1. Description
of Business
Callaway
Partners, LLC (the “Company”), a Georgia limited liability company, was formed
in March 2002 and began operations in September 2002. The Company hires
experienced professionals who specialize in general accounting and finance,
internal audit, bankruptcy support, and technical accounting services and
provides their services to clients on a staff augmentation or project basis. The
Company has offices in Atlanta, Georgia; Birmingham, Alabama; Reston, Virginia;
and Southfield, Michigan.
2. Summary of
Significant Accounting Policies
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Although management believes these estimates and
assumptions are adequate, actual results could differ from the estimates and
assumptions used.
Revenue
Recognition
The
Company recognizes revenues in accordance with Staff Accounting Bulletin (“SAB”)
No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB No.
104, “Revenue Recognition” when persuasive evidence of an arrangement exists,
the related services are provided, the price is fixed or determinable and
collectibility is reasonably assured. The Company’s revenues are recognized upon
the performance of services by the Company’s professionals and are typically
billed at standard hourly rates as defined in the services agreement between the
Company and the client.
Expense
reimbursements that are billable to clients are recognized during the period in
which the related professional services are delivered and are included in total
revenues and reimbursable expenses. In general, prior to 2006, the revenue and
expense components for expense reimbursements billable to clients were netted
against each other. The 2005 amounts have been revised to classify these
reimbursable expenses as both a component of revenues and of expenses. The
impact of this revision is to increase reimbursable expenses by $10,731,841 as
both a component of revenues and of expenses for the year ended December 31,
2005. These revisions had no impact on previously reported members'
equity, net income or cash flows.
Direct
Costs and Reimbursable Expenses
Direct
costs (exclusive of depreciation and amortization) and reimbursable expenses
consist primarily of billable employee compensation and their related benefit
costs, as well as direct expenses and administrative costs to be reimbursed by
clients.
Cash
and Cash Equivalents
The
Company considers all highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents.
Allowances
for Doubtful Accounts
The
Company provides an allowance for doubtful accounts equal to the estimated
uncollectible amounts. The Company’s estimate is based on historical collection
experience and a review of the current status of accounts
receivable.
CALLAWAY
PARTNERS, LLC
NOTES
TO FINANCIAL STATEMENTS
Property
and Equipment
Property
and equipment is stated at cost, less accumulated depreciation and amortization.
Major replacements and betterments are capitalized. Repairs and maintenance are
expensed to operations as incurred. The Company will record impairment losses on
long-lived assets used in operations when events and circumstances indicate that
the assets are impaired and the undiscounted cash flows to be generated by those
assets are less than the carrying amounts. The Company periodically reviews
property and equipment to determine if its carrying costs will be recovered from
future operating cash flows. In cases where the Company does not expect to
recover its costs, the Company recognizes an impairment loss. No such impairment
losses have been recognized to date.
Property
and equipment are depreciated over their estimated useful lives using the
straight-line method. Estimated useful lives are 3 to 5 years for computer
equipment and 5 to 7 years for office furniture and equipment. Leasehold
improvements are depreciated using the straight-line method over the shorter of
the life of the asset or the term of the lease. Depreciation expense was
$176,598 and $200,406 for the years ended December 31, 2006 and 2005,
respectively.
Deferred
Revenues and Customer Deposits
Deferred
revenues represent collections of job related labor and expense in advance of
billings. Deferred revenues were $0 and $214,059 as of December 31, 2006
and 2005, respectively. Customer deposits represent retainers received by the
Company from clients. Customer deposits were $95,000 and $0 as of
December 31, 2006 and 2005, respectively.
Client
Payables
Client
payables represent amounts overpaid by a client during the year. These payables
were refunded by the Company to the client in January 2007.
Income
Taxes
The
Company is a limited liability company and is not subject to federal or state
income taxes. Accordingly, no recognition has been given to income taxes in the
accompanying financial statements of the Company since the taxable income or
loss of the Company is included in the tax returns of the individual members.
The tax returns of the Company are subject to examination by federal and state
taxing authorities. If such examinations were to result in adjustments to
distributive shares of taxable income or loss, the tax liability of the members
would be adjusted accordingly.
Fair
Value of Financial Instruments
Cash and
cash equivalents are stated at cost, which approximates fair market value. The
carrying values for accounts receivable, accounts payable and other accrued
liabilities reasonably approximate fair market value due to the nature of the
financial instrument and the short-term maturity of these items.
Contingencies
The
Company is periodically involved in certain legal proceedings and other disputes
that arise in the ordinary course of business. The Company reviews these issues
to determine if reserves are required for losses that are probable to
materialize and reasonably estimable in accordance with Statement of Financial
Accounting Standards No. 5, “Accounting for Contingencies”. The Company
evaluates such reserves, if any, based upon several criteria including the
merits of each claim, settlement discussions, and the advice of outside counsel.
The Company’s policy is to include estimates of legal fees and other directly
related costs to be incurred in conjunction with a loss contingency in the
contingency reserves.
CALLAWAY
PARTNERS, LLC
NOTES
TO FINANCIAL STATEMENTS
Marketing
The
Company’s policy is to expense marketing costs as the costs are incurred.
Marketing expenses were $476,782 and $573,711 for the years ended
December 31, 2006 and 2005, respectively.
3. Restatement
Relating to IRS Settlement
The
Company discovered that since inception it had been erroneously omitting certain
amounts of employee compensation from the amounts being reported to the Internal
Revenue Service (the “IRS”).
The
Company notified the IRS of the omissions, and as of December 31, 2006 had
reached an informal understanding with the IRS regarding settlement of the
matter. The Company will pay the IRS $566,260. Of this amount, $504,016 related
to periods prior to 2006. The settlement amount represents an estimate of the
FICA and federal income taxes which would have been paid by the Company and its
employees if the amounts had not been omitted from gross compensation. The IRS
will not require the Company to file corrected informational returns or issue
corrected payee statements to the affected employees for the years in
question.
The IRS
will not consider the Company’s payment to the IRS on behalf of the employees as
income to the employees in the year of payment, and will not require the
employees to include the amount in gross income for the years in question. The
IRS will not require the Company to pay any penalties or interest or to pay for
not furnishing correct W-2’s and properly paying FICA taxes on the excluded
income.
The
Company believes the liabilities it has incurred as a result of these omissions
should be treated as a correction of an error, and recorded these amounts
in the period in which the related omissions occurred. The effect of the errors
to the Company was to understate the originally reported accrued liabilities and
to overstate the originally reported net income and members’ equity balances by
the following amounts: $328,563 in 2005 and $175,453 in periods prior to
2005.
Subsequently
in June 2007, the Company entered into a formal settlement agreement with the
IRS and paid $566,260.
4. Accounts
Receivable
Accounts
receivable consists of the following:
| |
|
As
of December 31, |
|
| |
|
2006 |
|
2005 |
|
Accounts
receivable |
|
$ |
8,852,039 |
|
$ |
5,213,505 |
|
|
Unbilled
accounts receivable |
|
|
301,861 |
|
|
810,076 |
|
|
Total
accounts receivable |
|
|
9,153,900 |
|
|
6,023,581 |
|
|
Less:
Allowance for doubtful accounts |
|
|
(291,274 |
) |
|
(350,000 |
) |
|
Total
accounts receivable, net |
|
$ |
8,862,626 |
|
$ |
5,673,581 |
|
CALLAWAY
PARTNERS, LLC
NOTES
TO FINANCIAL STATEMENTS
5. Property and
Equipment
Property
and equipment consists of the following:
| |
|
As
of December 31, |
|
| |
|
2006 |
|
2005 |
|
|
Computer
equipment |
|
$ |
935,083 |
|
$ |
929,976 |
|
|
Office
furniture and equipment |
|
|
275,023 |
|
|
79,480 |
|
|
Leasehold
improvements |
|
|
26,474 |
|
|
6,280 |
|
|
Total
property and equipment, at cost |
|
|
1,236,580 |
|
|
1,015,736 |
|
|
Less:
Accumulated depreciation |
|
|
(423,233 |
) |
|
(274,942 |
) |
|
Total
property and equipment, net |
|
$ |
813,347 |
|
$ |
740,794 |
|
6. Line of
Credit
Prior to
September 11, 2006, the Company had a line of credit with a financial
institution of up to $5,000,000 based upon qualified accounts receivable. The
line of credit was secured by the Company’s business assets and guaranteed by
three of the Company’s members. Interest was charged monthly on the outstanding
balance at 7.750%. There was no outstanding balance under this line of credit at
December 31, 2005. In September 2006, the Company closed this line of
credit, and transferred the outstanding balance to a new line of credit as
described below.
In
September 2006, the Company obtained a new $5,000,000 revolving line of credit
with a different financial institution. The line of credit bears interest at the
one month LIBOR plus 1.75%. Prior to September 8, 2008, the Company has a
one time option to request an increase in its revolving line of credit up to
$8,000,000, provided it meets certain covenants as defined in the line of credit
loan agreement. On September 8, 2009, the line of credit will expire, upon
which time any unpaid principal and interest are due. The Company will pay an
availability fee equal to 0.20% per annum on the unused portion of the line of
credit for each day during the preceding fiscal quarter. No availability fee
will be due for any quarter in which the average line of credit balance
outstanding is greater than $3,000,000. The line of credit requires annual
audited financial statements to be submitted within 120 days after year
end.
As of
December 31, 2006, the Company’s total available credit was $5,000,000,
with no outstanding balance. The line of credit is collateralized by all
personal property of the Company (including a continuing perfected security
interest in all accounts, documents, line of credit rights, chattel paper,
accessions, inventory, equipment, general intangibles, deposit accounts,
instruments, investment property, and financial assets). The Company is required
to meet certain debt service coverage ratios as defined in the line of credit
loan agreement, and maintain all operating and deposit cash accounts with the
financial institution providing the line of credit. As of December 31, 2006, the
Company was transitioning its operating and deposit cash accounts from the old
financial institution to the new financial institution and has obtained a waiver
for this debt covenant.
The
revolving line of credit was subsequently closed upon the sale of the Company as
described in note 13 below.
CALLAWAY
PARTNERS, LLC
NOTES
TO FINANCIAL STATEMENTS
7. Members'
Equity
Prior to
January 1, 2006, ownership of the Company was divided into two classes of
units, “Class A Units” and “Class B Units”. Class A Units granted an interest in
the profits, losses and distributions of all operations and activities of the
Company. Class B Units granted an interest in the profits, losses and
distributions of all operations and activities of the Company, except for those
arising from the performances of services by the Company on a specific project
as defined in the operating agreement. As of December 31, 2005, there were
87,000 Class A Units and 13,000 Class B Units outstanding. On January 1,
2006, all outstanding Class B Units were converted into and became the same
number of Class A Units. As of December 31, 2006, there are 100,000 Class A
Units outstanding.
Prior to
December 20, 2006, the Company had a Phantom Performance Unit Plan (the
“Phantom Plan”) to provide certain key employees the ability to share in the
growth in the value of the Company. Such benefits were based upon the award of
performance units (“Performance Units”). As of December 31, 2005, there were
2,000 Performance Units outstanding. During 2006, all 2,000 of the Performance
Units outstanding under the Phantom Plan were converted into Unit Awards under
the new Plan described below.
On
December 20, 2006, the Company adopted the 2006 Unit Appreciation Awards
Plan (the “Plan”). The purpose of the Plan is: (1) to encourage performance by
key management employees, partners, managers and members of the Company, (2) to
provide an incentive for such employees to expand and improve the profits and
prosperity of the Company, and (3) to assist the Company in attracting and
retaining key personnel through the grant of unit appreciation awards (“Unit
Awards”). The Plan is administered collectively by the Company, through its
managers and any such committee as they may designate.
The
Company has created for the purposes of the Plan 25,000 Unit Awards. All Unit
Awards granted to a participant shall become fully vested by no later than the
fifth anniversary following the date of grant. The Company may provide, at its
discretion, for immediate vesting or for accelerated vesting under specific
circumstances as described in the Plan.
Payments
of vested Unit Awards will be triggered only when one of the following events (a
“Change of Control Event”) occurs: (1) the sale of all or substantially all of
the Company’s assets, a liquidation, or winding up of the Company or (2) any
transaction or series of related transactions whether by sale, merger or
consolidation, in which there is a shift of more than fifty percent (50%) of the
Company’s ownership and economic interests to any transferee who is not a member
of the Company as of the date of this Plan. Except as provided for in the Plan,
if a Change of Control event has not occurred within the six months of the
termination of employment, death or disability of a participant, all vested
units previously awarded to the participant will be forfeited.
As of
December 31, 2006, there were 18,500 Unit Awards outstanding with vesting
schedules of zero to three years. No expense relating to the Performance Units
or the Unit Awards was recognized for the years ended December 31, 2006 and
2005. Upon the sale of the Company in July 2007 as described in note 13 below,
all outstanding Unit Awards were rescinded.
CALLAWAY
PARTNERS, LLC
NOTES
TO FINANCIAL STATEMENTS
8. Benefit
Plan
The
Company sponsors a defined contribution 401(k) plan under which eligible
employees may choose to contribute up to 100% of their salary, less applicable
Social Security and Medicare taxes on a pre-tax basis, subject to certain IRS
limitations. All employees who are twenty-one or older are immediately eligible
to participate in the plan upon their hire date. There is no service
requirement. The Company does not currently make a matching
contribution.
9. Supplemental
Disclosure of Cash Flow Information
|
|
|
2006 |
|
2005 |
|
|
Cash
paid for interest during the year |
|
$ |
105,154 |
|
$ |
7,940 |
|
As of
December 31, 2006 and 2005, the Company had accrued distributions payable
of $968,300 and $3,648,150, respectively. These amounts have been treated as
non-cash items on the respective statements of cash flows.
10. Concentrations
Concentration
by revenue source - In
2006, the two largest clients accounted for approximately 43% and 14% of the
Company’s revenues. In 2005, the largest client accounted for approximately 70%
of the Company’s revenues.
Concentration
by financial institution - At
various times throughout the year, the Company maintains cash and cash
equivalents in accounts with various financial institutions in excess of the
amount insured by the Federal Deposit Insurance Corporation. The Company’s
management regularly monitors the financial stability of these financial
institutions and does not believe there is a significant credit risk associated
with deposits in excess of federally insured amounts.
Concentration
by financial instrument -
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist primarily of trade receivables. The Company monitors its
exposure to credit losses and maintains an allowance for doubtful
accounts.
As of
December 31, 2006, three clients accounted for approximately 22%, 17%, and
10% of trade receivables. As of December 31, 2005, three clients accounted
for approximately 29%, 25%, and 13% of trade receivables.
11. Commitments
and Contingencies
Lease
Commitments - The
Company leases office space under three separate non-cancelable operating leases
with expiration dates extending until 2012. Additionally, the Company leases
office space at a fourth location on a month to month basis, and rents certain
office equipment under cancelable leases. Rent expense for the years ended
December 31, 2006 and 2005 was $291,395 and $203,483,
respectively.
CALLAWAY
PARTNERS, LLC
NOTES
TO FINANCIAL STATEMENTS
The
minimum annual future rental payments under the non-cancelable leases are as
follows:
Year
ending December 31, |
|
|
|
2007 |
|
$ |
314,601 |
|
|
2008 |
|
|
342,919 |
|
|
2009 |
|
|
322,195 |
|
|
2010 |
|
|
275,997 |
|
|
2011 |
|
|
273,337 |
|
|
Thereafter |
|
|
185,832 |
|
|
Total |
|
$ |
1,714,881 |
|
Legal - The
Company is a defendant in a class action lawsuit filed in August 2006 by former
employees seeking unspecified damages alleging they were not paid correctly for
overtime bonus hours worked as provided for by the Fair Labor Standards Act of
1938. The Company denies these claims, and intends to vigorously defend its
position. The Company has provided an accrual of $650,000 during the year ended
December 31, 2006 for the estimated legal fees and settlement costs of this
suit.
Purchase
Obligations - In May
2005, the members entered into the Second Amended and Restated Operating
Agreement (the “Agreement”). In the event of death, termination without cause or
disability of a member, the Agreement obligates the Company to purchase the
affected member’s membership interest in the Company.
Upon the
death of a member (the “Decedent”), the Company is obligated to purchase the
decedent’s membership interest at a price equal to seventy-five percent (75%) of
the fair market value of the decedent’s interest in the Company (the “Decedent
Purchase Price”). The Decedent Purchase Price shall be payable in cash or check
on the closing date, as defined, unless the Company elects prior to or on the
closing date to purchase the decedent’s interest in installments as provided in
the Agreement. The Company has purchased term life insurance policies on three
of its members to cover a portion of its purchase obligation in the event of the
death of a member.
In the
event a member’s employment or consulting arrangement with the Company is
terminated by the Company without cause or a member suffers a disability, the
member may require the Company to purchase its membership interest at a price
equal to one hundred percent (100%) or seventy-five percent (75%) of the fair
market value of the member’s interest in the Company, respectively. The Company
may elect to purchase the member’s interest in installments as outlined in the
Agreement.
In the
event a member is terminated for cause, the Company may choose to purchase and
the member shall sell such member’s membership interest at a price equal to
twenty-five percent (25%) of the fair market value of the member’s interest in
the Company.
12. Related Party
Transactions
The
owners of the Company also have key roles in the operations of the Company.
During 2006 and 2005, the owners were paid certain salaries, commissions,
consulting fees, and discretionary bonuses in addition to the distributions
reflected in the Statement of Members’ Equity.
CALLAWAY
PARTNERS, LLC
NOTES
TO FINANCIAL STATEMENTS
13. Subsequent
Event
On
July 29, 2007, Huron Consulting Group Inc. (“Huron”) acquired the Company
for $60,000,000 in cash paid at closing, subject to standard post-closing
adjustments. Additional purchase consideration in cash may be payable by Huron
if specific performance targets are met over the five-year period beginning on
January 1, 2008 and ending on December 31, 2012.