association, and National Investment Managers Inc.
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on December 17, 2009. (File No.
333-160488))
|
|
4.73
|
2005
Stock Option Plan (Incorporated by reference to Form S-8 filed with the
Securities and Exchange Commission on July 9, 2009. (File No.
333-160488))
|
|
4.74
|
Short-Term
Working Capital Loan by and between Woodside Capital Partners IV, LLC,
Woodside Capital Partners IV QP, LLC, Woodside Capital Partners V, LLC as
assignee of Woodlands Commercial Bank (f/k/a Lehman Brothers Commercial
Bank), Woodside Capital Partners V QP, LLC as assignee of Woodlands
Commercial Bank (f/k/a Lehman Brothers Commercial Bank), and Woodside
Agency Services, LLC, as collateral agent and National Investment Managers
Inc. (Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on April 16, 2010. (File No.
333-160488))
|
62
4.75
|
Amendment
No. 11 to Revolving Line of Credit and Term Loan Agreement by and between
RBS Citizens, National Association, and National Investment Managers Inc.
(Incorporated by reference to Form 10-K filed with the Securities and
Exchange Commission on April 30, 2010. (File No.
333-160488))
|
|
4.76
|
Amendment
No. 4 and Allonge to Revolving Line of Credit Note by and between RBS
Citizens, National Association, and National Investment Managers Inc.
(Incorporated by reference to Form 10-K filed with the Securities and
Exchange Commission on April 30, 2010. (File No.
333-160488))
|
|
4.77
|
Amendment
No. 4 and Allonge to Term Promissory Note by and between RBS Citizens,
National Association, and National Investment Managers Inc. (Incorporated
by reference to Form 10-K filed with the Securities and Exchange
Commission on April 30, 2010. (File No. 333-160488))
|
|
4.78
|
Amendment
No. 8 to Securities Purchase and Loan Agreement by and between Woodside
Capital Partners IV, LLC, Woodside Capital Partners IV QP, LLC, Woodside
Capital Partners V, LLC as assignee of Woodlands Commercial Bank (f/k/a
Lehman Brothers Commercial Bank), Woodside Capital Partners V QP, LLC as
assignee of Woodlands Commercial Bank (f/k/a Lehman Brothers Commercial
Bank), and Woodside Agency Services, LLC, as collateral agent and National
Investment Managers Inc. (Incorporated by reference to Form 10-K filed
with the Securities and Exchange Commission on April 30, 2010. (File No.
333-160488))
|
|
4.79
|
Amendment
to Intercreditor and Subordination Agreement by and between RBS Citizens,
National Association, Woodside Capital Partners IV, LLC, Woodside Capital
Partners IV QP, LLC, Woodside Capital Partners V, LLC as assignee of
Woodlands Commercial Bank (f/k/a Lehman Brothers Commercial Bank),
Woodside Capital Partners V QP, LLC as assignee of Woodlands Commercial
Bank (f/k/a Lehman Brothers Commercial Bank), and Woodside Agency
Services, LLC, as collateral agent and National Investment Managers Inc.
(Incorporated by reference to Form 10-K filed with the Securities and
Exchange Commission on April 30, 2010. (File No.
333-160488))
|
|
4.80
|
Side
Letter Fee Arrangement by and between Woodside Capital Partners IV, LLC,
Woodside Capital Partners IV QP, LLC, Woodside Capital Partners V, LLC as
assignee of Woodlands Commercial Bank (f/k/a Lehman Brothers Commercial
Bank), Woodside Capital Partners V QP, LLC as assignee of Woodlands
Commercial Bank (f/k/a Lehman Brothers Commercial Bank), and Woodside
Agency Services, LLC, as collateral agent and National Investment Managers
Inc. (Incorporated by reference to Form 10-K filed with the Securities and
Exchange Commission on April 30, 2010. (File No.
333-160488))
|
|
4.81
|
Side
Letter Repayment of Short-Term Working Capital and Participation
Arrangement by and between RBS Citizens, National Association, Woodside
Capital Partners IV, LLC, Woodside Capital Partners IV QP, LLC, Woodside
Capital Partners V, LLC as assignee of Woodlands Commercial Bank (f/k/a
Lehman Brothers Commercial Bank), Woodside Capital Partners V QP, LLC as
assignee of Woodlands Commercial Bank (f/k/a Lehman Brothers Commercial
Bank), and Woodside Agency Services, LLC, as collateral agent and National
Investment Managers Inc. (Incorporated by reference to Form 10-K filed
with the Securities and Exchange Commission on April 30, 2010. (File No.
333-160488))
|
|
4.82
|
Termination
Agreement by and between Woodside Capital Partners IV, LLC, Woodside
Capital Partners IV QP, LLC, Woodside Capital Partners V, LLC as assignee
of Woodlands Commercial Bank (f/k/a Lehman Brothers Commercial Bank),
Woodside Capital Partners V QP, LLC as assignee of Woodlands Commercial
Bank (f/k/a Lehman Brothers Commercial Bank), and Woodside Agency
Services, LLC, as collateral agent and National Investment Managers Inc.
(Incorporated by reference to Form 10-K filed with the Securities and
Exchange Commission on April 30, 2010. (File No.
333-160488))
|
63
10.1
|
Agreement
and Plan of Reorganization, dated as of February 18, 2005 by and among
Fast Eddie Racing Stables, Inc, Glenn A. Little, Duncan Capital Financial
Group, Inc. and FERS Acquisition Corp. (Incorporated by reference to Form
8-K filed with the Securities and Exchange Commission on February 23,
2005)
|
|
10.2
|
Employment
Agreement, dated as of December 23, 2004, between Duncan Capital Financial
Group, Inc. and Richard E. Stierwalt. (Incorporated by reference to Form
8-K filed with the Securities and Exchange Commission on March 15,
2005)
|
|
10.3
|
Employment
Agreement, dated as of January 1, 2005, between Duncan Capital Financial
Group, Inc. and Leonard Neuhaus. (Incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on March 15,
2005)
|
|
10.4
|
12%
Senior Secured Note, dated January 27, 2005, in the original principal
amount of $350,000, delivered by Duncan Capital Financial Group, Inc. to
CAMOFI Master LDC (formerly known as DCOFI Master LDC) (Incorporated by
reference to Form SB-2 Registration Statement filed with the Securities
and Exchange Commission on April 19, 2005. (File
No.333-124161))
|
|
10.5
|
Securities
Purchase Agreement, dated as of January 27, 2005, between Duncan Capital
Financial Group, Inc. and CAMOFI Master LDC(Incorporated by reference to
Form SB-2 filed with the Securities and Exchange Commission on April 19,
2005. (File No.333-124161))
|
|
10.6
|
Security
Agreement, dated as of January 27, 2005, among Duncan Capital Financial
Group, Inc., Pension Administration Services, Inc., Complete Investment
Management Inc. of Philadelphia, MD Bluestein Inc. and CAMOFI Master LDC.
(Incorporated by reference to Form SB-2_filed with the Securities and
Exchange Commission on April 19, 2005. (File
No.333-124161))
|
|
10.7
|
Subsidiary
Guarantee, dated as of January 27, 2005, among Duncan Capital Financial
Group, Inc., Pension Administration Services, Inc., Complete Investment
Management Inc. of Philadelphia and MD Bluestein Inc. in favor of CAMOFI
Master LDC. (Incorporated by reference to Form SB-2/A_filed with the
Securities and Exchange Commission on June 17, 2005. (File
No.333-124161))
|
|
10.8
|
12%
Senior Secured Note, dated May 4, 2005, in the original principal amount
of $150,000, delivered by Duncan Capital Financial Group, Inc. to CAMOFI
Master LDC. (Incorporated by reference to Form SB-2/A_filed with the
Securities and Exchange Commission on June 17, 2005. (File
No.333-124161))
|
|
10.9
|
Agreement,
dated as of June 15, 2005, between the Company and Richard Berman.
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on June 17, 2005.)
|
|
10.10
|
Asset
Purchase Agreement between National Investment Mangers Inc. and American
Benefit Resources, Inc. dated November 1, 2005 (Incorporated by reference
to Form 8-K filed with the Securities and Exchange Commission on November
4, 2005. (File No.000-51252))
|
|
10.11
|
A/R
Escrow Agreement by and among National Investment Mangers Inc., JP Morgan
Chase Bank, N.A. and American Benefit Resources, Inc. dated November 30,
2005 (Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on December 6, 2005. (File
No.000-51252)
|
|
10.12
|
Indemnification
Escrow Agreement by and among National Investment Mangers Inc., JP Morgan
Chase Bank, N.A. and American Benefit Resources, Inc. dated November 30,
2005 (Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on December 6, 2005. (File
No.000-51252)
|
64
10.13
|
Registration
Rights Agreement between National Investment Mangers Inc., American
Benefit Resources, Inc. and Arthur J. Steinberg as manager of IBF Fund
Liquidating LLC dated November 30, 2005 (Incorporated by reference to Form
8-K filed with the Securities and Exchange Commission on December 6, 2005.
(File No.000-51252))
|
|
10.14
|
Stock
Purchase Agreement, dated August 2, 2005, among the Company, Stephen H.
Rosen Associates, Inc., Stephen H. Rosen and Elizabeth Davies.
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on August 5, 2005. (File
No.000-51252))
|
|
10.15
|
Stock
Purchase Agreement, dated August 2, 2005, among the Company, Haddon
Strategic Alliances, Inc. and John Ermilio. (Incorporated by reference to
Form 8-K filed with the Securities and Exchange Commission on August 5,
2005. (File No.000-51252))
|
|
10.16
|
|
Employment
Agreement, dated as of August 2, 2005, between the Company and Stephen H.
Rosen. (Incorporated by reference to Form 8-K filed with the Securities
and Exchange Commission on August 5, 2005. (File
No.000-51252))
|
10.17
|
Noncompetition
Agreement, dated as of August 2, 2005, between the Company and Stephen H.
Rosen. (Incorporated by reference to Form 8-Kfiled with the Securities and
Exchange Commission on August 5, 2005 (File
No.000-51252))
|
|
10.18
|
Noncompetition
Agreement, dated as of August 2, 2005, between the Company and John
Ermilio. (Incorporated by reference to Form 8-K filed with the Securities
and Exchange Commission on August 5, 2005. (File
No.000-51252))
|
|
10.19
|
Agreement
and Plan of Merger Dated as of January 4, 2006 by and among Jack C.
Holland, Steven R. Eyer, Valley Forge Enterprises, Ltd., VFE Merger Corp.
and National Investment Managers Inc. (Incorporated by reference to Form
8-K filed with the Securities and Exchange Commission on January 12, 2006.
(File No.000-51252))
|
|
10.20
|
Employment
Agreement dated January 1, 2006 by and between Steven R. Eyer and Valley
Forge Enterprises, Ltd (Incorporated by reference to Form 8-K filed with
the Securities and Exchange Commission on January 12, 2006. (File
No.000-51252))
|
|
10.21
|
Employment
Agreement dated January 1, 2006 by and between Jack C. Holland and Valley
Forge Enterprises, Ltd. (Incorporated by reference to Form 8-K filed with
the Securities and Exchange Commission on January 12, 2006. (File
No.000-51252))
|
|
10.22
|
Non-Competition,
Non-Disclosure and Non-Solicitation Agreement dated January 1, 2006 by and
between Steven R. Eyer and National Investment Managers Inc. (Incorporated
by reference to Form 8-K filed with the Securities and Exchange Commission
on January 12, 2006. (File No.000-51252))
|
|
10.23
|
Non-Competition,
Non-Disclosure and Non-Solicitation Agreement dated January 1, 2006 by and
between Jack C. Holland and National Investment Managers Inc.
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on January 12, 2006. (File
No.000-51252))
|
|
10.24
|
Employment
Agreement dated March 1, 2006 by and between Leonard Neuhaus and the
Company (Incorporated by reference to Form 8-K filed with the Securities
and Exchange Commission on March 6, 2006. (File
No.000-51252)
|
|
10.25
|
Consulting
Agreement dated March 1, 2006 by and between Richard Stierwalt and the
Company (Incorporated by reference to Form 8-K filed with the Securities
and Exchange Commission on March 6, 2006. (File
No.000-51252))
|
65
10.26
|
Employment
Agreement dated March 2006 by and between Steven Ross and the Company
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on March 17, 2006.)
|
|
10.27
|
Consulting
Agreement dated January 1, 2006 by and between DC Associates LLC and the
Company (Incorporated by reference to Form 10-KSB filed with the
Securities and Exchange Commission on March 31, 2006.)
|
|
10.28
|
Put
Agreement entered by and among American Benefit Resources, Inc., IBF Fund
Liquidating LLC and Duncan Capital Group LLC
|
|
10.29
|
Exhibit
number was intentionally not used.
|
|
10.30
|
|
Stock
Purchase Agreement by and between National Investment Managers Inc., The
LAMCO Group, Inc., Lamoriello & Co., Inc., Circle Pension, Inc.,
Southeastern Pension Services, Inc. and Nicholas J. Lamoriello
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on October 10, 2006. (File No.
000-51252))
|
10.31
|
Stock
Option issued to Nicholas J. Lamoriello (Incorporated by reference to Form
8-K filed with the Securities and Exchange Commission on October 10, 2006.
(File No. 000-51252))
|
|
10.32
|
Escrow
Agreement entered by and between National Investment Managers Inc. and The
LAMCO Group, Inc. (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on October 10, 2006. (File No.
000-51252))
|
|
10.33
|
Cross
Sales Agreement entered between National Investment Managers Inc. and The
LAMCO Group, Inc. (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on October 10, 2006. (File No.
000-51252))
|
|
10.34
|
Technology
Agreement entered between National Investment Managers Inc. and The LAMCO
Group, Inc. (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on October 10, 2006. (File No.
000-51252))
|
|
10.35
|
Management
entered between National Investment Managers Inc., Nicholas J. Lamoriello
and Stephen R. Zito (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on October 10, 2006. (File No.
000-51252))
|
|
10.36
|
Non-Competition,
Non-Disclosure and Non-Solicitation Agreement between National Investment
Managers Inc., Nicholas J. Lamoriello and The LAMCO Group, Inc.
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on October 10, 2006. (File No.
000-51252))
|
|
10.37
|
Joinder
Agreement between Laurus Master Fund, Ltd., Lamoriello & Co. Inc.,
Circle Pension, Inc., and Southeastern Pension Services, Inc.
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on October 10, 2006. (File No.
000-51252))
|
|
10.38
|
Employment
Agreement dated October 24, 2006 by and between Steven Ross and the
Company. (Incorporated by reference to Form 8-K filed with the Securities
and Exchange Commission on October 26, 2006. (File No.
000-51252))
|
|
10.39
|
Stock
Purchase Agreement by and between National Investment Managers Inc.,
National Actuarial Pension Services, Inc., Charles McLeod and Mary H.
McLeod (Incorporated by reference to Form 8-K filed with the Securities
and Exchange Commission on December 4, 2006. (File No.
000-51252))
|
66
10.40
|
Promissory
Note issued by National Investment Managers Inc. to Charles McLeod and
Mary H. McLeod (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on December 4, 2006. (File No.
000-51252))
|
|
10.41
|
Promissory
Note issued by National Investment Managers Inc. to Charles McLeod and
Mary H. McLeod (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on December 4, 2006. (File No.
000-51252)
|
|
10.42
|
Promissory
Note issued by National Investment Managers Inc. to Charles McLeod and
Mary H. McLeod (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on December 4, 2006. (File No.
000-51252))
|
|
10.43
|
Employment
Agreement entered between National Investment Managers Inc. and Mary
McLeod (Incorporated by reference to Form 8-K filed with the Securities
and Exchange Commission on December 4, 2006. (File No.
000-51252))
|
|
10.44
|
|
Non-Competition,
Non-Disclosure and Non-Solicitation Agreement between National Investment
Managers Inc. and Charles McLeod and Mary H. McLeod. (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
December 4, 2006. (File No. 000-51252))
|
10.45
|
Joinder
Agreement between Laurus Master Fund, Ltd. and National Actuarial Pension
Services, Inc. (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on December 4, 2006. (File No.
000-51252))
|
|
10.46
|
Joinder
Agreement between Laurus Master Fund, Ltd. and National Actuarial Pension
Services, Inc. (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on December 4, 2006. (File No.
000-51252))
|
|
10.47
|
Agreement
between National Investment Managers Inc. and Duncan Capital Group LLC, a
Delaware limited liability company and DCI Master LDC. (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
December 22, 2006. (File No. 000-51252))
|
|
10.48
|
Stock
Purchase Agreement by and between National Investment Managers Inc.,
Benefit Dynamics, Inc., Jo Ann Massanova and Carmen Laverghetta
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on January 4, 2007. (File No.
000-51252))
|
|
10.49
|
Form
of Promissory Note issued by National Investment Managers Inc. payable
March 2, 2008 (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on January 4, 2007. (File No.
000-51252))
|
|
10.50
|
Form
of Promissory Note issued by National Investment Managers Inc. payable
March 2, 2009 (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on January 4, 2007. (File No.
000-51252))
|
|
10.51
|
Employment
Agreement entered between Benefit Dynamics, Inc. and Jo Ann Massanova
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on January 4, 2007. (File No.
000-51252))
|
|
10.52
|
Employment
Agreement entered between Benefit Dynamics, Inc. and Carmen Laverghetta
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on January 4, 2007. (File No.
000-51252))
|
67
10.53
|
Non-Competition,
Non-Disclosure and Non-Solicitation Agreement between National Investment
Managers Inc. and Jo Ann Massanova (Incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on January 4, 2007.
(File No. 000-51252))
|
|
10.54
|
Non-Competition,
Non-Disclosure and Non-Solicitation Agreement between National Investment
Managers Inc. and Jo Ann Massanova (Incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on January 4, 2007.
(File No. 000-51252))
|
|
10.55
|
Joinder
Agreement between Laurus Master Fund, Ltd. and Benefit Dynamics, Inc.
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on January 4, 2007. (File No.
000-51252))
|
|
10.56
|
Stock
Option Agreement entered by and between the Company and Jo Ann Massanova
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on January 4, 2007. (File No.
000-51252))
|
|
10.57
|
Stock
Purchase Agreement by and between National Investment Managers Inc., Renee
J. Conner, William Renninger and The Pension Alliance, Inc. (Incorporated
by reference to Form 8-K filed with the Securities and Exchange Commission
on March 6, 2007. (File No. 000-51252))
|
|
10.58
|
|
Promissory
Note issued by National Investment Managers Inc. to Renee J. Conner due
April 28, 2008 (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on March 6, 2007. (File No.
000-51252))
|
10.59
|
Promissory
Note issued by National Investment Managers Inc. to William Renninger due
April 28, 2008 (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on March 6, 2007. (File No.
000-51252))
|
|
10.60
|
Promissory
Note issued by National Investment Managers Inc. to Renee J. Conner due
April 28, 2009 (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on March 6, 2007. (File No.
000-51252))
|
|
10.61
|
Promissory
Note issued by National Investment Managers Inc. to Renee J. Conner due
April 28, 2009 (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on March 6, 2007. (File No.
000-51252))
|
|
10.62
|
Employment
Agreement entered between National Investment Managers Inc. and Renee J.
Conner (Incorporated by reference to Form 8-K filed with the Securities
and Exchange Commission on March 6, 2007. (File No.
000-51252))
|
|
10.63
|
Non-Competition,
Non-Disclosure and Non-Solicitation Agreement between National Investment
Managers Inc. and Charles McLeod and Mary H. McLeod. (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
March 6, 2007. (File No. 000-51252))
|
|
10.64
|
Non-Competition,
Non-Disclosure and Non-Solicitation Agreement between National Investment
Managers Inc. and Charles McLeod and Mary H. McLeod. (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
March 6, 2007. (File No.000-51252))
|
|
10.65
|
Stock
Purchase Agreement by and between National Investment Managers Inc.,
Pentec, Inc., Pentec Capital Management, Inc. and Michael E. Callahan
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on March 6, 2007. (File No.
000-51252))
|
|
10.66
|
Promissory
Note issued by National Investment Managers Inc. to Michael E. Callahan
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on March 6, 2007. (File No.
000-51252))
|
68
10.67
|
Employment
Agreement entered between Pentec, Inc., Pentec Capital Management, Inc.
and Michael Callahan (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on March 6, 2007. (File No.
000-51252))
|
|
10.68
|
Non-Competition,
Non-Disclosure and Non-Solicitation Agreement between National Investment
Managers Inc. and Michael Callahan (Incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on March 6, 2007. (File
No. 000-51252))
|
|
10.69
|
Addendum
to Employment Agreement by and between the Company and Steven J. Ross
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on March 29, 2007. (File No.
000-51252))
|
|
10.70
|
Addendum
to Employment Agreement by and between the Company and Leonard Neuhaus
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on March 29, 2007. (File No.
000-51252))
|
|
10.71
|
Employment
Agreement by and between the Company and John Davis (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
March 29, 2007. (File No. 000-51252))
|
|
10.72
|
Second
Omnibus Amendment and Waiver, dated as of May 2, 2007, by and between
National Investment Managers, Inc. and Laurus Master Fund, Ltd.
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on May 7, 2007. (File No.
000-51252))
|
|
10.73
|
|
Second
Omnibus Amendment and Waiver, dated as of May 2, 2007, by and between
National Investment Managers, Inc. and Laurus Master Fund, Ltd.
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on May 7, 2007. (File No.
000-51252))
|
10.74
|
Second
Omnibus Amendment and Waiver, dated as of May 2, 2007, by and between
National Investment Managers, Inc. and Laurus Master Fund, Ltd.
(Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on May 7, 2007. (File No.
000-51252))
|
|
10.75
|
Employment
Agreement by and between National Investment Managers Inc. and Steven Ross
(to be filed by amendment) (Incorporated by reference to Form 8-K filed
with the Securities and Exchange Commission on December 4, 2007. (File No.
000-51252))
|
|
10.76
|
Agreement
by and between National Investment Managers Inc. and DC Associates LLC
(“DCA”), and Michael Crow (Incorporated by reference to Form 8-K filed
with the Securities and Exchange Commission on December 4, 2007. (File No.
000-51252))
|
|
10.77
|
Amendment
No. 1 to the Agreement, dated as of November 30, 2007 by and among
National Investment Managers Inc. Duncan Capital Group LLC and DCI Master
LDC (Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on December 4, 2007. (File No.
000-51252))
|
|
10.78
|
Stock
Purchase Agreement among National Investment Managers Inc., California
Investment Annuity Sales, Inc., Richard L. Kaplan and Hana E. Kaplan Inter
Vivos Trust Agreement dated 1/29/97 as amended and restated 1/10/03 and
Anthony Delfino dated April 3, 2008 (Incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on April 8, 2008. (File
No. 000-51252))
|
|
10.79
|
Employment
Agreement by and between Richard L. Kaplan and VEBA Administrators, Inc.
dated April 3, 2008 (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on April 8, 2008. (File No.
000-51252))
|
69
10.80
|
Consulting
Agreement by and between Anthony S. Delfino and VEBA Administrators, Inc.
dated April 3, 2008 (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on April 8, 2008. (File No.
000-51252))
|
|
10.81
|
Non-Disclosure
and Non-Solicitation Agreement by and between Anthony S. Delfino and
National Investment Managers Inc. dated April 3, 2008 (Incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
April 8, 2008. (File No. 000-51252))
|
|
10.82
|
Non-Disclosure
and Non-Solicitation Agreement by and between Richard Kaplan and National
Investment Managers Inc. dated April 3, 2008 (Incorporated by reference to
Form 8-K filed with the Securities and Exchange Commission on April 8,
2008. (File No. 000-51252))
|
|
10.83
|
Promissory
Note payable to Anthony S. Delfino (Incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on April 8, 2008. (File
No. 000-51252))
|
|
10.84
|
Promissory
Note payable to Richard Kaplan (Incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on April 8, 2008. (File
No. 000-51252))
|
|
10.85
|
Settlement
Agreement and Release by and between Renee J. Conner, William E. Renninger
and National Investment Managers Inc. dated May 15, 2008. (Incorporated by
reference to the Form 10Q Quarterly Report filed with the Securities and
Exchange Commission on May 15, 2008. (File No. 000-51252))
|
|
10.86
|
Promissory
Note issued by National Investment Managers, Inc. to Renee J. Conner and
William E. Renninger due April 30, 2009 (Incorporated by reference to the
Form 10Q Quarterly Report filed with the Securities and Exchange
Commission on May 15, 2008. (File No. 000-51252))
|
|
10.87
|
Promissory
Note issued by National Investment Managers, Inc. to Renee J. Conner and
William E. Renninger due October 31, 2009 (Incorporated by reference to
the Form 10Q Quarterly Report filed with the Securities and Exchange
Commission on May 15, 2008. (File No. 000-51252))
|
|
10.88
|
Addendum
to the Employment Agreement by and between National Investment Managers
Inc. and John M. Davis (Incorporated by reference to the Form 10Q
Quarterly Report filed with the Securities and Exchange Commission on
August 14, 2008. (File No. 000-51252))
|
|
10.89
|
Agreement
by and between National Investment Managers Inc. and Richard
Berman.
|
|
10.90
|
Stock
Purchase Agreement by and among National Investment Managers, Pension
Technical Services, Inc., Ralph W. Shaw and Eileen A. Baldwin-Shaw
(Incorporated by reference to Form 8-K filled with the Securities and
Exchange Commission on October 6, 2008. (File No.
000-51252))
|
|
10.91
|
Promissory
Note issued to Ralph W. Shaw and Eileen A. Baldwin-Shaw due December 2009
(Incorporated by reference to Form 8-K filled with the Securities and
Exchange Commission on October 6, 2008. (File No.
000-51252))
|
|
10.92
|
Promissory
Note issued to Ralph W. Shaw and Eileen A. Baldwin-Shaw due December 2010
(Incorporated by reference to Form 8-K filled with the Securities and
Exchange Commission on October 6, 2008. (File No.
000-51252))
|
|
10.93
|
Employment
Agreement entered by and between Pension Technical Services, Inc. and
Ralph W. Shaw (Incorporated by reference to Form 8-K filled with the
Securities and Exchange Commission on October 6, 2008. (File No.
000-51252))
|
70
10.94
|
Employment
Agreement entered by and between Pension Technical Services, Inc. and
Eileen A. Baldwin-Shaw (Incorporated by reference to Form 8-K filled with
the Securities and Exchange Commission on October 6, 2008. (File No.
000-51252))
|
|
10.95
|
Stock
Purchase Agreement by and among National Investment Managers, Peter R.
Stephan, individually and as Trustee of The Stephan Family Trust Dated
August 2, 1993, James R. Norman, Jr., individually and as Trustee of The
Norman Living Trust Dated December 7, 2005, Rise Spiegel, individually and
as Trustee of The Rise Norris Spiegel Trust Dated November 16, 2005 and
the Pension Group, Inc. (Incorporated by reference to Form 8-K/A filed
with the Securities and Exchange Commission on December 3, 2008. (File No.
000-51252))
|
|
10.96
|
Promissory
Note issued to Peter R. Stephan, James R. Norman, Jr. and Rise Spiegel due
January 2010 (Incorporated by reference to Forms 8-K and 8-K/A filed with
the Securities and Exchange Commission on December 1, 2008 and December 3,
2008, respectively. (File No. 000-51252))
|
|
10.97
|
Promissory
Note issued to Peter R. Stephan, James R. Norman, Jr. and Rise Spiegel due
January 2011 (Incorporated by reference to Forms 8-K and 8-K/A filed with
the Securities and Exchange Commission on December 1, 2008 and December 3,
2008, respectively. (File No. 000-51252))
|
|
10.98
|
Employment
Agreement entered by and between The Pension Group, Inc. and Peter R.
Stephan (Incorporated by reference to Forms 8-K and 8-K/A filed with the
Securities and Exchange Commission on December 1, 2008 and December 3,
2008, respectively. (File No. 000-51252))
|
|
10.99
|
Employment
Agreement entered by and between The Pension Group, Inc. and James R.
Norman, Jr. (Incorporated by reference to Forms 8-K and 8-K/A filed with
the Securities and Exchange Commission on December 1, 2008 and December 3,
2008, respectively. (File No. 000-51252))
|
|
10.100
|
Employment
Agreement entered by and between The Pension Group, Inc. and Rise Spiegel.
(Incorporated by reference to Forms 8-K and 8-K/A filed with the
Securities and Exchange Commission on December 1, 2008 and December 3,
2008, respectively. (File No. 000-51252))
|
|
10.101
|
Promissory
Note issued by National Investment Managers, Inc. to Renee J. Conner and
William E. Renninger due March 1, 2010. (Incorporated by reference to Form
10K filed with the Securities and Exchange Commission on March 31, 2009.
(File No. 000-51252))
|
|
10.102
|
Promissory
Note issued by National Investment Managers, Inc. to Renee J. Conner and
William E. Renninger due March 1, 2010. (Incorporated by reference to Form
10K filed with the Securities and Exchange Commission on March 31, 2009.
(File No. 000-51252))
|
|
10.103
|
Promissory
Note issued by National Investment Managers, Inc. to Michael E. Callahan
due December 1, 2009. (Incorporated by reference to Form 10K filed with
the Securities and Exchange Commission on March 31, 2009. (File No.
000-51252))
|
|
10.104
|
Promissory
Note issued by National Investment Managers, Inc. to Richard Kaplan due
June 15, 2010. (Incorporated by reference to Form 10K filed with the
Securities and Exchange Commission on March 31, 2009. (File No.
000-51252))
|
|
10.105
|
Promissory
Note issued by National Investment Managers, Inc. to Anthony Delfino due
June 15, 2010. (Incorporated by reference to Form 10K filed with the
Securities and Exchange Commission on March 31, 2009. (File No.
000-51252))
|
|
10.106
|
Employment
Agreement entered by and between the Company and John M. Davis dated April
14, 2009 (Incorporated by reference to the Form 10Q Quarterly Report filed
with the Securities and Exchange Commission on May 15, 2009. (File No.
000-51252))
|
71
10.107
|
Employment
Agreement entered by and between the Company and Christopher W. Larkin
dated April 15, 2009 (Incorporated by reference to the Form 10Q Quarterly
Report filed with the Securities and Exchange Commission on May 15, 2009.
(File No. 000-51252))
|
|
10.108
|
Amendment
No. 1 to Subordinated Promissory Notes by and between National Investment
Managers Inc., James R. Norman, Jr., Peter R. Stephan and Rise Norris
Spiegel due January 2010 and January 2011. (Incorporated by reference to
Form 8-K filed with the Securities and Exchange Commission on October 2,
2009. (File No. 333-160488))
|
|
10.109
|
Amendment
No. 1 to Promissory Notes by and between National Investment Managers
Inc., Ralph W. Shaw and Eileen A. Baldwin-Shaw due December 2009 and
December 2010. (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on October 2, 2009. (File No.
333-160488))
|
|
10.110
|
Amendment
No. 1 to Promissory Note by and between National Investment Managers Inc.
and Richard L. Kaplan due June 15, 2010. (Incorporated by reference to
Form 8-K filed with the Securities and Exchange Commission on October 2,
2009. (File No. 333-160488))
|
|
10.111
|
Amendment
No. 1 to Promissory Note by and between National Investment Managers Inc.
and Anthony S. Delfino due June 15, 2010. (Incorporated by reference to
Form 8-K filed with the Securities and Exchange Commission on October 2,
2009. (File No. 333-160488))
|
|
10.112
|
Amendment
No. 1 to Promissory Note by and between National Investment Managers Inc.,
Renee J. Conner and William E. Renninger due March 1, 2010. (Incorporated
by reference to Form 8-K filed with the Securities and Exchange Commission
on October 2, 2009. (File No. 333-160488))
|
|
21.1
|
List
of subsidiaries of the Company
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule
15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
99.1
|
Press
Release dated November 3, 2009, referencing asset purchase from Standard
Retirement Services (Incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on November 3, 2009. (File No.
333-160488))
|
72
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, National Investment Managers, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL
INVESTMENT MANAGERS, INC.
Dated:
April 30, 2010
|
/s/
Steven Ross
|
Steven
Ross
|
|
Chief
Executive Officer and Director
|
|
Dated:
April 30, 2010
|
/s/
Christopher W. Larkin
|
Christopher
W. Larkin
|
|
Chief
Financial Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of National Investment Managers,
Inc. and in the capacities and on the dates indicated.
SIGNATURE
|
TITLE
|
DATE
|
||
/s/
Steven J. Ross
|
Chief
Executive Officer and Director
|
April
30, 2010
|
||
Steven
J. Ross
|
||||
/s/
Christopher W. Larkin
|
Chief
Financial Officer
|
|||
Christopher
W. Larkin
|
(principal
financial and accounting officer)
|
April
30, 2010
|
||
/s/
Richard Berman
|
Chairman
of the Board of Directors
|
April
30, 2010
|
||
Richard
Berman
|
||||
/s/
Steven B. Ruchefsky
|
Director
|
April
30, 2010
|
||
Steven
B. Ruchefsky
|
||||
/s/
Jeff Cooke
|
Director
|
April
30, 2010
|
||
Jeff
Cooke
|
||||
/s/
Arthur D. Emil
|
Director
|
April
30, 2010
|
||
Arthur
D. Emil
|
||||
/s/
Steven Virany
|
Director
|
April
30, 2010
|
||
Steven
Virany
|
73
Report of
Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders of
National
Investment Managers, Inc.
We have
audited the accompanying consolidated balance sheets of National Investment
Managers Inc. and Subsidiaries (collectively, the “Company”) as of December 31,
2009 and 2008, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of National Investment Managers
Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
/s/
Rothstein, Kass & Company, P.C.
|
|
Roseland,
New Jersey
|
|
April
30, 2010
|
National
Investment Managers Inc. and Subsidiaries
Consolidated
Balance Sheets
December
31, 2009 and 2008
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
(includes restricted cash of $33,263 and $411,299)
|
$ | 274,956 | $ | 531,446 | ||||
Accounts
receivable, net
|
5,128,127 | 4,886,329 | ||||||
Prepaid
expenses and other current assets
|
893,864 | 1,265,431 | ||||||
Total
current assets
|
6,296,947 | 6,683,206 | ||||||
Property
and equipment, net
|
1,550,058 | 1,034,047 | ||||||
Other
assets:
|
||||||||
Goodwill
|
28,826,173 | 28,474,114 | ||||||
Customer
lists/relationships, net
|
24,697,027 | 27,118,405 | ||||||
Other
intangibles, net
|
4,258,586 | 7,732,504 | ||||||
Deferred
financing costs
|
611,838 | 979,455 | ||||||
Total
other assets
|
58,393,624 | 64,304,478 | ||||||
Total
assets
|
$ | 66,240,629 | $ | 72,021,731 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Revolving
line of credit
|
$ | 2,500,000 | $ | 327,992 | ||||
Long-term
debt, current portion
|
3,352,743 | 5,560,800 | ||||||
Accounts
payable
|
1,602,125 | 918,748 | ||||||
Unearned
revenue
|
4,331,108 | 5,464,992 | ||||||
Accrued
expenses and other current liabilities
|
3,851,586 | 5,602,819 | ||||||
Total
current liabilities
|
15,637,562 | 17,875,351 | ||||||
Long-term
liabilities:
|
||||||||
Long-term
debt, less current portion
|
23,116,367 | 23,710,830 | ||||||
Preferred
dividends payable
|
7,849,920 | 5,872,320 | ||||||
Derivative
financial instruments
|
1,724,219 | 2,510,864 | ||||||
Deferred
tax liability
|
5,589,839 | 7,708,914 | ||||||
Total
long-term liabilities
|
38,280,345 | 39,802,928 | ||||||
Total
liabilities
|
53,917,907 | 57,678,279 | ||||||
Commitments
and contingencies (see Note 10)
|
||||||||
Stockholders'
equity:
|
||||||||
Preferred
stock, $.001 par value, 10,000,000 shares authorized; 4,000,000 designated
as Series A shares - 2,420,000 shares issued and outstanding as of
December 31, 2009 and December 31, 2008 (liquidation preference $2,420,000
as of December 31, 2009 and December 31, 2008); 4,000,000 designated as
Series B shares - 3,615,000 shares issued and outstanding as of December
31, 2009 and December 31, 2008 (liquidation preference $7,230,000 as of
December 31, 2009 and December 31, 2008); 1,000,000 designated as Series C
shares - 770,834 shares issued and outstanding as of December 31, 2009 and
December 31, 2008 (liquidation preference $9,250,008 as of December 31,
2009 and December 31, 2008); 500,000 designated as Series D
shares - 409,500 shares issued and outstanding as of December 31, 2009 and
December 31, 2008 (liquidation preference $8,190,000 as of December 31,
2009 and December 31, 2008); and 60,000 designated as Series E shares -
29,350 shares issued and outstanding as of December 31, 2009 and December
31, 2008 (liquidation preference $5,870,000 as of December 31, 2009 and
December 31, 2008)
|
7,245 | 7,245 | ||||||
Common
stock, $.001 par value, 100,000,000 shares authorized, 39,656,669 shares
issued and outstanding as of December 31, 2009 and 39,556,669 shares
issued and outstanding as of December 31, 2008.
|
39,657 | 39,557 | ||||||
Additional
paid-in capital
|
35,840,231 | 35,407,205 | ||||||
Accumulated
deficit
|
(23,564,411 | ) | (21,110,555 | ) | ||||
Total
stockholders' equity
|
12,322,722 | 14,343,452 | ||||||
Total
liabilities and stockholders' equity
|
$ | 66,240,629 | $ | 72,021,731 |
See
accompanying notes to consolidated financial statements.
F-2
National
Investment Managers Inc. and Subsidiaries
Consolidated
Statements of Operations
Years
Ended December 31, 2009 and 2008
2009
|
2008
|
|||||||
Revenues:
|
$ | 48,149,363 | $ | 41,680,122 | ||||
Operating
expenses
|
||||||||
Selling,
general and administrative expenses
|
39,038,488 | 33,703,829 | ||||||
Depreciation
and amortization
|
7,250,168 | 6,911,995 | ||||||
Stock-based
compensation
|
433,126 | 1,002,599 | ||||||
Total
operating expenses
|
46,721,782 | 41,618,423 | ||||||
Net
operating income (loss)
|
1,427,581 | 61,699 | ||||||
Other
income (expenses):
|
||||||||
Change
in fair value of derivative financial instruments
|
786,645 | 1,865,033 | ||||||
Interest
expense
|
(4,593,641 | ) | (4,018,743 | ) | ||||
Debt
and other restructuring charges
|
(60,000 | ) | - | |||||
Interest,
dividend and rental income
|
28,769 | 48,301 | ||||||
Total
other income (expense), net
|
(3,838,227 | ) | (2,105,409 | ) | ||||
Net
income (loss) before income tax benefit (expense)
|
(2,410,646 | ) | (2,043,710 | ) | ||||
Income
tax benefit (expense)
|
1,934,390 | 1,913,685 | ||||||
Net
income (loss) before preferred stock dividends
|
(476,256 | ) | (130,025 | ) | ||||
Preferred
stock dividends
|
(1,977,600 | ) | (1,979,900 | ) | ||||
Net
income (loss) available to common stockholders
|
$ | (2,453,856 | ) | $ | (2,109,925 | ) | ||
Net
income (loss) per common share - basic and
diluted
|
$ | (0.06 | ) | $ | (0.06 | ) | ||
Weighted
average common shares outstanding - basic and diluted
|
39,557,000 | 37,269,000 |
See
accompanying notes to consolidated financial statements.
F-3
Consolidated
Statements of Stockholders' Equity
Years
Ended December 31, 2009 and 2008
Additional
|
Total
|
|||||||||||||||||||||||||||||||||||
Treasury
Stock
|
Preferred
Stock
|
Common
Stock
|
Paid-In
|
Accumulated
|
Stockholders'
|
|||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
||||||||||||||||||||||||||||
Balances,
January 1, 2008
|
- | $ | - | 7,344,684 | $ | 7,345 | 35,539,620 | $ | 35,540 | $ | 33,005,919 | $ | (19,000,630 | ) | $ | 14,048,174 | ||||||||||||||||||||
Shares
issued to S. Ross pursuant to employment contract
|
700,000 | 700 | 461,300 | 462,000 | ||||||||||||||||||||||||||||||||
Conversion
of 100,000 Preferred B Shares to 200,000 shares of common
stock
|
(100,000 | ) | (100 | ) | 200,000 | 200 | (100 | ) | - | |||||||||||||||||||||||||||
Shares
issued to J. Davis pursuant to employment contract
|
350,000 | 350 | 230,650 | 231,000 | ||||||||||||||||||||||||||||||||
Issuance
of shares in connection with the purchase of Alaska Pension
Services
|
369,128 | 369 | 219,631 | 220,000 | ||||||||||||||||||||||||||||||||
Shares
issued to J. Davis pursuant to employment contract
|
50,000 | 50 | 27,450 | 27,500 | ||||||||||||||||||||||||||||||||
Issuance
of shares in connection with the purchase of REPTECH
|
1,430,208 | 1,430 | 713,674 | 715,104 | ||||||||||||||||||||||||||||||||
Conversion
of derivative liability to permanent equity pursuant to repurchase of
shares from IBF Fund Liquidating LLC
|
1,000,000 | 1,000,000 | ||||||||||||||||||||||||||||||||||
Purchase
of treasury shares pursuant to repurchase of shares from IBF Fund
Liquidating LLC
|
(671,141 | ) | (1,000,000 | ) | (1,000,000 | ) | ||||||||||||||||||||||||||||||
Treasury
shares retired pursuant to the repurchase of shares from IBF
Fund Liquidating LLC
|
671,141 | 1,000,000 | (671,141 | ) | (671 | ) | (999,329 | ) | - | |||||||||||||||||||||||||||
Issuance
of shares in connection with the purchase of The Pension
Group
|
1,488,854 | 1,489 | 466,011 | 467,500 | ||||||||||||||||||||||||||||||||
Shares
issued to S. Ross pursuant to employment contract
|
100,000 | 100 | 29,900 | 30,000 | ||||||||||||||||||||||||||||||||
Stock
based compensation
|
252,099 | 252,099 | ||||||||||||||||||||||||||||||||||
Preferred
dividends
|
(1,979,900 | ) | (1,979,900 | ) | ||||||||||||||||||||||||||||||||
Net
income (loss) before preferred stock dividends
|
(130,025 | ) | (130,025 | ) | ||||||||||||||||||||||||||||||||
Balances,
December 31, 2008
|
- | $ | - | 7,244,684 | $ | 7,245 | 39,556,669 | $ | 39,557 | $ | 35,407,205 | $ | (21,110,555 | ) | $ | 14,343,452 | ||||||||||||||||||||
Shares
issued to S. Ross pursuant to employment contract
|
100,000 | 100 | 14,900 | 15,000 | ||||||||||||||||||||||||||||||||
Stock
based compensation
|
418,126 | 418,126 | ||||||||||||||||||||||||||||||||||
Preferred
dividends
|
(1,977,600 | ) | (1,977,600 | ) | ||||||||||||||||||||||||||||||||
Net
income (loss) before preferred stock dividends
|
(476,256 | ) | (476,256 | ) | ||||||||||||||||||||||||||||||||
Balances,
December 31, 2009
|
- | $ | - | 7,244,684 | $ | 7,245 | 39,656,669 | $ | 39,657 | $ | 35,840,231 | $ | (23,564,411 | ) | $ | 12,322,722 |
See
accompanying notes to consolidated financial statements.
F-4
National
Investment Managers Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
Years
Ended December 31, 2009 and 2008
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss) before preferred stock dividends
|
$ | (476,256 | ) | $ | (130,025 | ) | ||
Adjustments
to reconcile net income (loss) before preferred stock dividends to net
cash provided by (used in) operating activities:
|
||||||||
Depreciation
and amortization
|
7,250,168 | 6,911,995 | ||||||
Change
in allowance for doubtful accounts
|
295,281 | (33,672 | ) | |||||
Noncash
interest
|
1,995,717 | 1,634,682 | ||||||
Stock-based
compensation
|
433,126 | 1,002,599 | ||||||
Deferred
income tax benefit
|
(2,119,075 | ) | (2,061,051 | ) | ||||
Change
in fair value of derivative financial instruments
|
(786,645 | ) | (1,865,033 | ) | ||||
Increase
(decrease) in cash attributable to changes in operating assets and
liabilities
|
||||||||
Accounts
receivable, net
|
(537,079 | ) | (878,837 | ) | ||||
Prepaid
expenses and other current assets
|
371,567 | (345,523 | ) | |||||
Accounts
payable
|
785,746 | 87,401 | ||||||
Unearned
revenues
|
(1,208,328 | ) | (113 | ) | ||||
Accrued
expenses and other current liabilities
|
(633,085 | ) | (146,933 | ) | ||||
Net
cash provided by (used in) operating activities
|
5,371,137 | 4,175,490 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of property and equipment
|
(1,237,883 | ) | (323,457 | ) | ||||
Acquisition
of Alaska Pension Services
|
(40,200 | ) | (895,561 | ) | ||||
Acquisition
of Lamoriello Entities
|
(50,810 | ) | - | |||||
Acquisition
of National Actuarial Pension Services, Inc.
|
(64,318 | ) | (184,054 | ) | ||||
Acquisition
of Alan N. Kanter & Associates
|
(206,863 | ) | (1,886,913 | ) | ||||
Acquisition
of Benefit Dynamics
|
- | (8,770 | ) | |||||
Acquisition
of Pentec and Pentec Capital Management
|
- | (40,246 | ) | |||||
Acquisition
of The Pension Alliance
|
- | (1,396,299 | ) | |||||
Acquisition
of California Investment and Annuity Services
|
- | (1,535,929 | ) | |||||
Acquisition
of the assets of REBS
|
- | (178,257 | ) | |||||
Acquisition
of REPTECH Corp
|
(190,514 | ) | (1,846,138 | ) | ||||
Acquisition
of The Pension Group, Inc.
|
(1,355,380 | ) | (2,281,427 | ) | ||||
Acquisition
of the assets of Standard Retirement Services, Inc.
|
(68,653 | ) | - | |||||
Acquisition
of the assets of Custom K, Inc.
|
(15,000 | ) | - | |||||
Net
cash provided by (used in) investing activities
|
(3,229,621 | ) | (10,577,051 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from revolving line of credit
|
3,404,908 | - | ||||||
Proceeds
from long-term debt
|
- | 7,060,895 | ||||||
Payments
on long-term debt
|
(4,510,305 | ) | (1,650,194 | ) | ||||
Payments
on revolving line of credit
|
(1,232,900 | ) | (672,008 | ) | ||||
Payments
to repurchase common stock
|
- | (1,000,000 | ) | |||||
Payment
of deferred financing costs
|
(59,709 | ) | (60,445 | ) | ||||
Net
cash provided by (used in) financing activities
|
(2,398,006 | ) | 3,678,248 | |||||
Net
increase (decrease) in cash
|
(256,490 | ) | (2,723,313 | ) | ||||
Cash,
beginning of period
|
531,446 | 3,254,759 | ||||||
Cash,
end of period
|
$ | 274,956 | $ | 531,446 |
(continued)
F-5
National
Investment Managers Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
Years
Ended December 31, 2009 and 2008
2009
|
2008
|
|||||||
Supplemental
disclosure of cash flows information:
|
||||||||
Cash
paid during the period for interest
|
$ | 2,542,034 | $ | 2,314,261 | ||||
Cash
paid during the period for taxes
|
$ | 252,808 | $ | 101,463 | ||||
Supplemental schedules of noncash investing and financing activites: | ||||||||
Accrued
preferred dividends
|
$ | 1,977,600 | $ | 1,979,900 | ||||
Capitalization
of accrued interest on secured term notes
|
$ | 435,893 | $ | 372,150 | ||||
Capitalization
of deferred financing costs on secured term notes
|
$ | 177,500 | $ | - | ||||
Conversion
of derivative liability to permanent equity
|
$ | - | $ | 1,000,000 |
(continued)
F-6
Supplemental
Disclosure of Non-Cash Investing and Financing Activities
The
Company endeavors to structure its stock purchase agreements with acquisition
candidates as cash and debt free transactions where the sellers retain all cash
and outstanding liabilities. If any net liabilities remain at the closing date,
they are settled as a reduction in the purchase proceeds. Proceeds paid to the
sellers typically include, cash, notes payables issued to the sellers and the
issuance of common stock of the Company at the average of recent market values.
The majority of liabilities assumed by the Company represent unearned revenues
of the acquired company at the closing date and the deferred tax liability
related to the recorded intangible assets.
The
following schedule represents cumulative cash paid, notes and common stock
issued and liabilities assumed since acquisition date.
National
Actuarial
|
||||||||||||
2006:
|
Lamoriello
Entities
|
Pension
Services
|
||||||||||
Fair
value of assets acquired
|
$ | 6,656,190 | $ | 3,649,469 | ||||||||
Cash
paid
|
(3,354,190 | ) | (2,110,069 | ) | ||||||||
Notes
issued
|
- | (700,000 | ) | |||||||||
Common
stock issued
|
(1,500,000 | ) | - | |||||||||
Total
liabilities assumed
|
$ | 1,802,000 | $ | 839,400 | ||||||||
Pentec
Inc. and Pentec
|
||||||||||||
2007:
|
Benefit
Dynamics Inc.
|
Capital
Management
|
The
Pension Alliance Inc.
|
|||||||||
Fair
value of assets acquired
|
$ | 938,318 | $ | 6,027,702 | $ | 8,847,393 | ||||||
Cash
paid
|
(348,770 | ) | (1,731,622 | ) | (4,776,299 | ) | ||||||
Notes
issued
|
(200,000 | ) | (1,450,000 | ) | (1,175,000 | ) | ||||||
Common
stock issued
|
- | (250,000 | ) | (675,000 | ) | |||||||
Total
liabilities assumed
|
$ | 389,548 | $ | 2,596,080 | $ | 2,221,094 | ||||||
California
Investment
|
Alaska
Pension
|
Alan
N. Kanter
|
||||||||||
2008:
|
Annuity
Sales
|
Services,
Ltd.
|
&
Associates, Inc.
|
|||||||||
Fair
value of assets acquired
|
$ | 2,949,929 | $ | 1,663,443 | $ | 2,663,679 | ||||||
Cash
paid
|
(1,535,929 | ) | (935,761 | ) | (2,093,776 | ) | ||||||
Due
to sellers
|
- | - | (65,938 | ) | ||||||||
Notes
issued
|
(950,000 | ) | (220,000 | ) | - | |||||||
Common
stock issued
|
- | (220,000 | ) | - | ||||||||
Total
liabilities assumed
|
$ | 464,000 | $ | 287,682 | $ | 503,965 | ||||||
Retirement
& Employee
|
||||||||||||
2008:
|
Benefit
Services Inc.
|
REPTECH
Corp.
|
The
Pension Group, Inc.
|
|||||||||
Fair
value of assets acquired
|
$ | 178,257 | $ | 5,001,218 | $ | 6,315,702 | ||||||
Cash
paid
|
(178,257 | ) | (2,036,652 | ) | (3,636,807 | ) | ||||||
Notes
issued
|
- | (922,656 | ) | (617,500 | ) | |||||||
Common
stock issued
|
- | (715,104 | ) | (467,500 | ) | |||||||
Total
liabilities assumed
|
$ | - | $ | 1,326,806 | $ | 1,593,895 | ||||||
Standard
Retirement
|
||||||||||||
2009:
|
Services,
Inc.
|
Custom
K, Inc.
|
||||||||||
Fair
value of assets acquired
|
$ | 591,000 | $ | 42,000 | ||||||||
Cash
paid
|
(68,653 | ) | (15,000 | ) | ||||||||
Accrued
contingent obligations
|
(522,347 | ) | - | |||||||||
Total
liabilities assumed
|
$ | - | $ | 27,000 |
See
accompanying notes to consolidated financial statements.
F-7
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
Note
1—Nature of Operations, Background, Basis of Presentation and Reverse
Acquisition Transaction
National
Investment Managers, Inc. ("NIVM" or the "Company") is in the principal business
of acquiring and managing operating entities that offer pension plan
administration, financial and investment advisory services and insurance
products to small and medium sized businesses and high-net worth individuals in
the United States.
As of
December 31, 2009, the Company owned 22 operating units in fourteen states. The
wholly-owned subsidiaries are based in Lake Mary, FL; North Attleboro, MA;
Haddonfield, NJ; Yorktown Heights, NY; New York, NY; Beaverton, OR; Horsham, PA;
Wayne, PA; Warwick, RI; Houston, TX; Marina Del Rey, CA; Seattle, WA;
Harrisburg, PA; Southington, CT; Pikesville, MD; Anchorage, AK; Denver, CO and
Laguna Hills, CA. The Company’s corporate headquarters is located in Dublin,
Ohio.
On
February 18, 2005, Fast Eddie Racing Stables, Inc. ("FEST"), a public "Shell
Company", entered into an Agreement and Plan of Reorganization (the
"Acquisition") with Duncan Capital Financial Group, Inc. ("Duncan Capital"). On
March 9, 2005, FEST completed the acquisition of Duncan Capital. On March 15,
2005, FEST changed its name to National Investment Managers, Inc. The
Acquisition was effected through the exchange of 12,040,000 shares of common
stock of FEST for 12,040,000 shares of common stock of Duncan Capital and Duncan
Capital effectively became a wholly-owned subsidiary of FEST. Under the terms of
the Agreement, the former shareholders of Duncan Capital held approximately 94%
of the outstanding common shares of FEST immediately after the effective time of
the merger. In addition, each outstanding option and warrant to purchase Duncan
Capital common stock was converted into an option or warrant to purchase the
number of shares of FEST common stock equal to the number of Duncan Capital
common shares underlying the option or warrant immediately prior to the closing
of the transaction. Subsequent to the Acquisition, 3,820,000 shares of Series A
Preferred Stock of Duncan Capital was surrendered in exchange for an equivalent
number of preferred shares of NIVM containing identical terms. As the former
shareholders of Duncan Capital control FEST after the transaction, the merger
was accounted for as a reverse acquisition under which, for accounting purposes,
this transaction is considered to be a capital transaction in substance, rather
than a business combination. This resulted in the owners of Duncan Capital (the
"accounting acquirer") having actual or effective operating control of the
Company after the transaction, with the shareholders of FEST (the "legal
acquirer") continuing only as passive investors. No goodwill was recognized
since FEST was a "Shell Company."
On
December 13, 2004, Duncan Capital, an incorporated company with no operations,
acquired 100% of the issued and outstanding securities of Pension Administration
Services, Inc., Complete Investment Management Inc. of Philadelphia and MD
Bluestein, Inc. (collectively the “PAS Group").
On August
2, 2005, the Company acquired 100% of the issued and outstanding securities of
Stephen H. Rosen & Associates, Inc., ("SHRA") and Haddon Strategic Alliance,
Inc. ("Haddon") (collectively the "SHRA Group").
On
November 30, 2005, the Company acquired certain assets and liabilities of
American Benefit Resources, Inc. ("ABR") and 100% of the capital stock of the
wholly-owned subsidiaries of ABR, National Associates, Inc. N.W. ("National"),
ABR Advisors, Inc. ("Advisors"), BPI/PPA, Inc. ("BPI"), Benefit Management, Inc.
("BMI"), MLK Capital Management, Inc. ("MLK Capital"), VEBA Administrators, Inc.
dba Benefit Planning, Inc. ("VEBA") and AFC Enterprises, Inc. ("AFC"),
(collectively the "ABR Group").
On
January 4, 2006, the Company acquired 100% of the issued and outstanding
securities of Valley Forge Enterprises, Ltd. ("Valley Forge").
On March
24, 2006, the Company sold to M. Lane Kerns, Billie Kerns, and Kerns Asset
Management, LLC (i) 100% of the issued and outstanding securities of MLK Capital
and (ii) certain assets, client relationships and liabilities of BMI related to
the third party administration business.
On
October 3, 2006, the Company acquired 100% of the issued and outstanding
securities of Lamoriello & Co., Inc. ("LCI"), Circle Pension, Inc. ("CPI"),
and Southeastern Pension Services, Inc. ("SPSI") (collectively “The Lamoriello
Entities”).
On
December 1, 2006, the Company acquired 100% of the issued and outstanding
securities of National Actuarial Pension Services ("NAPS").
On
January 2, 2007, the Company acquired 100% of the issued and outstanding
securities of Benefit Dynamics Inc. (“BDI”).
On
February 28, 2007, the Company acquired 100% of the issued and outstanding
securities of Pentec, Inc. (“Pentec”) and Pentec Capital Management Inc.
(“PCM”).
F-8
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
On
February 28, 2007, the Company acquired 100% of the issued and outstanding
securities of The Pension Alliance (“TPA”).
On April
3, 2008, the Company acquired 100% of the issued and outstanding securities of
California Investment and Annuity Sales, Inc. (“CIAS”).
On June
30, 2008, the Company acquired 100% of the issued and outstanding securities of
Alaska Pension Services, Ltd. (“Alaska Pension”).
On July
16, 2008, the Company acquired 100% of the issued and outstanding securities of
Alan N. Kanter & Associates, Inc. (“Kanter & Associates”).
On August
5, 2008, the Company purchased certain assets of Retirement & Employee
Benefit Services, Inc. (“REBS”).
On
October 2, 2008, the Company acquired 100% of the issued and outstanding
securities of Pension Technical Services, Inc. d/b/a REPTECH Corp.
(“REPTECH”).
On
November 26, 2008, the Company acquired 100% of the issued and outstanding
securities of The Pension Group, Inc. (“TPG”).
On
October 28, 2009, the Company purchased certain assets of Standard Retirement
Services, Inc. (“Standard”).
On
December 31, 2009, the Company purchased certain assets and liabilities of
Custom K, Inc. (“Custom K”).
The
accompanying 2008 consolidated financial statements include (i) the accounts of
CIAS from April 3, 2008 through December 31, 2008, (ii) the accounts of Alaska
Pension from June 30, 2008 through December 31, 2008, (iii) the accounts of
Kanter & Associates from July 16, 2008 through December 31, 2008, (iv) the
accounts of REPTECH from October 2, 2008 through December 31, 2008 and (v) the
accounts of TPG from November 26, 2008 through December 31, 2008 (vi) and the
assets of REBS which are being administered by Pentec,
The
accompanying 2009 consolidated financial statements include (vii) the assets of
Standard which are being administered by various subsidiaries within the Company
(viii) and the assets of Custom K which are being administered by
SHRA.
Note
2—Significant Accounting Policies and Liquidity
Principles
of Consolidation
The
Company's consolidated financial statements include the accounts of NIVM and all
of its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements as well as the reported
amounts of revenues and expenses during the reporting period. Actual amounts
could differ from those estimates.
Revenue
Recognition
The
Company generates revenue primarily from the following sources:
|
·
|
Third
party administration – The Company earns fees for the development and
implementation of corporate and executive benefit programs, as well as
fees for the duration that these programs are
administered.
|
|
·
|
Financial
planning and investment advisory fees and securities commissions – The
Company receives commissions related to the sale of securities and certain
investment-related insurance products as well as fees for offering
financial advice through financial intermediaries and related services.
These fees are based on a percentage of assets under management and are
generally paid quarterly. The Company also charges fees for evaluations of
the performance of portfolios.
|
F-9
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
|
·
|
Insurance
commissions - Insurance and annuity commissions paid by insurance
companies are paid to the Company for policies sold based on a percentage
of the premium that the insurance company charges to the policyholder.
First-year commissions are calculated as a percentage of the first twelve
months premium on the policy and earned in the year that the policy is
originated. In many cases, the Company receives renewal commissions for
periods following the first year, if the policy remains in
force.
|
Revenue
is recognized only when all of the following are present: persuasive evidence of
an arrangement exists, delivery has occurred or services have been rendered, the
fee to the client is fixed or determinable, and collectability is reasonably
assured. These criteria are in accordance with GAAP and the Revenue Recognition
Topic of the FASB ASC.
The
Company recognizes revenue from the above sources as follows:
Third
party administration:
|
·
|
Persuasive
evidence of an arrangement between the Company and a client
exists;
|
|
·
|
Delivery
of a completed product to the client has occurred or the service has been
provided to the customer;
|
|
·
|
The
price to the client is fixed and
determinable;
|
|
·
|
Collectability
of the sales price is reasonably
assured.
|
Financial
planning and investment advisory fees and securities commissions:
|
·
|
As
services are rendered;
|
|
·
|
Contingent
commissions are recorded as revenue when earned and determinable and
collection is reasonably assured.
|
Insurance
commissions:
|
·
|
The
policy application is substantially
complete;
|
|
·
|
The
premium is paid;
|
|
·
|
The
insured party is contractually committed to the purchase of the insurance
policy.
|
Net
Loss Per Common Share
The
Company complies with the Earnings Per Share Topic of the FASB ASC. Basic net
loss per common share includes no dilution and is computed by dividing net loss
available to common shareholders by the weighted average number of common shares
outstanding for the periods. Diluted net loss per common share is computed using
the weighted average number of common shares outstanding for the periods plus
the effect of any dilutive potential common shares. Dilutive potential common
shares consist of the assumed exercise of stock options and warrants, the
proceeds of which are then assumed to have been used to repurchase outstanding
stock using the treasury stock method, and the assumed conversion of convertible
notes and preferred stock.
Unexercised
stock options and warrants to purchase common stock and notes and preferred
stock convertible into common stock as of December 31, 2009 and 2008 are as
follows (in shares):
December
31, 2009
|
December
31, 2008
|
|||||||
Options
and warrants
|
27,597,519 | 27,160,519 | ||||||
Preferred
stock
|
32,960,008 | 32,960,008 | ||||||
Convertible
notes
|
- | 544,355 | ||||||
60,557,527 | 60,664,882 |
For the
years ended December 31, 2009 and 2008, respectively, options and warrants
include non-vested shares of 802,500 and 909,167.
The
foregoing common stock equivalents were excluded from the calculation of diluted
net loss per common share since their inclusion would be
anti-dilutive.
F-10
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
A portion
of the employee options granted in 2009 may only be exercised if authorized
common shares are available. Furthermore, the Company is not obligated to settle
these options in cash.
Reclassifications
Certain
amounts in the 2008 consolidated financial statements and disclosures have been
reclassified to conform to the current year presentation.
Business
Segments
In
accordance with the Segment Reporting Topic of the FASB ASC, the Company has
determined that they operate in a single segment within the financial services
industry entirely within the United States of America and its
territories.
Cash,
Cash Equivalents and Restricted Cash
For
purposes of the consolidated statements of cash flows, cash equivalents consist
of highly-liquid investments purchased with a remaining maturity of three months
or less. Cash that is restricted as to its usage consists of cash on deposit
from client flexible spending plans. Restricted cash at December 31, 2009 and
2008 is $33,263 and $411,299, respectively. The Company maintains cash balances
at financial institutions in excess of the amount insured by the Federal Deposit
Insurance Corporation. Management regularly monitors the financial
condition of these institutions to minimize any potential risk of loss
associated with these accounts.
Share
Based Payments
The
Company complies with the fair value recognition provisions of the Compensation
and Equity Topics of the FASB ASC. This guidance requires that compensation cost
for all stock awards be calculated and recognized over the service period
(generally equal to the vesting period). This compensation cost is determined
using option pricing models intended to estimate the fair value of the awards at
the grant date. An offsetting increase to stockholders' equity is recorded equal
to the amount of the compensation expense charge. The fair value of issued stock
options and warrants are estimated on the date of grant using the Black-Scholes
option-pricing model including the following assumptions: expected volatility of
25.0% to 60.0%, expected dividend yield rate of 0%, expected life over the term,
generally, 5 or 7 years, and a range of risk-free interest rates of 1.55% to
4.19% which coincides with the expected life of the options and warrants at the
time of issuance.
There was
no cash flow effect resulting from these arrangements.
Contingent
Consideration
The
Company has incorporated contingent consideration into the structure of certain
acquisitions completed. These arrangements generally result in the payment of
additional consideration to the sellers upon the satisfaction of certain
events.
For
acquisitions prior to 2009, the additional cash payments or share issuances are
contingent considerations and are considered to be additional purchase
consideration and will be accounted for as part of the purchase price of the
firms when the outcome of the contingency is determinable beyond a reasonable
doubt.
For
acquisitions beginning in 2009, the additional cash payments or share issuances
are contingent consideration accounted for under the Business Combinations Topic
of the FASB ASC and are considered to be additional purchase consideration as
part of the purchase price of the firms at the time of acquisition. These
contingencies will be reassessed on a periodic basis until the final outcome of
the contingency is determinable but not longer than the measurement period, with
the change recorded to identifiable intangibles.
Property
and Equipment
Property
and equipment are recorded at cost and depreciated using the straight-line
method over their estimated useful lives, generally 3 to 7 years. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
the terms of the leases. Betterments and improvements are capitalized while
repairs and maintenance are expensed as incurred.
Goodwill
and Other Intangible Assets
Goodwill
represents the excess of cost over the fair value of net assets of businesses
acquired. The Company accounts for goodwill under the guidance of the
Intangibles - Goodwill and Other Topic of the FASB ASC. Goodwill and other
intangible assets acquired in a purchase business combination and determined to
have an indefinite useful life are not amortized, but instead tested for
impairment, at least annually, in accordance with this guidance. This guidance
also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with the Property, Plant, and
Equipment Topic of the FASB ASC.
F-11
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
In
accordance with the guidance of the Property, Plant, and Equipment Topic of the
FASB ASC, long-lived assets, such as property and equipment and purchased
intangible assets subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
No
impairment losses have been recognized to date on goodwill. In December 2008,
the remaining $166,667 in unamortized customer list intangible asset for Haddon
was written off due to a previously unanticipated loss in customer
base.
Income
Taxes
The
Company complies with the Income Taxes Topic of the FASB ASC, which requires an
asset and liability approach to financial accounting and reporting for income
taxes. Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and liabilities that
will result in future taxable or deductible amounts, based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when necessary, to
reduce deferred income tax assets to the amount expected to be
realized.
In
accordance with the guidance of the Income Taxes Topic of the FASB ASC, there
were no unrecognized tax benefits as of December 31, 2009 and 2008. This
guidance prescribes a recognition threshold and a measurement attribute for the
financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. For those benefits to be recognized, a tax
position must be more-likely-than-not sustainable upon examination by taxing
authorities. The Company recognizes accrued interest and penalties related to
unrecognized tax expense or benefits as income tax expense. No amounts were
accrued for the payment of interest and penalties at December 31, 2009 and 2008.
Management is currently unaware of any issues under review that could result in
significant payments, accruals or material deviations from its position. The
adoption of the provisions of this guidance did not have a material impact on
the Company's consolidated financial position, results of operations and cash
flows.
Fair
Value of Financial Instruments
The fair
value of the Company's assets and liabilities, which qualify as financial
instruments under the Financial Instruments Topic of the FASB ASC, approximate
the carrying amounts presented in the accompanying consolidated balance
sheets.
Derivative
Financial Instruments
The
Company accounts for non-hedging contracts that are indexed to, and potentially
settled in, its own common stock in accordance with the provisions of the
Derivatives and Hedging Topic of the FASB ASC. These non-hedging contracts
accounted for in accordance with this guidance include freestanding warrants and
options to purchase the Company's common stock as well as embedded conversion
features that have been bifurcated from the host financing contract. Under
certain circumstances that could require the Company to settle these equity
items in cash or stock, and without regard to probability, this guidance could
require the classification of all or part of the item as a liability and the
adjustment of that reclassified amount to fair value at each reporting date,
with such adjustments reflected in the Company's consolidated statements of
operations.
Business
Acquisitions, Purchase Price Allocations and Intangible Assets
As of
December 31, 2009, we had completed 16 groups of acquisitions. All of these
acquisitions have been accounted for using the acquisition method, and their
related net assets and results of operations were included in our consolidated
financial statements commencing on their respective acquisition dates. Certain
acquisitions have provisions for contingent additional consideration based upon
their financial results. For acquisitions prior to 2009, this additional
consideration is reflected as an increase in goodwill or identifiable
intangibles when results are achieved and the outcome of the contingency is
determinable beyond a reasonable doubt. For acquisitions beginning in 2009, the
fair value of the contingency is estimated at the time of acquisition. It is
reassessed on a periodic basis until the final outcome is determinable but not
longer than the measurement period, with the change recorded to goodwill or
identifiable intangibles. We allocate the excess of purchase price over net
assets acquired to customer relationships, covenants not to compete, employment
contracts, trade name, and goodwill. We amortize intangibles such as customer
lists/ relationships, trade names, covenants not to compete and employment
agreements over their estimated useful lives. In accordance with the
Intangibles-Goodwill and Others Topic of the FASB ASC, we do not amortize
goodwill.
Arrangements
with Off-Balance Sheet Risk - Guarantees
The
Contingencies and Guarantees Topics of the FASB ASC discuss the requirements
relating to a guarantor's accounting for and disclosures of certain guarantees
issued. The Company has not entered into any guarantees in 2009 and
2008.
F-12
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
Adoption
of New Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued guidance
in the Consolidation Topic of the FASB Accounting Standards Codification
(“ASC”). The guidance establishes accounting and reporting standards for
ownership interest in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
non-controlling interest, changes in a parent’s ownership interest, and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The guidance also establishes disclosure requirements that
clearly identify and distinguish between the interest of the parent and the
interest of the non-controlling owners. The guidance is effective for the
Company beginning January 1, 2009. The guidance does not have a material impact
on the Company’s consolidated financial statements.
In
December 2007, the FASB issued guidance in the Business Combinations Topic of
the FASB ASC. This guidance requires the acquiring entity in a business
combination to recognize most identifiable assets acquired, liabilities assumed,
non-controlling interests and goodwill acquired in a business combination at
full fair value; establishes the acquisition date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose to investors and other users all of the information they
need to evaluate and understand the nature and financial effect of the business
combination. This guidance is effective for the Company beginning January 1,
2009. The adoption of this guidance on January 1, 2009 did not have a
material impact on the Company’s consolidated financial position, results of
operations and cash flows during the year ended December 31, 2009. However, the
application of this guidance to future acquisitions could impact the Company’s
financial condition and results of operations and the reporting of acquisitions
in the consolidated financial statements.
In March
2008, the FASB issued guidance on disclosures in the Derivatives and Hedging
Topic of the FASB ASC. This guidance requires enhanced disclosures about an
entity’s derivative and hedging activities and thereby improves the transparency
of financial reporting. The objective of the guidance is to provide users of
financial statements with an enhanced understanding of how and why an entity
uses derivative instruments; how derivative instruments and related hedged items
are accounted for; and how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
This guidance is effective for the Company beginning January 1, 2009. The
Company does not make it a practice to participate in derivative transactions
except in financing arrangements with lenders. See Note 7, Debt, for further
discussion as it relates to the accounting treatment and effect on the Company’s
Consolidated Balance Sheets as of December 31, 2009 and 2008. The resulting
change in fair value of derivative financial instruments is disclosed on the
Company’s Consolidated Statements of Operations and Cash Flows as of December
31, 2009 and 2008. The Company currently does not participate in any hedging
transactions.
In
April 2009, the FASB issued guidance in the Business Combinations Topic of
the FASB ASC. This addresses application issues, including: (1) initial
recognition and measurement; (2) subsequent measurement and accounting; and
(3) disclosure of assets and liabilities arising from contingencies in a
business combination. This guidance was prospectively effective for business
combinations consummated in fiscal years beginning on or after December 15,
2008, with early application prohibited. The adoption of this guidance on
January 1, 2009 did not have a material impact on the Company’s
consolidated financial position, results of operations and cash flows during the
year ended December 31, 2009. However, the application of this guidance to
future acquisitions could impact the Company’s financial condition and results
of operations and the reporting of acquisitions in the consolidated financial
statements.
In May
2008, the FASB issued guidance in the Debt Topic of the FASB ASC. This guidance
provides clarification on convertible instruments that may be settled in cash
upon conversion (including partial cash settlement). Additionally, this guidance
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. This guidance is effective for financial statements issued
for fiscal years and interim periods beginning after December 15, 2008, and
is to be applied retrospectively for all periods that are presented in the
annual financial statements for the period of adoption. This guidance does not
have a material impact on the Company’s consolidated financial statements.
In
April 2009, the FASB issued guidance in the Fair Value Measurements and
Disclosures Topic of the FASB ASC. This guidance affirms that the objective of
fair value when the market for an asset is not active is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date under current
market conditions. It provides guidance for estimating fair value when the
volume and level of market activity for an asset or liability have significantly
decreased and determining whether a transaction was orderly. This guidance
applies to all fair value measurements when appropriate and is effective for the
Company for the quarterly period beginning April 1, 2009. The guidance does not
have a material impact on the Company’s consolidated financial
statements.
F-13
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
In
April 2009, the FASB issued guidance in the Financial Instruments and
Interim Reporting Topics of the FASB ASC. This guidance requires disclosures
about fair value of financial instruments in interim financial statements. It
requires that disclosures be included in both interim and annual financial
statements of the methods and significant assumptions used to estimate the fair
value of financial instruments. This guidance is effective for periods ending
after June 15, 2009, with comparative disclosures required only for periods
ending subsequent to initial adoption. The Company has disclosed the assumptions
used to estimate the fair value of financial instruments in the notes to
consolidated financial statements.
In
May 2009, the FASB issued guidance in the Subsequent Events Topic of the
FASB ASC. This guidance is intended to establish general standards of accounting
for and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. Specifically,
this standard sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the Company’s consolidated
financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its
consolidated financial statements, and the disclosures that an entity should
make about events or transactions that occurred after the balance sheet
date. This guidance is effective for fiscal years and interim periods
ended after June 15, 2009 and will be applied prospectively. The Company
adopted this guidance during the second quarter of 2009, and its adoption did
not have a material impact on the Company’s consolidated financial statements
for the year ended December 31, 2009. In February 2010, the FASB issued guidance
in the Subsequent Events Topic of the FASB ASC in which an entity that is an SEC
filer is not required to disclose the date through which subsequent events have
been evaluated. This guidance is effective immediately.
In June
2009, the FASB issued guidance in the General Accepted Accounting Principles
Topic of FASB ASC. This guidance modifies the GAAP hierarchy by establishing
only two levels of GAAP, authoritative and non-authoritative accounting
literature. Effective July 2009, the ASC, also known collectively as the
“Codification,” is considered the single source of authoritative U.S. accounting
and reporting standards, except for additional authoritative rules and
interpretive releases issued by the SEC. Non-authoritative guidance and
literature would include, among other things, FASB Concepts Statements, American
Institute of Certified Public Accountants Issue Papers and Technical Practice
Aids and accounting textbooks. The Codification was developed to organize GAAP
pronouncements by topic so that users can more easily access authoritative
accounting guidance. It is organized by topic, subtopic, section and paragraph,
each of which is identified by a numerical designation. This guidance is
effective for interim and annual periods beginning with the third quarter of
2009.
In August
2009, the FASB issued guidance in the Fair Value Measurements and Disclosures
Topic of FASB ASC. The guidance updates the fair value measurement of
liabilities that provides clarification for circumstances in which a quoted
price in an active market for the identical liability is not available; a
reporting entity is required to measure fair value using alternative valuation
techniques. This guidance provided in this update is effective for interim and
annual periods beginning after August 27, 2009. Valuation techniques used by the
Company are disclosed in Note 8.
New
Accounting Pronouncements
In
September 2009, the FASB issued guidance in the Revenue Recognition Topic of
FASB ASC. This guidance updates the accounting and expands disclosures for
multiple-deliverable arrangements to enable vendors to account for products or
services separately rather than as a combined unit. The update will be effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Management is currently
evaluating the impact of applying the update to the Company’s future
consolidated financial statements.
In
January 2010, the FASB issued guidance in the Fair Value Measurements and
Disclosures Topic of FASB ASC. The guidance requires reporting entities to make
new disclosures about recurring and nonrecurring fair value measurements
including significant transfers into and out of Level 1 and Level 2 fair value
measurements and information on purchases, sales, issuances, and settlements on
a gross basis in the reconciliation of Level 3 fair value measurements. The
guidance also clarified existing fair value measurement disclosure guidance
about the level of disaggregation, inputs and valuation techniques. The new
disclosures and clarifications of existing disclosures are effective for interim
and annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuance, and settlements in the roll
forward of activity in Level 3 fair value measurements. Those disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years.
F-14
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
Liquidity
At
December 31, 2009 and 2008, the Company's working capital deficit was
approximately $9.3 million and $11.2 million, respectively and its accumulated
deficit was approximately $23.6 million and $21.1 million, respectively.
Further, for the years ended December 31, 2009 and 2008, the Company generated
losses before preferred stock dividends of approximately $0.5 million and $0.1
million, respectively and its cash flows from operations were approximately $5.4
million and $4.2 million, respectively.
In 2009,
cash generated from operating activities increased as a result of annualized
results from the Company’s 2008 acquisitions. In addition, through its senior
lending arrangements, the Company has access to a Revolving Line of Credit of up
to $2.0 million, which was temporarily increased to $2.5 million through
December 31, 2009 and further extended through February 28, 2010, to supplement
its cash generated from operations. At December 31, 2009, the Company had $2.5
million of principal outstanding under this arrangement. At December 31, 2008,
the Company had approximately $0.3 million of principal outstanding and $1.7
million available under this arrangement. Effective April 26, 2010, the maximum
principal amount available under the Revolving Line of Credit was increased to
$4.0 million as a result of an amendment to its current senior lending
arrangement as disclosed in Note 7.
On April
12, 2010, in order to alleviate a lack of short-term liquidity, the Company
obtained an additional loan of $0.5 million for short term working capital
purposes from its subordinated lenders due on May 15, 2010. The Company intends
to use funds available from the increased Revolving Line of Credit to pay off
the short term working capital loan.
The
Company’s existing commitments for term notes from senior and subordinated
lenders are currently exhausted. The Company has amended its current lending
arrangements, with its existing lenders, beyond 2010. In the
amendments, the Company has agreed that its senior or subordinated lenders may
terminate its forbearance agreements if, in the lender’s reasonable judgment,
the Company has not made satisfactory progress toward a reasonably satisfactory
recapitalization initiative by July 15, 2010 or any date thereafter through the
forbearance period. If the Company is not successful in its recapitalization or
refinancing efforts, it will not have the ability to pay the senior and
subordinated senior debt at the end of the forbearance period.
Management
establishes an annual plan for operations and then utilizes the operating plan,
current financial results, equity and credit market conditions, and other
factors to forecast its quarterly and annual financial results and related cash
flows from operations. Based upon management's cash forecast for revenues,
operating expenses and debt services, the Company believes its cash resources
will be adequate to fund operations through December 31, 2010.
As a
result of the dramatic decrease in the availability of credit in the marketplace
and general liquidity constraints, the Company engaged in limited acquisition
activity in 2009. The Company did complete two asset purchase transactions, most
notably the acquisition of a book of business consisting of approximately 500
balance forward plans from Standard Retirement Services, Inc. Beyond these two
acquisitions, management’s primary focus in 2009 has been to enhance operating
efficiencies and increase the effectiveness of the existing operating
subsidiaries through the implementation of technology and operational
upgrades.
Note
3—Accounts Receivable and Allowance for Doubtful Accounts
Accounts
receivable are recorded at cost less an allowance for doubtful
accounts.
The
Company maintains allowances for doubtful accounts for estimated losses from
clients' inability to make payments as invoiced. Each account that is more than
60 days delinquent and other accounts when information known to us indicates
amounts may be uncollectible are assessed for ultimate collectability and the
need for allowance. In order to estimate the appropriate level of the allowance,
management considers such factors as historical bad debts, current client
creditworthiness, changes in client payment patterns and any correspondence with
the client. If the financial condition of the Company’s clients were to
deteriorate and impair their ability to make payments, additional allowances
might be required in future periods. The allowance for doubtful accounts as of
December 31, 2009 and 2008 was approximately $418,000 and $122,000,
respectively.
F-15
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
Note
4—Property and Equipment
The
following is a summary of property and equipment:
December 31, 2009
|
December 31, 2008
|
|||||||
Property
and Equipment
|
||||||||
(includes
$1,248,467 and $1,246,017 of property and equipment from acquisitions,
respectively)
|
$ | 3,401,269 | $ | 2,163,387 | ||||
Less:
accumulated depreciation
|
(1,851,211 | ) | (1,129,340 | ) | ||||
$ | 1,550,058 | $ | 1,034,047 |
Depreciation
expense was approximately $722,000 and $500,000 for the years ended December 31,
2009 and 2008, respectively.
Note
5—Goodwill and Other Intangible Assets
Goodwill
The
changes in the carrying amount of goodwill are as follows:
Balance
as of January 1, 2008
|
$ | 20,705,032 | ||
Goodwill
acquired during the year
|
5,693,649 | |||
Purchase
Price Adjustment
|
2,075,433 | |||
Balance
as of December 31, 2008
|
28,474,114 | |||
Goodwill
acquired during the year
|
276,216 | |||
Purchase
Price Adjustment
|
75,843 | |||
Balance
as of December 31, 2009
|
$ | 28,826,173 |
Other
Intangible Assets
Other
intangible assets recognized in connection with the Company's Duncan Capital,
PAS Group, SHRA Group, ABR Group, Valley Forge, the Lamoriello Entities, NAPS,
BDI, Pentec, PCM, TPA, CIAS, Alaska Pension, Kanter & Associates, REBS,
REPTECH, TPG, Standard and Custom K acquisitions include the
following:
Gross
|
|||||||||||||
Carrying
|
Accumulated
|
Estimated
|
|||||||||||
Amount
|
Amortization
|
Net
|
Lives
|
||||||||||
Customer
lists / relationships
|
$ | 35,413,444 | $ | 10,716,417 | $ | 24,697,027 |
5 -
15 years
|
||||||
Covenants
not to compete
|
10,786,540 | 8,705,567 | 2,080,973 |
1 -
4 years
|
|||||||||
Trade
name
|
2,574,000 | 514,543 | 2,059,457 |
7 -
15 years
|
|||||||||
Employment
agreements
|
2,207,000 | 2,108,250 | 98,750 |
1 -
2 years
|
|||||||||
Other
intangibles
|
25,403 | 5,997 | 19,406 |
6
years
|
|||||||||
$ | 51,006,387 | $ | 22,050,774 | $ | 28,955,613 |
The
Company defines customer lists/relationships as the acquired firm's existing
client relationships that provide a significant source of income through
recurring revenue over the course of the economic life of the relationships. The
Company and its valuation experts generally use the historical attrition rate of
the customer list/relationships acquired, any unique circumstances associated
with the acquisition of the firm, and industry experience to determine the
estimated lives of the assets. Industry experience indicates that customer
retention is typically 95% or better due to the complexity and costs associated
with a transfer of a plan to a competitor and the long term consulting
relationship between the administrator and the client.
These
other intangible assets will be amortized by use of the straight-line method
over the estimated lives of the assets. During the years ended December 31, 2009
and 2008, amortization expense related to customer lists/relationships and other
intangible assets were approximately $6,528,000 and $6,412,000, respectively.
Management periodically evaluates the recoverability of intangible assets,
taking into account events or circumstances that may warrant a revision to
estimated useful lives or impairment conditions.
Estimated
amortization expense for future years will change primarily as the Company
continues to acquire firms.
F-16
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
Impairment
of Goodwill and Intangible Assets:
The
Company evaluates its amortizing intangible assets and goodwill for impairment
in accordance with the Intangibles - Goodwill and Other and Plant, Property and
Equipment Topics of the FASB ASC.
In
connection with its evaluation, management proactively looks for indicators of
impairment. Indicators include, but are not limited to, sustained operating
losses or a trend of poor operating performance and significant customer or
revenue loss. If one or more indicators of impairment exist among any of the
Company's firms, the Company performs an evaluation to identify potential
impairment. If impairment were to be identified, the Company would measure and
record the amount of impairment loss. No impairment losses have been recognized
to date on goodwill. In December 2008, the remaining $166,667 in unamortized
customer list intangible asset for Haddon was written off due to an
unanticipated loss in customer base which is included in depreciation and
amortization on the Consolidated Statements of Operations and the Consolidated
Statements of Cash Flows.
Both the
process to look for indicators of impairment and the method to compute the
amount of impairment incorporate quantitative data and qualitative criteria
including new information that can dramatically change the decision about the
valuation of an intangible asset in a very short period of time. The timing and
amount of impairment losses reported in earnings could vary if management's
conclusions were different.
Note
6 —Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities consist of the following:
December 31, 2009
|
December 31, 2008
|
|||||||
Payroll
and payroll related
|
$ | 404,101 | $ | 1,034,472 | ||||
Vacation
|
77,618 | 307,576 | ||||||
Accrued
investor fees
|
1,873,033 | 1,873,033 | ||||||
Due
to former owners of certain subsidiaries
|
355,965 | 1,879,264 | ||||||
Interest
payments to lenders
|
186,212 | 127,846 | ||||||
Contingent
payments to sellers - asset purchase
|
522,347 | - | ||||||
Other
|
432,310 | 380,628 | ||||||
$ | 3,851,586 | $ | 5,602,819 |
Note
7—Debt
Summary
and Future Maturities
Long-term
debt activity for the years ended December 31, 2009 and 2008 consisted of the
following:
December 31, 2009
|
December 31, 2008
|
|||||||
Senior
Term Note
|
$ | 12,000,000 | $ | 14,750,000 | ||||
Subordinated
Sr Note
|
12,992,542 | 12,404,150 | ||||||
Seller
notes
|
2,868,489 | 4,447,656 | ||||||
Capitalized
leases
|
62,254 | 93,393 | ||||||
27,923,285 | 31,695,199 | |||||||
Less:
unamortized debt discount
|
(1,454,175 | ) | (2,423,569 | ) | ||||
26,469,110 | 29,271,630 | |||||||
Less:
current portion
|
(3,352,743 | ) | (5,560,800 | ) | ||||
$ | 23,116,367 | $ | 23,710,830 |
F-17
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
Principal
payments due on long-term debt for the years ending December 31 are as
follows:
2010
|
$ | 3,352,743 | ||
2011
|
24,552,764 | |||
2012
|
13,595 | |||
2013
|
4,183 | |||
2014
|
- | |||
$ | 27,923,285 |
Revolving
Line of Credit and Senior Term Note
On
November 30, 2007, the Company entered into (i) a Revolving Line of Credit and
Term Loan Agreement (the "Senior Loan Agreement") with RBS Citizens Bank
(“Senior Lender”) and (ii) a Securities Purchase and Loan Agreement (the
"Subordinated Senior Agreement") with Woodside Capital Partners IV, LLC,
Woodside Capital Partners IV QP, LLC and Lehman Brothers Commercial Bank (the
“Subordinated Senior Lenders”). A principal amount of the proceeds generated
from the two financings were used to retire existing debt. Pursuant to the
Senior Loan Agreement, the Company entered into a Revolving Line of Credit in
the initial amount of $1,000,000 (the "Revolver") and a Term Loan Promissory
Note in the initial amount of $8,000,000 (the "Term Loan"). If certain
conditions are satisfied, the Company may utilize additional financing under the
Revolver up to $1,000,000 (the "Additional Revolver") and additional term loans
up to $7,000,000 (the "Additional Term Loan") to fund future acquisitions (the
Term Loan and the Additional Term Loan are collectively referred to as the
“Senior Term Note”). On July 15, 2008, the Company borrowed an additional
$2,358,375 on the Senior Term Note. As part of the transaction, the Company paid
$22,992 in deferred financing costs which will be amortized over the remaining
life of the loan. On October 2, 2008, the Company borrowed an additional
$1,937,760 on the Senior Term Note. On November 26, 2008, the Company borrowed
the remaining $2,703,865 on the Senior Term Note exhausting the availability of
funds under the Senior Term Note. The Senior Term Note and the Revolving Line of
Credit bear interest at the applicable LIBOR rate of interest. The Senior Term
Note and the Revolving Line of Credit mature on July 31, 2010; but, were
extended under the April 26, 2010 amendment discussed further in the Subsequent
Events - Debt Amendments section of this Note 7. From closing through November
30, 2008, the Company was required to pay interest accruing on the Senior Term
Note and the Revolving Line of Credit on the last day of the applicable LIBOR
interest period. Subsequent to November 30, 2008, the Company is required to pay
the applicable amount of interest owed on the Senior Term Note and the Revolving
Line of Credit as well as a portion of the principal of the Senior Term Note
based upon a five year straight line amortization schedule of $250,000 in
principal on a monthly basis with the remaining outstanding principal balance to
be paid in one lump sum on the date of maturity. Commencing January 1, 2008, the
Company is obligated to pay an unused commitment fee on the first business day
of each quarter for any amounts not used by the Company under the Additional
Term Loan. The unused commitment fee to be paid is equal to one-quarter
multiplied by the applicable basis point level, which is contingent upon the
Company's ratio of total debt funded to EBITDA. The Senior Lender has a secured
lien on all assets of the Company and its subsidiaries. The Company may prepay
the Senior Term Note and the Revolving Line of Credit at anytime.
As of
December 31, 2009, the outstanding principal balance on the Revolving Line of
Credit and Senior Term Note was approximately $2.5 million and $12.0 million,
respectively and the interest rate was 4.73%. As of December 31, 2008, the
outstanding principal balance on the Revolving Line of Credit and Senior Term
Note was approximately $0.3 million and $14.8 million, respectively and the
interest rate was 4.18% and 4.68%, respectively.
Subordinated
Senior Term Note
The
Subordinated Senior Note bears interest at 15% of which 12% is due and payable
on a monthly basis and 3% (the "Compounded Rate") is compounded monthly and
added to the principal amount of the Subordinated Senior Note. The Subordinated
Senior Note matures on the earlier of January 31, 2011, the occurrence of a
capital transaction, or an event of default. A capital transaction includes the
sale, disposition, dissolution or liquidation of the Company's assets or
subsidiaries, the acquisition by any person of 30% or more of the Company's
common stock or a public offering in the minimum amount of $20,000,000 (a
"Capital Transaction"). The Subordinated Senior Lenders have a secured lien on
all assets of the Company and its subsidiaries and would be entitled to
foreclose on the Company's assets in the event of default, subject to the rights
of the Senior Lender. The Company may prepay the Subordinated Senior Notes at
any time after May 30, 2009.
At
closing, the Company issued the Subordinated Senior Warrants to purchase an
aggregate 5,742,789, 3,828,527 and 1,914,262 shares of common stock at $0.50,
$1.00 and $1.50 per share, respectively. The Subordinated Senior Warrants are
exercisable through November 2017 on a cash or cashless basis. Subsequent to
January 31, 2011, the consummation of a Capital Transaction or an event of
default, the Subordinated Senior Lenders may elect to sell to the Company all or
a portion of the shares issuable upon exercise of the Subordinated Senior
Warrants (the "Put"). The cash payment to be made by the Company shall be
determined by dividing the value of the Company's common stock equity by the
number of shares outstanding on a fully diluted basis (the "Repurchase Price").
In the event that a Capital Transaction is entered into during the six
months following the closing of the Put, then the Company is obligated to make
an additional payment to the Subordinated Senior Lenders to reflect the
difference of the amount initially paid in connection with the Put and the
amount that would have been paid had the Put been exercised pursuant to the
second Capital Transaction.
F-18
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
The
Subordinated Senior Lenders may elect to require the Company to pay an
additional fee (the "Fee Agreement") as well as the Conditional Interest Payment
("CIP Payment") at (i) January 31, 2011, (ii) the date of consummation of a
Capital Transaction, or (iii) an event of default. The Fee Agreement is based
upon the Subordinated Senior Lenders ownership in the Company and the per share
price of the Company's common stock. The CIP Payment is equal to 5% of the
Company's equity value which is payable on the 90th day following receipt of
such notice from the Subordinated Senior Lenders and an additional payment equal
to 1.5% of the Company's equity value is payable on the end of each calendar
quarter thereafter. The aggregate CIP Payment may not exceed 15% of the
Company's equity value. At any time after the Subordinated Senior Lenders
deliver notice with respect to the CIP Payment, the Company may elect to
purchase the shares of common stock underlying the Subordinated Senior Warrants
at the Repurchase Price.
The
Subordinated Senior Lenders have both demand and piggyback registration rights
with respect to shares issuable upon conversion of the Subordinated Senior
Warrants or any other shares held at the time of the request. The
Company must use its best efforts in good faith to affect the registration of
these shares.
On
November 3, 2008, Woodside Capital Partners V, LLC and Woodside Capital Partners
V QP, LLC (“Woodside Purchasers”) acquired all of the Subordinated Senior Notes
and Subordinated Senior Warrants held by Lehman Brothers Commercial Bank
(“Lehman”). Concurrent with the sale of the Subordinated Senior Notes and
Subordinated Senior Warrants by Lehman, the Company and the Woodside Purchasers
entered into a side letter agreement whereby the Woodside Purchasers agreed that
in the event that a capital transaction is consummated on or prior to May 4,
2009, the Woodside Purchasers shall surrender each of the assigned Subordinated
Senior Warrants held by it to the Company for cancellation and forfeit its right
to receive its portion of the conditional interest payment and fee arrangement
assigned to it by Lehman.
As of
December 31, 2009 and 2008, approximately $13.0 million and $12.4 million,
respectively, were outstanding under the Subordinated Senior
Agreement.
In connection with the April 26, 2010 amendments, described
further in the Subsequent Events - Debt Amendments section of this Note 7, the
Subordinated Senior Lenders agreed to surrender the Subordinated Senior Warrants
and relinquish their rights to the CIP Payment and the Fee
Agreement.
Covenant
Compliance and Related Debt Amendments
Under the
terms of the Senior Loan Agreement and the Subordinated Senior Agreement, the
Company is subject to meeting certain restrictive quarterly financial covenants
which, among other things, require the Company to maintain certain minimum
Adjusted EBITDA and certain leverage and fixed charge coverage ratios. Adjusted
EBITDA is a financial performance metric which is not recognized by accounting
principles generally accepted in the United States of America.
As of
December 31, 2008, the Company was not in compliance with certain covenants
under the Senior Loan Agreement and the Subordinated Senior Agreement. The
Company’s decline in asset based revenues, as a result of the dramatic decline
in the U.S. equity markets in the second half of 2008, negatively impacted its
ability to achieve Adjusted EBITDA targets as planned and three out of five
related debt covenants presented below. As a result, management entered into
Waiver and Amendment Agreements to the Senior Loan Agreement and the
Subordinated Senior Agreement (“Waiver and Amendment Agreements”) in March 2009.
Under the terms of the Waiver and Amendment Agreements, the Senior Lender and
Subordinated Senior Lenders waived the existing defaults on the debt covenants
at December 31, 2008 and revised future covenant calculations. In
exchange, the Company is subject to an increase in the interest rates of 1.25%
on the Senior Term Note and 1.75% on the outstanding Revolving Line of Credit,
over the remaining term of the Senior Loan Agreement. In addition, the Company
incurred one-time amendment fees totaling $100,625 (of which $60,000 was added
to the Subordinated Senior Note) upon the effective date and is now subject to a
0.25% unused commitment fee on the Revolver which the Company does not expect to
be material. The Senior Lender and the Subordinated Senior Lenders will also
have approval rights for all future acquisitions and the Company will be subject
to more frequent and timely compliance and reporting requirements with the
Senior Lender.
On
September 29, 2009, the Company and Senior Lender agreed to temporarily increase
the maximum principal amount available under the Revolving Line of Credit to
$2,500,000 through December 31, 2009 and later extended through February 28,
2010. At February 28, 2010, the Company is required to repay any amounts
outstanding under the Revolving Line of Credit in excess of $2,000,000. As part
of the transaction, the Company paid or accrued $61,583 as of December 31, 2009
in deferred financing costs associated with the original increase in the
Revolving Line of Credit dated September 29, 2009, which will be amortized over
the remaining life of the loan. The agreement was further amended as part of the
April 26, 2010 amendment described further in the Subsequent Event – Debt
Amendments section of this Note 7.
F-19
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
As of
September 30, 2009, the Company was not in compliance with certain restrictive
covenants in the Waiver and Amendment Agreements. As a result, the Senior Lender
and the Subordinated Senior Lenders issued the Company reservation of rights
letters, which notifies the Company of default under the Waiver and Amendment
Agreements. The document indicates that this default entitles the Senior Lender
and the Subordinated Senior Lenders to exercise certain rights and remedies
under the Senior Loan Agreement and the Subordinated Senior Agreement through
issuance of a Reservation of Rights letter. The Senior Lender and Subordinated
Senior Lenders agreed to not exercise all their rights and remedies at this
time; but, reserve the right to do so in the future. The Subordinated Senior
Lenders exercised their right to increase the interest rate by 3% on the
Subordinated Senior Note effective November 15, 2009. The increased interest is
compounded monthly and added to the Subordinated Senior Note.
As of
December 31, 2009, the Company was not in compliance with certain restrictive
covenants in the Waiver and Amendment Agreements. As a result, the Company and
the Senior and Subordinated Senior Lenders worked through an amendment process
that culminated in amendments to the lending agreements at April 26, 2010. Under
the amendments, the Senior and Subordinated Senior Lenders agreed to forbear
from exercising their rights and remedies for identified events of default at
December 31, 2009 and anticipated events of default during the forbearance
period subject to certain terms and conditions which are discussed further in
the Subsequent Events – Debt Amendments section of this Note 7.
The
tabular presentation sets forth the Company’s most restrictive covenants for the
trailing twelve month periods ended December 31, 2008, as originally defined,
and December 31, 2009, as amended by quarter for 2009.
Amended
|
||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||
Q1
|
Q2
|
Q3
|
Q4
|
|||||||||||||||||
Minimum
Adjusted EBITDA (1)
|
||||||||||||||||||||
Actual
|
$ | 8,798,069 | $ | 9,638,281 | $ | 8,780,797 | ** | $ | 8,884,905 | *** | $ | 7,935,070 | * | |||||||
Covenant
|
$ | 8,400,000 | $ | 9,000,000 | $ | 9,050,000 | $ | 10,100,000 | $ | 8,000,000 | ||||||||||
Maximum
Leverage Ratio (2)
|
||||||||||||||||||||
Actual
|
3.11 | 3.05 | 3.48 | ** | 3.42 | *** | 3.28 | * | ||||||||||||
Covenant
|
3.25 | 3.25 | 3.25 | 2.75 | 3.00 | |||||||||||||||
Minimum
Fixed Charge Coverage Ratio (3)
|
||||||||||||||||||||
Actual
|
1.12 | 1.02 | 0.95 | ** | 1.16 | *** | 1.12 | * | ||||||||||||
Covenant
|
1.05 | 1.00 | 1.00 | 1.20 | 1.25 | |||||||||||||||
Minimum
Interest Coverage Ratio (4)
|
||||||||||||||||||||
Actual
|
3.09 | 3.27 | 2.93 | 2.94 | 2.82 | |||||||||||||||
Covenant
|
2.25 | 2.25 | 2.25 | 2.50 | 2.00 | |||||||||||||||
Maximum
Ratio of Total Funded Debt to Net Worth (5)
|
||||||||||||||||||||
Actual
|
1.45 | 1.21 | 1.17 | 1.18 | 1.51 | |||||||||||||||
Covenant
|
2.00 | 2.00 | 2.00 | 2.00 | 2.50 |
* Waived
as a part of the Waiver and Amendment Agreement dated March 2009.
**
Reservation of rights issued by the Senior Lender and Subordinated Senior
Lenders dated November 13, 2009.
*** Under
the Senior Loan Amendment and Subordinated Senior Amendment entered into on
April 26, 2010, the Senior and Subordinated Senior Lenders agreed to forbear
from accelerating or otherwise enforcing their rights and remedies with respect
to the above covenant defaults under the Senior Loan and Subordinated Senior
Amendments until January 2011.
(1)
Minimum Adjusted EBITDA includes, for the trailing twelve month period, net loss
plus the following items: consolidated interest expense, income taxes,
depreciation, amortization, non-cash charges for stock based compensation,
contractually specific charges to goodwill, and any non-cash extraordinary and
unusual or non-recurring write downs or write offs.
(2)
Maximum Leverage Ratio is total funded debt divided by the sum of Minimum
Adjusted EBITDA and the trailing twelve months Adjusted EBITDA for
acquisitions.
(3)
Minimum Fixed Charge Coverage Ratio is the quotient of Operating cash flow and
Debt Service. Operating cash flow is the sum of Minimum Adjusted
EBITDA and the trailing twelve months of Adjusted EBITDA from acquisitions less
taxes paid and capital expenditures during the trailing twelve month period.
Debt Service is the sum of the current portion of all long term debt and the
trailing twelve months of interest expense.
(4)
Minimum Interest Coverage Ratio is the quotient of Minimum Adjusted EBITDA
divided by the trailing twelve month interest expense.
(5)
Maximum Ratio of Total Funded Debt to Net Worth is the quotient of funded debt
divided by the total of assets, less liabilities plus the accumulated
amortization of intangible assets recorded since November 30, 2007 (the date of
debt agreement).
F-20
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
Following
is a reconciliation of Minimum Adjusted EBITDA to net loss available to common
stockholders:
Year Ended
|
||||
December 31, 2009
|
||||
Minimum
Adjusted EBITDA for the trailing twelve months
|
$ | 8,884,905 | ||
Depreciation
and amortization
|
(7,250,168 | ) | ||
Stock
based compensation
|
(433,126 | ) | ||
Change
in fair value of derivative financial
instruments
|
786,645 | |||
Contractually
specific charges to goodwill
|
254,739 | |||
Interest
expense
|
(4,593,641 | ) | ||
Debt
and other restructuring charges
|
(60,000 | ) | ||
Income
tax expenses
|
(184,686 | ) | ||
Deferred
income tax benefit
|
2,119,076 | |||
Preferred
stock dividends
|
(1,977,600 | ) | ||
Net
loss available to common stockholders
|
$ | (2,453,856 | ) |
Subsequent
Events – Debt Amendments
On April
12, 2010, the Company entered into an agreement with the Subordinated Senior
Lenders to receive an additional loan (“Short-Term Working Capital Loan”) of
$500,000 to be used for short-term working capital needs. For use of the funds,
the Company paid a fee of $5,000. The Short-Term Working Capital Loan accrues
interest at 12% per annum. The principal amount and any accrued and unpaid
interest is due on May 15, 2010. Any unpaid amounts at maturity will continue to
accrue interest at 18% per annum.
On April
26, 2010, the Company entered into an amendment (“Senior Loan Amendment”) to the
Senior Loan Agreement. In the Senior Loan Amendment, the Senior Lender agreed to
forbear from accelerating or otherwise enforcing its rights and remedies with
respect to currently existing covenant defaults and anticipated events of
covenant defaults under the Senior Loan Agreement until January 2, 2011 (the
“Forbearance Period”) and, in addition, extend the maturity of the indebtedness
until January 2, 2011. The Senior Lender agreed to increase the maximum
principal amount available under the Revolving Line of Credit to $4,000,000
during the Forbearance Period. All advances on the Revolving Line of Credit
after the date of the Senior Loan Amendment, including any outstanding draws,
will incur interest, payable on a monthly basis, at a rate of prime plus 6%. The
Senior Lender also agreed to suspend the monthly principal payments of $250,000
on the Senior Term Note during the Forbearance Period. The Company will continue
to pay the applicable amount of interest owed on the Senior Term Note on the
last day of each month.
In
return, the Company agreed as part of the Senior Loan Amendment that, among
other things, the Senior Lender may terminate the Senior Loan Amendment during
the Forbearance Period if the Company does not (i) meet specified cash flow
tests of its cash receipts and disbursements measured weekly on a rolling six
week and forbearance period-to-date basis, as defined in the amendment, during
the Forbearance Period or (ii) maintain a specified minimum cash and available
Revolving Line of Credit balance of $500,000 during the Forbearance
Period.
The
Company engaged a financial advisor to assist in exploring, evaluating and
implementing one or more strategic alternatives for the recapitalization of the
Company (“Recapitalization Initiative”), including refinancing its current debt,
raising capital, and/or sale of the Company to a third party. The Senior Lender
may terminate the Forbearance Period if, in the Senior Lender’s reasonable
judgment, the Company has not made satisfactory progress regarding a reasonably
satisfactory Recapitalization Initiative by July 15, 2010 or any date
thereafter. The Company agreed to pay the financial advisor $60,000 upon the
execution of an amendment to the loan agreements with Senior and Subordinated
Senior Lenders and a monthly service fee of $30,000. In the event of a sale to a
third party, the Company will pay the financial advisor a transaction fee of
$950,000. In the case of a refinancing, the Company will pay the financial
advisor a fee equal to (i) 1.5% of the total amount of senior debt raised, plus
(ii) 3.0% of the total amount of any one-stop debt raised, plus (iii) 4.0% of
the total amount of junior debt raised.
F-21
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
The
Company agreed to pay the Senior Lender an amendment fee (“Amendment Fee”) of
$250,000, of which $50,000 was paid on the amendment date with the remainder to
be paid in $25,000 monthly installments beginning May 31, 2010 and ending
December 31, 2010. The Company also agreed to pay the Senior Lender a
monthly fee (“Monitoring Fee”) of $2,000 per month throughout the duration of
the Forbearance Period and reimburse the Senior Lender for any legal fees in
connection with the Senior Loan Amendment.
In
addition, upon closing of a capital transaction, the Company is required to pay
an additional fee to its Senior Lender. In the event of a sale to a third party,
the Company will pay the Senior Lender a fee (“Borrower Sale Fee”) equal to the
sum of $300,000 plus 0.75% of the excess of the gross purchase price paid for
the Company over the Company’s outstanding indebtedness less any exit fees paid
to the Subordinated Senior Lenders. In the case of a repayment in full or
maturity, the Company will pay the Senior Lender a fee (“Borrower Refinancing
Fee”) equal to 4% of the outstanding indebtedness to the Senior Lender. If a
Company sale were to take place within six months after the maturity date or the
repayment in full and if that sale transaction would result in a Borrower Sale
Fee greater than $300,000, then the Company would pay the Senior Lender an
amount equal to the difference between the Borrower Sale Fee and
$300,000.
On April
26, 2010, in addition to the Senior Loan Amendment, the Company entered into an
amendment (“Subordinated Senior Amendment”) to the Subordinated Senior Agreement
with the Subordinated Senior Lenders. In the Subordinated Senior Amendment, the
Subordinated Senior Lenders agreed to forbear from accelerating or otherwise
enforcing its rights and remedies with respect to currently existing covenant
defaults and anticipated events of covenant defaults under the Subordinated
Senior Agreement until January 2, 2011 (the “Forbearance Period”). In addition,
the Subordinated Senior Lenders agreed to surrender the Subordinated Senior
Warrants, and relinquish their rights to the CIP Payment and the Fee
Agreement.
In
return, the Company agreed as part of the Subordinated Senior Amendment that,
among other things, the Subordinated Lenders may terminate the Subordinated
Senior Amendment during the Forbearance Period if the Company does not (i) meet
specified cash flow tests of its cash receipts and disbursements measured weekly
on a rolling six week and forbearance period-to-date basis as defined in the
agreements during the Forbearance Period or (ii) maintain a specified minimum
cash and available Revolving Line of Credit balance of $500,000 during the
Forbearance Period.
The
Company engaged a financial advisor to assist in exploring, evaluating and
implementing one or more strategic alternatives for the recapitalization of the
Company (“Recapitalization Initiative”), including refinancing its current debt,
raising capital, and/or sale of the Company to a third party. The Subordinated
Senior Lenders may terminate the Forbearance Period if, in the Subordinated
Senior Lenders’ reasonable judgment, the Company has not made satisfactory
progress toward a Recapitalization Initiative by July 15, 2010 or any date
thereafter. The Company has agreed to pay the financial advisor as discussed
above.
The
Subordinated Senior Note continues to bear interest at 18%; however,
only 6% is due and payable on a monthly basis and 12% is compounded monthly
and added to the principal amount of the Subordinated Senior Note. The Company
agreed to pay the Subordinated Senior Lenders a fee (“Modification Fee”) of
$250,000, which is to be paid on the earlier of January 31, 2011, a
capitalization transaction, or an event of default. The Modification Fee shall
constitute an additional debt obligation and accrue interest at 18% per annum,
compounded monthly, payable at the date the Modification Fee is
due.
In
addition, the Company agreed to pay the Subordinated Senior Lenders a fee (“Exit
Fee”) payable on the earlier of (i) a sale of the Company to a third party, (ii)
repayment of all amounts due the Subordinated Senior Lenders (“Repayment
Event”), or (iii) January 31, 2011 (“Maturity”). In the event of a sale
transaction occurring prior to a Repayment Event, the Exit Fee will be $450,000
plus 1.5% of the excess of the gross purchase price paid for the Company over
the Company’s outstanding indebtedness less any Borrower Sale Fee paid to the
Senior Lender. Upon a Repayment event or Maturity, the Exit Fee shall be
$450,000. If a Company sale were to take place within six months
after a Repayment Event or Maturity and if that sale transaction would have
resulted in an Exit Fee greater than $450,000, then the Company would pay the
Subordinated Senior Lenders an amount equal to the difference between the
greater Exit Fee and $450,000.
F-22
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
Seller
Financing
In
connection with the Company’s acquisition strategy, part of the purchase price
is paid through seller financed instruments. As of December 31, 2009, total
funds due to former owners were $2,868,489. Of this amount, $2,327,187 is due in
2010 and $541,302 in 2011. Seller financed instruments bear interest at 6% to 8%
per annum. All seller financed instruments are uncollateralized. Under the terms
of the Senior Loan Amendment and the Subordinated Senior Amendment, any
subordinated payments, including seller financing, are not to be paid during the
forbearance period unless otherwise approved by the Senior and Subordinated
Senior Lenders. The Company will seek to amend and restructure any unpaid seller
notes during the forbearance period, although, there is no guarantee that this
can be accomplished.
On
February 24, 2009, the Company executed a Restructured Promissory Note (the “TPA
Restructured Note Agreement”) with the sellers of The Pension Alliance, Inc.
(“TPA”) under which the parties agreed to execute replacement notes superseding
and terminating all existing promissory notes with the sellers of TPA. Under the
TPA Restructured Note Agreement, the Company agreed to issue promissory notes
for an aggregate of $837,500 payable in nine equal principal monthly
installments of $93,056, plus accrued interest, beginning on July 1, 2009 and
ending March 1, 2010 at an interest rate of 8% per annum. Interest accrued on
superseded promissory notes was paid to the sellers within fifteen business days
after the effective date of the TPA Restructured Note Agreement.
On
February 28, 2009, the Company executed a Restructured Promissory Note (the
“Pentec Restructured Note Agreement”) with the seller of Pentec, Inc. (“Pentec”)
and Pentec Capital Management, Inc. (“PCM”) under which the parties agreed to
execute replacement notes superseding and terminating, the prior unpaid notes
between the parties dated February 28, 2007. Under the Pentec Restructured Note
Agreement, the Company agreed to issue a promissory note of $600,000 payable in
six equal principal monthly installments of $100,000, plus accrued interest,
beginning on July 1, 2009 and ending December 1, 2009 at an interest rate of 8%
per annum. Any accrued interest on the remaining February 28, 2007 promissory
notes was paid to the seller within fifteen business days after the effective
date of the Pentec Restructured Note Agreement. At December 31, 2009, the
restructured promissory note was paid in full.
On March
16, 2009, the Company executed restructured promissory notes with the sellers of
CIAS (see Note 13).
On March
24, 2009, the Company executed promissory notes with the sellers of TPG (see
Note 13).
On
September 24, 2009, the Company executed an amendment to the promissory notes
with the sellers of TPG (see Note 13).
On
September 25, 2009, the Company executed an amendment to the promissory notes
with the sellers of REPTECH (see Note 13).
On
September 28, 2009, the Company executed an amendment to the restructured
promissory notes with the sellers of CIAS (see Note 13).
On
September 29, 2009, the Company executed Amendment No. 1 to the TPA Restructured
Note Agreement with the sellers of TPA under which the sellers of TPA agreed to
replace the remaining monthly principal installments of $93,056 plus accrued
interest under the TPA Restructured Note Agreement, dated February 24, 2009,
with a single principal payment of $558,333 on March 1, 2010 plus interest
accrued from August 31, 2009. The Senior and Subordinated Senior Lenders have
not authorized payment of the principal or accrued interest of this note as of
April 26, 2010.
Derivative
Liabilities
Pursuant
to the Derivatives and Hedging Topic of FASB ASC, the Subordinated Senior
Warrants and the Fee Agreement, meet the requirements of and are accounted for
as a liability since they could require net-cash settlement by the
Company. This option to net-cash settle is out of the Company’s
control. The initial value of the Subordinated Senior Warrants and
the Fee Agreement was treated as a discount to the corresponding note and
recorded as a liability. The Company calculated the initial value of the
Subordinated Senior Warrants to be $2,522,661 and the value of the Fee Agreement
to be $654,575. The value of the Subordinated Senior Warrants and the Fee
Agreement was determined using the formula outlined in section 11 of the
Securities Purchase and Loan Agreement and section 1.3 of the Fee
Agreement. The value of the derivative financial instruments are
reassessed at each balance sheet date and marked to market as a derivative gain
or loss until exercised or expiration. Upon exercise of the derivative financial
instruments, the related liability is removed by recording an adjustment to
additional paid-in-capital. At December 31, 2009 and 2008, the Subordinated
Senior Warrants have a value of $0 and $403,914, respectively, and the Fee
Agreement has a value of $1,635,321 and $1,792,260, respectively. Pursuant to
the Subordinated Senior Amendment, dated April 26, 2010 and discussed in Note 7,
the Subordinated Senior Lenders have agreed to surrender the Subordinated Senior
Warrants and relinquish their rights to the Fee Agreement.
F-23
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
In March
2005, as part of the since retired debt offering, the Company issued Laurus
Master Fund, Ltd. (“Laurus”) a common stock purchase warrant (the "2005
Warrant") entitling Laurus to purchase up to 1,084,338 shares of NIVM common
stock at a per share exercise price of $1.00, which was subsequently reduced to
$.50, and a stock option (the "2005 Option") entitling Laurus to purchase up to
643,700 shares of common stock at a per share purchase price of
$0.01.
On May
30, 2006, as part of another since retired debt offering, the Company issued
Laurus a common stock purchase warrant to purchase 700,000 shares of common
stock of the Company, at a purchase price of $0.01 per share, exercisable until
May 30, 2011 (the "May 2006 Warrant"). On June 12, 2006, the
Company and Laurus entered into an agreement pursuant to which the May 2006
Warrant was rescinded and a new common stock purchase warrant (the "New
Warrant") was issued to Laurus. The New Warrant, dated May 30, 2006, entitles
Laurus to purchase up to 700,000 shares of common stock of the Company, at an
exercise price of $0.1667 per share, exercisable until May 30,
2011.
Pursuant
to the Derivatives and Hedging Topic of FASB ASC, the 2005 Warrant, the 2005
Option and the New Warrant (collectively, “Laurus Derivative Financial
Instruments”), meet the requirements of and are accounted for as a liability
since they contain registration rights and the agreement is silent on how the
contract would be settled and thus assumes net-cash settlement in the event that
the Company is unable to deliver registered shares. The initial value of the
Laurus Derivative Financial Instruments was treated as a discount to their
corresponding notes and recorded as a liability. The Company calculated the
initial value of the Laurus Derivative Financial Instruments on the closing date
of the transactions as being $1,578,159. The value of the Laurus Derivative
Financial Instruments was determined using a Black-Scholes option pricing model
with the following assumptions: expected term - 3-8 years, volatility - 25%,
risk free rate - 4%, and zero dividend yield. Using the Black-Scholes
option-pricing method, the value of the Laurus Derivative Financial Instruments
are reassessed at each balance sheet date and marked to market as a derivative
gain or loss until exercised or expiration. Upon exercising the Laurus
Derivative Financial Instruments, the related liability is removed by recording
an adjustment to additional paid-in-capital. At December 31, 2009 and 2008, the
Laurus Derivative Financial Instruments have a value of $88,898 and $314,690,
respectively.
On
November 1, 2005, the Company entered into an Asset Purchase Agreement (the
"Agreement") with American Benefit Resources, Inc., a Connecticut corporation
("ABR") pursuant to which the Company acquired all of the assets of ABR. In
consideration for the assets, the Company paid ABR $8,000,000 in cash, issued to
IBF Fund Liquidating, LLC (“IBF”), ABR's parent company, 671,141 shares of
common stock (the "ABR Shares") and assumed various liabilities. Duncan Capital
Group LLC and DCI Master LDC (“Optionees”) entered into a put agreement with IBF
whereby Optionees may become obligated, between the second and third
anniversaries of the closing of the acquisition, to purchase, for up to $1
million, the ABR Shares. On December 20, 2006, the Company and the Optionees
entered into an agreement (the “Optionee Agreement”) pursuant to which the
Company agreed to make a payment to the Optionees of $1.49 less the market value
per share for each share purchased by the Optionees from IBF in the event that
IBF exercise their put with the Optionees. On November 30, 2007, the Company and
the Optionees entered into an amendment to the Optionee Agreement whereby the
Optionees’ provided the Company with the rights to acquire the shares from IBF
in the event that the shares are put to the Optionees. On November 3, 2008, the
Company acquired the 671,141 shares of common stock from IBF Funding Liquidating
LLC for $1,000,000 ($1.49 per share).
Note
8— Fair Value Measurements
Fair
Value Measurements and Disclosures Topic of FASB ASC established a three-level
valuation hierarchy for disclosure of fair value measurements. The valuation
hierarchy categorizes assets and liabilities measured at fair value into one of
three different levels depending on the observability of the inputs employed in
the measurement. The three levels are defined as follows:
|
·
|
Level
1 – inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
|
·
|
Level
2 – inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
|
·
|
Level
3 – inputs to the valuation methodology are unobservable and are
significant to the fair value
measurement.
|
F-24
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
A
financial instrument’s categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement. The Company’s assessment of the significance of a particular input
to the fair value measurement in its entirety requires judgment and considers
factors specific to the liability. The liabilities measured at fair value on a
recurring basis as of December 31, 2009 are as follows:
Fair Value at Reporting Date Using
|
||||||||||||||||
Quoted Price in
|
||||||||||||||||
Active Markets
|
Significant Other
|
Significant
|
||||||||||||||
for Indentical
|
Observable
|
Unobservable
|
||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
|||||||||||||
Description
|
December 31,
2009
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||||||||||
Derivative
financial instruments
|
$ | 1,724,219 | $ | - | $ | - | $ | 1,724,219 |
Reconciliation
of liabilities measured at fair value on a recurring basis using significant
unobservable inputs as of December 31, 2009 is as follows:
Fair
Value
|
||||
Measurments
|
||||
Using
Significant
|
||||
Unobservable
|
||||
Inputs
|
||||
(Level 3)
|
||||
Beginning
balance - January 1, 2009
|
$ | 2,510,864 | ||
Total
(gains) losses (realized/unrealized)
|
||||
Included
in earnings (or changes in net liabilities)
|
(786,645 | ) | ||
Ending
balance - December 31, 2009
|
$ | 1,724,219 | ||
The
amount of total (gains) losses for the period included in earnings (or
changes in net liabilities) attributable to the change in unrealized
(gains) losses relating to assets still held at the reporting date
|
$ | (786,645 | ) |
The
derivative liability measured at fair value of $1,724,219 consists of two
components of stock options and warrants. The fair value assessment of 2,159,331
options and warrants equaling $88,898 are valued using the Black-Scholes
option-pricing model based on assumptions for expected volatility, expected
dividend yield rate, expected life, and risk-free interest rates. And, the fair
value assessment of 11,485,578 warrants equaling $1,635,321 are valued using a
contractually agreed upon formula, which utilizes the ending stock price of the
Company and 100,000,000 fully diluted shares as of December 31, 2009 including
certain adjustments to equate to a market capitalization as defined under the
Subordinated Senior Warrants Agreement.
F-25
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
The
Company adopted this guidance for all non financial assets and liabilities that
are measured at fair value on a non-recurring basis, such as goodwill and
identifiable intangible assets. The assets measured at fair value on a
non-recurring basis as of December 31, 2009 are as follows:
Fair Value Measurements Using
|
||||||||||||||||||||
Quoted Prices in
|
||||||||||||||||||||
Active Markets
|
Significant Other
|
Significant
|
||||||||||||||||||
for Indentical
|
Observable
|
Unobservable
|
Total
|
|||||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
Gains
|
||||||||||||||||
Description
|
December 31,
2009
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
(Losses)
|
|||||||||||||||
Intangible
assets - customer lists
|
$ | 633,000 | $ | - | $ | - | $ | 633,000 | $ | - |
The
intangible assets measured at fair value of $633,000 consist of asset purchases
of Standard and Custom K. The fair value assessment of both asset purchases are
valued using plan attrition rates, both known and anticipated, and historical
annual revenues of the acquired assets to estimate fair value of the final
purchase price at the end of the contingency period. The Company concluded that
estimating a range of possible alternative inputs was not meaningful due to the
significant unobservable inputs utilized in the fair value
assessment.
In April
2009, the FASB issued guidance in the Fair Value Measurements and Disclosures
Topic of FASB ASC which clarifies the determination on whether a market is
active or a transaction is distressed. The guidance became effective for interim
and annual periods ending after June 15, 2009. The Company concluded that it
does not hold any distressed securities or securities in which the volume and
level of activity has significantly decreased.
Note
9 – Income taxes
The
components of the Company’s Income taxes (benefit) are as follows for the year
ended December 31:
2009
|
2008
|
|||||||
Current:
|
||||||||
Federal
|
$ | 30,500 | $ | 76,000 | ||||
State
|
154,185 | 71,366 | ||||||
184,685 | 147,366 | |||||||
Deferred:
|
||||||||
Federal
|
(1,301,638 | ) | (1,403,595 | ) | ||||
State
|
(229,700 | ) | (247,693 | ) | ||||
(1,531,338 | ) | (1,651,428 | ) | |||||
Change
in valuation allowance
|
(587,737 | ) | (409,763 | ) | ||||
(2,119,075 | ) | (2,061,051 | ) | |||||
Income
tax expense (benefit)
|
$ | (1,934,390 | ) | $ | (1,913,685 | ) |
F-26
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
The
reconciliation of income tax computed at the Federal and state statutory rate to
loss before taxes are as follows at December 31:
2009
|
2008
|
|||||||
U.S.
Federal statutory income tax rate
|
-34.0 | % | -34.0 | % | ||||
State
income tax rates
|
-6.0 | % | -6.0 | % | ||||
Non-deductible
permanent differences
|
-12.3 | % | -33.1 | % | ||||
Increase
(decrease) in valuation allowance
|
-24.4 | % | -20.0 | % | ||||
State
tax, net of Federal benefit
|
-4.5 | % | -7.7 | % | ||||
Alternative
Minimum Tax - Federal
|
2.1 | % | 3.7 | % | ||||
Other
|
-1.1 | % | 3.5 | % | ||||
-80.2 | % | -93.6 | % |
The
significant components of the Company’s deferred tax assets and liabilities are
as follows at December 31:
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Net
operating loss carryforward
|
$ | 1,054,903 | $ | 1,408,902 | ||||
Charitable
contribution carryover
|
5,923 | 4,979 | ||||||
Stock
based compensation
|
169,951 | 430,903 | ||||||
Allowance
for doubtful accounts
|
167,066 | 48,953 | ||||||
Vacation
accrual
|
31,047 | 123,030 | ||||||
Total
deferred tax assets
|
1,428,890 | 2,016,767 | ||||||
Valuation
allowance
|
(1,428,890 | ) | (2,016,767 | ) | ||||
Net
deferred tax asset
|
$ | - | $ | - | ||||
Deferred
tax liabilities:
|
||||||||
Basis
difference arising from intangible assets of acquisitions
|
$ | 5,589,839 | $ | 7,708,914 | ||||
Total
deferred tax liability
|
$ | 5,589,839 | $ | 7,708,914 |
At
December 31, 2009, the Company had approximately $2,900,000 of net operating
loss carry forwards (“NOL’s”) which begin to expire in 2024.
Under
Internal Revenue Code Section 382, the amounts and benefits of from NOL’s may be
impaired or limited in certain circumstances. Events which cause
limitations in the amount of the NOL that the Company may utilize in any one
year include, but are not limited to, a cumulative ownership change of more than
50%, as defined, over a three year period. The amount of such
limitation, if any, has not been determined.
The
Company has decided to fully reserve for its deferred tax asset, as it is more
likely than not that the Company will not be able to utilize these deferred tax
assets against future income, coupled with the possible limitations of the NOL’s
due to various changes in ownership over the past years.
The
Company files income tax returns in the United States Federal jurisdiction and
in the state jurisdictions in which it conducts operations. The Company’s
federal income tax returns for years ending prior to January 1, 2006 are no
longer subject to examination. With limited exceptions, the Company’s state and
local income tax returns are no longer subject to tax authority examinations for
years ending prior to January 1, 2005.
F-27
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
Note
10—Commitments and Contingencies
Leases
The
Company rents office space under operating leases with various expiration dates.
The Company and its subsidiaries have entered into several operating lease
agreements, some of which contain provisions for future rent increases during
the term of the lease. Rent is charged to operations by amortizing the minimum
rent payable over the term of the lease, using the straight line method. Future
minimum lease payments under these operating leases (which are subject to
escalation clauses) as of December 31, 2009 are approximately:
2010
|
$ | 2,149,000 | ||
2011
|
1,632,000 | |||
2012
|
888,000 | |||
2013
|
371,000 | |||
2014
|
303,000 | |||
Thereafter
|
128,000 | |||
Total
Minimum Lease Payments
|
$ | 5,471,000 |
Rent
expense was approximately $2,686,000 and $2,237,000 for the years ended December
31, 2009 and 2008, respectively.
Employment
Agreements
On
November 30, 2007, the Company entered into a new employment agreement with
Steven J. Ross, the Company's CEO. The agreement provides for a term through
December 31, 2009, which is automatically renewable for a period of one year
unless either party provides the other with notice 30 days prior to the end of
the term that the term shall not be extended. The employment agreement was
extended through December 31, 2010 under the existing terms. The CEO is entitled
to the following compensation pursuant to the employment agreement:
|
·
|
annual
compensation in the amount of
$475,000;
|
|
·
|
a
bonus of 50% of the base salary if certain targets set by the Board of
Directors are satisfied (the bonus shall be 65% during year two of the
agreement);
|
|
·
|
700,000
shares of common stock issued on January 2, 2008, 100,000 shares of common
stock issued on December 31, 2008 and 100,000 shares of common stock
issued on December 31, 2009;
|
|
·
|
an
option to receive 800,000 shares of common stock at an exercise price of
$0.65 per share vesting half on December 31, 2008 and half on December 31,
2009; and
|
|
·
|
a
housing and office allowance of $5,000 per
month
|
On April
14, 2009, the Company entered into a new employment agreement with John M.
Davis, the Company’s President and Chief Operating Officer. The employment
agreement provides for a term through December 31, 2010, which is automatically
renewable for a period of one year unless either party provides the other with
notice 30 days prior to the end of the term that the term shall not be extended.
Mr. Davis is entitled to receive the following compensation in accordance with
his employment agreement:
|
·
|
Annual
salary of $309,000;
|
|
·
|
For
each year under the term of the employment agreement, Mr. Davis is
eligible to receive a bonus equal to 50% of his annual salary based upon
the achievement of performance targets and objectives as established by
the Company’s Board of Directors.
|
|
·
|
Option
grant to purchase 600,000 shares of common stock of the Company at $0.20
per share of which 300,000 shares vested on April 14, 2009, 150,000 shares
vested on December 31, 2009 and 150,000 shares will vest on December 31,
2010. These options may be exercised only if authorized shares are
available. Refer to Note 2.
|
|
·
|
A
home office and car allowance of $1,000 per
month.
|
|
·
|
Continuation
of health, life and disability
insurance.
|
In 2009,
Mr. Davis volunteered to temporarily forego receiving the salary increase and
the $1,000 monthly home office and car allowance to be consistent with policies
and procedures implemented throughout the Company.
F-28
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
On April
15, 2009, the Company entered into an employment agreement with Christopher W.
Larkin, the Company’s Chief Financial Officer. The employment agreement provides
for a term through December 31, 2010, which is automatically renewable for a
period of one year unless either party provides the other with notice 30 days
prior to the end of the term that the term shall not be extended. Mr. Larkin is
entitled to receive the following compensation in accordance with his employment
agreement:
|
·
|
Annual
salary of $200,000;
|
|
·
|
For
each year under the term of the employment agreement, Mr. Larkin is
eligible to receive a bonus equal to 35% of his annual salary based upon
the achievement of performance targets and objectives as established by
the Company’s Board of Directors.
|
|
·
|
Option
grant to purchase 250,000 shares of common stock of the Company at $0.20
per share of which 150,000 shares vested on April 15, 2009, 50,000 shares
vested on December 31, 2009 and 50,000 shares will vest on December 31,
2010. These options may be exercised only if authorized shares are
available. Refer to Note 2.
|
|
·
|
Continuation
of health, life and disability
insurance.
|
In 2009,
Mr. Larkin volunteered to temporarily forego receiving the salary increase to be
consistent with policies and procedures implemented throughout the
Company.
Contingent
Consideration Arrangements
The
Company has incorporated contingent consideration into the structure of certain
acquisitions completed. These arrangements generally result in the payment of
additional consideration to the sellers upon the satisfaction of certain
events.
For
acquisitions prior to 2009, the additional cash payments or share issuances are
contingent considerations and are considered to be additional purchase
consideration and will be accounted for as part of the purchase price of the
firms when the outcome of the contingency is determinable beyond a reasonable
doubt.
For
acquisitions beginning in 2009, the additional cash payments or share issuances
are contingent consideration accounted for under the Business Combinations Topic
of the FASB ASC and are considered to be additional purchase consideration as
part of the purchase price of the firms at the time of acquisition. These
contingencies will be reassessed on a periodic basis until the final outcome of
the contingency is determinable, but not longer than the measurement period,
with the change recorded to goodwill or identifiable intangibles.
Other
Contingent Liabilities
Certain
contingent liabilities are recorded when the outcome of the contingency is
determinable beyond a reasonable doubt.
Legal
Proceedings
The
Company is from time to time subject to claims and suits arising in the ordinary
course of business. Although the ultimate disposition of such proceedings is not
presently determinable, management does not believe that the ultimate resolution
of these matters will have a material adverse effect on the financial condition,
results of operations or cash flows of the Company.
Note
11—Stockholders' equity
During
the year ended December 31, 2008, stockholders’ equity was increased as a result
of (i) the issuance of 369,128 shares of common stock in consideration for
$220,000 in connection with the acquisition of Alaska Pension Services, (ii) the
issuance of 1,430,208 shares of common stock in consideration for $715,104 in
connection with the acquisition of REPTECH Corp., (iii) the issuance of
1,488,854 shares of common stock in consideration for $467,500 in connection
with the acquisition of The Pension Group, (iv) stock-based compensation of
$252,099, and (v) the issuance of 1,200,000 shares of common stock valued at
$750,500 pursuant to employment contracts.
During
the year ended December 31, 2008, stockholders’ equity was decreased as a result
of the accrual of preferred stock dividends of $1,979,900.
During
the year ended December 31, 2008, the Company bought back and retired 671,141
shares of common stock from IBF pursuant to IBF exercising the put from the
December 20, 2006 Optionee Agreement (see Note 7). The impact on equity of
converting the derivative liability to additional paid in capital was an
increase to equity of $1,000,000. The impact of the subsequent repurchase and
retirement of the common stock was a decrease to equity of
$1,000,000.
F-29
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
During
the year ended December 31, 2009, stockholders’ equity was increased as a result
of stock-based compensation of $418,126 and the issuance of 100,000 shares of
common stock valued at $15,000 pursuant to employment contracts.
During
the year ended December 31, 2009, stockholders’ equity was decreased as a result
of the accrual of preferred stock dividends of $1,977,600.
Series
A Cumulative Convertible Preferred Stock Private Placement
In
December 2004, Duncan Capital sold securities in a private placement to
accredited investors (“A Investors”) for gross proceeds of $3.5 million. The
offering consisted of the sale of 9,540,000 shares of common stock at a price
per share of one sixth of a dollar. In addition, 3,820,000 shares of Series A
Convertible Preferred Stock (“A Preferred Stock”) were sold at a price of $.50
per share. The purchasers of A Preferred Stock were also issued warrants to
purchase one share of common stock for every two shares of A Preferred Stock
purchased (1,910,000 warrants were issued) at an exercise price of one sixth of
a dollar for a period of five years from the date of the closing of the
placement. Each share of A Preferred Stock is convertible into one share of
common stock. Subsequent to the Acquisition, 3,820,000 shares of A Preferred
Stock and 1,910,000 common stock purchase warrants issued in connection with the
A Preferred Stock offering of Duncan Capital were surrendered in exchange for an
equivalent number of A Preferred Stock and common stock purchase warrants of the
Company containing identical terms. In December 2009, the remaining 847,500
unexercised stock warrants expired.
Each
share of A Preferred Stock is convertible, at any time at the option of the
holder, into one share of common stock of the Company ("Common Stock"). The A
Preferred Stock will be automatically converted into Common Stock upon (i) the
approval of the holders of a majority of the then outstanding A Preferred Stock
or (ii) the closing of a firm commitment underwritten public offering of the
Company's securities in which the aggregate gross proceeds to the Company are
not less than $10,000,000 at a price equal to or higher than $2.00 per share of
Common Stock. Holders of the A Preferred Stock are entitled to receive, when
declared by the Company's board of directors, annual dividends of $0.06 per
share of A Preferred Stock paid semi-annually (equates to a 12% annualized
return). Such dividends may be paid, at the election of the Company, either (i)
in cash, (ii) in registered Common Stock or (iii) in restricted shares of Common
Stock with piggyback registration rights. In the event that the Company elects
to issue shares of Common Stock in connection with the dividend on the A
Preferred Stock, such dividend shares shall be determined by dividing the
dividend amount by 98% of the volume-weighted average price of the Common Stock
for the 20 trading days immediately preceding the record date for payment of
such dividend (the "Dividend VWAP"); provided, however, if the Company is unable
to determine the Dividend VWAP, then such dividend shall be determined by
dividing the dividend amount by the average of the three highest closing bid
prices during the 20 trading days immediately preceding the record date for
payment of such dividend. The Company granted the A Investors piggyback
registration rights and filed a registration statement for shares of Common
Stock issuable upon conversion of the A Preferred Stock within 60 days of
closing. In addition, the relevant subscription agreement provides that if a
registration statement is not filed or made effective, then until the
registration statement is filed or made effective, the Company will pay the
holder a fee. The Company filed a registration statement, however it was not
declared effective by the SEC.
In
addition to any voting rights provided by law, holders of the A Preferred Stock
will have the right to vote together with holders of Common Stock as a single
class on all matters upon which stockholders are entitled to vote, including
election of the members of the Company's Board of Directors. Each share of A
Preferred Stock will have the number of votes corresponding to the number of
shares of Common Stock into which the A Preferred Stock may be converted on the
record date for determining stockholders entitled to vote.
In the
event of any liquidation or winding up of the Company, the holders of A
Preferred Stock will be entitled to receive, in preference to holders of Common
Stock but subject to preferential liquidation rights of A Preferred Stock, an
amount equal to two times the original purchase price per share, plus any
previously declared and unpaid dividends.
The
shares of A Preferred Stock were offered and sold to the A Investors in a
private placement transaction made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506
promulgated there under. Each of the A Investors is an accredited investor as
defined in Rule 501 of Regulation D promulgated under the Securities Act of
1933.
F-30
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
Series
B Cumulative Convertible Preferred Stock Private Placement
On
October 18, 2005, 23 accredited investors ("B Investors") purchased an aggregate
of 2,965,000 shares of Series B Cumulative Convertible Preferred Stock ("B
Preferred Stock") at $1.00 per share for an aggregate purchase price of
$2,965,000. On November 11, 2005, 12 Investors purchased an aggregate of 850,000
shares of B Preferred Stock at $1.00 per share for an aggregate purchase price
of $850,000.
Each
share of B Preferred Stock is convertible, at any time at the option of the
holder, into two shares of Common Stock. The B Preferred Stock will be
automatically converted into Common Stock upon (i) the approval of the holders
of a majority of the then outstanding B Preferred Stock or (ii) the closing of a
firm commitment underwritten public offering of the Company's securities in
which the aggregate gross proceeds to the Company are not less than $10,000,000
at a price equal to or higher than $2.00 per share of Common Stock. Holders of
the B Preferred Stock are entitled to receive, when declared by the Company's
board of directors, annual dividends of $0.12 per share of B Preferred Stock
paid semi-annually (equates to a 12% annualized return). Such dividends may be
paid, at the election of the Company, either (i) in cash, (ii) in registered
Common Stock or (iii) in restricted shares of Common Stock with piggyback
registration rights. In the event that the Company elects to issue shares of
Common Stock in connection with the dividend on the B Preferred Stock, such
dividend shares shall be determined by dividing the dividend amount by 98% of
the volume-weighted average price of the common stock for the 20 trading days
immediately preceding the record date for payment of such dividend (the
"Dividend VWAP"); provided, however, if the Company is unable to determine the
Dividend VWAP, then such dividend shall be determined by dividing the dividend
amount by the average of the three highest closing bid prices during the 20
trading days immediately preceding the record date for payment of such dividend.
The Company granted the B Investors piggyback registration rights.
In
addition to any voting rights provided by law, holders of the B Preferred Stock
will have the right to vote together with holders of Common Stock and the A
Preferred Stock as a single class on all matters upon which stockholders are
entitled to vote, including election of the members of the Company's Board of
Directors. Each share of B Preferred Stock will have the number of votes
corresponding to the number of shares of Common Stock into which the B Preferred
Stock may be converted on the record date for determining stockholders entitled
to vote.
In the
event of any liquidation or winding up of the Company, the holders of B
Preferred Stock will be entitled to receive, in preference to holders of Common
Stock but subject to preferential liquidation rights of A Preferred Stock, an
amount equal to two times the original purchase price per share, plus any
previously declared and unpaid dividends.
The
shares of B Preferred Stock were offered and sold to the B Investors in a
private placement transaction made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506
promulgated there under. Each of the B Investors is an accredited investor as
defined in Rule 501 of Regulation D promulgated under the Securities Act of
1933.
Series
C Cumulative Convertible Preferred Stock Private Placement
On
November 11, 2005, three accredited investors ("C Investors") purchased an
aggregate of 833,334 shares of Series C Cumulative Convertible Preferred Stock
("C Preferred Stock") at $6.00 per share for an aggregate purchase price of
$5,300,004.
Each
share of C Preferred Stock is convertible, at any time at the option of the
holder, into 12 shares of Common Stock. The C Preferred Stock will be
automatically converted into Common Stock upon (i) the approval of the holders
of a majority of the then outstanding C Preferred Stock or (ii) the closing of a
firm commitment underwritten public offering of the Company's securities in
which the aggregate gross proceeds to the Company are not less than $10,000,000
at a price equal to or higher than $2.00 per share of Common Stock. Holders of
the C Preferred Stock are entitled to receive, when declared by the Company's
board of directors, annual dividends of $0.72 per share of C Preferred Stock
paid semi-annually (equates to a 12% annualized return). Such dividends may be
paid, at the election of the Company, either (i) in cash, (ii) in registered
Common Stock or (iii) in restricted shares of Common Stock with piggyback
registration rights. In the event that the Company elects to issue shares of
Common Stock in connection with the dividend on the C Preferred Stock, such
dividend shares shall be determined by dividing the dividend amount by the
Dividend VWAP; provided, however, if the Company is unable to determine the
Dividend VWAP, then such dividend shall be determined by dividing the dividend
amount by the average of the three highest closing bid prices during the 20
trading days immediately preceding the record date for payment of such dividend.
The Company granted the C Investors piggyback registration rights and filed a
registration statement for shares of common stock issuable upon conversion of
the C Preferred Stock within 60 days of closing. In addition, the relevant
subscription agreement provides that if a registration statement is not filed or
made effective, then until the registration statement is filed or made
effective, the Company will pay the holder a fee. The Company filed a
registration statement, however it was not declared effective by the
SEC.
F-31
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
In
addition to any voting rights provided by law, holders of the C Preferred Stock
will have the right to vote together with holders of Common Stock and the Series
A and B Preferred Stock as a single class on all matters upon which stockholders
are entitled to vote, including election of the members of the Company's Board
of Directors. Each share of C Preferred Stock will have the number of votes
corresponding to the number of shares of Common Stock into which the C Preferred
Stock may be converted on the record date for determining stockholders entitled
to vote. In the event of any liquidation or winding up of the Company, the
holders of C Preferred Stock will be entitled to receive, in preference to
holders of Common Stock but subject to preferential liquidation rights of the A
and B Preferred Stock, an amount equal to two times the original purchase price
per share, plus any previously declared and unpaid dividends.
The B
Investors and C Investors have contractually agreed to restrict their ability to
convert the preferred stock and receive shares of Common Stock such that the
number of shares of Common Stock held by them and their affiliates after such
conversion or exercise does not exceed 4.99% of the Company's then issued and
outstanding shares of Common Stock.
The
shares of C Preferred Stock were offered and sold to the C Investors in private
placement transactions made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506
promulgated there under. Each of the C Investors is an accredited investor as
defined in Rule 501 of Regulation D promulgated under the Securities Act of
1933.
Series
D Cumulative Convertible Preferred Stock Private Placement
On
September 21, 2006, six accredited investors purchased 226,500 shares of Series
D Cumulative Convertible Preferred Stock ("D Preferred Stock") from the Company
at $10.00 per share for a purchase price of $2,265,000. On November 8, 2006,
seven additional investors purchased 135,000 shares of D Preferred Stock from
the Company at $10.00 per share for a purchase price of $1,350,000. On December
11, 2006, five additional investors (collectively with the other thirteen
investors defined as “D Investors”) purchased 48,000 shares of D Preferred Stock
from the Company at $10.00 per share for a purchase price of $480,000. As a
result of the three aforementioned closings, the Company has sold an aggregate
of 409,500 shares of D Preferred Stock to the D Investors for an aggregate
purchase price of $4,095,000.
For each
share of D Preferred Stock purchased, each D Investor received a common stock
purchase warrant to purchase ten shares of common stock of the Company ("Series
D Warrants"). The Series D Warrants shall be exercisable for a period of seven
years at an exercise price of $0.50 per share. The funds raised were utilized by
the Company for working capital, future acquisitions and the payment of debt in
connection with previous acquisitions.
Each
share of D Preferred Stock is convertible, at any time at the option of the
holder, into 20 shares of Common Stock. Holders of the D Preferred Stock are
entitled to receive, when declared by the Company's board of directors, annual
dividends of $1.20 per share of D Preferred Stock paid quarterly (equates to a
12% annualized return). Such dividends may be paid, at the election of the
Company, either (i) in cash, (ii) in registered Common Stock or (iii) in
restricted shares of Common Stock with piggyback registration rights. In the
event that the Company elects to issue registered shares of Common Stock in
connection with the dividend on the D Preferred Stock, such dividend shares
shall be determined by dividing the dividend amount by 95% of the average
closing sale price of the common stock for the 20 trading days immediately
preceding the record date for payment of such dividend (the "Average Closing
Price"). In the event that the Company elects to issue restricted shares of
common stock in connection with the dividend on the D Preferred Stock, such
dividend shares shall be determined by dividing the dividend amount by 80% of
the Average Closing Price. If the Company and the D Investors are unable to
determine the Average Closing Price, then such dividend shall be determined by
dividing the dividend amount by the average of the three highest closing bid
prices during the 20 trading days immediately preceding the record date for
payment of such dividend.
The
Company is required to file a registration statement registering the shares of
common stock issuable upon conversion or exercise of the shares of D Preferred
Stock, Series D Warrants and upon declaration of the dividend within 60 days of
closing. Further, the Company is required to use its best efforts to have such
registration statement declared effective within 180 days of the first
closing.
In
addition to any voting rights provided by law, holders of the D Preferred Stock
will have the right to vote together with holders of Common Stock and the A, B
and C Preferred Stock as a single class on all matters upon which stockholders
are entitled to vote, including election of the members of the Company's Board
of Directors. Each share of D Preferred Stock will have the number of votes
corresponding to the number of shares of Common Stock into which the D Preferred
Stock may be converted on the record date for determining stockholders entitled
to vote.
In the
event of any liquidation or winding up of the Company, the holders of D
Preferred Stock will be entitled to receive, in preference to holders of Common
Stock but subject to preferential liquidation rights of the A, B and C Preferred
Stock, an amount equal to two times the original purchase price per share, plus
any previously declared and unpaid dividends.
F-32
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
The
shares of D Preferred Stock were offered and sold to the D Investors in a
private placement transaction made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506
promulgated there under. Each of the D Investors is an accredited investor as
defined in Rule 501 of Regulation D promulgated under the Securities Act of
1933.
Series
E Cumulative Convertible Preferred Stock Private Placement
On
December 21, 2006, the accredited investors purchased an aggregate of 16,750
shares of Series E Cumulative Convertible Preferred Stock ("E Preferred Stock")
to accredited investors at $100.00 per share for an aggregate purchase price of
$1,675,000. On January 31, 2007, the Company sold 7,600 shares of E Preferred
Stock to accredited investor at $100.00 per share for an aggregate purchase
price of $760,000. On February 27, 2007, the Chairman of the Board of
the Company (collectively with the other investors defined as “E Investors”)
purchased 5,000 shares of E Preferred Stock at $100.00 per share for an
aggregate purchase price of $500,000 from the Company. For each share
of E Preferred Stock purchased, each E Investor received a common stock purchase
warrant to purchase 100 shares of Common Stock ("Series E Warrants"). The Series
E Warrants shall be exercisable for a period of seven years at an exercise price
of $0.50 per share. The funds raised will be utilized by the Company for working
capital and acquisitions.
Each
share of E Preferred Stock is convertible, at any time at the option of the
holder, into 200 shares of Common Stock. Holders of the E Preferred Stock are
entitled to receive, when declared by the Company's board of directors, annual
dividends of $12.00 per share of E Preferred Stock paid quarterly (equates to a
12% annualized return). Such dividends may be paid, at the election of the
Company, either (i) in cash, (ii) in registered Common Stock or (iii) in
restricted shares of Common Stock with piggyback registration rights. In the
event that the Company elects to issue registered shares of Common Stock in
connection with the dividend on the E Preferred Stock, such dividend shares
shall be determined by the Average Closing Price. In the event that the Company
elects to issue restricted shares of Common Stock in connection with the
dividend on the E Preferred Stock, such dividend shares shall be determined by
dividing the dividend amount by 80% of the Average Closing Price. If the Company
and the investors are unable to determine the Average Closing Price, then such
dividend shall be determined by dividing the dividend amount by the average of
the three highest closing bid prices during the 20 trading days immediately
preceding the record date for payment of such dividend.
The
Company is required to file a registration statement registering the shares of
Common Stock issuable upon conversion or exercise of the shares of E Preferred
Stock, Series E Warrants and upon declaration of the dividend. Further, the
Company is required to use its best efforts to have such registration statement
declared effective within 180 days of the first closing.
In
addition to any voting rights provided by law, holders of the E Preferred Stock
will have the right to vote together with holders of Common Stock and the A, B,
C and D Preferred Stock as a single class on all matters upon which stockholders
are entitled to vote, including election of the members of the Company's Board
of Directors. Each share of E Preferred Stock will have the number of votes
corresponding to the number of shares of Common Stock into which the E Preferred
Stock may be converted on the record date for determining stockholders entitled
to vote.
In the
event of any liquidation or winding up of the Company, the holders of E
Preferred Stock will be entitled to receive, in preference to holders of Common
Stock but subject to preferential liquidation rights of the A, B, C and D
Preferred Stock and any amount of secured convertible debt, an amount equal to
two times the original purchase price per share, plus any previously declared
and unpaid dividends.
The
shares of E Preferred Stock were offered and sold to the E Investors in a
private placement transaction made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506
promulgated there under. Each of the E Investors is an accredited investor as
defined in Rule 501 of Regulation D promulgated under the Securities Act of
1933.
Dividends
The
Company accrued an annual cash dividend of 12% per share on the A, B, C, D, and
E Preferred Stock for the year ended December 31, 2009.
Series
B Preferred Stock Conversion
On March
10, 2008, a holder of 100,000 shares of Series B Convertible Preferred Stock
converted those shares into 200,000 shares of common stock.
F-33
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
Note
12—Stock-Based Compensation
The
Company complies with the fair value recognition provisions of the Compensation
and Equity Topics of the FASB ASC. The guidance requires compensation cost for
all stock awards be calculated and recognized over the service period (generally
equal to the vesting period). This compensation cost is determined using option
pricing models intended to estimate the fair value of the awards at the grant
date. An offsetting increase to stockholders' equity is recorded equal to the
amount of the compensation expense charge. The fair value of issued stock
options and warrants are estimated on the date of grant using the Black-Scholes
option-pricing model including the following assumptions: expected volatility of
25.0% to 60.0%, expected dividend yield rate of 0%, expected life over the term,
generally, 5 or 7 years, and a range of risk-free interest rates of 1.55% to
4.19% which coincides with the expected life of the options and warrants at the
time of issuance. During the years ended December 31, 2009 and 2008, the Company
recorded stock-based compensation of $433,126 and $1,002,599,
respectively. There was no cash flow effect resulting from these
arrangements.
The
following table sets forth activity relating to the Company's stock options and
warrants:
Weighted
|
||||||||||||||||||||
Average
|
||||||||||||||||||||
Weighted
|
Remaining
|
Aggregate
|
||||||||||||||||||
Options and
|
Range of
|
Average
|
Term
|
Instrinsic
|
||||||||||||||||
Warrants
|
Exercise Price
|
Exercise Price
|
(in years)
|
Value
|
||||||||||||||||
Outstanding,
January 1, 2008
|
4,044,963 |
$0.52
- $1.50
|
$ | 0.83 | 3.91 | $ | 222,800 | |||||||||||||
Granted
|
445,000 |
$0.50
- $0.65
|
$ | 0.56 | ||||||||||||||||
Exercised
|
- |
-
|
- | |||||||||||||||||
Forfeited
|
(1,500 | ) |
$1.00
- $1.50
|
$ | 1.17 | |||||||||||||||
Outstanding,
January 1, 2009
|
4,488,463 |
$0.50
- $1.50
|
$ | 0.80 | 3.07 | - | ||||||||||||||
Granted
|
2,502,000 |
$0.20
|
$ | 0.20 | ||||||||||||||||
Exercised
|
- |
-
|
- | |||||||||||||||||
Forfeited
|
(1,120,500 | ) |
$0.67
- $1.00
|
$ | 0.90 | |||||||||||||||
Expired
|
(25,000 | ) |
$1.00
|
$ | 1.00 | |||||||||||||||
Outstanding,
December 31, 2009
|
5,844,963 |
$0.20
- $1.50
|
$ | 0.53 | 3.13 | - | ||||||||||||||
Options
exercisable at December 31, 2009
|
5,042,463 | $ | 0.59 | 2.92 | $ | - | ||||||||||||||
Options
exercisable at December 31, 2008
|
3,579,296 | $ | 0.85 | 2.82 | $ | - |
The
Company settles stock option exercises with newly issued shares of common stock.
For the years ended December 31, 2009 and 2008, total compensation cost not yet
recognized for non-vested awards of $31,265 and $212,864, respectively, have a
weighted average period of 0.58 and 0.88 years, respectively, over which the
compensation expense is expected to be recognized.
F-34
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
Options and Warrants Outstanding at
2009
|
Options and Warrants Exercisable at
2009
|
||||||||||||||||||||
Weighted
|
|||||||||||||||||||||
Average
|
Weighted
|
Weighted
|
|||||||||||||||||||
Number
|
Remaining
|
Average
|
Number
|
Average
|
|||||||||||||||||
Exercise
|
Outstanding
|
Contractual
|
Exercise
|
Exercisable
|
Exercise
|
||||||||||||||||
Price
|
12/31/2009
|
Life
|
Price
|
12/31/2009
|
Price
|
||||||||||||||||
$
|
0.20
|
2,502,000 | 4.34 | $ | 0.20 | 1,699,500 | $ | 0.20 | |||||||||||||
$
|
0.50
|
200,000 | 3.92 | $ | 0.50 | 200,000 | $ | 0.50 | |||||||||||||
$
|
0.52
|
450,000 | 2.20 | $ | 0.52 | 450,000 | $ | 0.52 | |||||||||||||
$
|
0.65
|
815,000 | 2.99 | $ | 0.65 | 815,000 | $ | 0.65 | |||||||||||||
$
|
0.59
|
15,000 | 3.59 | $ | 0.59 | 15,000 | $ | 0.59 | |||||||||||||
$
|
0.61
|
215,000 | 3.26 | $ | 0.61 | 215,000 | $ | 0.61 | |||||||||||||
$
|
0.62
|
100,000 | 2.16 | $ | 0.62 | 100,000 | $ | 0.62 | |||||||||||||
$
|
0.70
|
15,000 | 2.84 | $ | 0.70 | 15,000 | $ | 0.70 | |||||||||||||
$
|
0.78
|
10,000 | 2.50 | $ | 0.78 | 10,000 | $ | 0.78 | |||||||||||||
$
|
0.84
|
60,000 | 2.58 | $ | 0.84 | 60,000 | $ | 0.84 | |||||||||||||
$
|
0.85
|
50,000 | 2.56 | $ | 0.85 | 50,000 | $ | 0.85 | |||||||||||||
$
|
1.00
|
1,352,463 | 1.37 | $ | 1.00 | 1,352,463 | $ | 1.00 | |||||||||||||
$
|
1.50
|
60,500 | 0.58 | $ | 1.50 | 60,500 | $ | 1.50 | |||||||||||||
|
|||||||||||||||||||||
5,844,963 | $ | 0.53 | 5,042,463 | $ | 0.59 |
Options and Warrants Outstanding at
2008
|
Options and Warrants Exercisable at
2008
|
||||||||||||||||||||
Weighted
|
|||||||||||||||||||||
Average
|
Weighted
|
Weighted
|
|||||||||||||||||||
Number
|
Remaining
|
Average
|
Number
|
Average
|
|||||||||||||||||
Exercise
|
Outstanding
|
Contractual
|
Exercise
|
Exercisable
|
Exercise
|
||||||||||||||||
Price
|
12/31/2008
|
Life
|
Price
|
12/31/2008
|
Price
|
||||||||||||||||
$ |
0.50
|
200,000 | 4.92 | $ | 0.50 | - | $ | 0.50 | |||||||||||||
$ |
0.52
|
450,000 | 3.20 | $ | 0.52 | 450,000 | $ | 0.52 | |||||||||||||
$ |
0.57
|
800,000 | 4.00 | $ | 0.57 | 400,000 | $ | 0.57 | |||||||||||||
$ |
0.59
|
15,000 | 4.59 | $ | 0.59 | 15,000 | $ | 0.59 | |||||||||||||
$ |
0.61
|
215,000 | 4.26 | $ | 0.61 | 115,000 | $ | 0.61 | |||||||||||||
$ |
0.62
|
100,000 | 3.16 | $ | 0.62 | 100,000 | $ | 0.62 | |||||||||||||
$ |
0.65
|
15,000 | 3.09 | $ | 0.65 | 15,000 | $ | 0.65 | |||||||||||||
$ |
0.67
|
50,000 | 3.24 | $ | 0.67 | 25,000 | $ | 0.67 | |||||||||||||
$ |
0.70
|
15,000 | 3.84 | $ | 0.70 | 15,000 | $ | 0.70 | |||||||||||||
$ |
0.78
|
30,000 | 3.50 | $ | 0.78 | 18,750 | $ | 0.78 | |||||||||||||
$ |
0.80
|
300,000 | 3.37 | $ | 0.80 | 200,000 | $ | 0.80 | |||||||||||||
$ |
0.81
|
50,000 | 3.39 | $ | 0.81 | 25,000 | $ | 0.81 | |||||||||||||
$ |
0.83
|
150,000 | 3.00 | $ | 0.83 | 150,000 | $ | 0.83 | |||||||||||||
$ |
0.84
|
60,000 | 3.58 | $ | 0.84 | 60,000 | $ | 0.84 | |||||||||||||
$ |
0.85
|
50,000 | 3.56 | $ | 0.85 | 25,000 | $ | 0.85 | |||||||||||||
$ |
1.00
|
1,927,963 | 2.26 | $ | 1.00 | 1,905,046 | $ | 1.00 | |||||||||||||
$ |
1.50
|
60,500 | 1.58 | $ | 1.50 | 60,500 | $ | 1.50 | |||||||||||||
4,488,463 | $ | 0.80 | 3,579,296 | $ | 0.85 |
F-35
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
Note
13—Acquisitions of Subsidiaries and Other Assets
The
Company has acquired numerous businesses since late 2004. The Company's strategy
in purchasing these businesses is to acquire pension administration and
investment service organizations with recurring revenue streams, and consolidate
these businesses to take advantage of economies of scale, efficiencies, and
synergies. The Company believes that these businesses have demonstrated stable
revenue growth and cash flow with low client attrition rates prior to their
acquisition. The Company plans to enhance revenues and profits in these acquired
businesses through cross-selling additional retirement planning services, the
introduction of higher-margin services through improved operations, offering
non-traditional investment management services and products and higher client
retention through improved service and national capabilities.
The
acquisition of each subsidiary is being accounted for under the acquisition
method of accounting in accordance with the Business Combinations Topic of FASB
ASC. Under the acquisition method, assets acquired and liabilities assumed are
recorded at their estimated fair values. Goodwill is recorded to the extent the
purchase price exceeds the fair value of the net identifiable tangible and
intangible assets acquired. Currently, only the Company’s 2009 acquisitions are
being accounted for under this guidance, which was effective January 1,
2009.
The
acquisitions completed by the Company in 2009 and 2008 are discussed further
below:
California
Investment and Annuity Sales
On April
3, 2008, the Company signed a Stock Purchase Agreement (“CIAS Agreement”) with
Richard Kaplan and Anthony Delfino (“CIAS Sellers”) and CIAS. The CIAS Agreement
was effective as of March 31, 2008. Pursuant to the CIAS Agreement, the Company
acquired and the CIAS Sellers sold, 100% of the common stock of CIAS. In
consideration for 100% of the common stock of CIAS, the Company paid the CIAS
Sellers $1,425,000 in cash, issued the CIAS Sellers promissory notes for an
aggregate of $950,000 with the first promissory notes in the amount of $475,000
payable June 3, 2009 and the second promissory notes in the amount of $475,000
payable June 3, 2010. In the event that certain revenue targets are not achieved
by CIAS during the 24 months following the closing date, the promissory
notes will be reduced by the amount of such shortfall. The total consideration
paid was $2,375,000.
As part
of the terms of the sale of CIAS, Richard Kaplan was awarded one-year employment
agreement and Anthony Delfino a one-year consulting agreement, and agreed to be
bound by non-disclosure and non-solicitation agreements.
On March
16, 2009, the Company executed a Restructured Promissory Note (“CIAS
Restructured Note Agreement”) with the sellers of California Investment and
Annuity Sales, Inc. (“CIAS”) under which the parties executed replacement notes
superseding and terminating, the prior note between the parties dated April 3,
2008. Under the CIAS Restructured Note Agreement, the Company issued two
promissory notes for an aggregate of $950,000 payable in eight monthly principal
only installments of $70,000 beginning on August 15, 2009 and ending March 15,
2010, and three monthly installments of $130,000 plus all accrued interest, less
any adjustments to the promissory notes under the CIAS Agreement, beginning on
April 15, 2010 and ending on June 15, 2010. The notes pay interest at 8% per
annum. Accrued interest on the April 3, 2008 promissory notes was paid to the
CIAS Sellers within ten business days of the original scheduled payment date of
June 3, 2009.
On
September 28, 2009, the Company executed Amendment No. 1 to the CIAS
Restructured Note Agreement with the CIAS Sellers under which the CIAS Sellers
agreed to replace the remaining monthly installment payments under the
Promissory Notes, dated March 16, 2009, with installment payments to be made in
six monthly principal only installments of $70,000 beginning on April 15, 2010
and ending September 15, 2010, and three monthly principal installments of
$130,000, plus all accrued interest, less any adjustments to the promissory
notes under the CIAS Agreement, beginning on October 15, 2010 and ending
December 15, 2010. The Senior and Subordinated Senior Lenders have not
authorized payment of the principal or accrued interest of this note as of April
26, 2010.
The total
purchase price for the acquisition of CIAS of $2,485,929 (including $112,956 of
acquisition costs and net of cash received of $2,027), which is being accounted
for under the acquisition method of accounting in accordance with the Business
Combinations Topic of the FASB ASC, is allocated as indicated in the table
included in Note 13.
The
identifiable intangible assets listed in Note 13 are amortized for book purposes
over the estimated useful lives of the assets. The amortization of most of the
identifiable intangible assets and goodwill are not deductible for tax purposes.
Additional consideration under the stock purchase agreements, if any, will be
recorded in the consolidated financial statements as an adjustment to
goodwill.
F-36
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
Alaska
Pension Services, Ltd.
On June
30, 2008, the Company entered into a Stock Purchase Agreement (“Alaska Pension
Agreement”) with Karen Jordan and Duane Mayer (“APS Sellers”) to purchase 100%
of the outstanding common stock of Alaska Pension Services, Ltd. (“Alaska
Pension”). In consideration for 100% of the outstanding common stock of Alaska
Pension, the Company paid the APS Sellers $430,766 in cash at closing and an
additional $165,000 in cash on December 31, 2008. The Company also paid
indebtedness and other obligations of Alaska Pension of $223,141; issued the APS
Sellers 369,128 shares of common stock of the Company valued at $220,000 (the
value of the common stock was determined by an average of the closing stock
price of the last 5 days prior to the announced acquisition); issued the APS
Sellers promissory notes for an aggregate of $220,000 with the first set of
promissory notes in the amount of $110,000 paid on August 31, 2009 and the
second set of promissory notes in the amount of $110,000 payable August 31,
2010. In the event that certain EBITDA targets are not achieved by Alaska
Pension during the 24 months following the closing date, the promissory notes
will be reduced by the amount of such shortfall. Under the terms of the Alaska
Pension Agreement, if certain EBITDA targets are met during the first two years
of the Alaska Pension Agreement, the Company agreed to pay 10% of the amount in
excess of the EBITDA targets. In 2009, the Company paid $6,656 in contingency
payments based on Alaska Pension meeting certain EBITDA targets. The total
consideration paid was $1,265,563.
As part
of the terms of the sale of Alaska Pension, Karen Jordan and Duane Mayer were
awarded two-year employment agreements and agreed to be bound by non-compete and
non-solicitation agreements.
The total
purchase price for the acquisition of Alaska Pension of $1,375,761 (including
$114,069 of acquisition costs and net of cash received of $3,871), which is
being accounted for under the acquisition method of accounting in accordance
with the Business Combinations Topic of the FASB ASC, is allocated as indicated
in the table included in Note 13.
The
identifiable intangible assets listed in Note 13 are amortized for book purposes
over the estimated useful lives of the assets. The amortization of most of the
identifiable intangible assets and goodwill are not deductible for tax purposes.
Additional consideration under the stock purchase agreements, if any, will be
recorded in the consolidated financial statements as an adjustment to
goodwill.
Alan
N. Kanter & Associates, Inc.
On July
16, 2008, the Company entered into a Stock Purchase Agreement (“Kanter
Agreement”) to purchase 100% of the common stock of Alan N. Kanter &
Associates, Inc. (“Kanter & Associates”). In consideration for 100% of the
outstanding common stock of Kanter & Associates, the Company paid cash of
$1,732,467. In addition, under the terms of a side letter to the Kanter
Agreement, the Company has agreed to pay the seller a portion of the revenue
generated by Kanter & Associates for completing pension plan document
restatement work during the first two years of the Kanter
Agreement. As of December 31, 2009, the Company paid $255,925 and
accrued an additional $65,938 under the terms of the side letter. The total
consideration paid was $2,054,330.
As part
of the terms of the sale of Kanter & Associates, Alan N. Kanter was awarded
a two-year employment agreement, and agreed to be bound by non-compete and
non-solicitation agreements.
The total
purchase price for the acquisition of Kanter & Associates of $2,159,714
(including $106,923 of acquisition costs and net of cash received of $1,539),
which is being accounted for under the acquisition method of accounting in
accordance with the Business Combinations Topic of the FASB ASC, is allocated as
indicated in the table included in Note 13.
The
identifiable intangible assets listed in Note 13 are amortized for book purposes
over the estimated useful lives of the assets. The amortization of most of the
identifiable intangible assets and goodwill are not deductible for tax purposes.
Additional consideration under the stock purchase agreements, if any, will be
recorded in the consolidated financial statements as an adjustment to
goodwill.
Retirement
& Employee Benefit Services, Inc.
On August
5, 2008, the Company entered into an Asset Purchase Agreement (“REBS Agreement”)
to purchase the assets of Retirement & Employee Benefit Services, Inc.
(“REBS”). The Company paid $164,943 in cash.
The total
purchase price for the acquisition of assets of REBS of $178,257 (including
$13,314 of acquisition costs), which is being accounted for under the
acquisition method of accounting in accordance with the Business Combinations
Topic of the FASB ASC, is allocated as indicated in the table included in Note
13.
F-37
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
The
identifiable intangible assets listed in Note 13 are amortized for book purposes
over the estimated useful lives of the assets.
The
Company’s strategy in purchasing the assets of REBS was to acquire
the customer relationships of a retirement plan administration
organization without incurring additional overhead expense. REBS was merged into
the workflow at Pentec.
Pension
Technical Services, Inc.
On
October 2, 2008, the Company entered into a Stock Purchase Agreement (“REPTECH
Agreement”) with Ralph W. Shaw and Eileen A. Baldwin-Shaw (“REPTECH Sellers”) to
purchase 100% of the common stock of REPTECH. In consideration for 100% of the
outstanding common stock of REPTECH, the Company paid the REPTECH Sellers
$1,787,760 in cash at closing, $150,000 on January 2, 2009, issued 1,430,208
shares of common stock of the Company valued at $715,104 (the value of the
common stock was determined by an average of the closing stock price of the last
five days prior to the announced acquisition), issued the REPTECH Sellers
promissory notes for an aggregate of $922,656 with the first set of promissory
notes in the amount of $461,328 payable December 2, 2009 and the second set of
promissory notes in the amount of $461,328 payable December 2, 2010. In the
event that certain EBITDA targets are not achieved by REPTECH during the 24
months following the closing date, the promissory notes will be reduced by the
amount of the shortfall. Under the terms of the REPTECH Agreement, if certain
EBITDA targets are met during the first two years of the REPTECH Agreement, the
Company agreed to pay 10% of the amount in excess of the EBITDA targets. In
2009, the Company paid $10,416 in contingency payments based on REPTECH meeting
certain EBITDA targets. The total consideration paid was
$3,585,936.
As part
of the terms of the sale of REPTECH, Ralph W. Shaw and Eileen A. Baldwin-Shaw
were awarded two-year employment agreements, and agreed to be bound by
non-compete and non-solicitation agreements.
On
September 25, 2009, the Company executed Amendment No. 1 to Promissory Notes
with the REPTECH Sellers under which the REPTECH Sellers agreed to replace the
payments due under the Promissory Notes, dated October 2, 2008, with installment
payments to be made in twelve monthly principal installments of $76,888, plus
accrued interest, beginning on May 15, 2010 and ending April 15, 2011 at an
interest rate of 8% per annum beginning on October 1, 2009. Interest accrued on
the Promissory Notes through September 30, 2009 was paid to the REPTECH Sellers
within fifteen business days of December 1, 2009.
The total
purchase price for the acquisition of REPTECH was $3,674,412 (including $165,791
of acquisition costs and net of cash received of $56,638 and an adjustment to
assets acquired and liabilities assumed of $20,677), which is being accounted
for under the acquisition method of accounting in accordance with the Business
Combinations Topic of the FASB ASC, is allocated as indicated in the table
included in Note 13.
The
identifiable intangible assets listed in Note 13 are amortized for book purposes
over the estimated useful lives of the assets. The amortization of most of the
identifiable intangible assets and goodwill are not deductible for tax purposes.
Additional consideration under the stock purchase agreements, if any, will be
recorded in the consolidated financial statements as an adjustment to
goodwill.
The
Pension Group, Inc.
On
November 26, 2008, the Company entered into a Stock Purchase Agreement (“TPG
Agreement”) with Peter Stephan, James Norman and Rise Spiegel (“TPG Sellers”) to
purchase 100% of the common stock of TPG. In consideration for 100% of the
outstanding common stock of TPG, the Company paid the TPG Sellers $2,141,869 in
cash at closing, with an additional $935,000 paid on February 24, 2009 and an
additional $467,500, prior to any adjustments, paid on March 26, 2009, issued
1,488,854 shares of common stock of the Company valued at $467,500 (the value of
the common stock was determined by an average of the closing stock price of the
last five days prior to the announced acquisition), issued the TPG Sellers
promissory notes for an aggregate of $467,500 with the first set of promissory
notes in the amount of $233,750 payable January 26, 2010 and the second set of
promissory notes in the amount of $233,750 payable January 26, 2011. In the
event that certain EBITDA targets are not achieved by TPG during the 24 months
following the closing date, the promissory notes will be reduced by the amount
of the shortfall. Under the terms of the TPG Agreement, if certain EBITDA
targets are met during the first two years of the TPG Agreement, the Company
agreed to pay 10% of the amount in excess of the EBITDA targets plus bonuses or
incentive compensation not to exceed 8.5% of the company’s aggregate payroll or
$156,000 during the first year of the TPG Agreement and not to exceed 8.5% of
the company’s aggregate payroll during the second year of the TPG Agreement. In
2009, the Company paid $700 in contingency payments based on TPG meeting certain
EBITDA targets. The total consideration paid was
$4,480,069.
F-38
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
As part
of the terms of the sale of TPG, Peter Stephan, James Norman and Rise Spiegel
were awarded two-year employment agreements, and agreed to be bound by
non-compete and non-solicitation agreements.
On March
24, 2009, the Company executed two promissory notes each for $75,000 payable to
the TPG Sellers in lieu of full payment of their portion of the additional
payment for $467,500, prior to any adjustments, due at March 26, 2009 under the
TPG Agreement and was subject to interest of 8% per annum. The notes were paid
on June 26, 2009.
On
September 24, 2009, the Company executed Amendment No. 1 to Promissory Notes
with the TPG Sellers under which the TPG Sellers agreed to replace the maturity
date and payment terms under the promissory notes, dated November 26, 2008, with
installment payments to be made in twelve monthly principal installments of
$38,958, plus accrued interest, beginning on July 25, 2010 and ending June 25,
2011 at an interest rate of 8% per annum beginning on October 1, 2009. Interest
accrued on the promissory notes through September 30, 2009 was paid to the TPG
Sellers within fifteen business days of January 25, 2010.
The total
purchase price for the acquisition of TPG was $4,721,807 (including $277,666 of
acquisition costs and net of cash received of $2,394 and an adjustment to assets
acquired and liabilities assumed of $33,534), which is being accounted for under
the acquisition method of accounting in accordance with the Business
Combinations Topic of the FASB ASC, is allocated as indicated in the table
included in Note 13.
The
identifiable intangible assets listed in Note 13 are amortized for book purposes
over the estimated useful lives of the assets. The amortization of most of the
identifiable intangible assets and goodwill are not deductible for tax purposes.
Additional consideration under the stock purchase agreements, if any, will be
recorded in the consolidated financial statements as an adjustment to
goodwill.
Standard
Retirement Services, Inc.
On
October 28, 2009, the Company entered into an Asset Purchase Agreement
(“Standard Agreement”) to purchase certain assets of Standard Retirement
Services, Inc (“Standard”). The final purchase price will be determined based on
retention rates as of February 28, 2011 and annual revenues of the acquired
assets. The Company paid $68,653 in cash at closing, which represented 10% of
the purchase price. An additional 25% of the purchase price is due on August 15,
2010, and the final 65% of the purchase price due on March 15, 2011, less any
adjustments in accordance with the Standard Agreement. The Company accrued
$522,347 as an estimate for settling the remaining contingent
payments.
The total
purchase price for the acquisition of Standard was estimated to be about
$591,000. It is being accounted for under the acquisition method of accounting
in accordance with the Business Combinations Topic of the FASB ASC and is
allocated as indicated in the table included in Note 13.
The
identifiable intangible assets listed in Note 13 are amortized for book purposes
over the estimated useful lives of the assets. Additional contingent
consideration under the asset purchase agreement, if any, is considered to be
additional purchase consideration as part of the purchase price of the firms at
the time of acquisition. These contingencies will be reassessed on a periodic
basis until the final outcome of the contingency is determinable but not longer
than the measurement period, with the change recorded to identifiable
intangibles.
The
Company’s strategy in purchasing certain assets of Standard was to acquire the
customer relationships of a retirement plan administration organization without
incurring additional overhead expense. Standard was merged into the workflow at
several of the Company’s subsidiaries.
F-39
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
2008:
|
California Investment
|
Alaska Pension
|
Alan N. Kanter
|
|||||||||
Annuity Sales
|
Services, Ltd.
|
& Associates, Inc.
|
||||||||||
Assets
acquired:
|
||||||||||||
Property
and equipment
|
$ | - | $ | 23,616 | $ | 13,006 | ||||||
Accounts
receivable
|
- | 198,634 | 113,769 | |||||||||
Customer
lists/relationships
|
880,000 | 440,000 | 710,000 | |||||||||
Covenant
not to compete
|
550,000 | 300,000 | 497,185 | |||||||||
Trade
name
|
- | 70,000 | 110,000 | |||||||||
Employment
contracts
|
280,000 | 125,000 | 270,000 | |||||||||
Plan
life documents
|
- | - | 25,403 | |||||||||
Goodwill
|
1,239,929 | 462,359 | 897,940 | |||||||||
Other
assets
|
- | 43,834 | 26,376 | |||||||||
2,949,929 | 1,663,443 | 2,663,679 | ||||||||||
Liabilities
assumed:
|
||||||||||||
Deferred
tax liability
|
464,000 | 254,000 | 446,161 | |||||||||
Other
liabilities
|
- | 33,682 | 57,804 | |||||||||
Net
purchase price
|
$ | 2,485,929 | $ | 1,375,761 | $ | 2,159,714 | ||||||
2008:
|
Retirement & Employee
|
|||||||||||
Benefit Services Inc.
|
REPTECH Corp.
|
The Pension Group, Inc.
|
||||||||||
Assets
acquired:
|
||||||||||||
Property
and equipment
|
$ | - | $ | 17,907 | $ | 79,878 | ||||||
Accounts
receivable
|
24,943 | 137,243 | 115,835 | |||||||||
Customer
lists/relationships
|
98,559 | 2,170,000 | 2,320,000 | |||||||||
Covenant
not to compete
|
54,755 | 720,000 | 1,040,000 | |||||||||
Trade
name
|
- | 540,000 | 750,000 | |||||||||
Goodwill
|
- | 1,386,469 | 1,989,945 | |||||||||
Other
assets
|
- | 29,599 | 20,044 | |||||||||
178,257 | 5,001,218 | 6,315,702 | ||||||||||
Liabilities
assumed:
|
||||||||||||
Deferred
tax liability
|
- | 1,084,000 | 1,228,000 | |||||||||
Unearned
revenue
|
- | 171,401 | 328,992 | |||||||||
Other
liabilities
|
- | 71,405 | 36,903 | |||||||||
Net
purchase price
|
$ | 178,257 | $ | 3,674,412 | $ | 4,721,807 | ||||||
2009:
|
Standard Retirement
|
|||||||||||
Services, Inc.
|
||||||||||||
Assets
acquired:
|
||||||||||||
Customer
lists/relationships
|
$ | 591,000 | ||||||||||
591,000 | ||||||||||||
Liabilities
assumed:
|
||||||||||||
Unearned
revenue
|
- | |||||||||||
Net
purchase price
|
$ | 591,000 |
F-40
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
Pro
forma Information (unaudited)
The
following unaudited pro forma information gives effect to the acquisitions of
California Investment and Annuity Sales, Alaska Pension Services, Ltd., Alan N.
Kanter & Associates, Inc., Retirement & Employee Benefit Services Inc.,
REPTECH Corp., The Pension Group, Inc., Standard Retirement Services, Inc. and
Custom K, Inc., as if the acquisitions all took place on January 1, 2008. The
Pro forma information does not necessarily reflect the results of operations
that would have occurred had the entities been a single company during the
periods presented.
Year Ended
|
Year Ended
|
|||||||
December 31, 2009
|
December 31, 2008
|
|||||||
Revenues
|
$ | 49,176,529 | $ | 49,659,540 | ||||
Net
loss available to common stockholders
|
$ | (1,422,237 | ) | $ | (817,399 | ) | ||
Net
loss per common stock - basic and diluted
|
$ | (0.04 | ) | $ | (0.02 | ) |
Note
14 — Separation and Consulting Agreements
On
January 30, 2009, the Company entered into a Separation Agreement with John
Schroepfer, Interim Chief Financial Officer, under which the parties agreed that
Mr. Schroepfer would resign as Interim Chief Financial Officer. The Agreement
called for a continuation of his salary, as well as, his life, health and
disability insurance through July 21, 2009.
On May
14, 2009, the Company entered into a Separation Agreement with Robert C.
Thompson, Senior Vice President and National Sales Manager, under which the
parties agreed that Mr. Thompson would resign as Senior Vice President and
National Sales Manager. The Agreement called for a continuation of his salary,
as well as, his life, health and disability insurance through August 15,
2009.
Note
15 – Related Party Agreements
In
November 2005, the Company granted Duncan Capital Group LLC (an entity
controlled by Michael Crow, one of the Company’s shareholders) and DCI Master
LDC ("Optionees") a five-year option to purchase up to 250,000 shares of common
stock in the Company at an exercise price of $1.00 per share, in consideration
for Optionee's agreeing, in connection with the Company’s acquisition of
American Benefit Resources, Inc. ("ABR"), to enter into a put agreement with ABR
and IBF Fund Liquidating LLC whereby Optionees may become obligated, between the
second and third anniversaries of the closing of the acquisition, to repurchase,
for up to $1 million, the shares delivered to IBF Fund Liquidating LLC as a
portion of the purchase price of ABR. On December 20, 2006, the Company and the
Optionees entered into an agreement (the "Optionee Agreement") pursuant to which
the Company agreed to make a payment to the Optionees of $1.49 less the market
value per share (as defined in the Optionee Agreement) for each share purchased
by the Optionees from Sellers in the event that the Sellers exercise their put
with the Optionees. In November 2007, the Company and DC Associates terminated
the Optionee Agreement. As part of the terms of the termination of
this agreement, the Company became liable directly to ABR and IBF Fund
Liquidating LLC for the put agreement. On August 21, 2008, IBF
notified the Optionees that it intended to exercise their put. On September 26,
2008, in accordance with the amendment to the Optionee Agreement dated November
30, 2007, the Company communicated its intent to exercise its right to buy back
the shares directly from IBF at $1.49 per share. On November 3, 2008, the
Company acquired the 671,141 shares of common stock from IBF Funding Liquidating
LLC for $1,000,000 ($1.49 per share).
On
October 1, 2008, the Company entered into an Advisory Agreement with MODC
Holdings, Inc. (“MODC”) to evaluate several equity transaction opportunities
that may involve a change in control. For their services, MODC was paid a
retainer of $75,000 and would receive a fee of $150,000 upon a successful close
of the transaction. MODC is controlled by Michael Crow, a shareholder of the
Company.
Richard
Berman, the Chairman of the Board of Directors (“Chairman”), receives $4,500 per
month as compensation for serving as Chairman of the Board. On October 16, 2008,
the Company’s Board of Directors authorized the Company to pay $54,000 to the
Chairman as an advance on his 2009 compensation. In the event that the
Chairman was to be terminated, resign or retire, or for any reason whatsoever,
including a change of control in which the Chairman is terminated, the Chairman
would not have been required to repay the 2009 advance.
F-41
National
Investment Managers Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
On
November 6, 2008, the Company entered into a two year Management Agreement
beginning October 1, 2008 with Nicholas J. Lamoriello and Stephen R. Zito
(“Managers”) under which the Managers will provide business management services
for three wholly-owned subsidiaries of the Company for a 24 month period. In
exchange for the business management services, the Company will pay the Managers
a management fee of $30,000 per month, plus out of pocket expenses while
providing services to the Company. Both Nicholas J. Lamoriello and Stephen R.
Zito are shareholders of the Company.
LAMCO
Advisory Services, Inc. is the investment advisor on the Company’s 401(k)
retirement plan and owned by Nicholas J. Lamoriello, a shareholder of the
Company. The Company paid approximately $15,000 and $13,000 in advisor fees to
LAMCO Advisory Service, Inc. in 2009 and 2008, respectively.
Renee
Conner and William Renninger, former owners of TPA and current employees of the
Company, collectively own 100% of Conner Management Group, LLC (“CMG”). TPA is a
lessee under an office lease agreement with CMG and paid approximately
$132,000 and $129,000 in rent to CMG in 2009 and 2008, respectively, which
approximates fair market value.
Stephen
H. Rosen, former owner of SHRA and current employee of the Company, owns an
interest in 89 Haddon Avenue Associates, L.L.C. (“HAA”). SHRA is a lessee under
an office lease agreement with HAA and paid approximately $168,000 and $163,000
in rent to HAA in 2009 and 2008, respectively, which approximates fair market
value.
Michael
Callahan, former owner of Pentec and PCM and current employee of the Company,
owns 100% of MJM MILESTONE, LLC (“MJM”). Pentec and PCM are lessees under an
office lease agreement with MJM and paid approximately $106,000 and $101,000 in
rent to MJM in 2009 and 2008, respectively, which approximates fair market
value.
Note
16 – Other
On July
9, 2009, the Company filed a Form S-8 Registration Statement with the Securities
and Exchange Commission registering shares of common stock underlying its 2005
Stock Incentive Plan.
On July
23, 2009, the Company filed Form 15 with the Securities and Exchange Commission
which was a certification and notice of termination of registration of the
Company’s common shares under section 12(g) of the Securities Exchange Act of
1934. The Company is required to continue to file reports with the
Securities and Exchange Commission under section 15(d) of the Securities
Exchange Act of 1934.
In July
2009, the Company executed a contract to sell the flex administration business
to the Total Administrative Services Corporation (“TASC”) which is expected to
be closed during 2010. As part of the contract, TASC will pay the Company a
percentage of the annual revenues transferred sixty days after closing, a
percentage of annual revenues based bonus payment if a target retention level is
obtained nine months after closing and a percentage of ongoing revenues
beginning thirteen months after closing. This transaction is not material to the
financial statements and thus is not necessary to be disclosed separately in the
consolidated financial statements. In addition, this transaction does not meet
the definition of a capital transaction as defined in Note 7.
Note
17 – Subsequent Events
On April
26, 2010, the Company entered into amendments to the Senior Loan Agreement and
Subordinated Senior Agreement with its Senior and Subordinated Senior
Lenders, The terms of the amendments are discussed in Note 7. As a result of the
amendments, the Company is restricted from paying any seller notes without the
authorization of the Senior and Subordinated Senior Lenders as discussed in Note
7.
F-42