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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)(Mark one)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
[FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBERFor the fiscal year ended December 31, 1996
OR2003 or
[ ] TRANSITION]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TOFor the Transition Period from to .
COMMISSION FILE NUMBER 0-25890
INTERNATIONAL ALLIANCECENTURY BUSINESS SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2769024
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10055 SWEET VALLEY DRIVE
VALLEY VIEW, OHIO 44125
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
DELAWARE 22-2769024
- -------------------------------------------- --------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
6050 OAK TREE BOULEVARD, SOUTH
SUITE 500
CLEVELAND, OHIO 44131
- -------------------------------------------- --------------------------------------------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODECODE: (216) 447-9000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g)12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant iswas approximately $150,000,912$306.4 million as of March 27, 1997.June 30, 2003. The number
of outstanding shares of the Registrant's common stock is 34,724,42885,723,711 shares as
of March 25 1997.February 27, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of the Registrant's Definitive Proxy Statement relative to
the 19972004 Annual Meeting of Stockholders.
Part IV Portions of previously filed reports and registration
statements.
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INTERNATIONAL ALLIANCECENTURY BUSINESS SERVICES, INC.
-------------------------------------
ANNUAL REPORT ON FORM 10-K
--------------------------
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
------------------------------------2003
TABLE OF CONTENTS
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PART I PagePAGE
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PART I
Items 1 and 2. Business and Properties.......................................................... 2Properties..................................... 3
Item 3. Legal Proceedings................................................................ 15Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.............................. 17Holders......... 14
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters............. 19Matters..................................................... 15
Item 6. Selected Consolidated and Combined Historical Financial Data..................... 20Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 21Operations................................... 17
Item 7A. Quantitative and Qualitative Information About Market
Risk........................................................ 29
Item 8. Financial Statements and Supplementary Data
27
Item 9. Changes in and Disagreements with Accountants on
AccountingAccounting.................................................. 30
Item 9. and Financial Disclosure....................................................... 27Disclosure.................................... 30
Item 9A. Controls and Procedures..................................... 30
PART III
Item 10. Directors and Executive Officers of the Registrant............................... 27Registrant.......... 32
Item 11. Executive Compensation........................................................... 27Compensation...................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management................... 27Management and Related Stockholder Matters.................. 36
Item 13. Certain Relationships and Related Transactions................................... 27Transactions.............. 36
Item 14. Principal Accountant Fees and Services...................... 37
PART IV
Item 14.15. Exhibits, Financial Statement Schedules and Reports on Form
8-K................................................. 278-K......................................................... 37
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THE FOLLOWING TEXT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES
THERETO) APPEARING ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K ("ANNUAL
REPORT").10-K. UNLESS THE
CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS ANNUAL REPORT TO "IASI""WE", "OUR",
"CBIZ", OR THE "COMPANY" SHALL MEAN INTERNATIONAL ALLIANCECENTURY BUSINESS SERVICES, INC., A DELAWARE
CORPORATION, AND ITS OPERATING SUBSIDIARIES.
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
OVERVIEW
IASICBIZ is a diversified services company which, acting through its
subsidiaries, provides specialty insurance services,professional outsourced business outsourcing
services and environmental services. In October 1996, IASI completed two
acquisitions (the "Merger Transactions") pursuant to which it acquired, through
a reverse merger, Century Surety Company ("CSC") and its subsidiaries (together
with CSC, the "CSC Group"), which includes three insurance companies, and
Commercial Surety Agency, Inc. d/b/a Century Surety Underwriters ("CSU"), an
insurance agency that markets surety bonds. Through its insurance subsidiaries,
IASI provides specialty insurance and bonding services to smallbusinesses
of various sizes, as well as individuals, governmental entities and medium sized
commercialnot-
for-profit enterprises throughout the United States.
In December 1996, IASI acquired SMR & Co. Business Services ("SMR").
Through SMR, IASIStates and Toronto, Canada. CBIZ
delivers integrated services through the following three practice groups:
- Accounting, Tax and Advisory;
- Benefits and Insurance; and
- National Practices
CBIZ provides services through 62 reporting business units with more than
160 offices located in 34 states, Washington D.C., and Toronto, Canada. Included
in this total, and managed within the National Practices group, is the Company's
medical practice management business unit which has 73 offices.
CBIZ's goal is to be the leading provider of outsourced business services
within its target markets by providing clients with a widebroad range of
high-quality products and services; expanding locally through internal growth;
and through cross-serving. CBIZ built its professional outsourced business
outsourcingthrough acquiring accounting, benefits, valuation and other service firms
throughout the United States, and has been established as a national provider
over the last several years. During 2003, CBIZ acquired four businesses that
enhance our benefits and insurance and accounting and tax services including information technology consulting, tax return preparation and
compliance, tax planning, business valuation, human resource management,
succession and estate planning, personal financial planning and employee benefit
program design and administrationin our
existing markets. Our intention is to individuals and small and medium sized
commercial enterprises primarily in Ohio.
In February 1997, IASI signed a non-binding letter of intent and
confidentiality agreement (collectively, the "Letter of Intent") to sell IASI's
environmental services operations. The Letter of Intent also contemplates the
formation of a strategic alliance between IASI and the purchaser whereby IASI
will continue to have access to IASI's environmental resources for the benefit
of its insurance customers after the sale. IASI anticipates that the sale will
be completed by mid-1997. Consummation of the transaction remains subject to the
purchaser's due diligence, the negotiation and execution of definitive
documentation and the receipt of necessary governmental and third party
approvals and consents. Accordingly, there can be no assurance that the
transaction will be consummated. See "- Environmental Services - General."
IASI's strategy is to aggressively grow as a diversifiedselectively acquire businesses
with complementary services company by expanding its recently acquired specialty insurance and business
outsourcing services operations through internal growth and additional
acquisitions in such industries. See "- Business Strategy."
IASI was formedtarget markets.
Formed as a Delaware corporation in 1987 under the name Stout Environmental, Inc. ("Stout"). In 1992, IASIAssociates,
CBIZ was acquired by Republic Industries, Inc. (formerly known as Republic Waste Industries, Inc., "RII").in 1992. In April 1995, RII effected a spin-off ofRepublic
spun off its hazardous waste operations, through a
distribution of the common stock, $.01 par value per share ("Common Stock"), of
IASIincluding CBIZ's predecessor company,
to the stockholders of record of RII (the "Spin-off"). In connection with
the Merger Transactions, in October 1996, IASI changed its name to International
Alliance Services, Inc. fromstockholders. Re-named Republic Environmental Systems, Inc. IASI's Common
Stock trades, CBIZ's common
stock began trading on the Nasdaq National Market ("Nasdaq") under the symbol "RESI." On
June 24, 1996, we changed our trading symbol "IASI.to "IASI" in anticipation of our
merger with Century Surety Company and Commercial Surety Agency, Inc., which
resulted in a change of our name to "International Alliance Services, Inc." In June 1996, IASI declaredThis
name change signaled our move away from the hazardous waste business. CBIZ
divested all remaining hazardous waste operations in 1997. On December 23, 1997,
CBIZ changed its name to Century Business Services, Inc. and distributed a two-for-one stock split inbegan trading under
the form of a 100% stock dividend ("Stock Split"). All the share numbers and per
share amounts set forth herein reflect the Stock Split.
The principal executive office of IASI is located at 10055 Sweet Valley
Drive, Valley View, Ohio, 44125 and its telephone number issymbol "CBIZ."
CBIZ'S PRINCIPAL EXECUTIVE OFFICE IS LOCATED AT 6050 OAK TREE BOULEVARD, SOUTH,
SUITE 500, CLEVELAND, OHIO 44131 AND OUR TELEPHONE NUMBER IS (216) 447-9000.
BUSINESS STRATEGY
IASI'sCBIZ's business strategy is to expand its current operationsgrow in the specialtyprofessional outsourced business
services industry by:
- offering a wide array of infrastructure support services;
- cross-serving these services to our existing customer base;
- attracting new customers with our diverse business services offerings;
- leveraging our practice area expertise across all our businesses; and
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- developing our core service offerings in target markets through selective
acquisitions.
Providing a range of outsourced business services to a client results in
advantages for both the client and for CBIZ. Working with one provider for
several tasks saves the client the time of having to coordinate with multiple
vendors. For example, the employee data used to process payroll can also be used
by a CBIZ health and welfare insurance agent and benefits consultant to provide
appropriate benefits package to a client's employee base. In addition, the
relationship our accounting and tax advisors have with their clients allows us
to identify financial planning, wealth management, and other business
outsourcingopportunities. The ability to combine several services areas, and discontinue itsoffer them through
one trusted provider distinguishes CBIZ from other outsourced service providers.
CBIZ is looking to strengthen our operations in the environmental services area. IASI plans to implement its
business strategy through internal growth and customer service
capabilities by acquiring and integrating
existing businesses that provide specialty insurance services or business
outsourcing services.
IASI generally targetsmaking selective acquisitions in markets where it will be, orwe currently
operate and where the prospects are favorable to increase itsour market share toand
become a significant provider of a comprehensive range of specialty insurance andoutsourced business
outsourcing services. IASI'sCBIZ's strategy is to acquire companies that (i) have
strong and energetic entrepreneurial leadership; (ii) have solid historic and
expected future internal growth; (iii) can add to the level and breadth of
services
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offered by IASI thereby enhancing IASI's competitive advantage over other
specialty insurance and business outsourcing services providers; (iv) have a
strong income stream; and (v)generally:
- have a strong potential for cross-sellingcross-serving among IASI's subsidiaries.CBIZ's subsidiaries;
- can integrate quickly with existing CBIZ operations;
- have strong and energetic leadership;
- are accretive to earnings; and
- help enhance the core CBIZ service offering in a geographical market.
In accordance with our strategy to deliver services to clients locally, and
to promote cross-serving between our various service groups, CBIZ consolidates
office locations wherever practical. Since 2000, CBIZ consolidated offices in
Atlanta, Boca Raton, Chicago, Cleveland, Columbus , Kansas City, Los Angeles,
Orlando, Minneapolis, Philadelphia, and St. Louis. CBIZ will continue to combine
offices, with consolidations planned for Dallas, Denver, Salt Lake City and San
Jose in 2004. Other potential consolidations could occur later. As opportunities are identified, within or outsidefurther
consolidations occur, the Company may incur additional costs associated with
these consolidations.
OUTSOURCED BUSINESS SERVICES
The following is a description of the outsourced business services
currently offered by CBIZ.
Accounting, Tax and Advisory. The business units that comprise CBIZ's
Accounting, Tax and Advisory ("ATA") group offer services in the following
areas: cash flow management; strategic planning; consulting; record-keeping and
financial statement preparation; federal, state and local tax return
preparation; tax planning based on financial and investment alternatives; tax
structuring of business transactions such criteria, IASI may acquire specialty insuranceas mergers and business outsourcing
operations throughout the United States.
IASI usesacquisitions; quarterly
and year-end payroll tax reporting; corporate, partnership and fiduciary tax
planning and return preparation; outsourced chief financial officer services and
other financial staffing services; financial investment analysis; succession,
retirement, and estate planning; profitability, operational and efficiency
enhancement consulting to a number of specialized industries, internal acquisition teamsaudit
services and Sarbanes-Oxley consulting and compliance services.
Restrictions imposed by independence requirements and conflict of interest
rules preclude CBIZ from rendering audit and attest services (other than
internal audit services). As such, CBIZ and its contactssubsidiaries maintain
joint-referral relationships and administrative service agreements (ASAs) with
independent licensed Certified Public Accounting (CPA) firms under which audit
and attest services may be provided to CBIZ's clients.
Under these ASAs, CBIZ provides a range of services to the CPA firms,
including (but not limited to): administrative functions such as office,
bookkeeping, and accounting; preparing marketing and promotion materials;
providing office space, computer equipment, and systems support; and leasing
administrative and professional staff. Services are performed in exchange for a
fee, which is a function of revenue generated by the CPA firms. Fees earned by
CBIZ under the ASAs are recorded as revenue in the specialty
insuranceaccompanying consolidated
statements of operations. In the event that accounts receivable and business outsourcing services industriesunbilled
work in process become uncollectible by the CPA firms, the service fee due to
identify, evaluate and
acquire businesses in attractive markets. Acquisition candidates are evaluated
by IASI's internal acquisition teams basedCBIZ is reduced on a comprehensive processpro-rata basis.
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The CPA firms with which includes operational,CBIZ maintains service agreements operate as
limited liability corporations, limited liability partnerships or professional
corporations. The firms are separate legal entities with separate governing
bodies and financial due diligence reviews.
Although management believesofficers. Neither the existence of the ASAs nor the providing of
services thereunder is intended to constitute control of the CPA firms by CBIZ.
CBIZ and the CPA firms maintain their own respective liability and risk of loss
in connection with performance of its respective services.
Attest services can not be performed by any individual or entity which is
not licensed to do so. CBIZ can not perform audits or reviews, does not contract
to perform them and does not provide audit or review reports. Given this legal
prohibition and course of conduct, CBIZ does not believe it is likely that IASI currentlywe
would bear the risk of litigious losses related to attest services provided by
the CPA firms.
At December 31, 2003, CBIZ maintained administrative service agreements
with 14 CPA firms, which has sufficient
resources, including cash on hand, cash flowdecreased from operating activities, credit
facilities41 during 2002. Most of the members
and/or shareholders of the CPA firms are also CBIZ employees, and CBIZ renders
services to the CPA firms as an independent contractor. The number of firms with
which CBIZ maintains administrative service agreements decreased when a majority
of the partners of CPA firms with whom we previously maintained ASAs joined
Mayer Hoffman McCann, P.C. (MHM P.C.) an independent national CPA firm
headquartered in Kansas City, Kansas. MHM P.C. has 156 shareholders, a vast
majority of which are also employees of CBIZ. MHM maintains a five member Board
of Directors, one of which is the National Director of MHM and not an employee
of CBIZ. There are no board members of MHM P.C. who hold senior officer
positions at CBIZ.
CBIZ's association with MHM P.C. offers clients access to financial marketsthe multi-state
resources and expertise of a national CPA firm. The advantage to fund currentCBIZ of these
consolidations is a reduction in the number of different firms with which we
maintain administrative service agreements.
Although the service agreements do not constitute control, CBIZ is one of
the beneficiaries of the agreements and planned
operations,may bear certain economic risks. As
such, the CPA firms with which CBIZ maintains administrative service any outstanding debt and make certain acquisitions, there
can be no assurance that additional financing will be available on a timely
basis, if at all, or that it will be available on terms acceptableagreements
may qualify as variable interest entities under FASB Interpretation No. 46 (FIN
46), "Consolidation of Variable Interest Entities". The impact to IASI. See
"Management'sCBIZ of this
accounting pronouncement is discussed in the "New Accounting Pronouncements"
section of the accompanying Management's Discussion and Analysis of Financial
Condition and Results of Operations - LiquidityOperations.
CBIZ's ATA practice is divided into four regions, representing the East,
Midwest, Great Lakes, and Capital Resources."
ACQUISITIONS
RECENT ACQUISITIONS
The following are acquisitions completed since the consummationWest regions of the
Merger Transactions in October 1996:
In November 1996, IASI acquired Environmental and Commercial Insurance
Agency, Inc. ("ECI"), a small, privately-held insurance agency, for $1.0 million
in cash and 192,500 shares of Common Stock. ECI markets, through over 100
independent agents, property and casualty insurance surety bonds to
environmental remediation contractors, landfill operators, consultants, and
other small and medium sized companies specializing in environmental businesses
throughout the United States. In December 1996, IASI completed the acquisitionEach of these
regions is headed by a designated regional director, all of whom report to the
outstanding sharesSenior Vice President, Accounting, Tax and Advisory Services.
The Accounting, Tax and Advisory group contributed approximately $203.4
million of SMRrevenue, representing approximately 39% of CBIZ's annual revenue in
exchange for 600,000 shares2003.
Benefits and Insurance Services. The business units that comprise CBIZ's
Benefits and Insurance group are organized by the following two groups: Retail
and National Services. The Retail group is divided into three geographical
regions representing the East, Central and West regions of Common Stock and
warrants to purchase an additional 900,000 shares of Common Stock at an exercise
price of $10.375 per share.
In January 1997, IASI acquired certain of the assets and business of
Midwest Indemnity Corporation ("Midwest"), in exchange for $3.3 million in cash,
407,256 shares of Common Stock and $1.8 million in non-interest bearing notes
payable in installments through December 31, 1998. Midwest markets environmental
and surety bond products throughout the United States through a system of
approximately 100 independent agents and subagents.
In February 1997, IASI acquired Midland Consultants, Inc., a
full-service specialized employment firm, in exchange for $208,000 in cash,
87,500 shares of Common Stock and warrants to purchase an additional 20,000
shares of Common Stock at an exercise price of $11.625 per share.
In March 1997, IASI acquired M&N Risk Management, Inc., M&N
Enterprises, Inc. and Millisor Firmco, Inc. (collectively, the "M&N Companies")
for $1.0 million in cash, 384,600 shares of Common Stock and warrants to
purchase an additional 900,000 shares of Common Stock at an exercise price of
$13.00 per share. The M&N Companies provide third party workers' compensation
administration services.
PENDING ACQUISITIONS
In March 1997, IASI announced the contemplated acquisition of all of
the outstanding capital stock of The Benefits Group Agency, Inc, a full-service
corporate benefits administration company. ("The Benefits Group"), for $2.5
million in cash, 395,000 shares of Common Stock and warrants to purchase an
additional 500,000 shares of Common Stock at an exercise price of $12.50 per
share.
SPECIALTY INSURANCE SERVICES
GENERAL
Through its insurance subsidiaries, IASI provides specialty insurance
and bonding services to small and medium sized commercial enterprises throughout the United States.
The following is a descriptionEach of the specialty insurance and
bonding services currently offered by IASI.
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OPERATIONS
The products provided by IASI's insurance subsidiaries can be divided
into two categories: commercial lines, which constitutes approximately 85% of
IASI's specialty insurance business, and surety bonds, which constitutes the
other 15% of IASI's specialty insurance business. In addition, IASI employs
reinsurance to limit its exposure on policies and bonds that it has written.
COMMERCIAL LINES. IASI's commercial linesretail operations consist of
approximately 40 different programs for a wide variety of specialty risk groups.
Largest among these are general liability insurance and related coverages for
small construction contractors; restaurants, bars, and taverns; small commercial
and retail establishments; sun tanning salons; and environmental contractors and
professionals.
Insurance coverages offered to environmental contractors and
professionals, include (i) property and general liability insurance for
remediation action contractors engaged in a full hazard range of clean-ups;
asbestos abatement contractors; underground storage tank removal and remediation
contractors; and solid waste landfill operators; and (ii) errors and omissions
insurance for environmental consultants. In addition IASI conducts a
comprehensive inspection of environmental risks which management believes
enhances its position as a provider of environmental insurance.
IASI's commercial lines business is produced by a network of
approximately 72 agents (with 104 offices) and 28 brokers (with 28 offices).
Subject to strict and detailed written underwriting guidelines regarding pricing
and coverage limitations published by IASI, agents have limited authority to
bind coverage. For casualty coverage, agents may bind and write up to $1.0
million combined single limit of liability for risks other than those on the
list of prohibited classes or on the list for referral to IASI. Policies that
are bound by agents are immediately forwarded to IASI for review and inspection
and IASI reserves the right to make the final underwriting decision based on
IASI's acceptance or rejection of individual risks. Risks outside the written
guidelines must be submitted to IASI for specific approval for underwriting.
Brokers have no underwriting authority and must submit all risks to IASI for
underwriting, quoting, binding and policy insurance.
IASI checks premium ratings on a selective basis to verify that program
rules and rates are being followed. In addition, underwriters perform monthly
reviews of files for renewal risks. Files are reviewed on a selective basis by
policy types, particular risk classes, or individual general agents as loss
experience or changing underwriting practices dictate. In addition to other
underwriting quality control measures, a continuous audit process for each
general agent is maintained. At least once a year, a visit to each agent's
office is arranged to review all of the foregoing areas, as well as premium
production, losses and loss ratio. Management also performs internal
underwriting audits of all underwriters on a regular basis to maintain control
of the underwriting quality and pricing of IASI.
All claims against commercial policies are managed by IASI's claim
departments. Outside adjusters and attorneys are engaged, as necessary, to
supplement IASI's in-house staff and to represent IASI in litigation over
disputed claims. Claims guidelines are in place on all programs. State
regulations and data on unfair claims practices are also provided to the staff
members as necessary and appropriate. IASI's philosophy is to pay valid claims
as expeditiously as possible but to resist firmly what management believes are
unjust and fraudulent claims. In an effort to provide adequate resources to the
claims staff, CSC became a member of the Property Loss Research Bureau and the
Liability Insurance Research Bureau in 1995. IASI also submits claim data to the
index bureaus of the American Services Insurance Group and the Property
Insurance Loss Register.
It is the responsibility of the claims manager to appoint outside
adjusting firms to work on behalf of IASI. These firms, however, are given no
authority to settle any claims without IASI's prior agreement. The internal
adjuster assigned to each individual claim determines, after coverage is
analyzed, whether the claim can be handled in house or should be assigned to an
outside firm.
SURETY BONDING. IASI's surety bonding operations consist of two major
programs: contract surety bonds for smaller construction contractors (with work
programs typically ranging from $250,000 to $10.0 million per year) and bonds
for the solid waste industry, including waste haulers and landfill operators.
Contract surety consists of bonds that government authorities and some
private entities require construction contractors to post to provide assurance
that contract work will be performed timely, to specification, on budget, and
without encumbrance from suppliers or subcontractors who may have lien rights
for non-payment. Contract surety business is underwritten by IASI subject to
authority defined in agency agreements with the insurance companies. The
business is produced by approximately 100 appointed agents, who have limited
authority to bind the companies in accordance with specific guidelines
established by IASI. Because the contract surety business is specialized in
smaller, newer and more difficult accounts, underwriters take collateral,
require contract funds control, and take other risk control measures considered
extraordinary by standard market sureties. In virtually all cases, bond
principals indemnify the surety against loss with their personal as well as
corporate assets.
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Once bonds are issued, IASI continues to review all projects to
determine job progress, bill payment, and other factors. IASI maintains
real-time records of all bonded exposures, amended as appropriate, in an effort
to obtain the most current possible assessment of exposures for each account and
to avoid excessive exposure on any one account. IASI also strives through its
review procedures to provide the companies with the earliest possible notice of
potential difficulty so that claim resources can be brought to bear at the
earliest possible stage in an effort to mitigate losses.
While claims against surety bonds are managed by IASI, outside counsel
are engaged to handle surety defense litigation. In addition, IASI has or has
access to completion capability for finishing bonded work which bonded
principals are unable to prosecute, and pursues recoveries on behalf of the
companies from principals who have defaulted on bond obligations. Such recovery
efforts range from execution on collateral posted by bonded principals to
indemnity litigation to recover surety losses from indemnitors' business and
personal assets. Finally, IASI manages funds control escrow accounts as
specified by the underwriters for particular accounts.
IASI's solid waste bond program, which is national in scope, is
primarily written directly by IASI, and serves bond accounts that are generally
much larger than those handled by IASI's contract surety program. The primary
focus of this program is bonds for landfill closure and post-closure care
required by states in accordance with Subtitle D of the Resource Conservation
and Recovery Act of 1976, as amended ("RCRA"). These bonds are designed to
assure that non-hazardous solid waste landfills will be closed when their
useable airspace is exhausted in accordance with Subtitle D closure requirements
(or such higher standards as individual states may impose) and that the sites
will be maintained in accordance with Subtitle D standards for a period of at
least 30 years after closure. Management believes that this program is one of
only a few landfill bond programs in the United States, although bank letters of
credit and other devices may be used to satisfy Subtitle D financial assurance
requirements. Full implementation of RCRA financial assurance requirements by
the United States Environmental Protection Agency (the "EPA") is not currently
scheduled until after April 1997, although several states have already proceeded
with such implementation, including, most significantly for IASI, Ohio, Kentucky
and Pennsylvania. See "- Regulation." IASI currently writes landfill bonds for
some of the larger solid waste disposal firms in the country. As a companion to
the landfill closure bonds, IASI also writes bonds required of waste haulers to
assure the observance of terms of their contracts with the local communities
from which they collect waste.
To stay abreast of technical and market developments in the surety
industry, certain of IASI's subsidiaries are members of the Surety Association
of America, the National Association of Independent Sureties, National
Association of Surety Bond Producers, the Surety Federation of Ohio, and The
American Surety Association, on which Board of Directors CSC occupies a
position.
REINSURANCE. IASI employs reinsurance to limit its exposure on the
policies and bonds it has written. IASI utilizes several different reinsurance
programs to cover its exposure, including "treaties" that cover all business in
a defined class and "facultative" reinsurance that covers individual risks. IASI
retains from $50,000 to $200,000 of each commercial line risk, depending on the
program. Surety retentions may go as high as $1.0 million or more, but typically
are less than $250,000.
Numerous domestic and international reinsurers support these various
programs in different combinations. Generally, IASI's reinsurers are rated A- or
better by A.M. Best, a leading rating agency of insurance companies and
reinsurers, and demonstrate capital and surplus in excess of $80.0 million
(collectively in excess of $10.0 billion). Cessions are diversified so that
every reinsurance treaty (i.e., excluding facultative arrangements) is supported
by more than one reinsurer and no reinsurer is participating in all of IASI's
reinsurance programs.
MARKETING
IASI's insurance and bonding business is focused on niche insurance and
surety coverages known in the insurance business as "non-standard" or specialty
coverages. These terms refer to risks regarded as higher than standard or normal
risks and to risk groups regarded as too small or too specialized to permit
profitable underwriting by larger, "standard market" insurance companies. In
general, non-standard insurance and bonds are more expensive, and coverage more
limited, because of perceived additional risk associated with this type of
business. IASI attempts to identify and exploit such niches in the non-standard
insurance market where management believes the actual risk is significantly less
than the perceived risk at which the coverage is defined and priced, or where
IASI, because of its smaller size and lower overhead, is able to underwrite
coverages more economically than larger carriers.
Many non-standard insurance products can be marketed on an excess and
surplus lines basis, which means that the carrier is not fully admitted in a
given state but instead satisfies a less restrictive threshold of regulatory
scrutiny, known as "eligibility," to write excess and surplus lines ("E&S"). E&S
eligibility offers much more flexibility than admitted carriers enjoy. For
example, E&S eligibility offers certain marketing advantages, principally,
exemption from rate and form filing requirements that apply to admitted
carriers, which permits E&S carriers to adjust prices and coverages, or to cease
writing altogether. Accordingly, the majority of the non-surety business of IASI
is written on an
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E&S basis. Through certain of its subsidiaries, IASI is admitted in 34 states,
but is eligible to write on an E&S basis in 39 other states plus the District of
Columbia, the most significant of such states being California, Texas and
Florida.
Certain commercial lines products, however, are virtually impossible to
write on an E&S basis because of competitive or regulatory requirements to use
admitted carriers. In order to market these programs, IASI uses its admitted
subsidiaries, thereby reaching a market of 30 states. Management believes that
this strategy of employing both admitted and non-admitted E&S carriers helps to
maximize IASI's flexibility within the insurance regulatory environment in an
effort to marketprovides a broad range of products on a profitable basis. IASI also
employs reinsurance arrangements to market certain products in all 50 states.
COMPETITION
Bothservices within their
geographic area. The services include: employee benefits, insurance brokerage,
consulting, and administration, including the commercial linesdesign, implementation and
the surety industries have been highly
competitive in recent years, resulting in the consolidationadministration of some of the
industries' largest companies. Competition is particularly acute for smaller,
specialty carriers like IASI because the market niches exploited by IASI are
small and can be penetrated by a large carrier that elects to cut prices or
expand coverage. IASI has endured this risk historically by maintaining a high
level of development of new products,qualified plans, such as its environmental coverage and
landfill bonds eschewed by most major carriers. Nevertheless, there can be no
assurance that future development efforts will succeed or that product erosion
from intensifying competition will not outpace development efforts.
CUSTOMERS
IASI provides specialty insurance services to approximately 6,000
clients through a network of nearly 200 agents. IASI attempts to maintain
diversity within its client base to lower its exposure to downturns or
volatility in any particular industry and help insulate IASI to some extent from
general economic cyclicality. All prospective customers are evaluated
individually on the basis of insurability, financial stability and operating
history. No customer individually comprises more than 3.5% of the total
consolidated revenue of IASI.
REGULATION
FEDERAL REGULATION. IASI's specialty insurance operations are
vulnerable to both judicial and legislative law changes. Judicial expansion of
terms of coverage can increase risk coverage beyond levels contemplated in the
underwriting and pricing process. According to industry estimates reported by
A.M. Best, judicial imposition of pollution liability on insurers before the era
of specific pollution exclusions in insurance policies created an estimated $25
billion liability for U.S. insurers and reinsurers that such companies did not
know they were underwriting and for which they received no premium.
At the same time, coverages that are established by statute may be
adversely affected by legislative or administrative changes of law. Most surety
bonds exist because they are required by government agencies. When governments
change the threshold for requiring surety, the market for surety bonds is
directly affected. The repeated postponement by the EPA of deadlines for
compliance with the financial assurance portions of RCRA Subtitle D has
significantly slowed growth of IASI's landfill closure bond program, which was
begun in March 1994 because of the anticipated deadline of April 1994 for
universal compliance. Such compliance currently is not anticipated to be
universally mandated until after April 1997.
STATE REGULATION. The companies of the CSC Group are subject to
regulation and supervision by state insurance regulatory agencies, applicable
generally to each insurance company in its state of incorporation. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Sources of Cash." These regulatory bodies have broad administrative
powers relating to (i) standards of solvency, which must be met on a continuing
basis; (ii) granting and revoking of licenses; (iii) licensing of agents; (iv)
approval of policy forms; (v) maintenance of adequate reserves; (vi) form and
content of financial statements; (vii) types of investments permitted; (viii)
issuance and sale of stock; and (ix) other matters pertaining to insurance.
Each of the CSC Group companies are required to file detailed annual
statements with the respective state regulatory bodies and are subject to
periodic examination by the regulators. The most recent regulatory examination
for CSC was made as of December 31, 1993. The most recent regulatory
examinations of each of Evergreen National Indemnity Company ("Evergreen") and
Continental Heritage Insurance Company ("Continental Heritage"), each
subsidiaries of IASI, were made December 31, 1993 and December 31, 1994.
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BUSINESS OUTSOURCING SERVICES
GENERAL
Through its subsidiary, SMR, IASI provides a wide range of business
outsourcing services. It is IASI's goal to expand the business outsourcing
services offered by IASI into a comprehensive personnel, consulting and
management system that enables IASI to assist its clients with substantially all
business outsourcing matters. The following is a description of the business
outsourcing services currently offered by IASI.
OPERATIONS
IASI provides a comprehensive range of business outsourcing services,
including information technology consulting, tax return preparation and
compliance, tax planning, business valuation, human resource management,
succession and estate planning, personal financial planning and employeeprofit-sharing plans, defined benefit
program design and administration services to individuals and small and medium
sized commercial enterprises engaged in a wide variety of businesses. IASI
contracts with its clients based upon the services they require.
INFORMATION TECHNOLOGY CONSULTING. IASI provides a wide range of
information technology services. Such services include developing strategic
technology plans, determining emerging technology capabilities (such as imaging
and the Internet), reviewing operational use of software and hardware, defining
and implementing software and hardware systems to address day-to-day business
challenges and designing and implementing network solutions for clients with
multiple sites.
TAX RETURN PREPARATION AND COMPLIANCE; TAX PLANNING. IASI's tax return
preparation and compliance services include the preparation and review of
federal and state tax returns on behalf of IASI clients. In addition, IASI
offers tax planning services to businesses with the goal of reducing the
client's tax liabilities. Such services include assistance with the choice of
business entity, development of executive compensation
plans, and employee
benefitmoney purchase plans; actuarial services; health and retirement policies, and evaluation of investments.
BUSINESS VALUATION. IASI's business valuation services are designed to
assist a client in determining the precise value of a business or professional
practice, either to avoid tax and regulatory problems or simply to facilitate
organizational change. Such services are required in a variety of contexts,welfare benefits
consulting, including litigation, sales, employee stock ownership plans, corporate
recapitalization, succession plans or acquisitions.
Business valuation involves a formalized system of gathering
information to gain an in-depth understanding of a client's business and the
pertinent factors affecting its value. IASI employs a team of Certified
Valuation Analysts to perform such analyses.
HUMAN RESOURCE MANAGEMENT. As part of its human resource management
services, IASI performs organizational development audits and analyses and
organizational structure analyses to provide its clients with solutions to
strengthen both the financial and human resource side of the clients'
businesses. IASI then works with its clients to implement such solutions.
Included in the services provided by IASI is the development of
detailed personnel guides, which set forth a systematic approach to
administering personnel policies and practices including recruiting, discipline
and termination procedures. In addition, IASI will review and revise, if
necessary, personnel policies and employee handbooks or will create customized
handbooks for its clients.
IASI's human resource management services include the recruiting of new
employees. IASI will also perform executive compensation analyses and provide
management with detailed information regarding competitive salaries for a wide
variety of positions throughout the United States.
SUCCESSION AND ESTATE PLANNING. IASI provides business and estate
planning services, as well as assists in the review of estate planning
documents. Such services include the review and analysis of the laws affecting,
and the development of customized plans regarding, the management and succession
of businesses and estates.
PERSONAL FINANCIAL PLANNING. IASI offers financial planning services to
individuals. IASI employs tax and financial planners who assess the individual's
cash flow and tax situation, financial requirements and financial objectives,
and work with the individual to define his or her short and long term financial
goals. IASI's financial planners then work with the individual to develop and
implement plans and methods for achieving the individual's goals.
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EMPLOYEE BENEFIT PROGRAM DESIGN AND ADMINISTRATION. IASI currently
offers small group health insurance plans; dental and vision care
plans and otherprograms; group life insurance coverages that its
clients may provide to their employees. Such insurance coverages include group
term life, universal life,programs; accidental death and dismemberment and
disability programs; COBRA administration and voluntary insurance programs;
health care and dependent care spending accounts; premium reimbursement plans;
communications services to educate employees about their benefit programs;
executive benefits consulting on non-qualified retirement plans; and business
continuation plans.
The National Services group is comprised of several specialty operations
that provide unique services on a much wider geographic scale. The services
include: specialty high-risk life insurance and clinical underwriting; employee
benefit worksite marketing; wholesale insurance brokerage services; bank-owned
executive life insurance; and wealth management services, including Registered
Investment Advisory Services, Investment Policy Statements; mutual fund
selections; and ongoing mutual fund monitoring.
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CBIZ's Benefits and Insurance group also provides an on-line service,
CBIZSolutions.com, that in concert with our payroll services, enables the
employees of a client to access information such as health and welfare benefits,
retirement fund balances and payroll information; update their personal
information; and access company documents like employee handbooks and policies.
CBIZ's Benefits and Insurance Services group operates under one Senior Vice
President, who oversees the three retail regions and their respective regional
directors, as well as each of the National Services companies.
The Benefits and Insurance group has grown in recent years due to
acquisitions, the expansion of our client base, and in part due to rising
healthcare costs which positively impacted the group benefits business and
increased demand for benefits consulting. In addition, the life insurance
product line, including executive compensation, bank compensation plans and
individual life sales, has also prospered due to continued favorable tax
treatment and estate planning concerns among the general public. CBIZ expects
growth to continue in the benefits and insurance group based on our intention to
aggressively pursue appropriate acquisitions, negotiate better rates with our
larger insurance carriers, increase our sales staff in select markets, and seek
cross-serving opportunities within CBIZ to garner new business and grow market
share and strengthen existing client relationships in order to promote
retention.
The Benefits and Insurance group contributed approximately $162.1 million
of revenue, or 32% of CBIZ's annual revenue, in 2003.
National Practices. The business units that comprise CBIZ's National
Practices group offer services in the following areas: payroll processing and
administration; valuations of commercial, tangible, and intangible assets and
financial securities; mergers and acquisitions and capital advisory services;
health care consulting; government relations; process improvement; and
technology consulting, including strategic technology planning, project
management, development, network design and implementation and software
selection and implementation. CBIZ's medical practice management business, CBIZ
Medical Management Professionals ("CBIZ MMP"), is managed within the National
Practices group and is described below.
The business units within the National Practices group report to CBIZ's
President and Chief Operating Officer.
The National Practices group contributed approximately $147.3 million of
revenue, or 29% of CBIZ's annual revenue, in 2003. Included in the results of
the National Practices group are those of CBIZ MMP, which contributed
approximately $75.8 million of revenue, or 15% of CBIZ's annual revenue, in
2003.
CBIZ MMP. CBIZ's wholly-owned subsidiary, CBIZ MMP, provides coding and
billing services as well as records compliance for hospital-based physicians in
anesthesia, radiology, and other areas. CBIZ MMP's billing services include:
billing and accounts receivable management; automated claims processing and
collection; comprehensive delinquent claims follow up; compliance programming to
meet government regulations; and comprehensive statistical and operational
reporting. The financial management services provided by CBIZ MMP include:
financial reporting systems, accounts payable, payroll, general ledger
processing; design of physician employment, stock and compensation arrangements;
and comprehensive budgeting, forecasting, and financial analysis. Additionally,
CBIZ MMP conducts analyses of managed care contracts with a focus on negotiation
strategies, pricing, cost containment and utilization tracking; reviews and
negotiates contracts with hospitals and other entities; identifies and
coordinates practice merger and integration opportunities; and coordinates
practice expansion efforts.
SALES AND MARKETING
CBIZ's key competitive factors in attracting and retaining clients are:
- long-term disability. IASI worksestablished relationships;
- industry and technical expertise of our professional staff;
- strong local and regional presence;
- the ability to match client requirements with available services;
- the ability to offer a number of services from one provider; and
6
- the ability to offer services at competitive rates.
CBIZ believes that by combining a local entrepreneurial marketing strategy
with the resources of a nationally branded company, we will be able to
significantly increase our market penetration. CBIZ expects that we can
cross-serve new products and services to existing clients who do not currently
utilize all of the services CBIZ offers.
CBIZ's primary marketing strategy is to deepen our relationships with
clients by providing them with additional CBIZ services that would be in the
best interest of their business. CBIZ refers to this strategy of penetrating our
existing client to determine its needs and, in accordance
with such needs, givesbase as cross-serving. Because cross-serving is most effective
when it makes outsourcing more convenient for the client, the opportunitylocation of the
service provider is a key consideration. This requires marketing functions to select from among several
differentbe
carried out on a geographic basis. Using major metropolitan areas as our
marketing focal points, CBIZ, under the direction of a Senior Vice President of
National Marketing, has developed marketing plans that consider the needs of all
CBIZ business units in a common local area. While each business unit continues
to be individually responsible for executing a marketing plan packages or, with the assistance of IASI, design a personalized
package of benefits for the client.
As part of its services, IASI administers the foregoing benefit plans and is responsibleaccountable
for negotiating the benefitsits own performance, marketing planning and costsresources are coordinated
nationally. These resources include print and radio advertisements, printed
material such as brochures and stationery, and CBIZ-branded merchandise for
trade shows and other client-oriented events. Additionally, CBIZ has developed a
centralized client database, "CNECT," which is now being utilized by a majority
of our locations. CNECT supports marketing and distribution efforts such plans. IASI
serves as
a liaison for the delivery of suchimproved client service, new business development and product development. New
clients are generated primarily through local networking, referrals from
existing clients, and targeted new business efforts.
CUSTOMERS
CBIZ provides professional outsourced business services to over 70,000
clients. CBIZ's clients prefer to focus their resources on operational
competencies while outsourcing non-core administrative functions to CBIZ.
Outsourcing administrative functions allows clients to enhance productivity,
reduce costs and improve service, quality and efficiency by focusing on their
core business. Depending on a client's size and capabilities, it may choose to
utilize some or many of CBIZ's broad array of services, which it typically
accesses initially through its client's employees
and monitors and reviews claims for loss control purposes.
In addition, IASI offers to its clients 401(k), profit-sharing, defined
benefit and money purchase plans, as well as administration and consulting
services associated with such plans. IASI also provides support services to
insurance companies who offer retirement plans.
IASI's QuickVal Daily Valuation System ("QuickVal") provides 24-hour
telephone access to qualified retirement plan administration information for
individual participants. QuickVal provides participants with their account
balances and enables participants to change investments at any time.
OTHER BUSINESS OUTSOURCING SERVICES. In addition to the business
outsourcing services described above, IASI also provides the following business
outsourcing services: merger and acquisition analysis; litigation support; cash
flow management; process improvement consulting, including quality management
and strategic services; business management consulting, including communications
consulting, market research and organizational development; and bookkeeping
services.
MARKETING AND CUSTOMERS
IASI's business outsourcing services are sold primarily in Ohio. All
services use common marketing techniques, including direct sales methodologies
with emphasis on referral sources.
None of IASI's major business outsourcing services groups have a single
homogeneous client base. Rather, IASI'soriginal CBIZ representative.
CBIZ's clients come from a large variety of industries and markets. IASIEdward
Jones, a financial services firm and client of CBIZ Network Solutions for
electronic networking and information services, contributed approximately 2.5%
of the Company's revenue in 2003. No single customer individually comprises more
than 3% of CBIZ's total consolidated revenue. Management believes that such
diversity helps to insulate IASICBIZ from a downturn in a particular industry. In addition, none of IASI's business
outsourcing services are overly sensitive to price change.
Nevertheless, economic conditions among selected clients and groups of clients
may have a
temporaryan impact on the demand for such services.
COMPETITION
The professional outsourced business outsourcing services industry has beenis highly fragmented
and competitive, with a majority of industry participants, such as accounting,
employee benefits, payroll firms or professional employee organizations,
offering only a limited number of services. Competition is based primarily on
customer relationships, range and quality of services or product offerings,
customer service, timeliness, geographic proximity, and competitive rates. CBIZ
competes with a number of multi-location regional or national professional
services firms and a large number of relatively small independent firms in recent years resulting in consolidation and strategic alliances across
industry lines. The principal competitive factors in this industry are service
and price. This is particularly important to small to medium sized providers
because larger providers, or alliances with larger providers, can create service
and price distortions in the market place.
IASI'slocal
markets. CBIZ's competitors in the professional outsourced business outsourcing services
industry include but are not limited to independent consulting services
companies, independent accounting and tax firms, payroll service providers, and
divisions of diversified enterprisesservices companies, such as insurance brokers and
banks.
ACQUISITIONS AND DIVESTITURES
Acquisitions are an important part of our strategy. CBIZ is looking to
strengthen our operations and customer service capabilities by making
acquisitions in markets where we currently operate and where the prospects are
favorable to increase our market share and become a more significant provider of
a comprehensive range of outsourced business services. In 2003, CBIZ acquired
benefits and insurance firms located in Boca
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Raton, Florida and Salt Lake City, Utah, an accounting, tax and advisory firm in
Orange County, California and HarborView Partners, which was based in Stamford,
Connecticut. Before acquiring HarborView, CBIZ had established a relationship to
provide staffing to HarborView, a provider of internal audit outsourcing and
Sarbanes-Oxley consulting and compliance services primarily to publicly held
companies.
In 2003, CBIZ sold or closed eight business operations in an effort to
rationalize our business by divesting units that were either underperforming,
located in secondary markets, or did not provide the level of synergistic
cross-serving opportunities with other CBIZ businesses that is desired. These
divestitures are consistent with CBIZ's plan to focus on metropolitan markets in
which we can strengthen our ATA and Benefits & Insurance core service offerings.
Going forward, CBIZ may, from time to time, recognize additional gains and/or
losses on divestitures.
REGULATION
IASI's provision ofCBIZ's operations are subject to regulations by federal, state, and local
governing bodies. Accordingly, our outsourced business outsourcing services is vulnerable tomay be impacted
by legislative changes by these bodies, particularly with respect to itsprovisions
relating to payroll, benefits administration and insurance services, pension
plan administration, tax advisory, compliance and preparation
services. Legislativeaccounting. CBIZ remains abreast of regulatory
changes may expand or contract the types and amounts of
business services that individuals and businesses require.
ENVIRONMENTAL SERVICES
GENERAL
In February, 1997, IASI signed the non-binding Letter of Intent to sell
IASI's environmental services operations. The Letter of Intent also contemplates
the formation of a strategic alliance between IASI and the purchaser whereby
IASI will continue to have access to IASI's environmental resources for the
benefit of its insurance customers after the sale. IASI anticipates that the
sale will be completed by mid-1997. Consummation of the transaction remains
subject to the purchaser's due diligence review, the negotiation and execution
of definitive documentation and the receipt of necessary government and third
party approvals and consents. Accordingly, there can be no assurance, however,
that the transaction will be consummated or, if consummated, that the
transaction will be consummated on the terms set forth herein.
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The following is a description of IASI's environmental servicesaffecting our business, as of the date of this Annual Report.
OPERATIONS
IASI's environmental services operations include the operation of its
treatment, storage and disposal facilities ("TSD Facilities"), transportation,
remediation and technical services and related engineering, consulting and
analytical services. IASI currently operates seven hazardous and non-hazardous
TSD Facilities located in the United States and Canada. These TSD Facilities are
serviced by IASI's integrated trucking operations. IASI does not own any
hazardous waste disposal sites. IASI also provides a broad range of related
environmental services including engineering, consulting and analysis,
remediation, groundwater/wastewater services and other technical services.
TSD FACILITIES. IASI provides hazardous and non-hazardous waste
treatment, storage and disposal services through seven commercial hazardous TSD
Facilities located in the United States and Canada. The wastes handled by these TSD Facilities include substances which are classified as hazardous under
applicable law because of their source of generation, characteristic properties,
specific constituents and other substances subject to federal, provincial and
state environmental regulations.
Treatment, storage and disposal services are typically performed under
service agreements that obligate IASI to accept from its customer waste material
conforming to the specifications set forth in the services agreement. Before
IASI signs a service agreement with a customer, a representative sample of the
waste is analyzed by a laboratory to enable IASI to recommend the best method of
transportation, treatment and disposal. Prior to unloading at IASI's treatment
facility, a representative sample of the delivered waste is tested and analyzed
on site to ensure that it conforms to the customer's waste profile sheet. Once
the wastes are characterized, compatible groups are consolidated to achieve
economies in storage, handling, transportation and ultimate treatment and
disposal.
The operational and permitted capabilities of the seven TSD Facilities
operated by IASI vary extensively with each facility operating under site
specific permit requirements. The seven TSD Facilities in the aggregate have the
ability to process bulk liquids, solids, drums and laboratory-packaged waste
materials. Six of these TSD Facilities have received final hazardous waste
permits (EPA and/or state-issued Part B Permits or Canadian Ministry of the
Environment ("MOE") Permits) from the appropriate regulatory agencies and the
remaining TSD Facility is operating under an interim status permit. See "-
Regulation." IASI expects to obtain the final Part B permit for this facility in
1997. If this Part B permit application is denied, the TSD Facility would be
forced to cease hazardous waste operations and be subject to closure procedureschanges often affect clients'
activities with respect to employment, taxation, benefits, and accounting. For
instance, changes in income, estate, or property tax laws may require additional
consultation with clients subject to these changes to ensure their activities
comply with revised regulations.
CBIZ itself is subject to industry regulation and changes, including
changes in laws, regulations, and codes of ethics governing the accounting
industry, the interpretation of which may restrict CBIZ's operations. CBIZ is
currently in compliance with laws and regulations that have been recently
changed or imposed, and is not aware of any proposed changes that will have a
negative impact on CBIZ's operations, or our ability to comply with such
operations. The oil recycling operations that are conducted
at such location would be permittedexisting or proposed regulations.
CBIZ is subject to continue even if the permit is denied. It
is the opinion of management that the failure to obtain such permitcertain privacy, security, and the
subsequent closureelectronic-data
provisions of the facilityHealth Insurance Portability and Accountability Act of 1996
("HIPAA") and corresponding provisions of state law which may restrict CBIZ's
operations and give rise to expenses related to compliance. CBIZ is currently in
compliance with such laws and regulations, and expects to remain in compliance
in future periods.
On July 30, 2002, President George W. Bush signed into law the
Sarbanes-Oxley Act of 2002 to reform the oversight of public company auditing,
improve the quality and transparency of financial reporting by those companies
and strengthen the independence of auditors. The new legislation requires the
following: (i) CEOs and CFOs to certify that company financial statements fairly
present the company's financial condition; and (ii) public companies to report
certain off-balance sheet transactions, as well as to present any pro forma
disclosures in a way that is not misleading and is in accordance with
requirements to be established by the Securities Exchange Commission (SEC). The
new legislation also accelerates the required reporting of insider stock
transactions, which now generally must be reported by the end of the second
business day following a covered transaction; requires that annual reports filed
with the SEC include a statement by management asserting that it is responsible
for creating and maintaining adequate internal controls and assessing the
effectiveness of those controls; and requires companies to disclose whether or
not they have adopted an ethics code for senior financial officers, and, if not,
why not, and whether the audit committee includes at least one "financial
expert". CBIZ is currently in compliance with those requirements effective in
2003, and believes it will be in compliance with each of the foregoing
requirements that become effective in future periods.
LIABILITY INSURANCE
CBIZ carries commercial general liability, automobile liability,
professional liability, directors and officers liability, fiduciary liability,
employment practices liability and workers' compensation subject to prescribed
state mandates. Excess liability is carried over the underlying limits provided
by the commercial general liability and automobile liability policies.
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EMPLOYEES
At December 31, 2003, CBIZ employed approximately 4,700 employees,
approximately half of whom are professionals. The Company believes that it has a
good relationship with its employees. CBIZ realizes that as a professional
services company that differentiates itself from competitors through the quality
and diversity of our service offering, the Company's employees are our most
important asset. Accordingly, CBIZ strives to remain competitive as an employer
while increasing the capabilities and performance of our employees.
SEASONALITY
A disproportionately large amount of CBIZ's revenue occurs in the first
half of the year. This is due primarily to the Company's accounting and tax
practice, which is subject to seasonality related to heavy volume in the first
four months of the year. CBIZ's ATA group generated approximately 44% of its
revenue in the first four months of 2003. Like most professional service
companies, most of CBIZ's operating costs are fixed, resulting in much higher
operating margins in the first half of the year.
PROPERTIES
CBIZ's corporate headquarters are located at 6050 Oak Tree Boulevard,
South, Suite 500, Cleveland, Ohio 44131, in leased premises. Some of CBIZ's
property and equipment are subject to liens securing payment of indebtedness of
CBIZ and its subsidiaries. CBIZ and its subsidiaries lease more than 160 offices
in 34 states and one in Toronto, Canada, as well as office equipment and company
vehicles. As CBIZ continues to consolidate and rationalize its operations, we
expect to reduce the number of leases we currently hold. CBIZ believes that our
current facilities are sufficient for our needs.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS
This Annual Report contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this Annual Report, including without limitation, "Business and
Properties" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" regarding CBIZ's financial position, business strategy
and plans and objectives for future performance are forward-looking statements.
You can identify these statements by the fact that they do not relate strictly
to historical or current facts. Forward-looking statements are commonly
identified by the use of such terms and phrases as "intends," "believes,"
"estimates," "expects," "projects," "anticipates," "foreseeable future,"
"seeks," and words or phases of similar import in connection with any discussion
of future operating or financial performance. In particular, these include
statements relating to future actions, future performance or results of current
and anticipated services, sales efforts, expenses, and financial results. From
time to time, we also may provide oral or written forward-looking statements in
other materials we release to the public. Any or all of our forward-looking
statements in this 10-K, in the 2003 Annual Report and in any other public
statements that we make, are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Such
forward looking statements can be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Many factors mentioned in
the discussion below will be important in determining future results.
Consequently, no forward-looking statement can be guaranteed. Actual future
results may vary materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our 10-Q, 8-K and 10-K reports to the SEC. Also note that we provide
the following cautionary discussion of risks, uncertainties and possibly
inaccurate assumptions relevant to our businesses. These are factors that we
think could cause our actual results to differ materially from expected and
historical results. Other factors besides those listed here could also adversely
affect operating or financial performance. This discussion is provided as
permitted by the Private Securities Litigation Reform Act of 1995.
9
RISK FACTORS
The following factors may affect our actual operating and financial results
and could cause results to differ materially from those in any forward-looking
statements. There may be other factors, and new risk factors may emerge in the
future. You should carefully consider the following information.
WE ARE DEPENDENT ON THE CURRENT TREND OF OUTSOURCING BUSINESS SERVICES.
Our business and growth depend in large part on the trend toward
outsourcing business services. We can give you no assurance that this trend in
outsourcing will continue. Current and potential customers may elect to perform
such services with their own employees. A significant reversal of, or a decline
in, this trend would not have a material adverse effect on IASI.
The TSD Facilities have the collective ability to accept virtually all
typesour business, financial
condition and results of hazardousoperations.
WE MAY BE MORE SENSITIVE TO REVENUE FLUCTUATIONS THAN OTHER COMPANIES, WHICH
COULD RESULT IN FLUCTUATIONS IN THE MARKET PRICE OF OUR COMMON STOCK.
A substantial majority of our operating expenses such as personnel and
non-hazardous wastes, except radioactive materials. Each
TSD Facility is specifically regulated with respect to waste types thatrelated costs, depreciation and rent, are included in its permits.
The TSD Facilities collectively perform the following treatment and
storage services:
- -- bulking and consolidation for off-site incineration
- -- waste water treatment, including heavy metal precipitation,
carbon absorption, oxidation, reduction,
biological treatment and filtration
- -- low level cyanide destruction
- -- fuels blending
- -- oil recycling
- -- phase separation
- -- PCB storage
- -- solids liquification
- -- stabilization of solid and semi-solid sludges
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IASI currently owns nine TSD Facilities, seven of which are
operational. The following table provides certain information concerning the
operating TSD Facilities owned by IASI. These facilities serve marketsrelatively fixed in the northeasternshort term. As
a result, we may not be able to quickly reduce costs in response to any decrease
in revenue. For example, any decision by a significant client to delay or cancel
our services may cause significant variations in operating results and midwestern United States and southern Ontario regions.
PERMITTED
OPERATING AND STORAGE
TSD FACILITY PERMITTED ACTIVITIES CAPACITIES
------------ -------------------- ----------
Republic Environmental Part B Permit - hazardous waste Operating capacities - approximately 55
Systems (Pennsylvania), treatment and storage facilities million gallons per year bulk liquid,
Inc., Hatfield, PA; for hazardous and non-hazardous 73,000 tons per year bulk solid, 99,000
(formerly known as Waste solid and liquid waste in bulk, drums per year; storage capacity
Conversion, Inc., "RES drum and lab pack; interim status -approximately 568 drums, 335,000 gallons
(Pennsylvania)") PCB storage bulk liquid, 1,500 cubic yards solid
Republic Environmental Part B application filed in 1986; Operating capacities - approximately 18
Recycling (New Jersey), EPA and NJDEP (defined herein) million gallons per year of bulk waste;
Inc.; Clayton, New Jersey interim status-waste oil blending storage capacity - 2 million gallons
and recycling, fuels blending and
transfer facility
Republic Environmental Part B Permit - bulk solid Operating capacities - approximately
Systems (Cleveland), Inc., hazardous waste treatment and 124,800 tons per year bulk solid, 18,250
Bedford, Ohio; (formerly storage, hazardous and drums per year; storage capacity
Evergreen Environmental non-hazardous drum treatment, -approximately 975 drums and 47,500
Group, Inc., "RES bulk liquids and oils treatment gallons bulk liquid, 1,000 cubic yards
(Cleveland)") and fuels blending solid
Republic Environmental MOE Permit - hazardous waste Operating capacities - approximately 3.4
Systems (Fort Erie) Ltd.; treatment, processing, recovery, million gallons per year bulk liquid,
Fort Erie, Ontario transfer and storage 1,170 tons per year bulk solid, 52,000
drums per year; storage capacity -
approximately 1,300 drums and 65,000
gallons bulk liquid, 120 tons solid
Republic Environmental MOE Permit - hazardous waste Operating capacities - approximately 12.5
Systems (Brantford) Ltd.; treatment, processing, recovery, million gallons per year bulk liquid;
Brantford, Ontario transfer and storage storage capacity - 175,000 gallons bulk
liquid
Republic Environmental MOE Permit - hazardous waste Operating capacities - approximately 2.9
Systems (Pickering) Ltd.; treatment, processing, recovery, million gallons per year bulk or drum
Pickering, Ontario transfer and storage liquid or solid; storage capacity -
110,000 gallons bulk or drum
Republic Environmental MOE Permit - hazardous waste Operating capacities - approximately 3.1
Systems (Brockville) Ltd.; treatment, processing, recovery, million gallons per year bulk liquid,
Brockville, Ontario transfer and storage 24,000 tons per year bulk solid,
approximately 39,000 drums per year;
storage capacity - 3,000 drums and 120,000
gallons bulk liquid
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IASI also owns TSD Facilitiescould
result in Farmingdale, New York and Dayton,
Ohio, at which operations terminated in June 1993 and October 1995,
respectively. See "Legal Proceedings - Administrative Proceedings - RES
(Cleveland) and Republic Environmental Systems (Ohio), Inc." and "- Republic
Environmental Systems (New York), Inc."). With respect tolosses for the closing of both of
these TSD Facilities, IASI believes that it has accruedapplicable quarters. Additionally, the appropriate costs.
During June 1996, the Ohio Environmental Protection Agency (the "Ohio
EPA") approved the expansion of the types of waste managed in IASI's TSD
Facility located in Cleveland, Ohio. The remaining permit revisions are
currently still under review. Management expects final approval of the remaining
permit revisions during 1997.
TRANSPORTATION SERVICES. As an integral part of IASI's treatment,
storage and disposal operations, hazardous and non-hazardous wastes are
collected from customers and transported by IASI to and between its TSD
Facilities for treatment or bulking in preparation for shipment to final
disposal locations. In providing this service, IASI utilizes a variety of
specially designed and constructed tank trucks, vacuum trucks and semi-trailers.
Liquid waste is frequently transported in bulk, but may also be transported in
drums. Heavier sludges or bulk solids are transported in sealed roll-off
containers or sealed gate-dump trailers.
IASI's United States hazardous waste transportation services are
performed primarily by two of IASI's waste services subsidiaries, Republic
Environmental Systems (Transportation Group), Inc. ("RES (Transportation
Group)") and Chem-Freight, Inc. ("Chem-Freight"). RES (Transportation Group) is
located in Hatfield, Pennsylvania and has been operating since 1985.
Chem-Freight is located in Walton Hills, Ohio and has been operating since 1971.
These trucking companies provide a majority of their direct services to IASI's
TSD Facilities. IASI believes that this transportation arrangement ensures
quality control and improved efficiency and helps prevent delays at the TSD
Facilities. Trucking revenues for services provided to third parties, such as
other environmental service companies, waste brokers and waste generators, are
recognized as trucking revenue. Third-party customers of RES (Transportation
Group) and Chem-Freight include general
industrial businesses and other waste
management companies. RES (Transportation Group) is licensed to haul in 36
states from the eastern to the midwestern regionscondition of the United States economy has and Chem-Freight is licensedwill continue to haulaffect our
business. Potential new clients may defer from switching service providers when
they believe economic conditions are unfavorable. Any of these factors could
cause our quarterly results to be lower than expectations of securities
analysts, which could result in a decline in the 48 contiguous states.
Mostprice of our common stock.
WE HAVE A RISK THAT PAYMENTS ON ACCOUNTS RECEIVABLE OR NOTES RECEIVABLE MAY BE
SLOWER THAN EXPECTED, OR THAT AMOUNTS DUE ON RECEIVABLES OR NOTES MAY NOT BE
FULLY COLLECTABLE.
Professional services firms often experience higher average accounts
receivable days outstanding compared to many other industries. If collections
become slower, our liquidity may be adversely impacted. We monitor the aging of
receivables regularly and make assessments of the transportationability of customers to pay
amounts due. We accrue for potential bad debts each month and recognize
additional reserves against bad debts as we deem it appropriate. Notwithstanding
these measures, our customers may face unexpected circumstances that adversely
impact their ability to pay their trade receivables or note obligations to us
and we may face unexpected losses as a result.
WE ARE DEPENDENT ON THE SERVICES OF OUR EXECUTIVE OFFICERS AND OTHER KEY
EMPLOYEES.
Our success depends in large part upon the abilities and continued services
provided to IASI's Canadian TSD
Facilities are performed by one of IASI's subsidiaries, Republic Environmental
Systems (Brockville) Ltd. ("RES (Brockville)"). RES (Brockville) is licensed to
haul in the provinces of Ontarioour executive officers and Quebec in Canada and in the states of
Michigan and New York in the United States.
REMEDIATION. IASI's hazardous waste division provides selected
remediation services through its subsidiary, Republic Environmental Systems
(Technical Services Group), Inc. ("RES (Technical Services)"). RES (Technical
Services) is a full-service environmental remediation contractor specializing in
remedial services, tank cleaning, testing and removal, decontamination/lagoon
closure, excavation and removal of contaminated soils, dewatering, emergency
response, "Superfund" clean-up work and waste sampling. These services are
provided to IASI's TSD Facility customers and others on a competitive bid basis.
When IASI is engaged to perform an entire environmental remediation
project, it will first perform a site or situation assessment which involves
gathering samples from the contaminated site and then analyzing them to
establish or verify the nature and extent of the contaminants. Analysis of
samples is conducted by IASI at its TSD Facilities or by independently-operated
laboratory companies. IASI's engineering and consulting group then develops,
evaluates and presents alternative solutions to remedy the particular situation.
TECHNICAL SERVICES. At IASI's analytical facilities, technicians test
samples provided by customers through the use of comprehensive analytical
procedures to identify and quantify toxic pollutants in virtually every
component of the environment, including, without limitation, drinking water,
surface and groundwater, soil, air, food, industrial effluents and biological
tissues. The laboratory staff evaluates the properties of a given material,
selects appropriate analytical methods, and designs, documents and executes a
laboratory work plan that results in a comprehensive technical report.
IASI also provides environmental consulting services, including
regulatory consulting, RCRA consulting, Environmental Clean-up Responsibility
Act site assessment, remedial action plan preparation, treatment process
technology and system design, waste minimization programs planning and alternate
waste disposal evaluations.
SALES AND MARKETING
IASI's sales and marketing strategy is to provide full-service
environmental management to its customers. IASI targets customers of all sizes
from small quantity generators to large "Fortune 100" companies. Marketing
efforts also target environmental engineers, real estate brokers, potentially
responsible party ("PRP") committees, lawyers, hospitals and waste brokers.
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IASI believes in maintaining a strong foundation of repeat business.
IASI derives its business from a broad base of clientele which management
believes enables IASI to experience stable growth. Marketing efforts focus on
continuing and increasing business with existing customers, as well as
attracting new clients.
COMPETITION
The hazardous waste treatment, storage and disposal industry is highly
competitive and requires substantial amounts of capital. The competition in this
industry includes large national companiesother key employees, such as Clean Harbors, Inc., Laidlaw
Environmental Services, Inc.our business unit
presidents. In the course of business operations, employees may resign and Rollins Environmental, Inc., as well as local
TSD Facilitiesseek
employment elsewhere. Certain principal employees, however, are bound in writing
to non-compete agreements barring competitive employment, client solicitation,
and disposalsolicitation of employees for a period of between two and treatment companies. IASI environmentalten years
following his or her resignation. We cannot assure you that we will be able to
retain the services subsidiaries compete forof our key personnel. If we cannot retain the services of
key personnel, there could be a material adverse effect on our business,
on the basis of pricefinancial condition and geographic location.
CUSTOMERS
IASI's sales efforts with respect to its environmental services
operations have been directed toward establishing and maintaining business
relationships with businesses in the eastern and midwestern regions of the
United States and Ontario, Canada, which have ongoing requirements for one or
more of IASI's services. No one customer individually comprises more than 5% of
the total consolidated revenue of IASI.
SEASONALITY
IASI's environmental services operations experience seasonal
fluctuations, with higher demand commencing in approximately April of each year
and continuing through October, and lower demand occurring from November through
March. Additionally, IASI's environmental services operations may experience
operational limitations from November through March due to weather conditions in
the northeastern United States and southeastern Ontario. Severe weather
experienced during winter months may adversely affect IASI's results of operations. REGULATION
The transportationWhile we generally have
employment agreements and disposal of solid and chemical wastes and
rendering of related environmental servicesnon-competition agreements with key personnel, courts
are subjectat times reluctant to federal, state,
provincial and local requirements which regulate health, safety, the
environment, zoning and land-use. Operating permits are generally required for
TSD Facilities and certain transportation vehicles, and these permits are
subject to revocation, modification and renewal. Federal, state, provincial and
local regulations vary, but generally govern waste management activities
(including final disposal), the location and use of facilities and also impose
restrictions to prohibit or minimize air and water pollution.enforce such non-competition agreements. In addition,
governmental authorities have the powermany of our executive officers and other key personnel are either participants
in our stock option plan or holders of a significant amount of our common stock.
We believe that these interests provide additional incentives for these key
employees to enforce complianceremain with these
regulations and to obtain injunctions or impose fines in the case of violations,
including criminal penalties. These regulations are administered by the EPA and
various other federal, state, provincial and local environmental, health and
safety agencies and authorities, including the Occupational Safety and Health
Administration of the United States Department of Labor.
Although IASI strives to conduct its operations in compliance with
applicable laws and regulations, IASI believes that in the existing climate of
heightened legal, political and citizen awareness and concerns, companies in the
hazardous waste and environmental services industry, including IASI, may be
faced with fines and penalties and the need to expend funds for remedial work
and related activities at TSD Facilities. IASI has established a reserve to
cover such fines, penalties and costs which management believes will be
adequate. Further, in connection with the acquisition of certain TSD Facilities,
IASI has been indemnified against certain environmental liabilities. See "Legal
Proceedings." While such amounts expended in the past or anticipated to be
expended in the future have not had and are not expected to have a materially
adverse effect on IASI's financial condition or operations, the possibility
remains that technological, regulatory or enforcement developments, the results
of environmental studies or other factors could materially alter this
expectation and despite such reserves and indemnification obligations, could
adversely affect IASI's operating results.
IASI's operation of TSD Facilities subjects it to certain operating,
monitoring, site maintenance and closure obligations.us. In order to construct,
expandsupport our growth, we intend to
continue to effectively recruit, hire, train and operate a TSD Facility, one or more construction or operating
permits, as well as zoning approvals, must be obtained. These operating permitsretain additional qualified
management personnel. Our inability to attract and zoning approvals are difficult and time-consuming to obtain, and the
issuance of such permits and approvals often is opposed by neighboring
landowners and local and national citizens' groups. Once obtained, the operating
permits may be subject to periodic renewal and are subject to modification and
revocation by the issuing agency. In connection with IASI's acquisition of
existing TSD Facilities, it often may beretain necessary to expend considerable time,
effort and money to bring the acquired facilities into compliance with
applicable requirements and to obtain the permits and approvals necessary to
increase their capacity. The failure of IASI to renew existing permits or obtain
newly required permits, could adversely affect IASI's operating results. In
addition, IASI's waste transportation operations are subject to evolving and
expanding laws and regulations that may impose additional monitoring, training
and safety requirements.
Governmental authorities have the power to enforce compliance with
regulations and permit conditions and to obtain injunctions or impose fines in
case of violations. Citizens' groups may also bring suit for alleged violations.
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During the ordinary course of its operations, IASI may from time to time receive
citations or notices from such authorities that its operations are not in
compliance with applicable environmental, health or safety regulations. Upon
receipt of such citations or notices, IASI will work with the authorities to
attempt to resolve the issues raised. Failure to correct the problems to the
satisfaction of the authorities could lead to monetary or criminal penalties,
curtailed operations or facility closure any of whichpersonnel
could have a material adverse effect on IASI's operating results.
FEDERAL REGULATION. The following summarizesour business, financial condition and
results of operations.
10
RESTRICTIONS IMPOSED BY INDEPENDENCE REQUIREMENTS AND CONFLICT OF INTEREST
RULES MAY LIMIT OUR ABILITY TO PROVIDE SERVICES TO CLIENTS OF THE ATTEST FIRMS
WITH WHICH WE HAVE CONTRACTUAL RELATIONSHIPS AND THE ABILITY OF SUCH ATTEST
FIRMS TO PROVIDE ATTESTATION SERVICES TO CLIENTS OF OURS.
We do not offer audit and attest services, other than internal audit
services. However, we maintain joint-referral relationships with independent
licensed CPA firms under which audit and attest services may be provided to
CBIZ's clients. Under these service agreements, we provide administrative
services and lease staff in exchange for a fee. Revenue from these agreements is
reflected in our financial statements.
With respect to attest firm clients that are required to file audited
financial statements with the primary United States
federal statutes affectingSEC, the business of IASI:
(1) THE SOLID WASTE DISPOSAL ACT ("SWDA"), AS AMENDED BY RCRA.
SWDASEC staff views us and its implementing regulations establishthe attest firms
with which we have contractual relationships as a framework forsingle entity in applying
independence rules established by the regulationaccountancy regulators and the SEC.
According to the SEC staff, we are required to abide by all of the generation, handling, transportation, treatment,
storageindependence
rules that the attest firms must follow in order to be independent of an
SEC-reporting attest client. Accordingly, these independence rules prohibit us,
and disposalour officers, directors, affiliates and significant stockholders, to the
extent an attest firm is so prohibited, from:
- holding any financial interest in an SEC-reporting attest client;
- entering into any business relationship with an SEC-reporting attest
client; or
- selling any prohibited non-audit services to an SEC-reporting attest
client.
In addition, under these rules, the SEC staff views an attest firm and us
as lacking independence with respect to entities involved in an offering of hazardous and non-hazardous wastes. They also
require states to develop programs to insureour
stock or in making a market for, or otherwise facilitating the safe disposaltrading of, solid
wastesour
stock in sanitary landfills.
Subtitle C of RCRA imposesthe secondary market, including any entity that is a variety of regulatory
requirements on a person who is either a "generator" or "transporter"
of hazardous waste, or an "owner" or "operator"member of a
hazardous waste
treatment, storagesyndicate underwriting an offering of our stock, that is a broker-dealer
exercising discretionary buy and sell authority over customer accounts holding
significant positions in our stock, or disposal facility. The EPA has issued regulations
under RCRA for hazardous waste generators, transporters,that employs securities analysts that
follow us.
CBIZ and ownersthe attest firms with which we are associated have implemented
policies and operatorsprocedures designed to enable us to maintain independence and
freedom from conflicts of TSD Facilities.interest in accordance with applicable standards.
These regulations impose, among other
requirements, detailed operating, inspection, training and emergency
preparedness and response standards,procedures include independence screening in connection with the selection
of attest clients as well as requirements for
permitting, manifesting, record keepingperiodic confirmations of independence by officers,
directors and reporting, facility
closure, post-closure careprofessionals of us and financial assurance. Owners and
operators of TSD Facilities also are subjectthe attest firms. We remain in contact
with state accountancy regulators in jurisdictions in which we operate to stringent corrective
action requirementsensure
our business services model complies with independence regulations. To date, no
state accountancy regulatory authority has prohibited our operations in any
jurisdiction. However, state accountancy regulatory authorities may elect to
apply new rules that may restrict our service offerings to clients.
There can be very expensive. The Hazardousno assurance that following the policies and Solid
Waste Amendmentprocedures
implemented by us and the attest firms will enable us and the attest firms to
avoid circumstances that would cause us and them to lack independence from an
SEC-reporting attest client; nor can there be any assurance that state
accounting associations will not extend current restrictions on the profession
to include private companies. To the extent that licensed CPA firms for whom we
provide administrative and other services are affected, we may experience a
decline in fee revenue from these businesses as well. To date, revenues derived
from providing services in connection with attestation engagements of 1984 mandatedthe attest
firms performed for SEC-reporting clients have not been material.
GOVERNMENTAL REGULATIONS AND INTERPRETATIONS ARE SUBJECT TO CHANGES.
Laws and regulations often result in changes in the amount or the type of
business services required by businesses and individuals. We cannot be sure that
hazardous wastes be treated prior
to land disposal. Ownersfuture laws and operators of TSD Facilities must treat
wastes to meet specified performance-basedregulations will provide the same or technology-based
treatment standards.
(2) THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION,
AND LIABILITY ACT OF 1980, AS AMENDED ("CERCLA"). CERCLA, also known as
"Superfund," among other things, established a regulatory and remedial
program intendedsimilar opportunities for
us to provide business consulting and management services to businesses and
individuals. Accordingly, CBIZ's ability to continue to operate in some states
may depend on our flexibility to modify our operational structure in response to
these changes in regulations.
WE ARE SUBJECT TO RISK AS IT RELATES TO PROCESSING CUSTOMER TRANSACTIONS FOR
OUR PAYROLL, MEDICAL PRACTICE MANAGEMENT, PROPERTY TAX MANAGEMENT, AND CERTAIN
OTHER TRANSACTION PROCESSING BUSINESSES.
The high volume of client funds processed by us in our payroll and certain
other businesses entails risks for the investigation and the clean-up of
sites from which there is or has been a release or threatened release
of a hazardous substance into the environment. CERCLA's primary
mechanism for remedying such problems is to impose strict liability
(and pursuant to the interpretation of certain courts, joint and
several liability) for clean-up and for damages to natural resources
upon: (a) any person who currently owns or operates the facility or
site; (b) any person who owned or operated the facility or site at the
time of disposal of hazardous substances; (c) any person who by
contract, agreement or otherwise, arranged or accepted for disposal or
treatment (or for transport for disposal or treatment) of the hazardous
substances; and (d) any generator of the hazardous substances. Under
the authority of CERCLA and its implementing regulations, detailed
requirements apply to the manner and degree of remediation of
facilities and sites where hazardous substances have been or are
threatened to be released into the environment. The costs of CERCLA
investigation and clean-up can be substantial.
Among other things, CERCLA authorizes the federal government
either to remediate sites at which hazardous substances were disposed
and have been or are threatened to be released into the environment, or
to order (or offer an opportunity to order) persons potentially liable
for the clean-up of the hazardous substances to do so. Both the
government and the potentially liable partywe may seek to recover the
cost of clean-up from the responsible class of persons. In addition,
CERCLA requires the EPA to establish a National Priorities List of
sites at which hazardous substances have been or are threatened to be
released and which require investigation or clean-up.
Liability under CERCLA is not dependent upon the intentional
disposal of "hazardous wastes." It can be founded upon the release or
threatened release, even as a result of unintentional and non-negligent
action, of very small amounts of any one of thousands of "hazardous
substances" listed by the EPA, many of which can be found in household
waste. If this is the case, and if there is a release or threatened
release of such substances, IASI could be held liable under CERCLA for
all investigative and remedial costs even if others may also be liable.
CERCLA also authorizes the imposition of a lien in favoraccuracy
or timeliness of the United
States upon all real property subjecttransactions processed is not correct. We could
11
incur significant legal expense to or affected by a remedial
action for all costs for which a party is liable. The ability of IASI
to obtain reimbursement from others for their allocable share ofdefend any claims against us, even those
claims without merit. While we carry insurance against these potential
liabilities, we cannot be certain that circumstances surrounding such costsan error
would be limited by itsentirely reimbursed through insurance coverage. We believe we have
controls and procedures in place to address our fiduciary responsibility and
mitigate these risks.
WE ARE SUBJECT TO RISK AS IT RELATES TO SOFTWARE THAT WE LICENSE FROM THIRD
PARTIES.
We license software from third parties, much of which is integral to our
systems and our business. The licenses are terminable if we breach our
obligations under the license agreements. If any of these relationships were
terminated or if any of these parties were to cease doing business or cease to
support the applications we currently utilize, we may be forced to spend
significant time and money to replace the licensed software. However, we cannot
assure you that the necessary replacements will be available on reasonable
terms, if at all.
WE COULD BE HELD LIABLE FOR ERRORS AND OMISSIONS.
All of our professional business services entail an inherent risk of
professional malpractice and other similar claims. Therefore, we maintain errors
and omissions insurance coverage. Although we believe that our insurance
coverage is adequate, we cannot be certain that actual future claims or related
legal expenses would not exceed the coverage amounts. If we have a large claim
on our insurance, the rates for such insurance may increase, but contractual
arrangements with clients may constrain our ability to find other responsible parties
and prove the extent of each ofincorporate such
other parties' responsibility and
by the financial resources of such other parties. The costs of a CERCLA
clean-up can be very expensive. Given the difficulty of obtainingincreases into service fees. Such insurance for environmental impairment liability, such liabilityrate increases, as well as any
underlying claim, could have a material impactadverse effect on IASI'sour business,
financial condition and financial condition. See
"--Liability Insuranceresults of operations.
OUR PRINCIPAL STOCKHOLDERS MAY HAVE SUBSTANTIAL CONTROL OVER OUR OPERATIONS.
As of February 27, 2004, the following individual owned the following
aggregate amount and Bonding."
(3)percentage of our common stock, including shares that may
be acquired by exercising options:
- approximately 15,186,198 shares, representing 17.7% of all our
outstanding common stock, were owned by Michael G. DeGroote;
- approximately 18,299,280 shares, representing 21.3% of all our
outstanding common stock, were owned by our executive officers,
directors, and Mr. DeGroote as a group.
Because of their stock ownership, these persons may exert substantial
influence or actions that require the consent of a majority of our outstanding
shares, including the election of directors. CBIZ's share repurchase activities
may serve to increase the ownership percentage of these individuals and
therefore increase the influence they may exert, if they do not participate in
these share repurchase transactions.
WE HAVE SHARES ELIGIBLE FOR FUTURE SALE THAT COULD ADVERSELY AFFECT THE
FEDERAL WATER POLLUTION CONTROL ACTPRICE OF 1972, AS
AMENDED (THE "CLEAN WATER ACT"). The Clean Water Act establishes a
frameworkOUR COMMON STOCK.
Future sales or issuances of common stock, or the perception that sales
could occur, could adversely affect the market price of our common stock and
dilute the percentage ownership held by our stockholders. We have authorized 250
million shares, and have issued and outstanding approximately 86 million shares.
More than 47 million of these shares have been issued in connection with
acquisitions. As part of many acquisition transactions, the shares were
contractually restricted from sale for regulating the dischargeperiods up to two years, most of pollutants from a variety of
sources, including TSD Facilities, into streams, rivers and other
waters. Whenever point source runoff from IASI's facilities is to be
discharged into surface waters, the Clean Water Act requires IASI to
apply for and obtain discharge permits, conduct sampling and monitoring
and, under certain circumstances, reduce the quantity of pollutants in
those discharges. In 1990, the EPA published new storm water discharge
regulations which
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require a facility to apply for a storm water discharge permit unless
it is covered under a storm water general permit promulgatedhad expired by the
agency. These storm water discharge regulations also require a permit
for certain construction activities, which may affect IASI's
operations. If a facility discharges wastewater through a sewage system
to a publicly-owned treatment works ("POTW"), the facility must comply
with discharge limits imposed by the POTW. In addition, states may
adopt groundwater protection programs under the Clean Water Act or Safe
Drinking Water Act or independent state authority that could affect TSD
Facilities.
(4) THE CLEAN AIR ACT. The Clean Air Act establishes a
framework for the federal, state and local regulation of the emission
of air pollutants. These regulations may impose emission limitations
and monitoring and reporting requirements on certain of IASI's
operations. The Clean Air Act Amendments, which were enacted into law
at the end of 1990, resulted in2001. As of February 27, 2004, approximately 177,000
shares of common stock were under lock-up contractual restrictions. We cannot be
sure when sales by holders of our stock will occur, how many shares will be sold
or the impositioneffect that sales may have on the market price of stringent
requirements on many activities that were previously largely
unregulated, such as emissionsour common stock. As of
solvents used in small parts
degreasing baths in IASI's vehicle maintenance shops, as well as
imposing more stringent requirements on, among others, motor vehicle
emissions and emissions of hazardous air pollutants.
(5) THE OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970 ("OSHA").
OSHA authorizes the Occupational Safety and Health Administration to
promulgate occupational safety and health standards. Various of these
standards, including standards for notices of hazardous chemicals and
the handling of asbestos, may apply to IASI's operations.
STATE REGULATION. Each state in which IASI operates has its own laws
and regulations governing hazardous and solid waste disposal, water and air
pollution and, in most cases, release and clean-up of hazardous substances and
liability for such matters. The statesFebruary 27,
12
2004, we also have adopted regulations governingregistered under the design, operation, maintenanceSecurities Act the following shares of
common stock for the following purposes:
- $125 million in shares of our common stock, debt securities, and closurewarrants
to purchase common stock or debt securities, of TSD Facilities. IASI's
facilities and operations are likelywhich $100 million remain
available to be subject to many, if not all, of these
types of requirements.
Finally, various states have enacted, are considering enacting or are
considering repealing, laws that restrict the disposal within the state of solid
or hazardous wastes generated outside the state. While laws that overtly
discriminate against out-of-state waste have been found to be unconstitutional,
some laws that are less overtly discriminatory have been upheld in court.
Challenges to other such laws are pending. The outcome of pending litigation and
the likelihood that other such laws will be passed and will survive
constitutional challenge are uncertain. In addition, Congress is currently
considering legislation authorizing states to adopt such restrictions.
CANADIAN REGULATION. IASI's operations in Canada relating to hazardous
waste treatment, recycling and recovery of chemical waste and waste water are
subject to the general business and environmental laws and regulations of
Canada, which are similar in nature to United States laws and regulations. While
IASI believes that its Canadian operations are in substantial compliance with
applicable laws and regulations, IASI is unable to predict the course of
development of such laws and regulations.
LIABILITY INSURANCE AND BONDING
IASI carries commercial general liability insurance, automobile
liability insurance, workers' compensation, pollution legal liability and
employer's liability insurance as required by law in the various states and
provinces in which operations are conducted and umbrella policies to provide
excess limits of liability over the underlying limits contained in the
commercial general liability, automobile liability and employer's liability
policies. The nature of IASI's environmental services operations exposes it to a
significant risk of liability for legal damages arising out of such operations.
See "Legal Proceedings." The majority of IASI's environmental services
operations have environmental liability insurance subject to certain limitations
and exclusions in excess of the limits required by permit regulations; however,
there is no assurance that such limits would be adequate in the event of a major
loss.
Fromoffered from time to time IASI mayby us to the public under our
universal shelf registration statement;
- 15 million shares of our common stock, all of which remain available to
be requiredoffered from time to post a performance bond or a
bank letter of credittime by us in connection with acquisitions under
our acquisition shelf registration statement; and
- 6 million shares of our common stock, part of a shelf registration
statement, of which a majority have yet to be sold thereunder.
WE ARE RELIANT ON INFORMATION PROCESSING SYSTEMS.
Our ability to provide outsourced business services depends on our capacity
to store, retrieve process and manage significant databases, and expand and
upgrade periodically our information processing capabilities. Interruption or
loss of our information processing capabilities through loss of stored data,
breakdown or malfunctioning of computer equipment and software systems,
telecommunications failure, or damage caused by fire, tornadoes, lightning,
electrical power outage, or other disruption could have a material adverse
effect on our business, financial condition and results of operations. Although
we have disaster recovery procedures in place and insurance to protect against
such contingencies, we cannot be sure that insurance or these services will
continue to be available at reasonable prices, cover all our losses or
compensate us for the operationpossible loss of TSD Facilities,clients occurring during any period that
we are unable to provide outsourced business services.
WE MAY NOT BE ABLE TO ACQUIRE AND FINANCE ADDITIONAL BUSINESSES.
We have made four acquisitions in 2003, and it is our intention to
selectively acquire businesses that are complementary in building out our
service offerings in our target markets. However, we cannot be certain remediation contractsthat we
will be able to continue identifying appropriate acquisition candidates and
acquire them on satisfactory terms. We cannot assure you that such acquisitions,
even if obtained, will perform as expected or will contribute significant
revenues or profits. In addition, we may also face increased competition for
acquisition opportunities, which may inhibit our ability to complete
transactions on terms that are favorable to us. There are certain environmental permits. Bonds issued by
surety companies operate as a financial guarantee of IASI's performance. To
date, IASI has satisfied financial responsibility requirements by making cash
deposits, obtainingprovisions
under our bank lettersline of credit or by obtaining surety bonds.
EMPLOYEES
At December 31, 1996, IASI employed approximately 451 employees, 6 of
whom are partythat may limit our ability to collective bargaining agreements. IASI considers its
relationships with its employees to be satisfactory.
PROPERTIES
IASI's corporate headquarters are located in Valley View, Ohio in
leased premises. Certain of the property and equipment of IASI are subject to
liens securing payment of portions of the indebtedness of IASI and its
subsidiaries. IASI and its subsidiaries also lease six offices in five states,
as well as one office in Canada, and certain of their equipment. IASI believes
that all of its facilities are sufficient for its needs.
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In addition, IASI operates seven TSD Facilities in the United States
and Canada. For more information regarding these properties, see
"- Environmental Services - Operations."
ITEM 3. LEGAL PROCEEDINGS
ADMINISTRATIVE PROCEEDINGS
RES (CLEVELAND) AND REPUBLIC ENVIRONMENTAL SYSTEMS (OHIO), INC.
In June 1993, RES (Cleveland) received a Complaint and Compliance Order
from the Enforcement Division of EPA Region 5 alleging that the former owners of
RES (Cleveland)'s TSD Facility failed to submit a proper RCRA Facility
Investigation ("RFI") workplan to the EPA on a timely basis and fined RES
(Cleveland). In September 1993, EPA Region 5 granted approval for implementation
of the RFI workplan submitted by RES (Cleveland). In June 1995, RES (Cleveland)
reached an agreement with EPA Region 5 by consent agreement and final order (the
"CAFO") to settle the issues related to the former owners' failure to achieve an
approvable RFI workplan. The CAFO included a fine of $60,000 and required the
meeting of certain stipulations. IASI paid the fine in June 1995 and completed
all required activities stipulated under the CAFO in December 1996, and
submitted a final report to the EPA detailing the results. In 1996, the EPA
accepted and approved the final RFI report. The EPA has requested and approved a
second phase of the RFI workplan which requiresacquire additional
sample collections.
In addition, RES (Cleveland) was involved in negotiations with the Ohio
EPA to bring RES (Cleveland)'s facility located in Bedford, Ohio into full
compliance with the Ohio EPA regulations and settle a proposed penalty. In
August 1994, RES (Cleveland) reached an agreement by consent order with the Ohio
EPA which included a penalty for $250,000, payable over a three-year period, as
well as meeting certain stipulations. Final payment on the penalty was made in
1996. RES (Cleveland) has provided all of the required deliverables specified in
the consent order to Ohio EPA and is presently awaiting their final approval.
In June 1996, the Ohio Attorney General's Office began enforcement
proceedings against Republic Environmental Systems (Ohio), Inc. (formerly known
as Ecolotec, Inc., "RES (Ohio)") related to several past alleged violations at
the Dayton, Ohio facility, at which IASI ceased operations in September 1995.
Such violations included the failure to construct certain tertiary containment
features at the facility and issues related to the submission of permit
revisions in connection with the facility's groundwater monitoring program. At
this time, both parties have agreed to enter into a mediation agreement to
attempt to settle these matters with a third party mediator.
In addition, RES (Ohio)'s recent groundwater monitoring program results
indicate that past operations at the facility may have potentially affected
groundwater quality. RES (Ohio) is currently investigating the groundwater
further to determine what, if any, corrective measures should be taken.
In October 1996, the Ohio attorney general's office determined that the
Merger Transactions constituted a change of ownership of Ohio EPA permitted
facilities owned by RES (Cleveland) and RES (Ohio). In addition, the Ohio EPA
may determine that the Merger Transactions constitute a modification of such
permits. As a result, Ohio law requires that the change of ownership of the
permitted facilities, as well as the permit modifications, if any, be approved
by the director of the Ohio EPA, based upon the disclosure statements and an
investigative report prepared by the Ohio attorney general's office. IASI
consummated the Merger Transactions prior to receipt of the requisite approval
of the director of the Ohio EPA as permitted by applicable law. During the
approval process, IASI does not anticipate that the operations at such
facilities will be affected.businesses. In the event that the director of the Ohio EPA
ultimately disapproves such change of ownershipwe are not in compliance with certain covenants as
specified in our credit facility, we could be restricted from making
acquisitions, restricted from borrowing funds from our credit facility for other
uses, or if required, such permit
modifications, IASI would be required to effectpay down the negationoutstanding balance on the line of credit.
However, management believes that funds available under the change of
ownership of such facilities. The negation could be accomplished through the
restoration of the original ownership structure of such facilities, the
disposition of the facilities or another means that compliescredit facility,
along with the
requirements of applicable law.
REPUBLIC ENVIRONMENTAL SYSTEMS (NEW YORK), INC.
In late June 1993, Republic Environmental Systems (New York), Inc.
("RES (New York")) ceasedcash generated from operations, at its TSD Facility in Farmingdale, New
York, due to ongoing disputes and negotiations with various regulatory agencies
including the New York Department of Environmental Conservation (the "New York
DEC"), the town of Oyster Bay and Nassau County. In addition, RES (New York)
received from the New York DEC a proposed Summary Order in an Administrative
Action commenced by the New York DEC against the RES (New York) facility,
whereby the New York DEC sought revocation of RES (New York)'s permit to operate
as a TSD Facility. The New York DEC withdrew a previous consent order against
RES (New York), under which RES (New York) had agreed to pay $100,000 for past
alleged violations at the facility and to resolve several administrative permit
issues.
In early 1994, RES (New York) voluntarily ceased operations at its
hazardous waste TSD Facility and discontinued any efforts to pursue its permit
for this facility as a result of the ongoing disputes described above. In
addition, RES (New York) entered into negotiations for a consent order with the
New York DEC which provided for (i)
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payment of a fine by RES (New York) of $270,000, $170,000 of which will be suspended upon successful completion ofsufficient to meet our
liquidity needs, including planned acquisition activity, in the terms of the consent order, and (ii)
the closure of the facility in accordance with the requirements specified by the
order. RES (New York) has begun closure activities at the facility which it
expectsforeseeable
future. See note 8 to complete by the end of 1997.
PROCEEDINGS COVERED BY THIRD PARTY INDEMNITY
In connection with the acquisition of Stout, the former stockholders of
Stout (the "Party Stockholders") agreed to indemnify RII, IASI, subsidiaries of
IASI and their respective officers, directors, agents and representativesCBIZ's consolidated financial statements included
herewith.
THE OUTSOURCING INDUSTRY IS COMPETITIVE AND FRAGMENTED.
We face competition from
losses associated with, among other things, soil, water and groundwater
contamination occurring prior to RII's acquisition of Stout.
IASI has been identified as a PRP in a number of governmental
investigationssources in both the outsourced
business services industry and actions relatingfrom specialty insurance agencies. Competition in
both industries has led to waste disposal facilities whichconsolidation of many large companies that may be
subject to remedial action under CERCLA. Proceedings arising under CERCLA
typically involve numerous waste generatorshave
greater financial, technical, marketing and other waste transportation and
disposal companies. Generally, these proceedings are based on allegations that
these entities (or their predecessors) transported hazardous substances to the
facilities in question, in all cases prior to acquisition of Stout by RII. As a
successor to Stout, IASI and RII have become a party to and become potentially
liable in these proceedings to the same extent as Stout. IASI and RII have been
indemnified for all costs and expenses incurred with regardresources than us. In addition
to these proceedings
by Party Stockholders. The Party Stockholders' obligation under the indemnity
was secured by a first lien and perfected security interest covering two million
shares of RII's common stock. During June 1995, Party Stockholders had placed
$7.0 million in an escrow account (the "Party Collateral") in lieu of the two
million shares of RII's stock as security for the remaining indemnification
obligations. IASI is currently paying costs and legal expenses with regard to
these proceedings which are then reimbursed by the Party Stockholders. Pursuant
to agreements with RII, IASI has agreed to assume any and all liabilities of RII
in these proceedings and has accepted assignment from RII of all of its rights
in connection therewith, including, without limitation, RII's rights as
indemnitee and pledgee pursuant to the Party Stockholders indemnification
obligations.
Management believes that the legal and environmental proceedings
covered by the indemnity will be resolved in a manner that will not have a
materially adverse effect on IASI's results of operations or combined financial
position.
The following is a description of proceedings whose claims are covered
by the indemnity obligations of the Party Stockholders.
ADAMS OIL, INC.
In March 1996, IASI and the Party Stockholders entered into an
agreement amending the Merger Agreement and the Settlement Agreement to which
they are parties and voiding the transfer of Adams Oil, Inc. ("Adams Oil") to
IASI. Adams Oil is the owner of a former oil terminal located in Camden, New
Jersey at which there is evidence of contamination. Pursuant to such agreement,
on March 3, 1997, IASI transferred ownership of all of the capital stock of
Adams Oil to the Party Stockholders and released to the Party Stockholders $1.5
million of the Party Collateral. The Party Stockholders have agreed to use the
released Party Collateral to comply with New Jersey Department of Environmental
Protection ("NJDEP") requirements regarding the clean-up of the Camden facility,
including the requirement that the Party Stockholders post $500,000 with the
NJDEP within 30 days after the transfer to secure such clean-up. At such time
that the Party Stockholders post the required $500,000 with the NJDEP, IASI has
agreed to release an additional $500,000 of the Party Collateral to the Party
Stockholders. The Party Stockholders also have agreed to indemnify, defend and
hold harmless IASI, its environmental services subsidiary, Republic
Environmental Systems, Inc., and RII from losses incurred in connection with the
environmental condition of the Camden, New Jersey facility.
REPUBLIC ENVIRONMENTAL SYSTEMS (PENNSYLVANIA), INC.
RES (Pennsylvania) has been named as a PRPnew large companies, we face competition in the North Penn Area No. 2
regional groundwater problem involving 56 square miles occupied by hundreds of
industrial companies. The EPA is currently investigating the septic systemoutsourced business
services industry from in-house employee services departments, local outsourcing
companies and the contamination of groundwater and is considering adding other PRP companies.
The EPA and RES (Pennsylvania) have entered into an administrative order on
consent to investigate and determine: (i) whether or not there is sufficient
evidence to indicate that RES (Pennsylvania) has contributed to the groundwater
problem, and (ii) if RES (Pennsylvania) should participate in a regional
investigation. RES (Pennsylvania) has recently completed the required soil and
groundwater testing, as required under the administrative order, and has
submitted a final report to the EPA. Based on the results of this testing, RES
(Pennsylvania) has requested the EPA to release it from further investigation.
In addition, RES (Pennsylvania) also has been named as a PRP along with
13 other primary defendants for the recovery costs to remediate the Moyers
Landfill Site in eastern Pennsylvania. A company previously known as Waste
Conversion of Delaware, Inc. disposed of materials at Moyers Landfill from 1979
to 1981. This company then sold its assets to RES (Pennsylvania), which was then
owned by Stout. RES (Pennsylvania) is currently in settlement negotiations with
the EPA to limit its exposure in this matter.
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RES (New York) and RES (Pennsylvania) are parties in a PRP action with
respect to a former IASI Aqua-Tech TSD Facility in South Carolina. There are 180
parties to date. In April 1993, an agreement was reached whereby IASI paid
approximately $360,000 for proposed settlement of certain issues at the
facility, pending the PRP committee's final allocation to the PRPs.
REPUBLIC ENVIRONMENTAL SYSTEMS (NEW YORK), INC.
The New York DEC has alleged that RES (New York) is liable for unpaid
generator fees in the amount of $240,000 plus interest. RES (New York) and other
owners of New York TSD Facilities argue that the state is subjecting them to
excess fees by categorizing them both as a TSD Facility and as an original waste
generator. The central issue of the amount of generator fees owed by RES (New
York) has been stayed pending New York DEC determination of the appropriate
category for RES (New York) and what generator fee it should pay as a result
thereof. This matter will be settled under the consent order being negotiated
for the facility's closure. Payments scheduled under this order will be credited
to settle this matter.
In addition, on March 19, 1992, the New York DEC informed RES (New
York) that it may be a PRP with respect to the Quanta Resources site in Queens,
New York. At present, RES (New York) is awaiting additional information from the
New York DEC in order to assess the extent of its exposure, but believes it is
not material.
GENERAL
IASI is also a party to other administrative proceedings related to its
environmental services operations which have arisen in the ordinary course of
its business. Although it is possible that losses exceeding amounts already
recorded may be incurred upon ultimate resolution of these matters,independent consultants, as well as from new entrants into our
markets. We cannot assure you that, as our industry continues to evolve,
additional competitors will not enter the matters described above, management believesindustry or that our clients will not
choose to conduct more of their business services internally or through
alternative business services providers. Although we intend to monitor industry
trends and respond accordingly, we cannot assure you that we will be able to
anticipate and successfully respond to such losses, if any,trends in a timely manner. We cannot
be certain that we will be able to compete successfully against current and
future competitors, or that competitive pressure will not have a material
adverse effect on IASI'sour business, or financial position;
however, unfavorable resolutioncondition and results of each matter individually oroperations.
13
CBIZ makes available, free of charge on its website, , through the Investor
Information page, its annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to all those reports as soon
as reasonably practicable after CBIZ files (or furnishes) such reports to the
U.S. Securities and Exchange Commission. In addition, our corporate code of
conduct and ethics and the charters of the Audit Committee, the Compensation
Committee and the Nominating and Governance Committee of the Board of Directors
are available on the Investor Relations page of CBIZ's website, referenced
above, and in print to any shareholder who requests them.
ITEM 3. LEGAL PROCEEDINGS
Since September 1999, seven purported stockholder class-action lawsuits
filed against CBIZ and certain of our current and former directors and officers
were consolidated as In Re Century Business Services Securities Litigation, Case
No. 1:99CV2200, in the aggregate
could affectUnited States District Court for the consolidatedNorthern District of
Ohio. The plaintiffs alleged that the named defendants violated certain
provisions of the Securities Exchange Act of 1934 and certain rules promulgated
thereunder in connection with certain statements made during various periods
from February 1998 through January 2000 by, among other things, improperly
amortizing goodwill and failing to adequately monitor changes in operating
results. The United States District Court dismissed the matter with prejudice on
June 27, 2002. The matter was appealed by the plaintiffs to the Sixth Circuit
Court of Appeals. No decision has been rendered on the appeal.
CBIZ and the named officer and director defendants deny all allegations of
wrongdoing made against them in these actions and intend to continue vigorously
defending this matter. Although the ultimate outcome of such litigation is
uncertain, based on the allegations contained in the complaints and the
carefully considered judgment of the District Court in dismissing the case,
management does not believe that this lawsuit will have a material adverse
effect on the financial condition, results of operations foror cash flows of CBIZ.
In addition to the quarterly periodsabove-disclosed items, CBIZ is from time to time subject
to claims and suits arising in which they are resolved.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 CBIZ.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of CBIZ's stockholders during the
fourth quarter of 1996.
17the fiscal year covered by this Annual Report.
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EXECUTIVE OFFICERS OF IASI
The following table sets forth certain information as of March 28, 1997
regarding the executive officers of IASI. Each executive officer of IASI named
in the following table has been elected to serve until his successor is duly
appointed or elected or until his or her earlier removal or resignation from
office. No arrangement or understanding exists between any executive officer of
IASI and any other person pursuant to which he was selected as an officer.
NAME AGE POSITION(S)
---- --- -----------
Michael G. DeGroote 63 Chairman of the Board
Edward F. Feighan 49 Chief Executive Officer, President and Director
Roswell P. Ellis 62 Senior Vice President - Insurance Group
Douglas R. Gowland 55 Senior Vice President - Environmental Operations
and Director
Keith W. Reeves 40 Senior Vice President - Business Services
Gregory J. Skoda 40 Executive Vice President and
Chief Financial Officer
Craig L. Stout 48 Chief Operating Officer and Director
MICHAEL G. DEGROOTE has served as the Chairman of the Board of IASI
since the Spin-off. Mr. DeGroote also served as President and Chief Executive
Officer of IASI from the Spin-off until the Merger Transactions in October 1996.
Mr. DeGroote has served as Vice Chairman and a director of Republic Industries,
Inc. ("RII") since August 1995. Mr. DeGroote also served as Chairman of the
Board, President and Chief Executive Officer of RII from May 1991 to August 1995
and Senior Chairman of the Board of RII from May 1991 to August 1991. Mr.
DeGroote is a private investor who owned a controlling interest in Laidlaw Inc.,
a Canadian waste services company, from 1959 until he sold his interest to
Canadian Pacific Limited in 1988. Mr. DeGroote also serves as a director of Gulf
Canada Resources, Inc.
EDWARD F. FEIGHAN has served as Chief Executive Officer, President and
a Director of IASI since October 1996. Mr. Feighan is also Vice President of
Alliance Holding Corporation ("Alliance Holding"), a position he has held since
joining Alliance Holding in 1993. From 1983 until 1993, Mr. Feighan served as
the representative from the Ohio 19th Congressional District of the United
States House of Representatives. During his tenure in Congress, Congressman
Feighan served on the Judiciary and the House Foreign Affairs Committee;
Chairman, International Narcotics Control Committee; President, The
Interparliamentary Union; and permanent Representative to the Helsinki
Commission. He currently serves on the board of trustees of the National
Democratic Institute for International Affairs, the Handgun Control Federation
of Ohio, and the Rock and Roll Hall of Fame and Museum.
ROSWELL P. ELLIS has served as the Senior Vice President - Insurance
Group since March 1997. Mr. Ellis serves as Chairman and President of CSC, a
position he has held since 1987, and Chairman of Continental Heritage and
Evergreen, all subsidiaries of IASI.
DOUGLAS R. GOWLAND has served as the Senior Vice President -
Environmental Operations since October 1996 and a Director of IASI. In addition,
Mr. Gowland has served as President of IASI's hazardous waste subsidiaries since
March 1992. From the date of the Spin-off until the Merger Transactions, Mr.
Gowland served as IASI's Executive Vice President and Chief Operating Officer.
From March 1992 until the Spin-off, Mr. Gowland served as President of IASI.
From January 1992 to April 1995, Mr. Gowland served as Vice President -
Hazardous Waste Operations of RII. From March 1991 to January 1992, Mr. Gowland
served as Vice President of DRG Environmental Management, Inc. Prior thereto, he
served as President of Great Lakes Environmental Systems, Ltd.
KEITH W. REEVES has served as the Senior Vice President - Business
Services since March 1997. Mr. Reeves also serves as the President of SMR, a
position of which he has held since December 1996. Mr. Reeves served as Vice
President of SMR from August 1984 until its acquisition by IASI in December
1996. Mr. Reeves is a member of the American Institute of Certified Public
Accountants and the Ohio Society of Certified Public Accountants.
GREGORY J. SKODA has served as the Executive Vice President and Chief
Financial Officer of IASI since December 1996. Mr. Skoda also serves as the Vice
President and Chief Financial Officer of Alliance Holding, a position he has
held since June 1, 1994. Prior to IASI's acquisition of SMR in December 1996,
Mr. Skoda served as President and Chairman of SMR, which Mr. Skoda founded in
1980. Mr. Skoda is an active member of the American Institute of Certified
Public Accountants in the Tax, Employee Benefits, and Management Advisory
Services divisions.
CRAIG L. STOUT has served as Chief Operating Officer and a Director of
IASI since October 1996. Mr. Stout also serves as Chief Operating Officer of
Alliance Holding, a position he has held since the formation of Alliance Holding
in 1987. Prior to the Mergers, Mr. Stout served as President and Chairman of two
other companies which
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he founded, Contract Operations Planning, Inc., a surety claims management firm,
and Contract Surety Reinsurance Corporation, a reinsurance intermediary for
facultative surety reinsurance. These companies were merged into Alliance
Holding prior to the effective date of the Merger Transactions and their
operations are now conducted by IASI.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
IASI's Common StockPRICE RANGE OF COMMON STOCK
The common stock of CBIZ is listedquoted on the Nasdaq which is the principal trading
market for these securities,National Market under the
trading symbol "IASI.""CBIZ". The following table below sets forth for the periods indicated, therange of high and low
sales prices for the Common Stock as listedreported on Nasdaq.the Nasdaq National Market for
the periods indicated.
PRICE RANGE OF
COMMON STOCK
PRICE
RANGE
-------------------------------------
HIGH LOW
---- --------- ------
19952002
First Quarter............................................. $3.56 $2.05
Second Quarter(1)....................... $2 1/4 $1 1/4Quarter............................................ 4.07 2.81
Third Quarter........................... $4 $1 13/16Quarter............................................. 3.21 1.91
Fourth Quarter.......................... $2 5/16 $1 9/16
1996Quarter............................................ 3.50 2.20
2003
First Quarter........................... $1 19/32 $1 1/4Quarter............................................. 2.99 2.30
Second Quarter.......................... $20 7/8 $1 7/16Quarter............................................ 3.27 2.50
Third Quarter........................... $18 3/4 $4 3/4Quarter............................................. 4.85 3.10
Fourth Quarter.......................... $12 3/4 $7 1/2Quarter............................................ 4.90 3.80
(1) ConsistedOn December 31, 2003, the last reported sale price of the period from the date on which the Common Stock was
first listed on Nasdaq, April 27, 1995, through June 30, 1995.
On March 27, 1997, the closing sales price ofCBIZ's Common Stock
as reported byon the Nasdaq National Market (Nasdaq Amex-Online) was $11.125$4.47 per
share. The numberAs of February 27, 2004, CBIZ had approximately 9,400 holders of record
holders of Common Stockits common stock, and the last sale of CBIZ's common stock as of March 7, 1997,that date
was 953.
Since the Spin-off, IASI$4.42.
DIVIDEND POLICY
CBIZ has not declared or paid anycash dividends on its Common Stockcommon stock since April 27, 1995,
and does not anticipate paying cash dividends in the foreseeable future. CBIZ's
Board of Directors decides on the payment and level of dividends on common
stock. The Board of Directors' decision is based among other things on results
of operations and financial condition. In addition, CBIZ's credit facility
contains a requirement for lender consent prior to the declaration of any
dividends. CBIZ currently intends to retain future earnings to finance the
ongoing operations and growth of the business. Any future determination as to
dividend policy will be made at the discretion of the Board of Directors does not currently anticipate paying
dividendsand
will depend on the Common Stock at any time in the foreseeable future. The paymenta number of factors, including future dividends will be determined by IASI'searnings, capital
requirements, financial condition and future prospects, limitations on dividend
payments pursuant to credit or other agreements and such other factors as the
Board of Directors in light of
conditions then existing, including IASI's earnings, financial condition,
capital requirements, restrictions in financing agreements, business conditions
and other factors. The payment of dividends on the Common Stock is presently
prohibited under the terms of IASI's credit facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
19may deem relevant.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data for IASICBIZ
and areis derived from the historical consolidated and combined financial statements and notes
thereto, which are included elsewhere in this Annual Report
of IASI.Report. The information set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
and combined financial statements of IASI and
the notes thereto, which are included elsewhere in this Annual
Report.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ---------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Premiums earned ..........................STATEMENT OF OPERATIONS DATA:
Revenue........................................... $512,762 $499,209 $510,534 $ 27,743 $ 26,962 $ 23,368 $ 17,373 $ 11,534
Net investment income .................... 3,564 3,341 2,477 1,377 1,272
Net realized gains (losses) on investments 1,529 166 80 (91) 210
Other income ............................. 2,933 470 1,385 1,737 269543,472 $521,919
Operating expenses................................ 448,707 439,916 441,215 483,182 435,660
-------- -------- -------- --------- --------- --------- --------- ---------
Net revenues ............................. $ 35,769 $ 30,939 $ 27,310 $ 20,396 $ 13,285
========= ========= ========= ========= =========
Interest expense ......................... $ 46--------
Gross margin...................................... 64,055 59,293 69,319 60,290 86,259
Corporate general and administrative expense...... 19,647 19,672 19,797 24,694 19,138
Depreciation and amortization expense............. 17,161 20,474 40,477 43,196 22,125
Merger-related expenses........................... -- -- -- -- 5,789
-------- -------- -------- --------- --------
Operating income (loss)........................... 27,247 19,147 9,045 (7,600) 39,207
Other expenses ........................... 4,384 $ 3,157 $ 4,544 $ 3,287 $ 2,039income (expense):
Interest expense.............................. (1,055) (2,478) (6,797) (12,088) (6,544)
Goodwill impairment........................... -- -- -- (32,953) --
Gain (loss) on sale of operations, net........ 2,519 930 (7,113) (31,576) (7,067)
Other income (expense), net................... (1,093) (1,073) 3,885 (5,780) (4,634)
-------- -------- -------- --------- --------
Total other income (expense)................ 371 (2,621) (10,025) (82,397) (18,245)
Income (loss) from continuing operations before
income tax expense ..................... 6,062 4,891 4,844 3,485 2,123expense.............................. 27,618 16,526 (980) (89,997) 20,962
Income tax expense ....................... 1,640 1,422 1,344 1,189 751expense................................ 12,096 8,421 12,208 1,477 12,370
-------- -------- -------- --------- --------- --------- --------- -----------------
Income (loss) from continuing operations ........ 4,422 3,469 3,500 2,296 1,372operations.......... 15,522 8,105 (13,188) (91,474) 8,592
Loss from operations of discontinued operations ........ (38)businesses,
net of tax...................................... (932) (2,475) (2,812) (17,000) (758)
Gain (loss) on disposal of discontinued
businesses, net of tax.......................... 726 (2,471) -- (5,697) (391)
Cumulative effect of change in accounting
principle, net of tax........................... -- (80,007) -- (11,905) --
-------- -------- -------- --------- --------- --------- --------- -----------------
Net income ...............................(loss)................................. $ 4,38415,316 $(76,848) $(16,000) $(126,076) $ 3,469 $ 3,500 $ 2,296 $ 1,3727,443
======== ======== ======== ========= ========= ========= ========= =========
Gross written premiums ................... $ 42,888 $ 37,695 $ 37,869 $ 29,992 $ 17,786
Net written premium ...................... 31,149 26,677 27,219 21,173 12,089
Weighted========
Basic weighted average common andshares.............. 90,400 94,810 94,818 94,674 86,851
Diluted weighted average common share equivalents ............... 32,213 16,956 16,956 16,956 16,956
Earningsshares (2)........ 92,762 96,992 94,818 94,674 91,702
Diluted earnings (loss) per share:
Primary ................................From continuing operations...................... $ 0.21 $ 0.20 $ 0.20 $ 0.140.17 $ 0.08 ========= ========= ========= ========= =========
Fully diluted $ (0.14) $ (0.96) $ 0.09
From discontinued operations.................... $ -- $ (0.05) $ (0.03) $ (0.24) $ (0.01)
From cumulative effect of accounting change..... $ -- $ (0.82) $ -- $ (0.13) $ 0.00
-------- -------- -------- --------- --------
From net income (loss).......................... $ 0.160.17 $ 0.20(0.79) $ 0.20(0.17) $ 0.14(1.33) $ 0.08
======== ======== ======== ========= ========= ========= ========= =========
Loss ratio ............................... 41.3% 39.2% 37.9% 38.0% 34.6%
LAE ratio ................................ 22.5% 16.9% 15.6% 11.6% 11.5%
Expense ratio ............................ 38.0% 39.9% 43.5% 39.7% 48.0%
--------- --------- --------- --------- ---------
Combined ratio ........................... 101.8% 96.0% 97.0% 89.3% 94.1%
========= ========= ========= ========= =========
Invested assets and cash .................========
OTHER DATA:
Total assets...................................... $402,145 $433,111 $528,349 $ 108,523649,494 $809,085
Total liabilities................................. $124,307 $138,793 $157,702 $ 60,908262,556 $295,953
Total stockholders' equity........................ $277,838 $294,318 $370,647 $ 57,642386,938 $513,132
PRO FORMA NET INCOME (1) :
Net income (loss) from continuing operations...... $ 46,67015,522 $ 30,727
Goodwill, net of amortization ............ 6,048 -- -- -- --
Total assets ............................. 167,330 86,735 81,931 68,117 36,926
Loss and loss expense payable ............ 41,099 37,002 34,661 29,528 14,107
Total liabilities ........................ 76,008 59,967 58,100 50,304 23,895
Total Shareholders' equity ............... 91,322 26,768 23,580 18,401 13,0318,105 $ 5,164 $ (66,870) $ 14,741
Basic earnings (loss) per share................... $ 0.17 $ 0.08 $ 0.05 $ (0.71) $ 0.17
Diluted earnings (loss) per share (2)............. $ 0.17 $ 0.08 $ 0.05 $ (0.71) $ 0.16
20- ---------------
(1) Pro forma net income (loss) represents income from continuing operations
assuming the change in accounting principles for Securities Exchange
Commission Staff Accounting Bulletin (SAB) No. 101, adopted January 1, 2000,
and Financial Accounting Standards Board (SFAS) No. 142, adopted January 1,
2002, were applied retroactively, net of taxes, for all periods presented.
16
22(2) Pro forma diluted weighted average common shares for 2001 are 96,442, as the
effect of the incremental shares are not anti-dilutive on a pro forma basis.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in the understanding of
IASI'sCBIZ's financial position and results of operations for each of the years ended
December 31, 1996, 19952003, 2002 and 1994.2001. This discussion should be read in conjunction
with IASI'sCBIZ's consolidated and combined financial statements and notes thereto included
herein. In accordance with IASI's intentelsewhere in this Annual Report.
RECENT DEVELOPMENTS
CBIZ is focused on acquiring businesses that will complement its service
offerings in those primary markets where CBIZ already has a significant
presence. During 2003, CBIZ acquired benefits and insurance operations located
in Boca Raton, Florida, and Salt Lake City, Utah. The company also acquired an
accounting, tax and advisory operations in Orange County, California, and
acquired HarborView Partners, a firm specializing in internal audit services,
located in Stamford, Connecticut. Before acquiring HarborView Partners, CBIZ had
an arrangement to sellbe the exclusive provider of professional staff to the firm.
CBIZ continues to rationalize and sharpen the focus of its environmental
services operations the results ofby
divesting or closing non-core and non-performing units. During 2003, twelve
operations related to such operations have
been reflected as a discontinued operation in IASI's consolidated and combined
financial statements. See "Results of Operations - Discontinued Operations."
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Revenues increased $4.9 million, or 16%, from $30.9 million in 1995
to $35.8 million in 1996 and consist of the following:
YEAR ENDED
DECEMBER 31,
------------------
DOLLAR
1996 1995 CHANGE
------- ------- ------
(in thousands)
Premiums earned............................................... $27,743 $26,962 $781
Net investment income......................................... 3,564 3,341 223
Net realized gains on investments............................. 1,529 166 1,363
Other income.................................................. 2,933 470 2,463
------- ------- ------
Total revenues................................................ $35,769 $30,939 $4,830
------- ------- ------
Premiums earned increased approximately $800,000 on an increase of $4.4
million in net written premiums in 1996. Much of the increase in net written
premiums was recorded in the second half of 1996, which directly impacted IASI's
earned premium. On a gross written basis, IASI reported an increase of $5.1
million in 1996, $5.0 millionwere divested, six of which was generated through brokerages and
$800,000 of which was generated through general agencies. These increases were offset by a $1.3 million decline in IASI's remedial action coverages.
IASI reported increases in net investment income of $223,000 and net
realized gains on investments of $1.5 million in 1996. Net investment income
grew 6.7% on invested assets of $68.6 million in 1996. IASI's $1.4 million
increase in net realized gains on investments from $166,000 in 1995 to $1.5
million in 1996 is attributable to the gains realized on the sale of certain
equity investments.
Other income increased $2.5 million in 1996 over 1995 and is
attributable to non-recurring income of $1.1 million from the American Sentinel
settlement, higher commission income of $400,000 and SMR revenues of $600,000
since its acquisition.
Total expenses increased $3.7 million to $29.7 million in 1996 from
$26.0 million in 1995. Such increase was attributable to the change in loss and
loss adjustment expenses ("LAE") of $2.5 million and other expenses of $1.2
million. While losses incurred have increased $844,000, loss development from
prior years increased $1.4 million and primarily relate to property losses,
which were higher than normal. In addition, IASI has experienced increases in
LAE to $6.2 million in 1996 from $4.5 million in 1995. Such increases are
attributable to IASI's business mix, primarily its casualty lines of business,
and to the general litigation climate. The casualty lines of business generally
have higher loss adjustment costs relative to premium dollars. Another factor
affecting this increase is the court ruling in the case of Montrose Chemical
Corporation v. Admiral Insurance Company. The California Supreme Court adopted a
"continuous trigger of coverage" in cases involving continuous and progressive
third party damage claims. Insurance companies are liable for claims occurring
prior to the policy period for claims which continued to progress during the
course of the policy term. The exposure to IASI does not have a residual impact
on loss reserves but does have a direct effect on IASI's loss adjustment
reserving practices due to a higher potential for claims handling and litigation
costs.
Other expenses increased $1.2 million to $4.4 million in 1996 from $3.2
million in 1995 and primarily were affected by the initial consolidation of SMR
in December and other general corporate expenses incurred in the fourth quarter
of 1996. Other costs attributable to IASI's insurance services business improved
slightly to $2.9 million in 1996 from $3.1 million in 1995.
21
23
Income from continuingclassified as discontinued
operations before taxes increased $1.2 million,
or 23.9%, to $6.1 million in 1996 from $4.9 million in 1995 and net income
increased $915,000, to $4.4 million in 1996 from $3.5 million in 1995 primarily
for the reasons stated above.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
Total revenues increased $3.6 million, or 13% to $30.9 million in 1995
from $27.3 million in 1994. Premiums earned increased $3.6 million to $27.0
million in 1995 from $23.4 million in 1994, while net premiums declined $500,000
to $26.7 million in 1995 from $27.2 million in 1995. The timing of earned
premiums primarily accounted for the increase in total revenues. Timing
differentials reflect the changing mix of products to a substantially greater
concentration in the commercial lines and environmental surety businesses and a
decrease in the private passenger auto physical damage and miscellaneous surety
business. Commercial lines written premiums increased by $1.5 million but were
offset by a reduction in the automotive and miscellaneous surety business
following IASI's decision to withdraw from these markets. Also contributing to
the revenue increase was $864,000 in net investment income during 1995, a 35%
increase over 1994 revenues. Total revenue in 1994 included a gain of $807,000
attributable to the American Sentinel settlement.
Total expenses increased $3.5 million to $26.0 million in 1995 from
$22.5 million in 1994. Such increase was primarily a result of a $2.6 million
increase in loss and LAE. The increase in loss and LAE was a direct result of
increased premium revenue of $3.6 million. Acquisition expenses also increased
$2.3 million in 1995 from 1994. As a percentage of total revenue, total expenses
for 1995 and 1994 were 84% and 82%, respectively.
Primarily for the reasons stated above, 1995 income before income taxes
increased $47,000, or 1%, to $4.9 million in 1995 from $4.8 million in 1994 and
net income decreased $31,000, or 1%, to $3.5 million in 1995 from $3.5 million
in 1994.
BALANCE SHEET SUMMARY
The following tables set forth the key elements of IASI's balance
sheet:
ASSETS:
YEAR ENDED
DECEMBER 31,
--------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Total cash and invested assets................................ $108,523 $60,908 $57,642
Premiums receivable........................................... 7,013 4,467 5,201
Other assets.................................................. 51,794 21,360 19,088
-------- ------- -------
Total assets.................................................. $167,330 $86,735 $81,931
-------- ------- -------
LIABILITIES:
YEAR ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(in thousands)
Total liability for loss/LAE.................................. $41,099 $37,002 $34,661
Unearned premium.............................................. 18,637 15,636 15,453
Other liabilities............................................. 16,272 7,329 8,382
------- ------- -------
Total liabilities............................................. $76,008 $59,967 $58,496
------- ------- -------
CAPITAL AND SURPLUS:
YEAR ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Total shareholders' equity.................................... $91,322 $26,768 $23,580
22
24
COMBINED AND OPERATING RATIOS
The combined ratio is the sum of the loss ratio and expense ratio and
is the traditional measure of underwriting performance for insurance companies.
The operating ratio is the combined ratio less the net investment income ratio
(net investment income to net earned premium) excluding realized and unrealized
capital gains and is used to measure overall company performance.
The following table reflects the loss, LAE, expense, combined, net
investment and operation ratios of IASI on a generally accepted accounting
principles ("GAAP") basis for each of the years ended December 31 1996, 1995 and
1994:
YEAR ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
Loss ratio.................................................... 41.3 39.2 37.9
LAE ratio..................................................... 22.5 16.9 15.6
Expense ratio................................................. 38.0 39.9 43.5
----- ---- ----
Combined ratio................................................ 101.8 96.0 97.0
Net investment ratio.......................................... 12.9 12.4 10.6
Operating ratio............................................... 88.9 83.6 86.4
EXPENSES
The expense ratio reflected in the foregoing table is the relationship of
operating costs to net written premiums on a GAAP basis. The statutory ratio
differs from the GAAP ratio as a result of different treatment of acquisition
costs. Expense ratios have been favorably impacted by reinsurance contingencies.
INVESTMENTS AND INVESTMENT INCOME
Investments of IASI are restricted to certain investments permitted by Ohio and
Utah insurance laws. IASI's investment policy has been established by IASI's
investment committee and is reviewed periodically. IASI has retained an
independent professional investment firm to manage its fixed income portion of
the investment portfolio pursuant to the investment policy and strategy.
IASI accounts for its investment securities in accordance with Statement of Financial Accounting Standards ("SFAS") No.
115,144, "Accounting for Certain
Investmentsthe Impairment or Disposal of Long-Lived Assets." The
operations not meeting the criteria for treatment as discontinued operations
have been accounted for as gain (loss) on divested operations from continuing
operations in Debt and Equity Securities" which was adopted by the Financial
Accounting Standards Board (the "FASB"). Fixed maturity securitiesaccompanying statements of operations. CBIZ will continue to
divest those non-strategic businesses that IASI hasare either under-performing, are
located in secondary markets, or that do not provide the positive intent and ability to hold to maturitylevel of synergistic
cross-serving opportunities with other CBIZ businesses that is desired.
Additional gains or losses may be incurred as future transactions are carriedcompleted.
During the third quarter of 2003, CBIZ acquired approximately 10 million
shares of its common stock through a modified Dutch Auction tender offer. These
shares were purchased at amortized
cost. As IASI's fixed income securities mature, there can be no assurance that
IASI will be able to reinvest in securities with comparable yields. IASI's other
fixed maturity and all equity securities are classified as available-for-sale$3.30 per share, for a total cost, including expenses,
of approximately $33.2 million, and are currently carried at market value.as treasury stock.
RESULTS OF OPERATIONS -- CONTINUING OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 2003 TO YEAR ENDED DECEMBER 31, 2002
Operating Practice Groups
CBIZ currently delivers products and services through three practice
groups. Below is a brief description of these groups' operating results and
factors affecting their businesses. The unrealized gainsservices offered under each of these
groups are described in Part I of this report.
Accounting, Tax and losses asAdvisory Services. The ATA group contributed
approximately $203.4 million and $205.7 million of revenue, or approximately 39%
and 41% of CBIZ's annual revenue in 2003 and 2002, respectively. The decrease in
revenue of $2.3 million was a result of divestitures and the valuation is reported as a separate componenttransfer of shareholders' equitycertain
technology businesses to the National Practices group during 2003, offset by
organic growth. Divestitures, net of appropriate deferred income taxes. IASI has no investments classified as trading
securities.acquisitions, resulted in a net decline in
revenue of $0.2 million in 2003. The following table sets forth IASI's investment income for eachtransfer of the years ended December 31, 1996, 1995 and 1994:
YEAR ENDED
DECEMBER 31,
------------------------------
1996 1995 1994
------ ------ ------
(in thousands)
Net investment income......................................... $3,564 $3,341 $2,477
Net realized gain on
investments................................................ 1,529 166 80
------ ------ ------
Total investment income....................................... $5,093 $3,507 $2,557
====== ====== ======
Investment yield.............................................. 5.31% 5.56% 4.78%
Net unrealized appreciation
(depreciation)certain technology business
from ATA to National Practices in January 2003 resulted in a decrease in revenue
of $5.1 million. For ATA businesses with a full period of investments (net of tax)................. $3,696 $3,266 $(1,208)
23
25
LIABILITY FOR LOSSES AND LOSS EXPENSES PAYABLE
As of December 31, 1996, the liability for losses and LAE constituted
54% of IASI's consolidated liabilities. IASI has established reserves that
reflect its estimates of the total losses and LAE it will ultimately be required
to pay under insurance and reinsurance policies. Such reserves include losses
that have been reported but not settled and losses that have been incurred but
not reported ("IBNR"). Loss reserves are established on an undiscounted basis
after reductions for deductibles and estimates of salvage subrogation.
For reported losses, IASI establishes reserves on a "case" basis within
the parameters of coverage provided in the related policy. For IBNR losses, IASI
estimates reserves using established actuarial methods. Case and IBNR loss
reserve estimates reflect such variables as past loss experience, social trends
in damage awards, changes in judicial interpretation of legal liability and
policy coverages, and inflation. IASI takes into account not only monetary
increases in the cost of what is insured, but also changes in societal factors
that influence jury verdicts and case law and, in turn, claim costs. IASI's loss
reserves have been certified in accordance with the requirements of the National
Association of Insurance Commissioners.
The consolidated and combined financial statements of IASI include the
estimated liability for unpaid losses and LAE of IASI's insurance operations.
Reserves for unpaid losses covered by insurance policies and bonds consist of
reported losses and IBNR losses. These reserves are determined by claims
personnel and the use of actuarial and statistical procedures and they represent
undiscounted estimates of the ultimate cost of all unpaid losses and LAE through
year end. Although management uses many resources to calculate reserves, a
degree of uncertainty is inherent in all such estimates. Therefore, no precise
method for determining ultimate losses and LAE exist. These estimates are
subject to the effect of future claims settlement trends and are continually
reviewed and adjusted (if necessary) as experience develops and new information
becomes known. Any such adjustments are reflected in current operations.
Activity in the liability for unpaid losses and loss expense is
summarized in the following table:
YEAR ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Balance at January 1.......................................... $37,002 $34,661 $29,528
Less insurance recoverables................................ (8,914) (9,383) (8,505)
------- ------ -------
Net balance at January 1...................................... $28,088 $25,278 $21,023
------- ------ -------
Incurred related to:
Current year............................................... 17,216 17,297 14,753
Prior years................................................ 408 (2,180) (2,259)
------- ------ -------
Total incurred................................. 17,624 15,117 12,494
------- ------ -------
Paid related to:
Current year............................................... 3,684 5,963 4,269
Prior years................................................ 9,043 6,344 3,970
------- ------ -------
Total paid..................................... 12,727 12,307 8,239
------- ------ -------
Net balance at end of period.................................. 32,985 28,088 25,278
Plus reinsurance recoverables.............................. 8,114 8,914 9,383
------- ------ -------
Balance at end of period...................................... $41,099 37,002 $34,661
======= ====== =======
ANALYSIS OF LOSS AND LAE DEVELOPMENT
Year Ended December 31,
------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
Net liability for losses and
loss expenses................. $2,276 3,484 7,202 8,168 10,428 12,775 14,107 21,023 25,278 28,088 32,985
Cumulative amount of net
liability paid through:
One year later............ 1,262 1,566 2,985 2,404 2,404 2,811 3,026 4,131 6,309 8,785 --
Two years later........... 1,943 2,172 3,876 3,433 4,090 4,894 3,848 7,503 11,161
Three years later......... 2,205 2,623 4,398 4,322 5,239 5,372 4,786 9,346
Four years later.......... 2,482 2,759 4,799 4,984 5,184 6,010 5,119
Five years later.......... 2,562 2,907 5,140 4,880 5,352 6,102
Six years later........... 2,677 2,927 5,147 4,953 5,352
Seven years later......... 2,693 2,935 5,152 4,947
Eight years later......... 2,702 2,935 5,135
Nine years later.......... 2,702 2,917
Ten years later........... 2,700
The retroactively
reestimated net liability
for loss and loss
expenses as of:
One year later............ 2,888 4,277 7,406 8,388 10,674 12,003 12,587 18,910 23,049 28,246 --
Two years later........... 3,375 4,032 7,445 8,504 9,239 10,877 9,829 17,531 22,193
Three years later......... 3,132 4,042 7,419 7,025 8,183 8,419 8,899 16,174
Four years later.......... 3,056 4,028 6,365 6,668 6,631 8,675 7,822
Five years later.......... 3,039 3,420 6,311 5,638 6,320 7,467
Six years later........... 2,849 3,406 5,534 5,243 5,823
Seven years later......... 2,829 3,009 5,308 5,133
Eight years later......... 2,708 2,949 5,230
Nine years later.......... 2,713 2,926
Ten years later........... 2,706
------ ----- ----- ----- ----- ------ ------ ------ ------ ------ ------
Net cumulative redundancy
(deficiency)................ $ (430) 558 1,972 3,035 4,605 5,308 6,285 4,849 3,085 (158) --
====== ===== ===== ===== ===== ====== ====== ====== ====== ====== ======
Gross liability - end of year ...................................................................... $34,661 37,002 41,099
Reinsurance recoverable ............................................................................ 9,383 8,914 8,114
------ ------ ------
Net liability - end of year ........................................................................ 25,278 28,088 32,985
====== ====== ======
The data set forth in the table above does not reflect the adoption of SFAS
No. 113.
DISCONTINUED OPERATIONS
IASI's results of operations related to its environmental services
operations have been reflected as a discontinued operation in IASI's
consolidated and combined financial statements as a result of IASI's execution
of the non-binding Letter of Intent. See Note 15 to the Consolidated and
Combined Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION
IASI had cash and investments, excluding mortgage loans, of $104.8
million, $57.5 million, and $54.7 million at December 31, 1996, 1995 and 1994,
respectively. The $47.3 million increase from 1995 to 1996 is a result of IASI's
generation of proceeds from stock issuances from exercises of outstanding
options and warrants and the Private
24
26
Placement (defined herein), profits and additional loss reserves on an
increasing volume of liability coverages which have slower payout patterns than
property coverages.
Net cash provided by operations for the
years ended December 31, 1996,
1995,2003 and 1994 was $13.22002 (excluding acquisitions, divestitures and
transfers), revenue increased $3.0 million $3.6or 1.5%. Gross margins decreased from
13.8% in 2002 to 12.4% in 2003 primarily due to increased compensation and
benefits costs that rose at a rate higher than revenue. CBIZ expects its ATA
Services group to achieve modest revenue growth, as well as improvement in gross
margin in 2004. Improvements in staff utilization, as well as the acquisition of
HarborView Partners and related opportunities with Sarbanes-Oxley compliance and
consulting, a new product offering to
17
provide diagnostic information to clients regarding their financial condition,
and modest billing rate increases are expected to contribute to such growth and
margin improvement. The economic environment is expected to improve in 2004,
which will offer opportunities for additional discretionary work.
Benefits and Insurance Services. The Benefits and Insurance group
contributed approximately $162.1 million and $9.7$150.5 million of revenue, or
approximately 32% and 30% of CBIZ's annual revenue in 2003 and 2002,
respectively. These amounts were adequateThe increase in revenue is attributable to meet allorganic growth,
including larger bonuses from insurance carriers, as well as acquisitions.
Revenue increased $7.8 million due to acquisitions, offset by the decrease in
revenue related to divestitures completed during the year ended December 31,
2003 of IASI's capital expenditure, operating$7.2 million. For Benefits and acquisition costs and resulted primarily from earnings and the timingInsurance businesses with a full period
of reinsurance contingency transactions.
IASI's financing activities provided net cashoperations for the years ended December 31, 1996, 19952003 and 19942002, same-unit revenue
increased $11.0 million, or 8.0%. The gross margin increased from 18.0% in 2002
to 20.8% in 2003. CBIZ Benefits and Insurance group continued to benefit in 2003
from increasing group benefits premium rates. In addition, the worksite
marketing business experienced significant revenue growth due to an increasing
number of $35.7 million, $5.6new clients. The life insurance business also experienced revenue
growth through the sale of several large life cases and special risk insurance
cases, combined with bank-owned life insurance placements related to one major
carrier. CBIZ expects revenue and margin growth to continue in 2004, but may not
be able to sustain the levels of organic growth achieved during 2003, based on
the number of large cases placed that may not recur in future periods.
National Practices Services. The National Practices group contributed
approximately $147.3 million and $143.0 million of revenue, or approximately 29%
of CBIZ's annual revenue in 2003 and 2002, respectively. Included in the results
of the National Practices group are those of CBIZ MMP, which contributed
approximately $75.8 million and $66.2 million, or 15% and 13%, of CBIZ's annual
revenue in 2003 and 2002, respectively. This growth of 14.5% is attributable to
the addition of new clients, including the expansion into new markets, such as
the entrance into the Colorado market. Revenue for CBIZ MMP is based on a
percentage of amounts collected for their clients. The gross margin increased
from 17.6% in 2002 to 18.8% in 2003. CBIZ MMP invested capital dollars in
systems and new technologies in 2003 in order to accommodate future growth.
These systems are planned to be operational in 2004. Although CBIZ expects
growth in revenue of CBIZ MMP to continue, due to investments in systems and
technologies and the start-up costs incurred for opening new offices, we cannot
assure that gross margin growth will continue at the levels experienced in
recent years.
The other units within National Practices, excluding CBIZ MMP, contributed
approximately $71.5 million and $76.8 million of revenue in 2003 and 2002,
respectively. Approximately $4.3 million of the decrease in revenue was related
to the lack of transactions in CBIZ's Mergers and Acquisition Group (CBIZ M&A),
as compared to 2002, in which one significant transaction closed in the fourth
quarter. While CBIZ endeavors to find transactions of this nature in our mergers
and acquisition business, we are not able to predict the timing or amount of
these types of transactions, nor are we able to determine if they will continue
in the future. In addition to the decrease in CBIZ M&A's revenue, the valuation,
property tax and information technology (IT) businesses suffered from decreased
revenue in 2003 primarily due to rationalization of certain unproductive offices
and business lines. Gross margins for other National Practices decreased from
1.7% in 2002 to (1.9%) in 2003 also due primarily to the decision to close
certain unproductive offices and discontinue certain product lines within the
property tax, mergers and acquisitions, and IT businesses. Although gross
margins have declined in the last two years, CBIZ expects modest growth in
revenue and a positive gross margin for the other National Practices in 2004 due
to an improving environment in IT consulting and growth in the payroll business.
Revenues
Total revenue for the year ended December 31, 2003 was $512.8 million as
compared to $499.2 million for the year ended December 31, 2002, representing an
increase of $13.6 million, or 2.7 %. The increase in revenue attributable to
acquisitions completed during the year ended December 31, 2003 was $9.4 million,
offset by decreases in revenue attributable to divestitures of $9.0 million. For
business units with a full period of operations for the year ended December 31,
2003, revenue increased $13.1 million or 2.7%. A more comprehensive analysis of
revenue is discussed above by operating practice groups.
18
Expenses
Operating expenses increased to $448.7 million for the year ended December
31, 2003, from $439.9 million for the comparable period in 2002, representing an
increase of $8.8 million. The increase was primarily attributable to increased
compensation expense (excluding severance) of $9.6 million or 3.1%, which was
primarily to support higher revenue in the medical management and benefits and
insurance areas. Compensation expense represents approximately 72% of operating
expenses in 2003, compared to 71% of operating expenses in 2002. Also included
in operating expenses are costs related to continuing consolidation activities;
CBIZ incurred severance and restructuring costs of $3.0 million for the year
ended December 31, 2003, compared to $4.6 million in 2002, a decrease of $1.6
million. In addition, CBIZ incurred charges of $0.3 million and $1.3 million for
the years ended December 31, 2003 and 2002 related to a valuation and
obsolescence adjustment for inventory carried to support IT network maintenance.
As a percentage of revenue, operating expenses for the year ended December 31,
2003 were 87.5% compared to 88.1% for the year ended December 31, 2002.
Corporate general and administrative expenses decreased slightly to $19.6
million from $19.7 million for the years ended December 31, 2003, and 2002,
respectively. While total costs have remained relatively flat, compensation
expenses have increased in 2003, primarily due to $0.7 million of severance
expense. Expenditures for legal costs to pursue cases concerning non-competition
violations by former employees, insurance coverage issues, and other cases in
which CBIZ is involved, have decreased approximately $1.4 million. Corporate
general and administrative expenses represented 3.8% of total revenues for the
year ended December 31, 2003, compared to 3.9 % for the comparable period in
2002. CBIZ expects the core level of corporate, general and administrative
expenses to remain relatively constant in 2004. However, there may be increases
in expenses related to marketing, investments in wealth management, or training
costs to support these types of corporate initiatives. In addition, CBIZ will
incur additional costs to comply with Section 404 of the Sarbanes-Oxley Act,
which will become effective in 2004.
Depreciation and amortization expense decreased to $17.2 million for the
year ended December 31, 2003, from $20.5 million for the comparable period in
2002, representing a decrease of $3.3 million, or 16.2%. The decrease primarily
related to dispositions and assets that became fully depreciated, offset by
increases related to additional capital expenditures made since December 31,
2002 of approximately $10 million. In addition, approximately $0.9 million of
the decrease is directly related to the shift from purchasing certain assets to
leasing assets, which are recorded as operating leases in operating expense. As
a percentage of revenue, depreciation and amortization expense decreased to 3.3%
for the year ended December 31, 2003 from 4.1% for the comparable period in
2002. CBIZ expects depreciation and amortization expense to be approximately
$17.0 million in the future.
Interest expense decreased to $1.1 million for the year ended December 31,
2003, from $2.5 million for the same period in 2002, a decrease of $1.4 million,
respectively.or 57.4%. The decrease is the result of both lower average outstanding debt
balances and a lower average interest rate in 2003. The average debt balance was
$18.2 million for the year ended December 31, 2003 compared to $38.6 million for
the year ended December 31, 2002. The weighted average interest rate on bank
debt was 4.4% for the year ended December 31, 2003 compared to 5.6% for the same
period in 2002.
CBIZ recorded a net gain from divested operations of $2.5 million for the
year ended December 31, 2003, as compared to a net gain of $0.9 million for the
year ended December 31, 2002. CBIZ completed the divestiture of six non-core
business operations during the year ended December 31, 2003, either through sale
or closure. During 1996, IASI realized approximately $38.02002, the net gain was attributable to the divestiture of
eleven non-core operations. In addition to this divestiture activity, CBIZ
classified five operations as discontinued operations during 2003 and 2002,
respectively, in accordance with Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144)." The results of these operations are disclosed separately in the
consolidated financial statements and discussed separately under "Results of
Operations -- Discontinued Operations," below.
Other expense, net was $1.1 million for the years ended December 31, 2003
and 2002. Other expense, net is comprised primarily of interest income earned in
CBIZ's payroll business, gains and losses on the sale of assets, charges for
legal reserves and settlements, and miscellaneous income such as contingent
royalties from previous divestitures. For 2003, other income is offset by $2.8
million of impairment charges, of which $2.4 million related
19
to the impairment of a note taken in connection with the divestiture of the
hazardous waste operation in 1997, that filed bankruptcy in 2003. For 2002,
other income was offset by $2.4 million of charges related to the write-down of
CBIZ's investment in two high-tech start-up ventures, including $0.8 million
impairment charge related to the note previously discussed. In addition,
interest income decreased $0.4 million related to lower interest rates in 2003.
CBIZ recorded income tax expense from continuing operations of $12.1
million for the year ended December 31, 2003, compared with $8.4 million in
cash proceeds2002. The effective tax rate was 43.8% for the year ended December 31, 2003. The
effective tax rate for the year ended December 31, 2003, is higher than the
statutory federal and state tax rates of approximately 40% primarily due to
differences such as the establishment of a valuation allowance related to asset
impairment charges, portions of certain meal and entertainment expenses that are
not fully deductible for tax purposes, and tax credit carryforwards.
RESULTS OF OPERATIONS -- CONTINUING OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 2002 TO YEAR ENDED DECEMBER 31, 2001
Operating Practice Groups
CBIZ currently delivers products and services through three practice
groups. Below is a brief description of these groups' operating results and
factors affecting their businesses. The services offered under each of these
groups are described in Part I of this report.
Accounting, Tax and Advisory Services. The ATA group contributed
approximately $205.7 million and $226.0 million of revenue, or approximately 41%
and 44% of CBIZ's annual revenue in 2002 and 2001, respectively. The decrease in
revenue attributable to divestitures completed during the year ended December
31, 2002 was $11.0 million. For ATA businesses with a full period of operations
for the year ended December 31, 2002, revenue decreased $9.3 million, or 4.3%.
This decrease in same-unit revenue was primarily driven by the decrease for the
demand in discretionary work, such as consulting projects and special work
related to business transactions related to mergers and acquisitions, and a weak
economy. This decrease in revenue caused a decrease in gross margin from 14.7%
in 2001 to 13.8% in 2002.
Benefits and Insurance Services. The Benefits and Insurance group
contributed approximately $150.5 million and $141.3 million of revenue, or
approximately 30% and 28% of CBIZ's annual revenue in 2002 and 2001,
respectively. The increase in revenue is attributable to organic growth, offset
by the decrease in revenue related to divestitures completed during the year
ended December 31, 2001 of $5.0 million. For Benefits and Insurance businesses
with a full period of operations for the year ended December 31, 2002, same-unit
revenue increased $14.2 million, or 10.7%. The gross margin decreased from 20.6%
in 2001 to 18.0% in 2002. CBIZ's Benefits and Insurance group has benefited in
the last year from a private placementfirming of premium prices, particularly for the group
health and from stock issuances, offsetproperty and casualty products. In addition, the worksite marketing
division increased revenue and improved their profitability significantly, due
to several large cases closed in part
by dividends paid2002. However, reductions in equity values have
caused revenue to Alliance Holding by CSCdecline on asset-based fees, particularly in the pension and
CSU priorretirement areas.
National Practices Services. The National Practices group contributed
approximately $143.0 million and $143.3 million of revenue, or approximately 29%
and 28% of CBIZ's annual revenue in 2002 and 2001, respectively. Included in the
results of the National Practices group are those of CBIZ MMP, which contributed
approximately $66.2 million and $56.8 million, or 13% and 11%, of CBIZ's annual
revenue in 2002 and 2001, respectively. This growth of 16.4% is attributable to
the Merger
Transactions.
SOURCES OF CASH
IASI's principal sourceaddition of new clients, including the expansion into new markets, such as
the entrance into the Colorado market in 2002, as well as rising healthcare
prices. Revenue for CBIZ MMP is based on a percentage of amounts collected for
their clients. The gross margin decreased from 19.4% in 2001 to 17.6% in 2002,
based on the investment of start up costs, which decreases the margin until new
clients and regions reach expected levels of profitability.
The other units within National Practices, excluding CBIZ MMP, contributed
approximately $76.8 million and $86.4 million of revenue in 2002 and 2001,
respectively. The decrease in revenue attributable to divestitures completed
during the year ended December 31, 2001 was $8.1 million. For other National
Practices businesses with a full period of operations for the year ended
December 31, 2002, revenue decreased $1.5 million, or 1.6%.
20
The decrease in same-unit revenue was related to several areas, including the
information technology (IT) area, valuation and property tax services, and
government relations. This was offset by improvement in health care consulting
and improvement in CBIZ's Mergers & Acquisition Group. The increase in capital
management revenues was primarily affected by one significant transaction in the
fourth quarter, the sale of its clients Floors, Inc., Arvada Hardwood Floor Co.
and Floorworks Inc. to the Home Depot. Gross margins for other National
Practices decreased from its specialty5.1% in 2001 to 1.7% in 2002, primarily driven by
valuation adjustments to inventory in the IT group.
Revenues
Total revenue for the year ended December 31, 2002 was $499.2 million as
compared to $510.5 million for the year ended December 31, 2001, representing a
decrease of $11.3 million, or 2.2%. The decrease in revenue attributable to
divestitures completed during the year ended December 31, 2002 was $24.1
million. For business units with a full period of operations for the year ended
December 31, 2002 revenue increased $12.8 million or 2.6%. A more comprehensive
analysis of revenue is discussed above by operating practice groups.
Expenses
Operating expenses decreased to $439.9 million for the year ended December
31, 2002, from $441.2 million for the comparable period in 2001, representing a
decrease of $1.3 million. The decrease was primarily attributable to the
divestiture of low-margin businesses, as well as expense reductions initiated in
the second quarter of 2002 to help bring compensation expenses back in line with
revenue levels. Compensation expense (excluding severance), which represents
approximately 71% of operating expenses, decreased by $8.0 million, or 2.5%.
These cost reductions were offset by charges for severance, restructuring and
inventory adjustments. As a result of expense reductions and continuing
consolidation activities, CBIZ incurred severance and restructuring costs of
$4.6 million for the year ended December 31, 2002, an increase of $2.4 million.
In addition, CBIZ incurred a $1.3 million expense charge related to a valuation
and obsolescence adjustment for inventory carried to support IT network
maintenance contracts that have been recently terminated. As a percentage of
revenue, operating expenses for the year ended December 31, 2002 were 88.1%
compared to 86.4% for the year ended December 31, 2001, representing an increase
of 1.7%.
Corporate general and administrative expenses decreased to $19.7 million
for the year ended December 31, 2002, from $19.8 million for the comparable
period in 2001, representing a decrease of $0.1 million, or 0.6%. While costs
have remained relatively flat, the composition of general and administrative
costs has changed from 2001. Compensation expenses have decreased, while
expenditures for national marketing efforts and legal costs to pursue cases
concerning non-competition violations by former employees, insurance servicescoverage
issues, and other cases in which CBIZ is involved, have increased. Corporate
general and administrative expenses represented 3.9% of total revenues for the
years ended December 31, 2002, and 2001.
Depreciation and amortization expense decreased to $20.5 million for the
year ended December 31, 2002, from $40.5 million for the comparable period in
2001, representing a decrease of $20.0 million, or 49.4%. The decrease is
primarily attributable to a decrease in goodwill amortization of $21.9 million
resulting from the adoption of SFAS No. 142 which no longer allows for the
amortization of goodwill. The decrease was offset by increases related to
accelerated amortization expense of deferred debt costs in connection with
entering into a new credit facility, accelerated depreciation costs related to
changes in useful lives of assets held at sites being consolidated, and
additional capital expenditures made since December 31, 2001. As a percentage of
revenue, depreciation and amortization expense (excluding goodwill amortization)
decreased to 4.1% for the year ended December 31, 2002 from 7.9% for the
comparable period in 2001.
Interest expense decreased to $2.5 million for the year ended December 31,
2002, from $6.8 million for the same period in 2001, a decrease of $4.3 million,
or 63.5%. The decrease is the result of both lower average outstanding debt
balances and a lower average interest rate in 2002. The average debt balance was
$38.6 million for the year ended December 31, 2002 compared to $84.7 million for
the year ended December 31, 2001. The weighted average interest rate on bank
debt was 5.6% for the year ended December 31, 2002 compared to 7.6% for the same
period in 2001.
21
CBIZ recorded a net gain from divested operations consists of insurance$0.9 million for the
year ended December 31, 2002, as compared to a net loss of $7.1 million for the
year ended December 31, 2001. CBIZ completed the divestiture of eleven non-core
business operations during the year ended December 31, 2002, either through sale
or closure. During 2001, the net loss was attributable to the divestiture of
fifteen non-core operations. CBIZ also recorded in 2001 a loss on the planned
divestiture of four non-core business units for 2002, based on estimated
proceeds. In addition to this divestiture activity, CBIZ classified five
operations as discontinued operations during 2002, in connection with the
adoption of Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." The results of these
operations are disclosed separately on the consolidated financial statements and
reinsurance premiums,discussed separately under "Results of Operations - Discontinued Operations"
below.
Other income (expense), net was $1.1 million of expense for the year ended
December 31, 2002, as compared to $3.9 million of income for the comparable
period in 2001, representing a change of approximately $5.0 million. Other
income (expense), net is comprised primarily of interest income earned in CBIZ's
payroll business, gains and losses on the sale of assets, charges for legal
reserves and settlements, and miscellaneous income, such as contingent royalties
from previous divestitures. The decrease in other income (expense), net is
primarily attributable to a $2.4 million charge related to the write-down of
CBIZ's investment in two high-tech start-up ventures, and a note taken in
connection with the divestiture of the hazardous waste operation in 1997, that
were deemed impaired in 2002. In addition, interest income commissiondecreased $1.3
million related to lower interest rates in 2002.
CBIZ recorded income tax expense from continuing operations of $8.4 million
for the year ended December 31, 2002, compared with $12.2 million in 2001. The
effective tax rate was 51.0% for the year ended December 31, 2002. The effective
tax rate for the year ended December 31, 2002, is higher than the statutory
federal and fee income,state tax rates of approximately 40% due to permanent differences
such as non-deductible goodwill related to the disposition of businesses. The
effective tax rate 2001 is higher than the statutory rates primarily due to the
significant amount of goodwill amortization expense, the majority of which is
not deductible for tax purposes.
RESULTS OF OPERATIONS -- DISCONTINUED OPERATIONS
During each of the years 2003 and 2002, CBIZ adopted formal plans to divest
five non-core operations which were no longer part of CBIZ's strategic long-term
growth objectives. The ten operations were classified as discontinued operations
in connection with the adoption of Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and
the net assets, liabilities and results of operations are reported separately in
the consolidated financial statements. At December 31, 2003, all operations
classified as discontinued operations had been sold or are in the process of
being closed. Based on the sales proceeds and cost of closure, CBIZ recorded a
gain (loss) on disposal from salesdiscontinued operations, net of tax, of $0.7
million and maturities($2.5) million for the years ended December 31, 2003 and 2002,
respectively. Revenue associated with discontinued operations for the years
ended December 31, 2003, 2002 and 2001 was $6.5 million, $12.4 million and $16.3
million, respectively. The loss from operations of investment securities. Premiums written become premiums earnedthese discontinued
businesses, net of tax, for financial
statement purposesthe years ended December 31, 2003, 2002 and 2001 was
$0.9 million, $2.5 million and $2.8 million respectively.
RESULTS OF OPERATIONS - CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2002, CBIZ adopted Statement of Financial Accounting
Standard No., 142 "Goodwill and Other Intangible Assets" (SFAS 142), which
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually at
the reporting unit level. SFAS 142 also requires intangible assets with finite
useful lives to be amortized over their respective estimated useful lives and
reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." CBIZ finalized the required
transitional tests of goodwill during 2002, and recorded an impairment charge of
$88.6 million on a pre-tax basis. This non-cash charge is reflected as the premium is earned incrementally over the terma
cumulative effect of each
insurance policy and after deductinga change in accounting principle in the amount of premium ceded$80.0,
net of a tax benefit of $8.6 million.
22
FINANCIAL CONDITION
Total assets were $402.1 million and total liabilities were $124.3 million
as of December 31, 2003 and shareholders equity was $277.8 million. Current
assets of $184.8 million exceeded current liabilities of $108.4 million by $76.4
million at December 31, 2003. Total assets and liabilities decreased as cash was
used to reinsurers
pursuantpay for the share repurchase and to reinsurance treaties or agreements. The propertypay down debt.
Cash and liability
operationcash equivalents decreased $2.6 million to $3.8 million for the
year ended December, 31, 2003. Restricted cash was $10.9 million at December 31,
2003, a decrease of IASI generates positive$6.1 million from a year ago. Restricted cash flowrepresents
those funds held in connection with CBIZ's NASD regulated operations and funds
held in connection with the pass through of insurance premiums to the carrier.
As further described in note 1 to the consolidated financial statements
contained herein, funds held for clients were $44.9 million, which is directly
offset by client fund obligations. Cash, restricted cash and funds held for
clients fluctuate during the year based on the timing of cash receipts and
related payments. Accounts receivable, net were $111.6 million at December 31,
2003, an increase of $9.6 million from operationsa year ago, primarily due to increased
sales in the fourth quarter of 2003, as well as a slight slow down in
collections. Days sales outstanding (DSO), which are calculated based on gross
accounts receivable balance at the end of the period divided by daily revenue,
increased slightly from 79 days at December 31, 2002 to 82 days at December 31,
2003. CBIZ provides DSO data because such data is commonly used as a performance
measure by analysts and investors and as a measure of the Company's ability to
collect on receivables in a timely manner. Goodwill and other intangible assets,
net of accumulated amortization, increased $3.6 million from 2002. Acquisitions
resulted in a $7.5 million increase in intangibles in 2003. In addition,
intangibles decreased by $2.2 million as a result of premiums beingdivestitures completed
during 2003, and amortization expense for client lists and other intangibles.
In addition to changes in cash, receivables, and goodwill, the following is
a summary of other significant changes in assets: notes receivable (current and
non-current) decreased by $5.9 million due to the $2.4 million impairment charge
of a note related to the sale of operation in 1997, $2.1 million contributed in
connection with the HarborView acquisition, and collections; decrease in income
taxes recoverable of $4.5 million based on refunds received in advance2003 offset by
estimated tax payments; decrease in deferred tax assets (current and non-
current) of the time when the claim payments are made.
The companies of the CSC Group are subject to regulation and
supervision by state insurance regulatory agencies, applicable generally to each
insurance company in its state of incorporation. Such regulations limit the
amount of dividends or distributions by an insurance company to its
shareholders. If insurance regulators determine that payment of a dividend or
any other payment to an affiliate (such as a payment under a tax allocation
agreement) would, because of the financial condition of the paying insurance
company or otherwise, be detrimental to such insurance company's policyholders
or creditors, the regulators may block payment of such dividend or such other
payment$2.1 million due to the affiliates that would otherwise be permitted without prior
approval.
Ohio law limits the paymentincrease in valuation allowance; and
decrease in assets of dividends to IASI. The maximum dividend
that may be paid without prior approvaldiscontinued operations of the Director of Insurance of the
State of Ohio is limited$14.7 million due to the greatersale
or closure of all operations classified as held for sale as of December 31,
2003.
The accounts payable balance of $28.7 million at December 31, 2003 reflects
amounts due to suppliers and vendors. Other current accrued expenses decreased
$2.6 million to $34.6 million at December 31, 2003. Client fund obligations of
$44.9 million were directly related to funds held for clients in the statutorysame amount
as reflected in current assets. Bank debt for amounts due on CBIZ's credit
facility was $14.0 million at December 31, 2003, a reduction of $3.5 million
from December 31, 2002. The reduction in debt was a result of CBIZ's positive
cash flow generated during 2003.
Stockholders' equity decreased $16.5 million from 2002 to 2003, primarily
related to $33.2 million (approximately 10 million shares) of additional
treasury stock based on shares that were acquired through a modified Dutch
Auction tender offer in the third quarter of 2003. Funds used to purchase shares
were provided by cash flow generated from CBIZ's operations, as well as
borrowings under CBIZ's credit facility, which was amended in the third quarter
of 2003 to allow for the Dutch Auction tender offer, as previously described.
The decrease in stockholders' equity was offset by net income of $15.3 million
earned for the preceding calendar year or 10%ended December 31, 2003, and $1.2 million related to the
exercise of total statutory shareholder's equity asstock options.
On March 3, 2004, the Board of Directors authorized a share repurchase of
up to 8.5 million shares. On March 4, 2004, CBIZ announced a tender offer to
purchase up to 7.5 million shares of its outstanding common stock at a price of
$5.00 per share, which will expire on April 1, 2004. CBIZ anticipates that it
will obtain all of the priorfunds necessary to purchase shares tendered, and to pay
related fees and expenses, by borrowing under its $73 million secured revolving
credit facility, which was amended on March 3, 2004, to permit CBIZ to borrow up
to an aggregate of $50 million for the repurchase, on or before December 31. As31,
2004, of shares of CBIZ stock. CBIZ believes that investing in its own shares is
an attractive use of capital and an efficient means to provide value to CBIZ
stockholders.
23
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities in 2003 was $39.6 million versus
$42.3 million in 2002, a result,decrease of $2.7 million, primarily due to an increase
in working capital. Net cash provided by operating activities was the maximum dividend CSC may pay to IASI in 1997
without prior approval of the Director of Insurance of the State of Ohio is
approximately $2.6 million.
IASI's principal
source of revenuefunds used to reduce CBIZ's bank debt by $3.5 million during 2003 and
to fund the repurchase of approximately $33.6 million of CBIZ stock, in
accordance with CBIZ's Share Repurchase Program approved by the Board of
Directors on June 9, 2003.
Net cash used in investing activities during 2003 of $5.5 million consisted
of $7.2 million in proceeds from itsthe disposition of non-core and underperforming
business outsourcing
services operationunits and $1.8 million collected on notes receivable. Offsetting the
sources of investing activities was $10.6 million used for net capital
expenditures, and $3.9 million used toward business acquisitions including
contingent consideration from prior year acquisitions. Capital expenditures
consisted of leasehold improvements and equipment in connection with the
consolidation of certain offices, IT capital to support the growth of the
medical management practice, and equipment purchases in relation to normal
replacement. The majority of capital expenditures represent investment in
technology-related items including hardware and software, both to improve back
office functions and to provide better solutions for our clients.
Cash used in investing activities during 2002 of $3.1 million consisted of
$7.8 million in proceeds from the disposition of non-core and underperforming
business units and $1.9 million collected on notes receivable, offset by $8.2
million used for capital expenditures, and $4.6 million used toward business
acquisitions including contingent consideration from prior year acquisitions.
Capital expenditures consisted of leasehold improvements and equipment in
connection with the consolidation of certain offices and equipment purchases in
relation to normal replacement.
Cash used in financing activities during 2003 of $36.6 million consisted
primarily of $33.6 million used toward the purchase of CBIZ's common stock, in
accordance with CBIZ's Share Repurchase Program, a net reduction of $3.5 million
in the revolving credit facility and net payments of $1.1 million toward notes
payable and capitalized leases.
During the year ended December 31, 2002, cash used in financing activities
of $37.2 million consisted of a net reduction in the bank credit facility of
$37.5 million.
SOURCES OF CASH
CBIZ's principal source of net operating cash is derived from the
collection of fees from professional services rendered to its clients and
commissions earned in the areas of informationaccounting, tax, valuation and advisory
services, benefits consulting and administration services, insurance, human
resources and payroll solutions, capital advisory, retirement and wealth
management services and technology consulting, tax return
preparation and compliance, and business valuations, as well as other areas that
have been previously discussed.
In May 1995, IASIsolutions.
The Company has a senior secured a $6.0 million credit facilityagreement with a United
States commercial bankgroup of four
banks. The $73 million facility carries an option to provide IASI with additional liquidityincrease the facility to
$80 million and working
capital. This facility providesallows for borrowings at the prime lending rate plus
0.5% or adjusted three-month LIBOR rate plus 2.5%, which would be 8.75%allocation of funds for strategic initiatives,
including acquisitions and [7.95%], respectively, at December 31, 1996 and will mature in 1998. Up to $4.5
millionthe repurchase of CBIZ stock. The primary use of the
credit facility is available for working capital, internal growth initiatives, and
business acquisitions. The facility has a three year term with an expiration
date of September 2005. The credit agreement is secured by substantially all
assets and capital stock of CBIZ and its subsidiaries. Under the issuancecredit
agreement, CBIZ is subject to a monthly borrowing base related to accounts
receivable and unbilled revenues, and is required to meet certain financial
covenants. These covenants require CBIZ to meet certain requirements with
respect to (i) minimum tangible net worth; (ii) maximum leverage ratio; and
(iii) a minimum fixed charge coverage ratio. CBIZ is in compliance with its
covenants as of standby letters
of credit.December 31, 2003 and projects that it will remain in compliance
in 2004.
At December 31, 1996 IASI2003, CBIZ had issued $2.4$14 million in standbyoutstanding under its credit
facility. In addition, CBIZ had letters of credit and had no cash borrowing underoutstanding for $3.2 million
provided as security to certain lessors for office space leased by the credit facility. The credit
facility contains various affirmative and negative covenants which, among other
things, restrictCompany.
Management believes the payment of dividends and require the maintenance of certain
financial ratios. Borrowings underavailable funds from the credit facility, are secured by all of
IASI's United States based assets related to its environmental services
operations.
In December 1996, IASI issued and sold 3,251,888 units of IASI (the
"Units") for $9.00 per Unit (the "Private Placement"). Each Unit consisted of
one share of Common Stock and one warrant to purchase one share of Common Stock
of IASI at an exercise price of $11.00 per share exercisable, in whole or in
part, for a three year periodalong with
cash generated from the date of issuance. The Private Placement
resulted in net proceeds of approximately $27.6 million, after deducting the
placement agent fee and other estimated expenses associated with the Private
Placement.
In addition, MGD Holdings, the Harve A. Ferrill Trust U/A 12/31/69 (the
"Ferrill Trust") and WeeZor I Limited Partnership ("WeeZor"), affiliates of each
of Messrs. Michael G. DeGroote, Chairman of the Board of IASI, Harve A. Ferrill
and Richard C. Rochon, directors of IASI, respectively, have entered into
agreements to purchase an aggregate of 616,611 Units, subject to stockholder
approval. On January 6, 1997, the issuance of such Units was approved by written
consent of the holders of a majority of the outstanding shares of Common Stock.
In accordance with Rule 14c-2 under the Exchange Act, on or about April 1997,
IASI will distribute a Schedule 14C Information Statement (the "Information
Statement") to holders of IASI's Common Stock as of the date of such written
consent. The Information Statementoperations, will be usedsufficient to notify such holders of Common
Stock ofmeet its liquidity needs
in the action by written consent approving the issuance of Unitsforeseeable future.
See note 8 to MGD
Holdings, the Ferrill Trust and WeeZor. In accordance with the requirements of
the Exchange Act, the issuance of Units to MGD Holdings and Messrs. Ferrill and
Rochon will close no earlier than
25CBIZ's consolidated financial statements included herewith.
24
27
20 days following the distribution of the Information Statement to such holders.
Upon the closing of the issuance of such Units, IASI will receive an additional
$5.3 million in proceeds.
USES OF CASH AND LIQUIDITY OUTLOOK
OPERATIONS. IASI'sCBIZ's capital expenditures from continuing operations totaled $286,000, $223,000$10.6
million, $8.2 million and $340,000$12.9 million for the years ended December 31, 1996,
19952003,
2002 and 1994,2001, respectively, which included expenditures for fixed assets for
normal replacement, compliance with regulationsimplementation of the enterprise-wide solution to integrate
back office operations and market development.other initiatives and office consolidations. During
the year ended December 31, 1996, IASI2003, CBIZ principally funded capital expenditures
from cash on
hand and operating cash flow. IASIflow and financing activities. In 2004, capital expenditures
are expected to be approximately $10.0 million, and CBIZ anticipates that during
1997,2004, it will continue to fund these expenditures from operating cash flow
supplemented by borrowingborrowings under its revolving credit facility,agreement, as necessary.
At December 31, 2003, based on the borrowing base calculation, CBIZ had
approximately $45.4 million of available funds under its credit facility.
Management believes that IASIthose available funds, along with cash generated from
operations, will be sufficient to meet its liquidity needs in the foreseeable
future. To fund operations, capital expenditures and potential acquisitions,
CBIZ may also obtain funding by offering securities or debt, through the public
markets or the private markets. CBIZ currently has sufficienta number of shelf
registrations active, under which it can offer such securities. See note 12 to
the consolidated financial statements contained herein for a description of the
aforementioned registration filings.
CBIZ's aggregate amount of future obligations for the next five years and
thereafter is set forth below:
2004 2005 2006 2007 2008 THEREAFTER
------- ------- ------- ------- ------- ----------
ON-BALANCE SHEET
Bank debt.......................... $ -- $14,000 $ -- $ -- $ -- $ --
Notes payable and capitalized
leases........................... 1,481 613 40 7 324 --
Non-cancelable operating
lease obligations................ 31,913 27,492 23,679 21,257 19,720 105,357
Restructuring lease
obligations(1)................... 3,762 2,687 2,560 2,472 1,763 1,273
OFF-BALANCE SHEET
Letters of credit.................. 2,543 286 -- -- -- 330
Performance guarantees for non-
consolidated affiliates.......... 250 404 -- -- -- --
------- ------- ------- ------- ------- --------
Total......................... $39,949 $45,482 $26,279 $23,736 $21,807 $106,960
======= ======= ======= ======= ======= ========
- ---------------
(1) Excludes cash payments for subleases.
OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2003, CBIZ maintained administrative service agreements
with 14 CPA firms, as described more fully under "Outsourced Business Services"
section of Business and linesProperties. CBIZ is one of the beneficiaries of the
agreements and may bear certain economic risks. As such, the CPA firms with
which CBIZ maintains administrative service agreements may qualify as variable
interest entities under FASB Interpretation No. 46 (FIN 46), "Consolidation of
Variable Interest Entities," as amended. The impact to CBIZ of this accounting
pronouncement is discussed in the "New Accounting Pronouncements" section of the
accompanying Management's Discussion and Analysis of Financial Condition and
Results of Operations.
During 2003, CBIZ provided guarantees of contractual obligations for a CPA
firm with which CBIZ maintains an administrative services agreement. Potential
obligations under the guarantees totaled $0.7 million at December 31, 2003 and
expire in 2005. CBIZ expects the guarantees to expire without the need to
advance any cash.
Letters of credit are discussed in note 8 of the accompanying consolidated
financial statements.
25
INTEREST RATE RISK MANAGEMENT
During June 2003, CBIZ paid its revolving credit facility balance down to
fundzero, thus requiring it to terminate its interest rate swap. CBIZ used the
interest rate swap to manage the interest rate mix of its credit facility and
related overall cost of borrowing by allowing the Company to maintain a target
range of fixed to floating rate debt. The interest rate swap was scheduled to
expire during August 2003 and carried a fixed rate of 5.58% (fixed Libor rate of
3.58% plus an applicable margin of 2.0%).
CRITICAL ACCOUNTING POLICIES
The policies discussed below are considered by management to be critical to
the understanding of CBIZ's consolidated financial statements because their
application places significant demand on management's judgment, with financial
reporting results relying on estimation about the effects of matters that are
inherently uncertain. Specific risks for these critical accounting policies are
described in the following paragraphs. For all of these policies, management
cautions that estimates may require adjustment if future events develop
differently than forecasted.
REVENUE RECOGNITION AND VALUATION OF UNBILLED REVENUES
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, our fee to the client is fixed or determinable, and
collectibility is reasonably assured, which is in accordance with GAAP and SAB
104. CBIZ offers a vast array of products and outsourced business services to
its clients. Those services are delivered through three practice groups. A
description of revenue recognition, as it relates to those groups, is provided
below:
ACCOUNTING, TAX AND ADVISORY SERVICES -- Revenue consists primarily of fees
for accounting services, preparation of tax returns and consulting services
including Sarbanes-Oxley consulting and compliance projects. Revenues are
recorded in the period in which services are provided and meet revenue
recognition criteria in accordance with SAB 104. CBIZ bills clients based upon a
predetermined agreed-upon fixed fee or actual hours incurred on client projects
at expected net realizable rates per hour, plus any out-of-pocket expenses. The
cumulative impact on any subsequent revision in the estimated realizable value
of unbilled fees for a particular client project is reflected in the period in
which the change becomes known.
BENEFITS & INSURANCE -- Revenue consists primarily of brokerage and agency
commissions, and fee income for administering health and retirement plans. A
description of the revenue recognition, based on the insurance product and
billing arrangement, is described below:
- Commissions relating to brokerage and agency activities whereby CBIZ has
primary responsibility for the collection of premiums from insured's
(agency or indirect billing) are recognized as of the latter of the
effective date of the insurance policy or the date billed to the
customer.
- Commissions to be received directly from insurance companies (direct
billing) are recognized when the policy becomes effective.
- Life insurance commissions are recognized when the policy becomes
effective.
- Commission revenue is reported net of sub-broker commissions.
- Contingent commissions are recognized at the earlier of notification that
the contingency has been satisfied or cash collection.
- Fee income is recognized in the period in which services are provided,
and may be based on actual hours incurred on an hourly fee basis, fixed
fee arrangements, or asset-based fees.
26
NATIONAL PRACTICES -- The business units that comprise this practice group
offer a variety of services. A description of revenue recognition associated
with the primary services is provided below:
- Mergers & Acquisitions and Capital Advisory -- Revenue associated with
non-refundable retainers are recognized on a pro rata basis over the life
of the engagement. Revenue associated with success fee transactions are
recognized when the transaction is completed.
- Technology Consulting -- Revenue associated with hardware and software
sales are recognized upon delivery and acceptance of the product. Revenue
associated with installation and service agreements are recognized as
services are performed. Consulting revenue is recognized on an hourly or
per diem fee basis as services are performed.
- Valuation and Property Tax -- Revenue associated with retainer contracts
are recognized on a pro rata basis over the life of the contract, which
is generally twelve months. Revenue associated with contingency
arrangements is recognized once written notification is received from an
outside third party (e.g., assessor in the case of a property tax
engagement) acknowledging that the contingency has been resolved.
- Medical Management Group -- Revenue is recognized when payments are
received on our clients' patient accounts.
VALUATION OF ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE
The preparation of consolidated financial statements requires management to
make estimates and assumptions that affect the reported amount 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. Specifically, management must make estimates of the
collectability of our accounts receivable, including unbilled accounts
receivable, related to current operationsperiod service revenue. Management analyzes
historical bad debts, client credit-worthiness, and expansion thereof.
Cashcurrent economic trends and
conditions when evaluating the adequacy of the allowance for doubtful accounts
and the collectibility of notes receivable. Significant management judgments and
estimates must be made and used in investing activitiesconnection with establishing the allowance
for doubtful accounts in any accounting period. Material differences may result
if management made different judgments or utilized different estimates.
VALUATION OF GOODWILL
Effective January 1, 2002, CBIZ adopted the non-amortization provisions of
SFAS 142, and accordingly ceased amortization of our remaining goodwill balance.
CBIZ evaluated the goodwill for impairment using the fair value impairment
guidelines of SFAS 142. During 2002, CBIZ completed the process of evaluating
our goodwill for impairment using the fair market impairment guidelines of SFAS
142. This change to a new method of accounting for goodwill resulted in a
non-cash impairment charge of $88.6 million on a pretax basis ($80.0 million net
of tax), which was recorded as a cumulative effect of a change in accounting
principle as of January 1, 2002. CBIZ evaluates goodwill for impairment annually
during the fourth quarter of each fiscal year. During 2003, there was no
impairment of goodwill based on our annual evaluation.
VALUATION OF INVESTMENTS
CBIZ has certain investments in privately held companies that are currently
in their start-up or development stages and are included in "other assets" in
the accompanying consolidated balance sheets. These investments are inherently
risky as the market for the yearstechnologies or products they have under development
are typically in the early stages. The value of these investments is influenced
by many factors, including the operating effectiveness of these companies, the
overall health of the companies' industries, the strength of the private equity
markets and general market conditions. During 2002, CBIZ recorded charges of
approximately $1.6 million related to the impairment of certain investments
held. Although the market value of these investments is not readily
determinable, management believes their current fair values approximate their
carrying values as of December 31, 2003. In light of the circumstances noted
above, particularly with respect to the current economic environment, it
27
is possible that the fair value of these investments could decline in future
periods, and further impairment could occur. At December 31, 2003, CBIZ has one
remaining investment valued at approximately $0.6 million.
LOSS CONTINGENCIES
Loss contingencies, including litigation claims, are recorded as
liabilities when it is probable that a liability has been incurred and the
amount of the loss is reasonably estimable. Contingent liabilities are often
resolved over long time periods. Estimating probable losses requires analysis
that often depends on judgment about potential actions by third parties.
ESTIMATES OF INCENTIVE COMPENSATION COSTS AND EFFECTIVE INCOME TAX RATES
Incentive compensation costs and income tax expense are two significant
expense categories that are highly dependent upon management estimates and
judgments, particularly at each interim reporting date. In arriving at the
amount of expense to recognize, management believes it makes reasonable
estimates and judgments using all significant information available. Incentive
compensation costs are accrued on a monthly basis, and the ultimate
determination is made after our year-end results are finalized; thus, estimates
are subject to change. Circumstances that could cause our estimates of effective
income tax rates to change include the impact of information that subsequently
became available as we prepared our corporate income tax returns; the level of
actual pre-tax income; revisions to tax positions taken as a result of further
analysis and consultation, and changes mandated as a result of audits by taxing
authorities.
OTHER SIGNIFICANT POLICIES
Other significant accounting policies not involving the same level of
measurement uncertainties as those discussed above are nevertheless important to
understanding the consolidated financial statements. Those policies are
described in Note 1 to the consolidated financial statements contained herein.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). FIN 46
addresses conditions for consolidating an entity based on variable interests (as
defined in the standard) rather than voting interests. FIN 46 clarifies that
variable interest entities that do not disperse risks among the parties involved
should be consolidated by the entity that is determined to be the primary
beneficiary. FIN 46 applied immediately to variable interest entities created
after January 31, 2003. For variable interest entities in which an enterprise
holds a variable interest that was acquired before February 1, 2003, FIN 46
originally had to be adopted no later than the first fiscal year or interim
period beginning after June 15, 2003. However, in October 2003, the FASB issued
FASB Staff Position ("FSP") 46-e, "Effective Date of Interpretation 46." FSP
46-e deferred the effective date for applying the provisions of FIN 46, for
interests held by public entities in variable interest entities created before
February 1, 2003, until the end of the first interim or annual period ending
after December 15, 2003. In December 2003, the FASB issued a revision to FIN 46
("FIN 46R") to clarify some of the provisions of FIN 46 and to exempt certain
entities from its requirements. Under FIN 46R, special effective date provisions
apply to enterprises that have fully or partially applied FIN 46 prior to
issuance of FIN 46R. Otherwise, application of FIN 46R is required in financial
statements of public entities that have interests in structures that are
commonly referred to as special-purpose entities for periods ending after
December 15, 2003.
CBIZ has evaluated FIN 46, FSP 46-e and FIN 46R and determined that its
relationship with certain Certified Public Accounting firms with whom we
maintain administrative service agreements, may qualify as variable interest
entities. The accompanying financial statements do not reflect the consolidation
of the variable
28
interest entities, as the impact is immaterial and as consolidation does not add
material information. If the activities of the entities had been consolidated,
selected financial data would be as follows:
YEAR ENDED
DECEMBER 31, 2003
-----------------------
AS REPORTED PRO FORMA
----------- ---------
Revenue..................................................... $512,762 $519,794
Operating expenses.......................................... 448,707 453,889
Gross margin................................................ 64,055 65,905
Operating income............................................ 27,247 29,097
Minority share of operating income.......................... -- (1,850)
Net income from continuing operations....................... 15,522 15,522
Net income.................................................. 15,316 15,316
Other Data
Total assets................................................ $402,145 $405,627
Total liabilities........................................... 124,307 126,207
Minority interest........................................... -- 1,582
Total equity................................................ 277,838 277,838
Total service fees recognized as revenue in the accompanying statement of
operations under the administrative services agreements (ASAs) was approximately
$40 million during the year ended December 31, 1996, 19952003. Net assets related to the
ASAs and 1994 primarily came as the result of differencesrecorded in the purchasesaccompanying statement of position as of December 31,
2003 are approximately $5 million.
In December 2003, the Securities and salesExchange Commission issued Staff
Accounting Bulletin No. 104 (SAB 104), "Revenue Recognition". SAB 104 supersedes
SAB 101, "Revenue Recognition in Financial Statements," to include the guidance
from Emerging Issues Task Force EITF 00-21 "Accounting for Revenue Arrangements
with Multiple Deliverables." The guidance addresses how to determine if an
arrangement has multiple elements or deliverables, and whether or not the
elements should be treated as one unit of investments.
IASI is required to establish a reserve for unearned premiums. IASI's
principal costs and factors in determining the levelaccounting, or segregated into
multiple units of profit is the difference
between premiums earned and losses, LAE and agent commissions. Loss and LAE
reserves are estimatesaccounting. The adoption of whatSAB 104 did not have an insurer expects to pay on behalf of claimants.
IASI is required to maintain reserves for payment of estimated losses and LAE
for both reported claims and for IBNR claims. Although the ultimate liability
incurred by IASI may be different from current reserve estimates, management
believes that the reserves are adequate.
IASI believes its cash flow from operations and available financial
resources provide for adequate liquidity to fund existing and anticipated
capital and operational requirements as well as to fund future growth and
expansion. Management is not aware of any current recommendations by regulatory
authorities that, if implemented, could have a material impact on
IASI's
liquidity, capital resourcesCBIZ's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and operations.
ACQUISITIONS. IASI's strategy isEquity". SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 applies specifically to aggressively expand its specialty
insurance and business outsourcing services operations through internal growth
and by acquiring and integrating existing businesses. IASI makes its decision to
acquire or invest in businesses based ona number of financial and strategic considerations.
See "Business and Properties -- Business Strategy." Businesses acquired to dateinstruments that companies
have been accounted for under the purchase method of accounting and,
accordingly, are included in thehistorically presented within their financial statements fromeither as equity
or between the date of
acquisition.
Management believes that IASI currently has sufficient resources,
including cash on hand, cash flow from operating activities, credit facilitiesliabilities section and access tothe equity section, rather than as
liabilities. SFAS No. 150 is effective for financial markets to fund currentinstruments entered into or
modified after May 31, 2003, and planned operations, service
any outstanding debt and make certain acquisitions. However, substantial
additional capital may be necessary to fully implement IASI's aggressive
acquisition program. There can be no assurance that additional financing will be
available on a timely basis, ifotherwise is effective at all, or that it will be available in the amounts or on terms acceptable to IASI.
STOCK REPURCHASE PROGRAM
In April 1995, IASI's Board of Directors authorized IASI to repurchase
up to 500,000 shares or 4.6% of Common Stock during 1995 as deemed appropriate
by management and authorized an additional repurchase of 500,000 shares or 4.6%
of Common Stock in February 1996. Repurchases were effected at prevailing market
prices from time to time on the open market prior to the negotiationbeginning of the
Merger Transactions.first interim period beginning after June 15, 2003. The last repurchase was effected by IASI on March 4, 1996
and asadoption of such date IASI had repurchased approximately 695,842 shares of Common
Stock for an aggregate cost of approximately $1,040,000. The repurchased shares
have been retired and the repurchase program has been discontinued.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS
This Annual Report contains various forward-looking statements and
information that are based on management's belief as well as assumptions made
by, and information currently available to, management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"projects," "management believes," "IASI believes" and words or phrases of
similar import. Such statements are subject to certain risks, uncertainties or
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. Among the key factors
that may have a direct bearing on IASI'sSFAS No. 150
did not impact CBIZ's consolidated results of operations and financial condition are: (i) demand for IASI's services; (ii) IASI's abilityposition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
QUANTITATIVE INFORMATION ABOUT MARKET RISK.
CBIZ's floating rate debt under its credit facility exposes the Company to
integrateinterest rate risk. A change in the operationsFederal Funds Rate, or the Reference Rate
set by the Bank of acquired businesses; (iii) IASI's abilityAmerica (San Francisco), would affect the rate at which CBIZ
could borrow funds under its credit facility. If market interest rates were to
expand into new
markets; (iv)increase or decrease immediately and uniformly by 100 basis points from the
consummationlevels at December 31, 2003, interest expense would increase or decrease by $0.1
million annually. During June 2003, CBIZ paid its revolving credit facility
balance down to zero, thus requiring it to terminate its interest rate swap. The
interest rate swap was scheduled to expire during August 2003 and carried a
fixed rate of IASI's disposition5.58% (fixed Libor rate of 3.58% plus an applicable margin of
2.0%).
29
CBIZ does not engage in trading market risk sensitive instruments. The
company has used interest rate swaps to manage the interest rate mix of its
environmental
services operations; (v) environmental liabilitiescredit facility and related overall cost of borrowing. Interest rate swaps
involve the exchange of floating for fixed rate interest payments to which IASI may become
subjecteffectively
convert floating rate debt into fixed rate debt based on one- three- or
six-month U.S. dollar LIBOR. Interest rate swaps allow the company to maintain a
target range of fixed to floating rate debt.
QUALITATIVE INFORMATION ABOUT MARKET RISK.
CBIZ's primary market risk exposure is that of interest rate risk. A change
in the futureFederal Funds Rate, or the reference rate set by the Bank of America (San
Francisco), would affect the rate at which are not covered by an indemnity or insurance; (vi)CBIZ could borrow funds under its
credit facility. See "Quantitative Information about Market Risk" for a further
discussion on the potential impact of current and future laws and governmental regulations affecting
IASI's operations; (vii) competitive practicesa change in the specialty insurance and
bonding industries; (viii) competitive practices in the reinsurance markets
utilized by IASI; (ix) judicial, legislative, and regulatory changes of law
relating to risks covered by IASI or to the operations of insurance companies in
general; (x) market fluctuations in the values or
26
28
returns on assets in IASI's investment portfolios; (xi) pricing of IASI
insurance products; and (xii) adverse loss development.interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.DATA
The Financial Statements and Supplementary Data required hereunder are
included in this Annual Report as set forth in Item 14(a)15(a) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
DescribedNone.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS
We evaluated the effectiveness of our disclosure controls and procedures
("Disclosure Controls") as of the end of the 2003 fiscal year. This evaluation
("Controls Evaluation") was done with the participation of our Chairman and
Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO").
Disclosure Controls are controls and other procedures that are designed to
ensure that information required to be disclosed by us in IASI's Form 8-K dated February 19, 1997.the reports that we
file or submit under the Securities Exchange Act of 1934 ("Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. Disclosure Controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, including our CEO and
CFO, as appropriate to allow timely decisions regarding required disclosure.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
Our management, including our CEO and CFO, does not expect that our
Disclosure Controls or our internal controls over financial reporting ("Internal
Controls") will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, but not absolute,
assurance that the objectives of a control system are met. Further, any control
system reflects limitations on resources, and the benefits of a control system
must be considered relative to its costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within CBIZ have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of a control. A design of a control system is also based upon certain
assumptions about the likelihood of future events, there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and may not be detected.
30
CONCLUSIONS
Based upon the Controls Evaluation, our CEO and CFO have concluded that,
subject to the limitations noted above, the Disclosure Controls are effective in
providing reasonable assurance that material information relating to CBIZ is
made known to management on a timely basis during the period when our periodic
reports are being prepared.
There were no changes in our Internal Controls that occurred during the
quarter covered by this report that have materially affected, or are reasonably
likely to materially affect, our Internal Controls.
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information appearing under the caption "Election of Directors" in
IASI'sREGISTRANT
Information with respect to this item not included below is incorporated by
reference from CBIZ's definitive proxy statement (the "Proxy Statement"for the 2004 Annual
Stockholders' Meeting to be filed with the Securities and Exchange Commission no
later than 120 days after the end of CBIZ's fiscal year.
At its July 31, 2003 Board of Directors Meeting, the Board resolved to
expand the current size of the Board from six to eight directors. Upon
nomination by the Nominating and Governance Committee of the Board of Directors,
Todd Slotkin and Donald V. Weir were elected to fill the newly created seats.
Mr. Weir will hold office until the 2005 Annual Meeting of Shareholders, and Mr.
Slotkin shall hold office until the 2006 Annual Meeting of Shareholders.
Further, Mr. Slotkin became a member of the Nominating & Governance Committee as
well as the Compensation Committee during 2003. Mr. Weir became a member of the
Audit Committee and the Nominating & Governance Committee during 2003.
The following table sets forth certain information regarding the directors,
executive officers and certain key employees of CBIZ. Each executive officer of
CBIZ named in the following table has been elected to serve until his successor
is duly appointed or elected or until his earlier removal or resignation from
office. No arrangement or understanding exists between any executive officer of
CBIZ and any other person pursuant to which he or she was selected as an
officer.
NAME AGE POSITION(S)
- ---- --- -----------
EXECUTIVE OFFICERS AND DIRECTORS:
Steven L. Gerard (1).................. 58 Chairman and Chief Executive Officer
Rick L. Burdick (1)(3)................ 52 Director and Vice Chairman
Gary W. DeGroote...................... 48 Director
Joseph S. DiMartino (3)(4)............ 60 Director
Harve A. Ferrill (2)(3)............... 71 Director
Richard C. Rochon (2)(3)(4)........... 45 Director
Todd Slotkin (3)(4)................... 51 Director
Donald V. Weir (2)(3)................. 62 Director
Jerome P. Grisko, Jr. (1)............. 42 President and Chief Operating Officer
Ware H. Grove......................... 53 Senior Vice President and Chief
Financial Officer
Leonard Miller........................ 64 Senior Vice President, Accounting, Tax
& Advisory
Robert A. O'Byrne..................... 47 Senior Vice President, Benefits &
Insurance
Michael W. Gleespen................... 45 Secretary and General Counsel
OTHER KEY EMPLOYEES:
George A. Dufour...................... 57 Senior Vice President and Chief
Technology Officer
Mark M. Waxman........................ 47 Senior Vice President of Marketing
Teresa E. Bruce....................... 39 Vice President, Human Resources
Chris Spurio.......................... 38 Vice President, Finance
Michael P. Kouzelos................... 35 Vice President, Strategic Initiatives
Kelly J. Kuna......................... 33 Controller
David S. Azzolina..................... 43 Treasurer
- ---------------
(1) Member of Management Executive Committee
(2) Member of Audit Committee
32
(3) Member of Nominating & Governance Committee
(4) Member of Compensation Committee
EXECUTIVE OFFICERS AND DIRECTORS:
Steven L. Gerard was elected by the Board to serve as its Chairman in
October, 2002. He was appointed Chief Executive Officer and Director in October,
2000. Mr. Gerard was Chairman and CEO of Great Point Capital, Inc., a provider
of operational and advisory services from 1997 to October 2000. From 1991 to
1997, he was Chairman and CEO of Triangle Wire & Cable, Inc. and its successor
Ocean View Capital, Inc. Mr. Gerard's prior experience includes 16 years with
Citibank, N.A. in various senior corporate finance and banking positions,
including ultimately Senior Managing Director, responsible for the risk
management of Citibank's commercial and investment banking activities in the
United States, Europe, Australia and Japan. Further, Mr. Gerard served seven
years with the American Stock Exchange, where he last served as Vice President
of the Securities Division. Mr. Gerard also serves on the Boards of Directors of
Fairchild Company, Inc., Lennar Corporation, TIMCO Aviation Services, Inc. and
Joy Global, Inc.
Rick L. Burdick has served as a Director of CBIZ since October 1997, when
he was elected as an independent director. In October 2002, he was elected by
the Board as Vice Chairman, a non-officer position. Mr. Burdick has been a
partner at the law firm of Akin Gump Strauss Hauer & Feld L.P since April 1988.
Mr. Burdick serves on the Board of Directors of AutoNation, Inc.
Gary W. DeGroote has served as a Director of CBIZ since October, 2002, when
he was elected as an independent director to serve the remaining term of his
father, Michael G. DeGroote, who resigned from the Board for health reasons. Mr.
DeGroote is the President of GWD Management Inc., a private Canadian diversified
investment holding company founded in 1980 with an office in Burlington,
Ontario. Mr. DeGroote also serves as a Director and Officer of other private
companies. From 1976 to 1989, Mr. DeGroote held several positions with Laidlaw
Inc., a public waste services and transportation company, ending as
Vice-President and Director in 1989. From 1991 to 1994, Mr. DeGroote served as
President of Republic Environmental Systems Ltd., and Director of Republic
Industries Inc. He is currently a Director of Capital Environmental Resources
Inc.
Joseph S. DiMartino has served as a Director of CBIZ since November 1997,
when he was elected as an independent director. Mr. DiMartino has been Chairman
of the Board of the Dreyfus Family of Funds since January 1995. Mr. DiMartino
served as President, Chief Operating Officer and Director of The Dreyfus
Corporation from October 1982 until December 1994 and also served as a director
of Mellon Bank Corporation. Mr. DiMartino also serves on the Board of Directors
of LEVCOR International, Inc. (formerly Carlyle Industries, Inc.) relating, The Newark
Group, and the Muscular Dystrophy Association.
Harve A. Ferrill has served as a Director of CBIZ since October 1996, when
he was elected as an independent director. Mr. Ferrill served as Chief Executive
Officer and Chairman of Advance Ross Corporation, a company that provides tax
refunding services, from 1992 to 1996. Mr. Ferrill served as President of
Advance Ross Corporation from 1990 to 1992. Since 1996, Advance Ross Corporation
has been a wholly-owned subsidiary of Cendant Corporation. Mr. Ferrill has
served as President of Ferrill-Plauche Co., Inc., a private investment company,
since 1982.
Richard C. Rochon has served as a Director of CBIZ since October 1996, when
he was elected as an independent director. Mr. Rochon is Chairman and Chief
Executive Officer of Royal Palm Capital Partners, a private investment and
management fund. From 1985 to February 2002, Mr. Rochon served in various
capacities with, and most recently as, President of Huizenga Holdings, Inc., a
management and holding company owned by H. Wayne Huizenga. Mr. Rochon also
served, as a director since September 1996 and as Vice Chairman since April
1997, of Boca Resorts, Inc., the owner and operator of luxury resort properties
in South Florida. From 1979 until 1985, Mr. Rochon was employed as a certified
public accountant by the public accounting firm of Coopers & Lybrand, L.L.P. Mr.
Rochon also serves on the Board of Directors of Citizens Bancshares of South
Florida.
Todd Slotkin has served as a Director of CBIZ since September 2, 2003, when
he was elected as an independent director. Mr. Slotkin serves as Executive Vice
President and CFO of MacAndrews and Forbes Holdings, and as Executive Vice
President and CFO of publicly owned MYF Worldwide (NYSE:MFW). Prior to
33
joining MacAndrews & Forbes in 1992, Mr. Slotkin spent 17 years with Citicorp,
ultimately serving as senior managing director and senior credit officer. Mr.
Slotkin serves on the Board of Managers of Spectaguard and the Board of
Directors of TransTech Pharma; formerly served as director of CalFed Bank; and
is Chairman and co-founder of the Food Allergy Institute.
Donald V. Weir has served as a Director of CBIZ since September 2, 2003,
when he was elected as an independent director. Mr. Weir has served as financial
consultant with Sanders Morris Harris for the past four years. Prior to this Mr.
Weir was CFO and director of publicly-held Deeptech International and two of its
subsidiaries, Tatham Offshore and Leviathan Gas Pipeline Company, the latter of
which was a publicly-held company. Prior to his employment with Deeptech, Mr.
Weir worked for eight years with Sugar Bowl Gas Corporation, as Controller and
Treasurer and later in a consulting capacity. Mr. Weir was associated with Price
Waterhouse, an international accounting firm, from 1966 to 1979.
Jerome P. Grisko, Jr. has served as President and Chief Operating Officer
of CBIZ since February 1, 2000. Mr. Grisko joined CBIZ as Vice President,
Mergers & Acquisitions in September 1998 and was promoted to Senior Vice
President, Mergers & Acquisitions and Legal Affairs in December of 1998. Prior
to joining CBIZ, Mr. Grisko was associated with the law firm of Baker &
Hostetler LLP, where he practiced from September 1987 until September 1998,
serving as a partner of such firm from January 1995 to September 1998. While at
Baker & Hostetler, Mr. Grisko concentrated his practice in the area of mergers,
acquisitions and divestitures.
Ware H. Grove has served as Senior Vice President and Chief Financial
Officer of CBIZ since December 2000. Before joining CBIZ, Mr. Grove served as
Senior Vice President and Chief Financial Officer of Bridgestreet
Accommodations, Inc., which he joined in early 2000 to restructure financing,
develop strategic operating alternatives, and assist with merger negotiations.
Prior to joining Bridgestreet, Mr. Grove served for three years as Vice
President and Chief Financial Officer of Lesco, Inc. Since beginning his career
in corporate finance in 1972, Mr. Grove has held various financial positions
with large companies representing a variety of industries, including Revco D.S.,
Inc., Computerland/Vanstar, Manville Corporation, The Upjohn Company, and First
of America Bank.
Leonard Miller has served as CBIZ Accounting, Tax and Advisory Services
Practice Head since November 2000 and was appointed Senior Vice President in
February 2002. Mr. Miller was the President and Director of Financial Operations
for Miller Wagner & Company, Ltd. in Phoenix, Arizona for 22 years before the
firm joined the Century Business Services family and became Miller Wagner
Business Services, Inc. and Miller Wagner & Company, PLLC. Mr. Miller was the
Regional Managing Partner for Lester Witte and Company, and was responsible for
11 of its offices prior to co-founding Miller Wagner & Company, Ltd. With over
38 years of experience, Mr. Miller is a recognized expert in the fields of
finance, real estate, general business consulting and various litigation support
matters. Mr. Miller's professional affiliations include the American Institute
of Certified Public Accountants (AICPA), the Arizona Society of Certified Public
Accountants (ASCPA) and the Illinois Society of Certified Public Accountants
(ISCPA).
Robert A. O'Byrne has serves as a Senior Vice President of CBIZ since
December 1998 and is responsible for CBIZ's Benefits Administration & Insurance
Services Group. Mr. O'Byrne served as President and Chief Executive Officer of
employee benefits brokerage/consulting firms Robert D. O'Byrne and Associates,
Inc. and The Grant Nelson Group, Inc. prior to their acquisition by CBIZ in
December 1997. Mr. O'Byrne has more than 24 years of experience in the insurance
and benefits consulting field.
Michael W. Gleespen has served as Corporate Secretary and General Counsel
since June 2001 and General Counsel since June 2001. Mr. Gleespen is an attorney
and has served as CBIZ's Vice President of Regulatory Compliance and Accountancy
Compliance Officer and Technical Director since February 1998. Prior to joining
CBIZ, Mr. Gleespen was an Assistant Ohio Attorney General in the Business &
Government Regulation Section and the Court of Claims Defense Section from 1988
until 1998, during which time he was counsel to the 1997
Annual Stockholders Meeting (the "Annual Meeting")Ohio Accountancy Board, the
Ohio State Teachers Retirement System and represented many other state
departments and agencies. Mr. Gleespen also held the post of Associate Attorney
General for Pension, Disability and Annuity Plans and was the Co-Chairman of the
Public Pension Plan Working Group. Mr. Gleespen is a member of the Board of
Directors of the Cancer Hope Foundation and is a member of the American Society
of Corporate Secretaries.
34
OTHER KEY EMPLOYEES:
George A. Dufour was appointed Senior Vice President and Chief Technology
Officer in July 2001. Prior to joining CBIZ, Mr. Dufour served as Corporate
Director of Information Access Services for University Hospitals Health Systems
(UHHS), where he achieved substantial cost savings by consolidating IS resources
throughout the health system. Prior to joining UHHS in 1999, Mr. Dufour acted as
Vice President and CIO for Akron General Health Systems. From 1986 through 1994,
Mr. Dufour was with Blue Cross/Blue Shield of Ohio and served most recently
there as Director of Information Systems Development. Mr. Dufour commenced his
career in information technology, which includes tenures at Cook United, Cole
National Corporation, General Tire & Rubber, Picker Corporation, and Sherwin
Williams, in 1971 as the Director of Education for the Institute of Computer
Management, a division of Litton Industries. Mr. Dufour is incorporated hereina member of the
northeast Ohio chapter of the Healthcare Information Management Systems Society.
Mark M. Waxman has over twenty years experience in marketing and branding.
Prior to joining CBIZ, he was CEO/Creative Director of one of Silicon Valley's
most well-known advertising agencies, Carter Waxman. Most recently, he was a
founding partner of SK Consulting (acquired by reference.CBIZ in 1998) providing strategic
marketing and branding services to a wide range of companies and industries. Mr.
Waxman has been a featured marketing columnist and contributor to many business
and trade publications, and currently serves on the Board of Trustees of the
Montalvo Center for the Arts, the West Valley Mission Foundation, and Catholic
Charities, and he recently served as the Chairman of the Board of the Silicon
Valley Chamber of Commerce.
Teresa E. Bruce has served as Vice President of Human Resources since
January 1999. From 1995 to 1999 Ms. Bruce served as Director of Human Resources
for Robert D. O'Byrne & Associates, Inc. and The information regarding executive officersGrant Nelson Group, Inc.,
subsidiaries of IASICBIZ now known as CBIZ Benefits and Insurance Services, Inc. Ms.
Bruce has over 15 years of experience in human resources and is containedan active member
of the Greater Kansas City Chapter of The Human Resources Management Association
and Society of Human Resources Management.
Chris Spurio has served as Vice President of Finance since July 1999.
Previously, Mr. Spurio was Controller since January 1998. Mr. Spurio also served
as Acting Chief Financial Officer from May 2000 to December 2000. Mr. Spurio was
associated with KPMG LLP, an international accounting firm, from July 1988 to
January 1998, serving as a Senior Manager of such firm from July 1995 to January
1998. Mr. Spurio is a CPA and a member of the American Institute of Certified
Public Accountants and the Ohio Society of Certified Public Accountants.
Michael P. Kouzelos has served as Vice President of Strategic Initiatives
since April 2001. Mr. Kouzelos served as Vice President of Shared Services from
August 2000 to March 2001 and Director of Business Integration from June 1998 to
July 2000. Mr. Kouzelos was associated with KPMG LLP, an international
accounting firm, from 1990 to September 1996 and received his Masters in
Part IBusiness Administration from The Ohio State University in May of this Annual Report under1998. Mr.
Kouzelos is a separate item captioned "Executive OfficersCPA and a member of IASI."the American Institute of Certified Public
Accountants and the Ohio Society of Certified Public Accountants.
Kelly J. Kuna has served as Corporate Controller since July 1999. Ms. Kuna
served as Manager of External Reporting from December 1998 to June 1999. Prior
to joining CBIZ, Ms. Kuna was associated with KPMG LLP, an international
accounting firm, from 1992 to December 1998, serving as a Senior Manager of such
firm from July 1998 to December 1998. Ms. Kuna is a CPA and a member of the
American Institute of Certified Public Accountants and the Ohio Society of
Certified Public Accountants.
David S. Azzolina joined CBIZ in April 1999 and was appointed Corporate
Treasurer in May 2000. Prior to joining CBIZ, Mr. Azzolina spent 13 years at
Bioproducts, Inc. in a broad range of financial assignments, including strategic
initiatives, financial planning and analysis, accounting, and cash management.
Mr. Azzolina has twenty years of financial experience. He received a B.S. degree
in accounting from The Ohio State University in 1983 and an M.B.A. degree from
The University of Akron in 1998. Mr. Azzolina is a licensed Certified Public
Accountant, State of Ohio.
35
ITEM 11. EXECUTIVE COMPENSATION.
The information appearingInformation with respect to this item is incorporated by reference from the
discussion under the captionheading "Executive Compensation" in CBIZ's definitive proxy
statement for the Proxy Statement relating2004 Annual Stockholders' Meeting to be filed with the
Annual Meeting is incorporated herein by
reference.Securities and Exchange Commission no later than 120 days after the end of
CBIZ's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy StatementMANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information with respect to this item is incorporated herein by reference.reference from
CBIZ's definitive proxy statement for the 2004 Annual Stockholders' Meeting to
be filed with the Securities and Exchange Commission no later than 120 days
after the end of CBIZ's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.TRANSACTIONS
The information appearingfollowing is a summary of certain agreements and transactions between
or among CBIZ and certain related parties. It is CBIZ's policy to enter into
transactions with related parties on terms that, on the whole, are no less
favorable than those that would be available from unaffiliated parties. Based on
CBIZ's experience and the terms of its transactions with unaffiliated parties,
it is the Board of Directors' belief that the transactions described below met
these standards at the time of the transactions.
A number of the businesses acquired since October 1996 are located in
properties owned indirectly by and leased from persons employed by CBIZ. In the
aggregate, CBIZ paid approximately $1.4 million, $0.8 million and $1.5 million
for the years ended 2003, 2002 and 2001, respectively, under such leases which
management believes were at market rates.
Rick L. Burdick, a director of CBIZ, is a partner of Akin, Gump, Strauss,
Hauer & Feld, L.L.P. (Akin, Gump.) Akin, Gump performed legal work for CBIZ
during 2003, 2002 and 2001 for which the captions "Certain Relationshipsfirm received approximately $180,000,
$119,000, and Related Transactions"$69,000 from CBIZ, respectively.
Robert A. O'Byrne, a Senior Vice President, was indebted to CBIZ in the
Proxy Statementamount of $250,000 and $325,000 at December 31, 2002 and 2001, respectively.
Likewise, CBIZ was indebted to the former shareholders of RDOB/GNG of which Mr.
O'Byrne is one, for $420,000 at December 31, 2002. The notes to CBIZ and Mr.
O'Byrne were paid in 2003, and no indebtedness remains at December 31, 2003. Mr.
O'Byrne also has an interest in a partnership that receives commissions from
CBIZ that are paid to certain eligible benefits and insurance producers in
accordance with a formal program to provide benefits in the event of death,
disability, retirement or other termination. The note and the program were both
in existence at the time CBIZ acquired the former company, of which Mr. O'Byrne
was an owner.
CBIZ maintains joint-referral relationships and service agreements with
licensed CPA firms under which CBIZ provides administrative services (including
office, bookkeeping, accounting, and other administrative services, preparing
marketing and promotion materials, and leasing of administrative and
professional staff) in exchange for a fee. A number of CBIZ employees own
interests in the independent companies maintaining administrative services
agreements with CBIZ. See a more detailed discussion of this arrangement in Part
I of the accompanying Annual Report.
During 2003, CBIZ guaranteed two letters of credit for a CPA firm with
which CBIZ maintains an administrative services agreement. The letters of credit
total $654,000.
In 2002, CBIZ executed a note receivable with a CPA firm whose partner
group has since joined MHM, PC, a CPA firm with which CBIZ maintains an
administrative services agreement. The balance on the note at December 31, 2003
and 2002 was approximately $222,000 and $263,000, respectively. The note does
not have a stated maturity date.
CBIZ divested several operations during 2003, 2002, and 2001, in an effort
to rationalize the business and sharpen the focus on non-strategic businesses.
In accordance with this strategy, CBIZ has sold and may sell in the future
businesses to former employees or shareholders. Management believes these
transactions were priced at
36
market rates, competitively bid, and entered into at arm's length terms and
conditions. See note 17 to CBIZ's consolidated financial statements included
herewith.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to this item is incorporated herein by reference.reference from
CBIZ's definitive proxy statement for the 2004 Annual Stockholders' Meeting to
be filed with the Securities and Exchange Commission no later than 120 days
after the end of CBIZ's fiscal year.
PART IV
ITEM 14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report or
incorporated by reference:
1. Financial Statements.
As to financial statements and supplementary information, reference
is made to "Index to Financial Statements" on page F-1 of this
Annual Report.
2. Financial Statement Schedules.
As to financial statement schedules, reference is made to "Index to
Financial Statements" on page F-1 of this Annual Report.
3. Exhibits.
The following documents are filed as exhibits to this Form 10-K pursuant to
Item 601 of Regulation S-K.
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of
IASI (filed as Exhibit 3.1 to IASI's
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of CBIZ
(filed as Exhibit 3.1 to CBIZ's Registration Statement on
Form 10, file no. 0-25890, and incorporated herein by
reference).
3.2 Certificate of Amendment of the Certificate of Incorporation
of CBIZ dated October 18, 1996 (filed as Exhibit 3.2 to
CBIZ's Annual Report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference).
3.3 Certificate of Amendment of the Certificate of Incorporation
of CBIZ effective December 23, 1997 (filed as Exhibit 3.3 to
CBIZ's Annual Report on Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference).
3.4 Certificate of Amendment of the Certificate of Incorporation
of CBIZ dated September 10, 1998 (filed as Exhibit 3.4 to
CBIZ's Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference).
3.5 Amended and Restated Bylaws of CBIZ (filed as Exhibit 3.2 to
CBIZ's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference).
4.1 Form of Stock Certificate of Common Stock of CBIZ (filed as
Exhibit 4.1 to CBIZ's Annual Report Form 10-K for the year
ended December 31, 1998, and incorporated herein by
reference).
4.4 CBIZ Business Services Employee Stock Investment Plan (filed
as exhibit 4.4 to CBIZ's Report on Form S-8 filed June 1,
2001, and incorporated herein by reference).
10.1 Form of Warrant to purchase 900,000 shares of CBIZ's common
stock issued to Jackson National Life Insurance Company
(filed as Exhibit 10.2 to CBIZ's Annual Report Form 10-K for
the year ended December 31, 1998, and incorporated herein by
reference).
10.2 1996 Employee Stock Option Plan (filed as Appendix I to
CBIZ's Proxy Statement 1997 Annual Meeting of Stockholders
dated April 1, 1997 and incorporated herein by reference).
10.3 Amendment to the 1996 Employee Stock Option Plan (filed as
Exhibit 99.2 to CBIZ's Current Report on Form 8-K dated
December 14, 1998, and filed January 12, 1999 and
incorporated herein by reference).
3.2* Certificate of Amendment of the Certificate of Incorporation
of IASI dated October 18, 1996.
27
37
29
3.3 Amended and Restated Bylaws of IASI (filed as Exhibit 3.2
to IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
4.1 Form of Stock Certificate of Common Stock of IASI (filed
as Exhibit 4.1 to IASI's Registration Statement on Form 10,
file no. 0-25890, and incorporated herein by reference)
4.2 Promissory Note, dated October 18, 1996, in the aggregate
principal amount of $4.0 million issued by IASI payable to
Alliance Holding (filed as Exhibit 99.7 to IASI's Current
Report on Form 8-K dated October 18, 1996, and incorporated
herein by reference).
9.1 Voting Agreement, dated as of October 18, 1996, by and between
MGD Holdings and Alliance Holding (filed as Exhibit 99.6 to
IASI's Current Report on Form 8-K dated October 18, 1996, and
incorporated herein by reference).
10.1 Spin-off Agreement (filed as Exhibit 10.1 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.2 Alternative Dispute Resolution Agreement (filed as
Exhibit 10.2 to IASI's Registration Statement on Form 10, file
no. 0-25890, and incorporated herein by reference)
10.3 Assumption of Liabilities and Indemnification Agreement
(filed as Exhibit 10.3 to IASI's Registration Statement on
Form 10, file no. 0-25890 and incorporated herein by
reference)
10.4 Corporate Services Agreement (filed as Exhibit 10.4 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.5 Employee Benefits Agreement (filed as Exhibit 10.5 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.6 Insurance and Indemnification Agreement (filed as Exhibit
10.6 to IASI's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference)
10.7 Tax Sharing Agreement (filed as Exhibit 10.7 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.8 IASI's Adjustment Plan (filed as Exhibit 10.8 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.9 Form of Warrant to purchase 200,000 shares of IASI's
Common Stock issued to MGD Holdings Ltd. (filed as Exhibit
10.9 to IASI's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference)
10.10 Form of Warrant to purchase 5,000 shares of IASI's Common
Stock issued to Douglas R. Gowland (filed as Exhibit 10.11 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.11 Form of Warrant to purchase 55,000 shares of IASI's Common
Stock issued for Douglas R. Gowland (filed as Exhibit 10.12 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.12 Credit Agreement dated as of May 11, 1995 by and among IASI
and its Subsidiaries, as Borrowers, and CoreStates Bank, N.A.
(filed as Exhibit 10.12 to IASI's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein
by reference)
10.13 Agreement and Plan of Merger by and among IASI, Republic/CSA
Acquisition Corporation, Republic/CSU Acquisition Corporation,
Alliance Holding, CSC and CSU (filed as Appendix I to IASI's
Definitive Schedule 14C Information Statement dated September
23, 1996 and incorporated herein by reference).
10.14 Amendment No. 1 to Agreement and Plan of Merger by and among
IASI, Republic/CSA Acquisition Corporation, Republic/CSU
Acquisition Corporation, Alliance Holding, CSC and CSU (filed
as Appendix IV to IASI's Definitive Schedule 14C Information
Statement dated September 23, 1996 and incorporated herein by
reference).
10.15 Amendment No. 2 to Agreement and Plan of Merger by and among
IASI, Republic/CSA Acquisition Corporation, Republic/CSU
Acquisition Corporation, Alliance Holding, CSC and CSU (filed
as
28
30
Appendix V to IASI's Definitive Schedule 14C Information
Statement dated September 23, 1996 and incorporated herein by
reference).
10.16 Stock Purchase Agreement by and between IASI and H. Wayne
Huizenga (filed as Appendix II to IASI's Definitive Schedule
14C Information Statement dated September 23, 1996 and
incorporated herein by reference).
10.17 Stock Purchase Agreement by and between IASI and MGD Holdings
(filed as Appendix III to IASI's Definitive Schedule 14C
Information Statement dated September 23, 1996 and
incorporated herein by reference).
10.18* Agreement and Plan of Merger by and among IASI, IASI/SMR
Acquisition Co., SMR and its shareholders dated November 30,
1996.
10.19* Agreement and Plan of Merger by and among IASI, IASI/ECI
Acquisition Co., ECI and its shareholders dated November 5,
1996.
11.1* IASI Earnings per Common Share Data.
21.1* List of Subsidiaries of IASI.
24.1* Consent of KPMG Peat Marwick LLP
99.1 Information Statement (filed as Exhibit 99.1 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
*Indicates
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.4 Amendment to the 1996 Employee Stock Option Plan (filed on
Secretary's Certificate as Exhibit 10.10 to CBIZ's Annual
Report on Form 10-K for the year ended December 31, 2000,
and incorporated herein by reference).
10.5 Severance Protection Agreement by and between Century
Business Services, Inc. and Jerome P. Grisko, Jr. (filed as
exhibit 10.11 to CBIZ's Report on Form 10-K for the year
ended December 31, 2000, and incorporated herein by
reference).
10.7 Employment Agreement by and between Century Business
Services, Inc. and Steven L. Gerard (filed as exhibit 10.13
to CBIZ's Report on Form 10-K for the year ended December
31, 2000, and incorporated herein by reference).
10.8 Employment Agreement by and between Century Business
Services, Inc. and Ware H. Grove (filed as exhibit 10.14 to
CBIZ's Report on Form 10-K for the year ended December 31,
2000, and incorporated herein by reference).
10.10 Credit Agreement dated September 26, 2002 among Century
Business Services, Inc., Bank of America, N.A. as Agent,
Issuing Bank, and Swing Line Bank, and the Other Financial
Institutions Party Hereto (filed as exhibit 10.17 to CBIZ's
Report on Form 10-Q for the period ended September 30, 2002,
and incorporated herein by reference).
10.11 First amendment to Amended and Restated Credit Agreement
effective June 6, 2003 among Century Business Services, Inc.
and each of the Guranators (filed as exhibit 99.B.II to
CBIZ's Report on Form SC TO-I filed June 10,2003, and
incorporated herein by reference).
21.1* List of Subsidiaries of Century Business Services, Inc.
23* Consent of KPMG LLP
24* Powers of attorney (included on the signature page hereto).
31.1* Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2* Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1* Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2* Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
- ---------------
* Indicates documents filed herewith.
(b) Reports on Form 8-K
IASI filed theThe following Current Reports on Form 8-K during the fourth
quarter of 1996: Current Report on Form 8-K datedwas filed during the three months
ended December 31, 2003:
(a) On October 18, 1996. Current Report30, 2003, CBIZ filed a current report on Form 8-K dated December 30, 1996.
29to provide
investors with its third quarter earnings, as released to the public
and discussed on a conference call on October 28, 2003.
38
31
INTERNATIONAL ALLIANCESIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Century has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CENTURY BUSINESS SERVICES, INC.
(REGISTRANT)
By /s/ WARE H. GROVE
------------------------------------
Ware H. Grove
Chief Financial Officer
March 15, 2004
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below on this Annual Report hereby constitutes and appoints Steven L. Gerard and
Ware H. Grove, and each of them, with full power to act without the other, his
true and lawful attorney-in-fact and agent, with full power of substitution for
him and his name, place and stead, in all capacities (until revoked in writing),
to sign any and all amendments to this Annual Report of Century Business
Services, Inc. and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary fully to all
intents and purposes as he might or could do in person, thereby ratifying and
confirming all that each attorney-in-fact and agent, or their or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report has been signed below by the following persons on
behalf of Century Business Services, Inc. and in the capacities and on the date
indicated above.
/s/ STEVEN L. GERARD /s/ JOSEPH S. DIMARTINO
- -------------------------------------------- --------------------------------------------
Steven L. Gerard Joseph S. DiMartino
Chairman and Chief Executive Officer Director
/s/ WARE H. GROVE /s/ HARVE A. FERRILL
- -------------------------------------------- --------------------------------------------
Ware H. Grove Harve A. Ferrill
Chief Financial Officer Director
(Principal Financial and Accounting Officer)
/s/ GARY W. DEGROOTE /s/ RICHARD C. ROCHON
- -------------------------------------------- --------------------------------------------
Gary W. DeGroote Richard C. Rochon
Director Director
/s/ RICK L. BURDICK /s/ TODD SLOTKIN
- -------------------------------------------- --------------------------------------------
Rick L. Burdick Todd Slotkin
Director Director
/s/ DONALD V. WEIR
- --------------------------------------------
Donald V. Weir
Director
39
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
Independent Auditors' Report.................................................F-2Report.............................. F-2
Consolidated and Combined Balance Sheets as of December 31, 19962003 and
1995.............................................F-32002................................................... F-3
Consolidated and Combined Statements of Income
Years EndedOperations for the years ended
December 31, 1996, 19952003, 2002 and 1994...........................F-42001.......................... F-4
Consolidated and Combined Statements of Shareholders'Stockholders' Equity Years Endedfor the
years ended December 31, 1996, 19952003, 2002 and 1994...........................F-52001........... F-5
Consolidated and Combined Statements of Cash Flows Years Endedfor the years ended
December 31, 1996, 19952003, 2002 and 1994...........................F-62001....................... F-6
Notes to the Consolidated Financial Statements............ F-7
Schedule II - Valuation and Combined Financial
Statements.............................................................F-7
Schedule I - Summary of Investments -- Other Than
Investments in Related Parties,Qualifying Accounts and
Reserves for the years ended December 31, 1996.....................F-31
Schedule IV - Reinsurance
Years Ended December 31, 1996, 19952003, 2002
and 1994..........................F-32
Schedule III - Supplementary Insurance Information
For the Years Ended December 31, 1996, 1995 and 1994..................F-332001............................................... F-30
F-1
32
INDEPENDENT AUDITORS' REPORT
----------------------------
BOARD OF DIRECTORS
INTERNATIONAL ALLIANCE SERVICES, INC.The Board of Directors and Stockholders
Century Business Services, Inc.:
We have audited the accompanying consolidated and combined financial statements of
International AllianceCentury Business Services, Inc. and Subsidiaries (Company) as listed in the
accompanying index on page F-1. In connection with our audits of the
consolidated and combined financial statements, we have also audited the consolidated
financial statement schedulesschedule as listed in the accompanying index on page F-1.
These consolidated and combined financial statements and the financial statement schedulesschedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated and combined
financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted auditing
standards.in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated and combined financial statements referred to above
present fairly, in all material respects, the financial position of International AllianceCentury
Business Services, Inc. and Subsidiaries atsubsidiaries as of December 31, 19962003 and 1995,2002, and
the results of their operations shareholders' equity and their cash flows for each of the years in
the three-year period ended December 31, 1996,2003, in conformity with accounting
principles generally accepted accounting principles.in the United States of America. Also, in our
opinion, the related financial statement schedules,schedule, when considered in relation
to the basic consolidated and combined financial statements taken as a whole, presentpresents
fairly, in all material respects, the information set forth therein.herein.
As discussed in notes 1 and 6 to the consolidated financial statements, the
Company adopted Financial Accounting Standards Board (FASB) Statement No. 142,
"Goodwill and Other Intangible Assets," and changed its method of accounting for
goodwill and other intangible assets, effective January 1, 2002.
As discussed in notes 1, 17, and 20 to the consolidated financial
statements, the Company adopted FASB Statement No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets," and changed its method for
identifying and measuring discontinued operations, effective January 1, 2002.
/s/ KPMG PEAT MARWICK LLP
Cleveland, Ohio
March 25, 1997February 12, 2004
F-2
33CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(IN THOUSANDS)
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31, 1996 AND 1995
1996 1995
------------- --------------
ASSETS2003 2002
--------- ---------
Investments (Note 4):
Fixed maturities held to maturity, at amortized cost $ 15,481 $ 15,309
Securities available for sale, at fair value:
Fixed maturities 35,471 33,153
Equity securities 9,213 5,426
Mortgage loans 3,685 3,393
Short-term investments 4,799 843
Other long-term investments - 90
------------- --------------
Total investments 68,649 58,214ASSETS
Current assets:
Cash and cash equivalents 39,874 2,694
Premiumsequivalents................................. $ 3,791 $ 6,351
Restricted cash........................................... 10,880 16,980
Accounts receivable, less allowance for doubtful
accounts of $284 and $138, respectively 7,013 4,467net.................................. 111,556 101,939
Notes receivable -- current............................... 1,315 2,029
Income taxes recoverable.................................. 438 4,957
Deferred policy acquisition costs (Note 8) 4,345 3,428
Reinsurance recoverables (Note 7) 11,185 12,647
Excess of cost over net assetsincome taxes..................................... 3,707 2,105
Other current assets...................................... 7,758 6,973
Assets of businesses acquired , net of accumulated amortization of $33 (Note 2) 6,048 -
Net assets held for disposal (Note 15) 22,999 -sale........................ 395 15,122
--------- ---------
Current assets before funds held for clients...... 139,840 156,456
Funds held for clients...................................... 44,917 49,217
--------- ---------
Total current assets.............................. 184,757 205,673
Property and equipment, net................................. 40,305 44,398
Notes receivable -- non-current............................. 2,433 7,585
Deferred income taxes -- non-current........................ 4,180 7,881
Goodwill and other intangible assets, net................... 167,280 163,706
Other assets 7,217 5,285
------------- --------------
TOTAL ASSETSassets................................................ 3,190 3,868
--------- ---------
Total assets...................................... $ 167,330402,145 $ 86,735
============= ==============433,111
========= =========
LIABILITIES
Losses and loss expenses payable (Note 6)Current liabilities:
Accounts payable.......................................... $ 41,09928,652 $ 37,002
Unearned premiums 18,637 15,636
Note payable and capitalized leases (Note 11) 3,211 47
Income taxes (Note 10) 1,994 1,375
Accrued expenses 5,355 2,67222,421
Other current liabilities................................. 34,575 37,171
Liabilities of businesses held for sale................... 260 7,548
--------- ---------
Current liabilities 5,712 3,235
------------- --------------
TOTAL LIABILITIES 76,008 59,967
------------- --------------
SHAREHOLDERS'before client fund
obligations..................................... 63,487 67,140
Client fund obligations................................... 44,917 49,217
--------- ---------
Total current liabilities......................... 108,404 116,357
Bank debt................................................... 14,000 17,500
Other non-current liabilities............................... 1,903 4,936
--------- ---------
Total liabilities................................. 124,307 138,793
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share (Note 5)
Authorized - 100,000,000 shares at December 31, 1996;
- 20,000,000 shares at December 31, 1995
Issuedshare...................... 957 951
Shares authorized 250,000; Shares issued 95,673 and
95,121; Shares outstanding - 33,764,506 shares at December 31, 1996;
- 14,760,000 shares at December 31, 1995 338 14885,371 and 94,901
Additional paid-in capital 80,446 19,146
Retained earnings 6,842 4,208
Net Unrealized appreciation of investments (net of tax) 3,696 3,266
------------- --------------
TOTAL SHAREHOLDERS' EQUITY 91,322 26,768
------------- --------------capital............................ 441,407 439,684
Accumulated deficit......................................... (129,438) (144,754)
Treasury stock, 10,302 and 220 shares....................... (35,087) (1,308)
Accumulated other comprehensive loss........................ (1) (255)
--------- ---------
Total stockholders' equity........................ 277,838 294,318
Commitments and contingencies (Note 12)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITYcontingencies.....................
Total liabilities and stockholders' equity........ $ 167,330402,145 $ 86,735
============= ==============433,111
========= =========
See the accompanying notes to the consolidated and combined financial statements.
F-3
34CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(In thousands, except per share data)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
-------------- ------------- ---------2003 2002 2001
-------- -------- --------
Revenues:
Premiums earned (Note 7) $ 27,743 $ 26,962 $ 23,368
Net investment income (Note 4) 3,564 3,341 2,477
Net realized gain on investments (Note 4) 1,529 166 80Revenue..................................................... $512,762 $499,209 $510,534
Operating expenses.......................................... 448,707 439,916 441,215
-------- -------- --------
Gross margin................................................ 64,055 59,293 69,319
Corporate general and administrative expense................ 19,647 19,672 19,797
Depreciation and amortization expense....................... 17,161 20,474 40,477
-------- -------- --------
Operating income............................................ 27,247 19,147 9,045
-------- -------- --------
Other income 2,933 470 1,385
-------------- ------------- --------------
Net revenues 35,769 30,939 27,310
-------------- ------------- --------------
Expenses:
Losses and loss adjustment expenses (Note 7) 17,624 15,117 12,494
Policy acquisition expenses (Note 8) 7,699 7,774 5,428(expense):
Interest expense.......................................... (1,055) (2,478) (6,797)
Gain (loss) on sale of operations, net.................... 2,519 930 (7,113)
Other expenses 4,384 3,157 4,544
-------------- ------------- --------------income (expense), net............................... (1,093) (1,073) 3,885
-------- -------- --------
Total expenses 29,707 26,048 22,466
-------------- ------------- --------------other income (expense), net................. 371 (2,621) (10,025)
Income (loss) from continuing operations before income tax
expense 6,062 4,891 4,844expense................................................... 27,618 16,526 (980)
Income tax expense (Note 10) 1,640 1,422 1,344
-------------- ------------- --------------expense.......................................... 12,096 8,421 12,208
-------- -------- --------
Income (loss) from continuing operations 4,422 3,469 3,500operations.................... 15,522 8,105 (13,188)
Loss from operations of discontinued operations
(netbusinesses, net of
income tax expensetax....................................................... (932) (2,475) (2,812)
Gain (loss) on disposal of $91) (Note 15) (38) - -
-------------- ------------ -------------discontinued businesses, net of
tax....................................................... 726 (2,471) --
-------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle...................................... 15,316 3,159 (16,000)
Cumulative effect of change in accounting principle, net of
tax....................................................... -- (80,007) --
-------- -------- --------
Net income (loss)........................................... $ 4,38415,316 $(76,848) $(16,000)
======== ======== ========
Earnings (loss) per share:
Basic:
Continuing operations.................................. $ 3,4690.17 $ 3,500
============== ============= ==============
Earnings per common and common share equivalents (Note 3):
Primary:
Income from continuing operations0.08 $ 0.21 $ 0.20 $ 0.20
Loss from discontinued operations - - -
------------- ------------- --------------(0.14)
Discontinued operations................................ -- (0.05) (0.03)
Cumulative effect of change in accounting principle.... -- (0.84) --
-------- -------- --------
Net income per share(loss)...................................... $ 0.210.17 $ 0.20(0.81) $ 0.20
============= ============= ==============
Fully(0.17)
======== ======== ========
Diluted:
Income from continuing operationsContinuing operations.................................. $ 0.160.17 $ 0.200.08 $ 0.20
Loss from discontinued operations - - -
------------- ------------- --------------(0.14)
Discontinued operations................................ -- (0.05) (0.03)
Cumulative effect of change in accounting principle.... -- (0.82) --
-------- -------- --------
Net income per share(loss)...................................... $ 0.160.17 $ 0.20(0.79) $ 0.20
============= ============= ==============
Weighted(0.17)
======== ======== ========
Basic weighted average common andshares outstanding....... 90,400 94,810 94,818
======== ======== ========
Diluted weighted average common share
equivalents, primary and fully diluted: 32,213 16,956 16,956
============== ============= ==============shares outstanding..... 92,762 96,992 94,818
======== ======== ========
See the accompanying notes to the consolidated and combined financial statements.
F-4
35CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS)
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
ACCUMULATED
ISSUED ADDITIONAL UNREALIZEDOTHER
COMMON COMMON PAID-IN RETAINED APPRECIATIONACCUM. TREASURY TREASURY COMPREHENSIVE
SHARES STOCK CAPITAL EARNINGS (DEPRECIATION)DEFICIT SHARES STOCK INCOME (LOSS) TOTALS
------ ----- ------------- ---------- --------- -------- ---------------------- ------------- --------
December 31, 1993 14,760,0002000......... 94,697 $947 $438,681 $ 148(51,906) -- $ 14,744 $ 3,589 $ (80)(754) $(30) $386,938
Comprehensive loss:
Net income - - - 3,500 -
Pre-merger capital contribution
from parent - - 3,807 - -
Pre-merger dividends paid
to parent - - - (1,000) -loss.............. -- -- -- (16,000) -- -- -- (16,000)
Change in unrealized
appreciation, (depreciation) - - - - (1,164)
Cumulative effectnet
of change
in accounting for investments - - - - 36
-------------- ---------- ------------ ----------- -----------tax........... -- -- -- -- -- -- (194) (194)
------ ---- -------- --------- ------- -------- ---- --------
Total
comprehensive
loss........... -- -- -- (16,000) -- -- (194) (16,194)
Share repurchase...... -- -- -- -- 170 (439) -- (439)
Divestiture
consideration....... -- -- -- -- 50 (115) -- (115)
Stock options......... 34 -- 144 -- -- -- -- 144
Business acquisitions
and contingent
payments.............. 148 2 311 -- -- -- -- 313
------ ---- -------- --------- ------- -------- ---- --------
December 31, 1994 14,760,000 148 18,551 6,089 (1,208)2001......... 94,879 949 439,136 (67,906) 220 (1,308) (224) 370,647
Comprehensive loss:
Net income - - - 3,469 -
Pre-merger capital contribution
from parent - - 595 - -
Pre-merger dividends paid
to parent - - - (5,350) -loss.............. -- -- -- (76,848) -- -- -- (76,848)
Change in unrealized
appreciation, (depreciation) - - - - 4,474
-------------- ---------- ------------ ----------- -----------net
of tax........... -- -- -- -- -- -- (31) (31)
------ ---- -------- --------- ------- -------- ---- --------
Total
comprehensive
loss........... -- -- -- (76,848) -- -- (31) (76,879)
Stock options....... 242 2 548 -- -- -- -- 550
------ ---- -------- --------- ------- -------- ---- --------
December 31, 1995 14,760,000 148 19,146 4,208 3,2662002......... 95,121 951 439,684 (144,754) $ 220 (1,308) (255) 294,318
Comprehensive Income:
Net income - - - 4,384 -
Pre-merger capital contribution
from parent - - 595 - -
Pre-merger dividends paid
to parent - - - (1,750) -Income............ -- -- -- 15,316 -- -- -- 15,316
Change in unrealized
appreciation, (depreciation) - - - - 430
Reverse merger 10,858,158 108 16,136 - -net
of tax........... -- -- -- -- -- -- 254 254
Total
comprehensive
income......... -- -- -- 15,316 -- -- 254 15,570
Share repurchase.... -- -- -- -- 10,036 (33,578) -- (33,578)
Divestiture
consideration.... 46 (201) -- (201)
Stock issuances 7,251,888 73 38,164 - -
Stock options 101,960 1 1,153 - -options....... 375 4 1,203 -- -- -- -- 1,207
Business acquisitions
792,500 8 5,252 - -
-------------- ---------- ------------ ----------- -----------and contingent
payments.............. 177 2 520 -- -- -- -- 522
------ ---- -------- --------- ------- -------- ---- --------
December 31, 1996 33,764,5062003......... 95,673 $957 $441,407 $(129,438) 10,302 $(35,087) $ 338 $ 80,446 $ 6,842 $ 3,696
============== ========== ============ =========== ===========(1) $277,838
====== ==== ======== ========= ======= ======== ==== ========
See the accompanying notes to the consolidated and combined financial statements.
F-5
36CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS)
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 19942003 2002 2001
--------- --------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations(loss)......................................... $ 4,42215,316 $ 3,469 $ 3,500(76,848) $(16,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
NetLoss from operations of discontinued businesses........ 932 2,475 2,812
(Gain) loss fromon disposal of discontinued operations (38) - -
Deprecationbusinesses..... (726) 2,471 --
(Gain) loss on sale of operations...................... (2,519) (930) 7,113
Bad debt expense, net of recoveries.................... 5,847 6,980 7,845
Impairment of notes receivable......................... 2,394 -- --
Cumulative effect of change in accounting principle.... -- 80,007 --
Depreciation and amortization 7,969 8,143 5,866amortization.......................... 17,161 20,474 40,477
Deferred income taxes (27) (699) 55
Income on participation transaction - - (807)
Cash provided by (used in) changestaxes.................................. 2,099 3,252 2,566
Changes in assets and liabilities, net of acquisition:
Premiumsacquisitions and
dispositions:
Restricted cash........................................ 5,968 (3,668) 6,561
Accounts receivable, net (915) (62) (348)
Deferred policy acquisition costs (8,616) (7,476) (6,748)
Reinsurance recoverables, net 1,462 (1,671) (1,150)net............................... (15,784) 910 1,010
Other assets (1,540) (527) (313)
Losses and loss expenses payable 4,097 2,341 5,133
Unearned premiums 3,001 183 3,287assets........................................... (1,600) 1,558 3,451
Accounts payable....................................... 6,532 672 (7,072)
Income taxes 646 725 170taxes........................................... 3,789 (2,653) 19,607
Accrued expenses 1,105 533 (82)
Other liabilities 3,292 1,242 1,273
Other, net (1,693) (2,599) (146)and other liabilities................. (6,569) 4,246 (7,839)
Net cash provided by continuing operations................ 32,840 38,946 60,531
Net cash provided by discontinued operations.............. 6,727 3,388 (4,628)
--------- --------- -------- ------- -------
Net cash provided by operating activities 13,165 3,602 9,690activities................. 39,567 42,334 55,903
--------- --------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities, held to maturity (1,318) (269) (1,805)
Purchase of fixed maturities, available for sale (12,408) (9,552) (8,857)
Purchase of equity securities (2,921) (228) (223)
Redemption of fixed maturities, held to maturity 1,000 1,281 2,009
Sale of fixed maturities, available for sale 9,333 7,089 1,155
Sale of equity securities 675 150 201
Increase in mortgage loans (1,275) (1,342) (1,893)
Principal receipts on mortgage loans 983 910 780
Change in short-term investments (3,956) 27 5,968
Business acquisitions including contingent consideration
earned, net of cash acquired 912 - 538
Acquisition ofacquired........................... (3,849) (4,553) (1,665)
Proceeds from divested operations......................... 5,590 3,122 14,005
Proceeds from discontinued operations..................... 1,599 4,639 --
Additions to property and equipment, (286) (223) (340)net.................. (10,612) (8,186) (12,909)
Net (increase) decrease in notes receivable............... 1,754 1,897 (877)
--------- --------- -------- ------- -------
Net cash used in investing activities (9,261) (2,157) (2,467)activities................ (5,518) (3,081) (1,446)
--------- --------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Pre-merger dividends paid to parent (1,750) (5,350) (1,000)
Repayment of debt (836) (295) (380)
Proceeds from bank debt................................... 225,950 62,600 27,900
Proceeds from notes payable and capitalized leases........ 324 607 478
Payment of bank debt...................................... (229,450) (100,100) (90,400)
Payment of notes payable and capitalized leases........... (1,062) (899) (3,770)
Payment for acquisition of treasury stock................. (33,578) -- (410)
Proceeds from exercise of stock issuances 38,237 - -options and warrants...... 1,207 550 115
--------- --------- -------- ------- -------
Net cash provided by (used in)used in financing activities 35,651 (5,645) (1,380)activities.................. (36,609) (37,242) (66,087)
--------- --------- -------- ------- -------
Net increase (decrease) in cash and cash equivalents 39,555 (4,200) 5,843equivalents........ (2,560) 2,011 (11,630)
Cash and cash equivalents at beginning of year 2,694 6,894 1,051year.............. 6,351 4,340 15,970
--------- --------- --------
------- -------
Cash and cash equivalents at the end of year:
Continuing operation 39,874 2,694 6,894
Discontinued operations 2,375 - -
-------- ------- -------
Total cash and cash equivalents at end of yearyear.................... $ 42,2493,791 $ 2,6946,351 $ 6,894
======== ======= =======4,340
========= ========= ========
See the accompanying notes to the consolidated and combined financial statements.
F-6
37
INTERNATIONAL ALLIANCECENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
International AllianceCentury Business Services, Inc. and its wholly-owned subsidiaries (the "Company") is(CBIZ)
are a diversified services organizationcompany which, acting through its subsidiaries,
provides specialtyprofessional outsourced business services primarily to small and
medium-sized businesses, as well as individuals, governmental entities, and
not-for-profit enterprises throughout the United States and Toronto, Canada.
CBIZ offers integrated services through its three practice groups: accounting,
tax and advisory services, benefits and insurance services, and business consulting and management services. The Company
markets its specialty insurance and bonding products and business
services in the United States.
RESI Transaction
----------------
On October 18, 1996, Republic Environmental Services, Inc. ("RESI") issued
(a) an aggregate of 14,760,000 shares of RESI common stock, par value
$0.01 per share ("RESI Common Stock"), (b) warrants to purchase an
aggregate of 4,200,000 additional shares of RESI Common Stock at
exercise prices ranging from $2.625 to $3.875 per share, expiring in
two to four years and (c) a promissory note in principal amount of
$4,000,000 in exchange for the stock of Century Surety Company ("CSC")
and Commercial Surety Agency, Inc. d.b.a. Commercial Surety
Underwriters ("CSU") (together the "Alliance Companies") ("the RESI
Transaction"). The RESI transaction was accounted for as a reverse
merger whereby the Alliance Companies gained a controlling interest in
the stock of RESI. Contemporaneously, RESI changed its name to
International Alliance Services, Inc. On June 24, 1996, the Company
began trading under the symbol "IASI" in anticipation of the name
change.
The consolidated and combined financial statements presented herein are as
follows:
i. Consolidated and Combined Balance Sheets of the Company at
December 31, 1996 and the Alliance Companies at December 31,
1995;
ii. Consolidated Statement of Income for the year ended December
31, 1996 of the Alliance Companies and RESI for the period
October 1, 1996 to December 31, 1996. The Combined Statements
of Income for the years ended December 31, 1995 and 1994 are
of the Alliance Companies;
iii. Consolidated and Combined Statements of Shareholders' Equity
of the Company for the years ended December 31, 1996, 1995
and 1994 reflecting the number of shares received in the RESI
Transaction as if the shares had been issued at January 1,
1994;
iv. Consolidated and Combined Statements of Cash Flows of the
Company for the year ended December 31, 1996, and the
Alliance Companies for the years ended December 31, 1995 and
1994.
The following are significant accounting policies followed by the Company.national
practices.
Basis of Consolidation
----------------------
The Company'saccompanying consolidated and combined financial statements include the accounts of
all wholly owned subsidiaries. Significant subsidiaries of
the Company include CSC in continuing operations and RESI in
discontinued operations.CBIZ. All significant intercompany accounts and transactions have been eliminated.
F-7
38
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accountingeliminated in
consolidation.
Use of Estimates
--------------------
In preparingPreparing the consolidated and combined financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management is required to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosures of contingent
assets and liabilities as of the date of the consolidated and combined financial statements
and the reported amounts of revenues and expenses for the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly
susceptible to significant change in the near-term relate to the
determination of losses and loss expenses payable, the recoverability
of deferred policy acquisition costs, and the net realizable value of
reinsurance recoverables and net assets held for disposal.
Management believes that the recorded liability for losses and loss
expenses is adequate. While management uses available information to
estimate losses and loss expenses payable, future changes to the
liability may be necessary based on claims experience and changing
claims frequency and severity of conditions. Management also believes
that deferred policy acquisition costs are recoverable, however, future
costs that are associated with the business in the unearned premium
liability could exceed management's estimates, causing the recorded
asset to be unrecoverable in whole or in part. In addition,
management's estimates of amounts recoverable from reinsurers, net of
valuation allowance, are believed to be consistent with the claim
liability, but the actual amounts recoverable could differ from those
estimates. The amounts the Company will ultimately realize from the
sale of the net assets held for disposal could differ from management's
estimates of their realizable value.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents consists of funds heldinclude cash on deposithand and short-term highly liquid
investments with an originala maturity of three months or less at the date of purchase. AtThe
carrying amount approximates fair value because of the short maturity of those
instruments.
Restricted Cash
Restricted cash represents fees earned by CBIZ in relation to its capital
and investment advisory services, as those funds are restricted in accordance
with applicable NASD regulations, funds on deposit from clients in connection
with the administering and settling of claims, and the pass through of insurance
premiums to the carrier. The related liability for these funds is recorded in
accrued expenses and other liabilities in the consolidated balance sheets.
Funds Held for Clients and Client Fund Obligations
As part of its payroll and payroll tax filing services, CBIZ is engaged in
the preparation of payroll checks, federal, state, and local payroll tax
returns, and the collection and remittance of payroll obligations. In relation
to its payroll services, CBIZ collects payroll funds from its client's account
in advance of paying the client's employees. Likewise, for its payroll tax
filing services, CBIZ collects payroll taxes from its clients in advance of
paying the various timestaxing authorities. Those funds that are collected before
they are due are invested in short-term investment grade instruments. The funds
held for clients and the related client fund obligations are included in the
consolidated balance sheets as current assets and current liabilities,
respectively. The amount of collected but not yet remitted funds for CBIZ's
payroll and tax filing services varies significantly during the year,year.
Derivative Instruments and Hedging Activities
CBIZ records derivative instruments in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as subsequently
amended by SFAS 137, SFAS 138 and SFAS 149. Derivatives are recognized as either
assets or liabilities in the Company had deposits withstatement of financial institutionsposition and are measured at
F-7
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair value. The treatment of gains and losses resulting from changes in excessthe fair
values of derivative instruments is dependent on the use of the $100,000 federally insured limit.
Excessrespective
derivative instruments and whether they qualify for hedge accounting.
In 2001, CBIZ entered into an interest rate swap agreement that qualified
as a cash flow hedge. For the year ended December 31,2002, the change in fair
value relating to CBIZ's hedging activity resulted in a loss of Costapproximately
$0.3 million, which is recorded in stockholders' equity under accumulated other
comprehensive loss; the interest rate swap was terminated in the third quarter,
2003. CBIZ does not have any outstanding derivative instruments at December 31,
2003.
Other Financial Instruments
The carrying amount of CBIZ's accounts receivable and accounts payable
approximates fair value because of the short maturity of these instruments. The
carrying value of bank debt approximates fair value, as the interest rate on the
bank debt is variable and approximates current market rates.
Goodwill and Other Intangible Assets
CBIZ utilizes the purchase method of accounting for all business
combinations, in accordance with Statement of Financial Accounting Standard No.,
141, "Business Combinations" (SFAS 141). Intangible assets include client lists
and non-compete agreements, which are amortized principally by the straight-line
method over Net Assetstheir expected period of Businesses Acquired
-----------------------------------------------------
The excessbenefit.
Effective January 1, 2002, CBIZ adopted Statement of costFinancial Accounting
Standard No., 142 "Goodwill and Other Intangible Assets" (SFAS 142), which
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually at
the reporting unit level. Prior to the adoption of SFAS 142, goodwill was
amortized over periods not exceeding 15 years. CBIZ conducts a formal impairment
test of goodwill on an annual basis and between annual tests if an event occurs
or circumstances change that would more likely than not reduce the fair value of
neta reporting unit below its carrying value.
Other intangible assets, including purchased client lists and non-compete
agreements, are amortized over their estimated useful lives and reviewed for
impairment in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of businesses
acquired is being amortized on a straight-line basis over periods
ranging from twenty to twenty-three years. It isLong-Lived Assets." CBIZ reviews the Company's policy
to evaluatecarrying value of its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the excess of cost over the net assets of businesses
acquired based on an evaluationcarrying amount of such factors as the occurrenceassets may not be fully recoverable.
Recoverability of long-lived assets is assessed by a significant adverse event or change in the environment in which the
business operates or if the expected future net cash flows,
undiscounted and without interest, would become less thancomparison of the carrying
amount of the asset to the estimated future net cash flows expected to be
generated by the asset.
An impairment loss would be recordedInvestments
CBIZ has certain investments in privately held companies that are currently
in their start-up or development stages and are included in "other assets" in
the period
such determination is made based onaccompanying consolidated balance sheets. These investments are inherently
risky as the fairmarket for the technologies or products they have under development
are typically in the early stages. The value of these investments is influenced
by many factors, including the related
businesses. Amortization expense from continuing operations in 1996 was
$33,000operating effectiveness of these companies, the
overall health of the companies' industries, the strength of the private equity
markets and $0 in 1995 and 1994, respectively.general market conditions.
Property and Equipment
----------------------
Property and equipment which is included in other assets in the
consolidated and combined balance sheets, are recorded at cost, less accumulated depreciation
and amortization. The Company uses an
accelerated method of depreciation, which approximatesDepreciation and amortization are provided on the
straight
line depreciation method,straight-line basis over the estimated useful lives of the
assets, which are 5 years.lives.
F-8
39
INTERNATIONAL ALLIANCECENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)-- (CONTINUED)
Capitalized Software
The cost of software purchased or developed for internal use is capitalized
and amortized to expense by the straight line method, in accordance with
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," over an estimated useful life not to
exceed seven years. Capitalized software is classified in property and
equipment.
Income Taxes
------------
The Company usesIncome taxes are provided for the assettax effects of transactions reported in
the financial statements and liability methodconsist of accounting for incometaxes currently due plus deferred taxes.
Deferred taxestax assets and liabilities are determined based onrecognized for the estimated future tax
effects ofconsequences attributable to differences between the financial accounting and tax basesstatement
carrying amounts of existing assets and liabilities usingand their respective tax
basis and operating loss and tax credit carryforwards. State income tax credits
are accounted for by the applicableflow-through method.
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax lawsassets will not be realized. CBIZ determines
a valuation allowance based on the analysis of amounts available in the
statutory carryback or carryforward periods, consideration of future deductible
amounts, and assessment of the consolidated and/or separate company
profitability of certain acquired entities.
Revenue Recognition and Valuation of Unbilled Revenues
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, our fee to the client is fixed or determinable, and
collectibility is reasonably assured, which is in accordance with GAAP and SAB
104. CBIZ offers a vast array of products and outsourced business services to
its clients. Those services are delivered through three practice groups. A
description of revenue recognition, as it relates to those groups, is provided
below:
ACCOUNTING, TAX AND ADVISORY SERVICES -- Revenue consists primarily of fees
for accounting services, preparation of tax returns and consulting services
including Sarbanes-Oxley consulting and compliance projects. Revenues are
recorded in the period in which services are provided and meet the revenue
recognition criteria in accordance with SAB 104. CBIZ bills clients based upon a
predetermined agreed-upon fixed fee or actual hours incurred on client projects
at expected net realizable rates per hour, plus any out-of-pocket expenses. The
cumulative impact on any subsequent revision in the estimated realizable value
of unbilled fees for a particular client project is reflected in the period in
which the change becomes known.
BENEFITS & INSURANCE -- Revenue consists primarily of brokerage and agency
commissions, and fee income for administering health and retirement plans. A
description of the revenue recognition, based on the insurance product and
billing arrangement, is described below:
- Commissions relating to brokerage and agency activities whereby CBIZ has
primary responsibility for the collection of premiums from insured's
(agency or indirect billing) are recognized as of the latter of the
effective date of the insurance policy or the date billed to the
customer.
- Commissions to be received directly from insurance companies (direct
billing) are recognized when the policy becomes effective.
- Life insurance commissions are recognized when the policy becomes
effective.
- Commission revenue is reported net of sub-broker commissions.
- Contingent commissions are recognized at the earlier of notification that
the contingency has been satisfied or cash collection.
F-9
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Fee income is recognized in the period in which services are provided,
and may be based on actual hours incurred on an hourly fee basis, fixed
fee arrangements, or asset-based fees.
NATIONAL PRACTICES -- The business units that comprise this practice group
offer a variety of services. A description of revenue recognition associated
with the primary services is provided below:
- Mergers & Acquisitions and Capital Advisory -- Revenue associated with
non-refundable retainers are recognized on a pro rata basis over the life
of the engagement. Revenue associated with success fee transactions are
recognized when the transaction is completed.
- Technology Consulting -- Revenue associated with hardware and software
sales are recognized upon delivery and acceptance of the product. Revenue
associated with installation and service agreements are recognized as
services are performed. Consulting revenue is recognized on an hourly or
per diem fee basis as services are performed.
- Valuation and Property Tax -- Revenue associated with retainer contracts
are recognized on a pro rata basis over the life of the contract, which
is generally twelve months. Revenue associated with contingency
arrangements is recognized once written notification is received from an
outside third party (e.g., assessor in the case of a property tax
engagement) acknowledging that the contingency has been resolved.
- Medical Management Group -- Revenue is recognized when payments are
received on our clients' patient accounts.
Earnings per Share
Basic earnings (loss) per share are computed by dividing net income (loss)
by the weighted average number of shares outstanding for the period. Diluted
earnings per share include the dilutive effect of stock options, warrants and
contingent shares.
Stock Options
CBIZ accounts for its employee stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price. CBIZ
provides pro forma net income and pro forma earnings per share disclosures for
employee stock option grants as if the fair-value-based method had been applied
in accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting123,
"Accounting for Income Taxes. Deferred income tax provisions and
benefits areStock-Based Compensation." Had the cost of stock option plans
been determined based on the changesfair value of options at the grant date, CBIZ's net
income (loss) and earnings (loss) per share pro forma amounts would be as
follows (amounts in thousands, except per share data):
AS REPORTED PRO FORMA
------------------- -------------------
BASIC DILUTED BASIC DILUTED
-------- -------- -------- --------
2003
Net income.................................. $ 15,316 $ 15,316 $ 14,792 $ 14,792
======== ======== ======== ========
Net income per share........................ $ 0.17 $ 0.17 $ 0.16 $ 0.16
======== ======== ======== ========
2002
Net loss.................................... $(76,848) $(76,848) $(80,365) $(80,365)
======== ======== ======== ========
Net loss per share.......................... $ (0.81) $ (0.79) $ (0.85) $ (0.83)
======== ======== ======== ========
2001
Net loss.................................... $(16,000) $(16,000) $(19,205) $(19,205)
======== ======== ======== ========
Net loss per share.......................... $ (0.17) $ (0.17) $ (0.20) $ (0.20)
======== ======== ======== ========
F-10
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
See note 12 to the consolidated financial statements for a complete
description of stock options and the assumptions used in determining the fair
value of such stock options.
Reclassifications
Certain amounts in the deferred tax asset or tax
liability from periodprior periods consolidated financial statements have
been reclassified to period.
Earnings per Common and Common Share Equivalents
------------------------------------------------
The earnings per common share calculationconform to the current year's presentation.
2. ACCOUNTS RECEIVABLE
Accounts receivable balances for the years ended December 31, 1996, 19952003 and 1994 was based upon the weighted average number of
common and common share equivalents outstanding and the incremental
number of outstanding common share equivalents computed under the
modified treasury stock method. Because the aggregate number of common
shares obtainable upon exercise of the outstanding options and warrants
exceeded 20% of the number of common shares outstanding, all options
and warrants were assumed to have been exercised and the aggregate
proceeds were applied first, to repurchase outstanding common shares at
the average market price for primary earnings per share and at the
ending market price for fully diluted earnings per share during the
period, but not to exceed 20% of the outstanding shares; second, to
reduce borrowings; and third, to invest the remaining funds in U.S.
government securities or commercial paper. Appropriate recognition
relating to the effect of all interest savings and benefits and the
respective tax effect was applied.
Investments
-----------
The Company adopted the provisions of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities as of January 1, 1994. Fixed
maturity securities that the Company has the positive intent and
ability to hold to maturity are classified as held to maturity and are
stated at amortized cost; other fixed maturity securities and all
equity securities are classified as available for sale and are stated
at fair value, with the unrealized gains and losses, net of deferred
income tax, reported as a separate component of shareholders' equity.
The Company has no investment securities classified as trading.
Pursuant to a Financial Accounting Standards Board Special Report, A
Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities, the Company reassessed the
classification of all its investment securities. Effective December 20,
1995, the Company reclassified certain of its held to maturity
securities to available for sale (see Note 4). Realized gains and
losses on the sale of investments are determined on the basis of
specific security identification and also includes other than temporary
declines, if any. Interest income is recognized on the accrual basis
and dividend income is recognized on the ex-dividend date.
Deferred Policy Acquisition Costs
---------------------------------
Acquisition costs, consisting of commissions, premium taxes and certain
underwriting expenses that vary with and are primarily related to the
production of business, are deferred and amortized ratably over the
policy term. The method used limits the amount to its estimated
realizable value which gives effect to the premium to be earned, the
incurrence of loss and loss expenses and certain other costs expected
to be incurred as premium is earned.
F-9
40
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options
-------------
The Company accounts for stock option plans under the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees. The Company has adopted the disclosure only provisions
of SFAS No. 123, Accounting for Stock-Based Compensation.
Losses and Loss Expenses Payable
--------------------------------
The liability for losses and loss expenses is provided based upon case
basis estimates for losses reported in respect to direct business;
estimates of unreported losses based on estimated loss experience;
estimates received and supplemental amounts provided relating to
assumed reinsurance; and deduction for estimated salvage and
subrogation recoverable. The liability for loss expenses is established
by estimating future expenses to be incurred in settlement of the
claims provided for in the liability for losses. The liability for
losses and loss expenses is not discounted.
Premium Recognition
-------------------
Premiums are recognized as revenue in proportion to the insurance coverage
provided, which is generally ratable over the terms of the policies.
Unearned premiums are generally computed on the daily pro rata basis
and include amounts relating to assumed reinsurance.
Reinsurance Ceded
-----------------
In accordance with SFAS No. 113, Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts, reinsurance receivables
are accounted for and reported separately as assets, net of valuation
allowance. Amounts recoverable from reinsurers are estimated in a
manner consistent with the claim liability. Contracts not resulting in
the reasonable possibility that the reinsurers may realize a
significant loss from the insurance risk assumed generally do not meet
the conditions for reinsurance accounting and are accounted for as
deposits. Reinsurance premiums ceded and reinsurance recoveries on
claims incurred are deducted from the respective revenue and expense
accounts. The Company is not relieved of its primary obligation in a
reinsurance transaction.
Business Risk
-------------
The following is a description of the most significant risks facing
property and casualty insurers and how the Company mitigates those
risks:
Inadequate Pricing Risk are the risks that the premium charged for
insurance and insurance related products are insufficient to cover the
costs associated with the distribution of such products which include:
claim and loss costs, loss adjustment expenses, acquisition expenses,
and other corporate expenses. The Company utilizes a variety of
actuarial and other qualitative methods to set such levels.
F-10
41
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Business Risk (Continued)
-------------------------
Adverse Loss Development and Incurred But Not Reported ("IBNR") Risk is
the risk inherent in the handling and settling of claims whose ultimate
costs, which include loss costs, loss adjustment expenses, and other
related expenses, are unknown at the time the claim is presented. An
associated risk relates to claims which have been incurred, but for
which the Company has no knowledge. The Company makes judgments as to
the ultimate costs of presented claims and makes a provision for their
future payment by establishing reserves for existing claims (case
reserves) and for IBNR claims, however, there can be no assurance that
the amounts reserved will be adequate to ultimately make all required
payments.
Legal/Regulatory Risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will occur and create
additional loss costs or expenses not anticipated by the insurer in
pricing its products. That is, regulatory initiatives designed to
reduce insurer profits or new legal theories may create costs for the
insurer beyond those recorded in the financial statements. The Company
is exposed to this risk by writing approximately 26% of its business in
Ohio and surrounding states and 41% in California, thus increasing its
exposure in these particular regions. This risk is reduced by
underwriting and loss adjusting practices that identify and minimize
the adverse impact of this risk.
Credit Risk is the risk that issuers of securities and mortgagors of the
mortgages owned by the Company will default, or other parties,
including reinsurers that owe the Company money, will not pay. The
Company minimizes this risk by adhering to a conservative investment
strategy, by maintaining sound reinsurance and credit and collection
policies, and by providing for any amounts deemed uncollectible.
Interest Rate Risk is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. The Company
mitigates this risk by attempting to match the maturity schedule of its
assets with the expected payouts of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer would
have to sell assets prior to maturity and recognize a gain or loss.
Management believes that the Company's positive cash flow from
investment income and operations will enable the Company to operate
without having to recognize significant losses from the sale of
investments that have an unrealized holding loss as of December 31,
1996.
Reclassifications
-----------------
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
2. ACQUISITIONS
In 1996, the Company made the following acquisitions:
On November 6, 1996, the Company acquired all of the outstanding shares of
Environmental and Commercial Insurance Agency, Inc. ("ECI"), an
insurance agency based in Columbus, Ohio for $1,000,000 in cash and
192,500 shares of the Company's Common Stock. The shares issued are
subject to a six month lock-up restriction.
F-11
42
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
2. ACQUISITIONS (Continued)
On December 3, 1996, the Company completed the acquisition of SMR & Co.
("SMR"), a business services and consulting firm in Mayfield Village,
Ohio. Under the terms of the acquisition, the Company acquired all of
the outstanding shares of SMR for 600,000 shares of the Company's
Common Stock and three-year warrants to acquire an additional 900,000
shares at $10.375 per share. Of the 600,000 shares issued, 90,000
shares are subject to a six-month lock-up restriction and 510,000
shares are subject to a two-year lock-up restriction.
These acquisitions have been accounted for by the purchase method of
accounting. The difference of $6,081,000 between the fair value of net
assets acquired and the purchase consideration of $1,000,000 in cash
and $5,260,000 of the Company's Common Stock has been allocated to
goodwill. The assets, liabilities and operating results of these
companies are reflected in the Company's financial statements from
their respective dates of acquisition forward. As a result of the
nature of the assets and liabilities acquired there are no material
identifiable intangible assets or liabilities.
The following data summarizes, on an unaudited pro forma basis, the
combined results of continuing operations of the Company and the
businesses acquired for the two years ended December 31,1996. The pro
forma amounts give effect to appropriate adjustments resulting from the
combination, but are not necessarily indicative of future results of
operations or of what results would have been for the combined
companies (in thousands):
1996 1995
------------- --------------
Net revenues - pro forma $ 44,900 $ 39,848
============= ==============
Net income - pro forma $ 5,084 $ 3,979
============= ==============
Earnings per common and common
share equivalent - pro forma
- primary $ .24 $ .23
============= ==============
- fully diluted $ .18 $ .23
============= ==============
3. CALCULATION OF EARNINGS PER COMMON AND COMMON SHARE EQUIVALENTS
Income from continuing operations for the year ended December 31, 1996 was
adjusted to reflect the effect of all interest savings and benefits and
the tax effects under the modified treasury stock method. Modifications
to income were not required for the years ended December 31, 1995 and
1994.
Fully
Primary Diluted
------------- --------------
(in thousands)
Income from continuing operations $ 4,422 $ 4,422
Interest expense reduction less 34% tax rate 30 30
Interest income less 34% tax rate 2,165 626
------------- --------------
Adjusted income from continuing operations 6,617 5,078
------------- --------------
Loss from discontinued operations (38) (38)
------------- --------------
Adjusted net income $ 6,579 $ 5,040
============= ==============
F-12
43
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
3. CALCULATION OF EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENTS
(Continued)
For the three years ended December 31, 1996, the Company computed earnings
per common and common share equivalents under the modified treasury
stock method as follows (in thousands):
Fully
Primary Diluted
------------- --------------
Weighted common shares - 1996:
Weighted average common shares 17,863 17,863
Additional stock equivalents less 20% limitation
on assumed repurchase 14,350 14,350
------------- --------------
32,213 32,213
============= ==============
Weighted common shares - 1995 and 1994:
Weighted average common shares 14,760 14,760
Additional share equivalents less 20% limitation
on assumed repurchase 2,196 2,196
------------- --------------
16,956 16,956
============= ==============
During February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, Earnings per Share, which is effective for financial
statements for annual periods ending after December 15, 1997. However,
disclosure of pro forma earnings per share amounts computed using the
provisions of SFAS No. 128 is permissible. The unaudited pro forma
earnings per share of the Company based on SFAS No. 128 are as follows:
1996 1995 1994
------------- ------------- -------------
Basic EPS:
Continuing operations $ .25 $ .24 $ .24
Discontinued operations - - -
------------ ------------- -------------
Net income per share $ .25 $ .24 $ .24
============ ============= =============
Diluted EPS from:
Continuing operations $ .18 $ .24 $ .24
Discontinued operations - - -
------------ ------------- -------------
Net income per share $ .18 $ .24 $ .24
============ ============= =============
F-13
44
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
4. INVESTMENTS
The amortized cost and estimated fair value of fixed maturities held to
maturity at December 31, 19962002
were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- ----------------2003 2002
-------- --------
U.S. Treasury securities
and obligations of U.S.
government corporations
and agenciesTrade accounts receivable................................... $ 6,13682,867 $ 28 $ (65) $ 6,099
Corporate securities 8,850 18 (96) 8,772
Mortgage-backed securities 495 10 - 505
--------------- ------------- ------------- ----------------
Totals $ 15,481 $ 56 $ (161) $ 15,376
=============== ============= ============= ================
The amortized cost and estimated fair value of securities available81,770
Unbilled revenue............................................ 37,659 28,924
-------- --------
Total accounts receivable................................... 120,526 110,694
Less allowance for sale at December 31, 1996 were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- ----------------
Fixed Maturities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 16,067 $ 224 $ (93) $ 16,198
Corporate securities 10,962 87 (66) 10,983
Mortgage-backed securities 8,092 207 (9) 8,290
--------------- ------------- ------------- ----------------
35,121 518 (168) 35,471
Equity securities 4,349 5,022 (158) 9,213
--------------- ------------- ------------- ----------------
Totals $ 39,470 $ 5,540 $ (326) $ 44,684
=============== ============= ============= ================doubtful accounts........................ (8,970) (8,755)
-------- --------
Accounts receivable, net.................................... $111,556 $101,939
======== ========
Expected maturities will differ from contractual maturities because3. NOTES RECEIVABLE
Notes receivable balances for the issuers may have the right to call or prepay obligations with or
without call or prepayment penalties. The amortized cost and estimated
fair value of fixed maturities held to maturity atyears ended December 31, 1996,
by contractual maturity,2003 and 2002
were as follows (in thousands):
Amortized Estimated
Cost Fair Value
--------------- ----------------2003 2002
------ ------
DueCURRENT
Notes in one year or less $ 1,633 $ 1,626
Due after one year through five years 12,921 12,811
Due after five years through ten years 356 347
Due after ten years 76 87
--------------- ----------------
14,986 14,871
Mortgage-backed securities 495 505
--------------- ----------------
$ 15,481 $ 15,376
=============== ================lieu of cash as consideration for the sale of
operations................................................ $1,107 $1,767
Other....................................................... 208 262
------ ------
Total notes receivable -- current........................... 1,315 2,029
NON-CURRENT
Notes in lieu of cash as consideration for the sale of
operations................................................ $1,991 $2,447
HarborView Partners......................................... -- 2,293
Philip Services............................................. -- 2,394
Other....................................................... 442 451
------ ------
Total notes receivable -- non-current....................... 2,433 7,585
------ ------
Notes receivable, net....................................... $3,748 $9,614
====== ======
F-14The HarborView Partners note was contributed in connection with the
acquisition of HarborView Partners LLC during the third quarter of 2003. The
Philip Services note was received in connection with the divestiture of the
hazardous waste operations in 1997, and was written off through impairment
charges of $1.6 million and $0.8 million in the first and fourth quarters of
2003, respectively. Philip Services' plan of reorganization under Chapter 11
bankruptcy was confirmed by the court in December 2003, and CBIZ estimates that
any recovery is unlikely.
4. INVESTMENTS
Investment balances of $0.6 million for the years ended December 31, 2003
and 2002 are included in other assets (non-current) and are accounted for under
the cost method of accounting. CBIZ's primary investment is a 4% ownership
interest in Statement One, Inc., which was purchased in 1999. In the third
quarter of 2002, the carrying value was written down to its current amount of
$0.6 million due to a decrease in the market valuation of
F-11
45
INTERNATIONAL ALLIANCECENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 4. INVESTMENTS (Continued)
The amortized cost-- (CONTINUED)
the investment. CBIZ held an interest in QuikCAT Technologies. CBIZ wrote-off
the investment of $1.3 million and estimated fair valuea related outstanding trade receivable of
fixed maturities available$0.5 million in the third quarter of 2002, and QuikCat has subsequently filed
for salebankruptcy.
5. PROPERTY AND EQUIPMENT
Property and equipment, net at December 31, 1996,2003 and 2002 consisted of the
following (in thousands):
2003 2002
-------- --------
Buildings and leasehold improvements........................ $ 12,626 $ 9,766
Furniture and fixtures...................................... 13,964 14,732
Equipment and capitalized software.......................... 68,651 67,116
-------- --------
95,241 91,614
Accumulated depreciation and amortization................... (54,936) (47,216)
-------- --------
$ 40,305 $ 44,398
======== ========
The increase in buildings and leasehold improvements in 2003 over 2002 is
largely the result of consolidations in the Kansas City market. The plan of
consolidation in the Kansas City market was initiated in 2002, and completed in
2003.
Depreciation expense (including amortization of capitalized software) was
approximately $13.7 million, $15.8 million, and $14.2 million in 2003, 2002, and
2001, respectively.
6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
The components of intangible assets, net are as follows (in thousands):
2003 2002
-------- --------
Goodwill.................................................... $157,815 $157,035
Intangibles:
Client lists.............................................. 13,493 9,216
Other intangibles......................................... 682 484
-------- --------
Total intangibles...................................... 14,175 9,700
-------- --------
Total goodwill and other intangibles assets................. 171,990 166,735
Less accumulated amortization............................... (4,710) (3,029)
-------- --------
Total goodwill and other intangible assets, net............. $167,280 $163,706
======== ========
Client lists are amortized over periods not exceeding ten years. Other
intangibles, which consist primarily of non-compete agreements and website
development costs, are amortized over periods ranging from two to ten years.
Amortization expense of client lists and other intangible assets was
approximately $1.8 million, $2.2 million and $2.4 million in 2003, 2002 and
2001, respectively.
During 2003, CBIZ recorded a $0.3 million (pre-tax) non-cash impairment
charge in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". The impairment charge relates to a client list
purchased in 1999 and is recorded as depreciation and amortization expense in
the accompanying consolidated statement of operations.
During 2002, in connection with the adoption of SFAS No. 142, "Goodwill and
Other Intangible Assets," CBIZ recorded a non-cash impairment charge to goodwill
of $88.6 million on a pretax basis. The charge is
F-12
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded as a cumulative effect of a change in accounting principle in the
accompanying consolidated statement of operations. CBIZ performed its annual
impairment review of goodwill in the fourth quarters of 2002 and 2003 and
determined that no impairment of goodwill existed.
Changes in goodwill for the year ended December 31, 2003 are as follows:
SEGMENT UNIT 2002 ADDITIONS DIVESTITURES 2003
- ------------ -------- --------- ------------ --------
Accounting, Tax, and Advisory Group........ $ 90,260 $2,142 $(1,035) $ 91,367
Benefits & Insurance Group................. 45,206 810 (1,137) 44,879
National Practice Group -- Other........... 4,357 -- -- 4,357
Medical Practice Management................ 17,212 -- -- 17,212
-------- ------ ------- --------
Goodwill, net.............................. $157,035 $2,952 $(2,172) $157,815
======== ====== ======= ========
Changes in goodwill for the year ended December 31, 2002 are as follows:
IMPAIRMENT
SEGMENT UNIT 2001 ADDITIONS DIVESTITURES CHARGES 2002
- ------------ -------- --------- ------------ ---------- --------
Accounting, Tax, and Advisory
Group......................... $137,009 $ -- $(2,702) $(44,047) $ 90,260
Benefits & Insurance Group...... 51,837 1,476 (374) (7,733) 45,206
National Practice Group --
Other......................... 36,564 -- -- (32,207) 4,357
Medical Practice Management..... 17,212 -- -- -- 17,212
-------- ------ ------- -------- --------
Goodwill, net................... 242,622 1,476 (3,076) (83,987) 157,035
-------- ------ ------- -------- --------
Discontinued operations......... 4,840 -- (236) (4,604) --
-------- ------ ------- -------- --------
Goodwill, net................... $247,462 $1,476 $(3,312) $(88,591) $157,035
======== ====== ======= ======== ========
Prior to January 1, 2002, goodwill was amortized over periods not exceeding
15 years. Pro forma net income (loss) and earnings (loss) per share (EPS) for
the years ended December 2003, 2002 and 2001 adjusted to eliminate historical
amortization of goodwill and related tax effects, are as follows (in thousands):
2003 2002 2001
------- -------- --------
Previously reported net income (loss).................. $15,316 $(76,848) $(16,000)
Goodwill amortization.................................. -- -- 21,861
Tax provision.......................................... -- -- (1,312)
------- -------- --------
Pro forma net income (loss)............................ $15,316 $(76,848) $ 4,549
======= ======== ========
Previously reported basic EPS.......................... $ 0.17 $ (0.81) $ (0.17)
Previously reported diluted EPS........................ $ 0.17 $ (0.79) $ (0.17)
Pro forma basic EPS.................................... $ 0.17 $ (0.81) $ 0.05
Pro forma diluted EPS (1).............................. $ 0.17 $ (0.79) $ 0.05
- ---------------
(1) Pro forma diluted weighted average common shares for 2001 are 96,442, as the
effect of the incremental shares are not anti-dilutive on a pro forma basis.
F-13
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
A summary of income tax expense (benefit) included in the consolidated
statements of operations is as follows (in thousands):
2003 2002 2001
------- ------- -------
Continuing operations:
Current:
Federal............................................ $ 7,916 $12,544 $ 9,533
State and local.................................... 1,927 (429) 4,162
------- ------- -------
Total current income tax expense from
continuing operations....................... 9,843 12,115 13,695
Deferred:
Federal............................................ 2,352 (4,719) (358)
Foreign............................................ 102 30 99
State and local.................................... (201) 995 (1,228)
------- ------- -------
Total deferred income tax expense from
continuing operations....................... 2,253 (3,694) (1,487)
------- ------- -------
Total income tax expense continuing
operations.................................. 12,096 8,421 12,208
Discontinued operations................................. (510) 71 (1,871)
Gain (loss) on sale of discontinued operations.......... 732 (1,413) --
Cumulative effect of change in accounting principle..... -- (8,584) --
------- ------- -------
$12,318 $(1,505) $10,337
======= ======= =======
The provision (benefit) for income taxes attributable to earnings (loss)
from continuing operations differed from the amount obtained by contractual maturity,applying the
federal statutory income tax rate to income (loss) from continuing operations
before income taxes, as follows (in thousands, except percentages):
2003 2002 2001
------- ------ -------
Tax at statutory rate.................................... $ 9,666 $5,785 $ (343)
State taxes (net of federal benefit)..................... 2,772 530 103
Tax credit carryforwards................................. (3,882) -- --
Change in valuation allowance............................ 4,657 109 1,503
Nondeductible goodwill................................... -- -- 6,432
Disposal of non-core business units...................... (361) 784 3,998
Other, net............................................... (756) 1,213 515
------- ------ -------
Provision for income taxes from continuing operations.... $12,096 $8,421 $12,208
======= ====== =======
Effective income tax rate................................ 43.8% 51.0% n/a
======= ====== =======
F-14
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities from continuing
operations at December 31, 2003 and 2002, are as follows (in thousands):
2003 2002
------- -------
Deferred Tax Assets:
Net operating loss carryforwards............................ $ 5,692 $ 4,550
Allowance for doubtful accounts............................. 2,422 912
Reserves and accrued liabilities............................ 2,417 3,156
Cumulative change in accounting principle (SAB 101)......... 2,895 3,309
Goodwill and other intangibles.............................. 3,943 4,459
Tax credit carryforwards.................................... 3,502 --
Asset impairment charges.................................... 1,277 --
Other deferred tax assets................................... 377 2,828
------- -------
Total gross deferred tax assets........................... 22,525 19,214
Less: valuation allowance................................. (7,673) (3,016)
------- -------
Net deferred tax assets................................... 14,852 16,198
------- -------
Deferred Tax Liabilities:
Property and equipment...................................... 6,905 5,720
Other deferred tax liabilities.............................. 60 492
------- -------
Total gross deferred tax liabilities...................... 6,965 6,212
------- -------
Net deferred tax asset...................................... $ 7,887 $ 9,986
======= =======
CBIZ had U.S. net operating loss (NOL) carryforwards of approximately $2.4
million and $3.0 million at December 31, 2003, and 2002, from the separate
return years of certain acquired entities. These losses are subject to
limitations regarding the offset of CBIZ's future taxable income and will begin
to expire in 2007. CBIZ has a Canadian NOL carryforward, of which the balance
was approximately $4.1 million and $3.4 million at December 31, 2003, and 2002,
respectively. The Canadian NOL carryforwards begin to expire in 2006. CBIZ also
had state NOL carryforwards for continuing operations with a tax benefit of $3.2
million and $2.1 million at December 31, 2003, and 2002, respectively, and state
NOL carryforwards for discontinued operations with a tax benefit of $1.8 million
and $2.2 million at December 31, 2003 and 2002, respectively, all of which have
various expiration dates. The availability of all the NOL's for continuing
operations is reported in the consolidated financial statements as deferred tax
assets, net of the applicable valuation allowance.
During 2003 CBIZ earned state income tax credits of $3.9 million, net of
federal taxes. These income tax credits arose from investments made by several
CBIZ subsidiaries. Of the total net credits earned, $0.4 million were used to
reduce current 2003 tax expense, and $3.5 million are available as state income
tax credit carryforwards with expiration dates ranging from 10 to 14 years. The
state income tax credit carryforwards are reported in the consolidated financial
statements as deferred tax assets, net of the applicable valuation allowance.
CBIZ has established valuation allowances for portions of the Canadian and
state NOL carryforwards and state income tax credit carryforwards, and for the
asset impairment charge. The overall net change in the valuation allowance for
the years ended December 31, 2003 and 2002 was an increase of $4.6 million and
$2.5 million, respectively. The net change in the valuation allowance for the
NOL carryforwards for the years ended December 31, 2003 and 2002 was an increase
of $1.9 million and $1.4 million. The valuation allowance, net of federal tax,
established for the state tax credit carryforwards in the year ended December
31, 2003 was $2.5 million, and a valuation allowance of $1.3 million was
established in the year ended December 31, 2003
F-15
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related to the asset impairment charge. A valuation allowance of $1.1 million
established in 2002 for state deferred taxes related to an impairment of tax
deductible goodwill was reversed in 2003.
8. BANK DEBT
Bank debt balances for the years ended December 31, 2003 and 2002 were as
follows (in thousands, except percentages):
2003 2002
------- -------
Bank debt:
Revolving credit facilities, effective rates of 3.08% to
5.58%.................................................. $14,000 $17,500
======= =======
Weighted average rates.................................... 4.39% 5.59%
======= =======
CBIZ maintains a $73 million revolving credit facility with a group of four
banks. The facility was amended in the third quarter of 2003, for the purposes
of increasing restricted payments to allow CBIZ to repurchase up to $52.5
million of capital stock through December 31, 2003, in addition to the existing
provision permitting the purchase of stock up to 50% of the trailing twelve
months of income.
Under the facility, loans are charged an interest rate consisting of a base
rate or Eurodollar rate plus an applicable margin. Additionally, a commitment
fee of 40 to 50 basis points is charged on the unused portion of the facility.
Borrowings and commitments by the banks under the credit facility mature in
September 2005. The credit facility is secured by substantially all assets and
capital stock of CBIZ and its subsidiaries.
The bank agreement contains financial covenants that require CBIZ to meet
certain requirements with respect to (i) minimum net worth; (ii) maximum
leverage ratio; and (iii) a minimum fixed charge coverage ratio. Limitations are
also placed on CBIZ's ability to acquire businesses, repurchase CBIZ common
stock and to divest operations. As of December 31, 2003, CBIZ is in compliance
with its covenants.
The bank credit agreement also places significant restrictions on CBIZ's
ability to create liens or other encumbrances, to make certain payments
(including dividends), investments, loans and guarantees and to sell or
otherwise dispose of a substantial portion of assets, or to merge or consolidate
with an unaffiliated entity. The agreement contains a provision that, in the
event of a defined change in control, the agreement may be terminated.
In the ordinary course of business, CBIZ provides letters of credit to
certain lessors in lieu of security deposits. Letters of credit under the credit
facility were $3.2 and $1.9 million as of December 31, 2003, and 2002,
respectively. CBIZ also acted as guarantor on two letters of credit for a CPA
firm with which we have an affiliation. The letters of credit total $0.7 million
as of December 31, 2003. CBIZ did not act as a guarantor on any letter of credit
at December 31, 2002. Management does not expect any material changes to result
from these instruments because performance is not expected to be required.
At December 31, 2003, based on the borrowing base calculation, CBIZ had
approximately $45.4 million of available funds under its credit facility.
Management believes that the carrying amount of bank debt recorded at
December 31, 2003 approximates its fair value.
F-16
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
CBIZ leases certain of its premises and equipment under various operating
lease agreements. At December 31, 2003, future minimum rental commitments
becoming payable under operating leases are as follows (in thousands):
YEARS ENDING DECEMBER 31,
- -------------------------
2004........................................................ $ 31,913
2005........................................................ 27,492
2006........................................................ 23,679
2007........................................................ 21,257
2008........................................................ 19,720
Thereafter.................................................. 105,357
--------
$229,418
========
Total rental expense incurred under operating leases was $30.4 million,
$28.0 million, and $28.6 million in 2003, 2002, and 2001, respectively.
Legal Proceedings
Since September 1999, seven purported stockholder class-action lawsuits
were filed against CBIZ and certain of our current and former directors and
officers were consolidated as In Re Century Business Services Securities
Litigation, Case No. 1:99CV2200, in the United States District Court for the
Northern District of Ohio. The plaintiffs alleged that the named defendants
violated certain provisions of the Securities Exchange Act of 1934 and certain
rules promulgated thereunder in connection with certain statements made during
various periods from February 1998 through January 2000 by, among other things,
improperly amortizing goodwill and failing to adequately monitor changes in
operating results. The United States District Court dismissed the matter with
prejudice on June 27, 2002. The matter was appealed by the plaintiffs to the
Sixth Circuit Court of Appeals. No decision has been rendered on appeal.
CBIZ and the named officer and director defendants deny all allegations of
wrongdoing made against them in these actions and intend to continue vigorously
defending this matter. Although the ultimate outcome of such litigation is
uncertain, based on the allegations contained in the complaints and the
carefully considered judgment of the District Court in dismissing the case,
management does not believe that this lawsuit will have a material adverse
effect on the financial condition, results of operations or cash flows of CBIZ.
In addition to the above-disclosed items, CBIZ 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 CBIZ.
10. CONSOLIDATION AND INTEGRATION RESERVE
The 1999 Plan -- During the fourth quarter of 1999, CBIZ's Board of
Directors approved a plan to consolidate several operations in multi-office
markets and integrate certain back-office functions into a shared-services
center. The plan included the consolidation of approximately 60 locations, the
elimination of more than 200 positions, and the divestiture of four non-core
businesses.
Other Plans -- Since adoption of the 1999 Plan, management has continued to
evaluate market areas in order to meet its strategy to deliver services to
clients conveniently, and to promote cross-serving between various
F-17
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
service groups. CBIZ has initiated consolidation activities in several markets
and has incurred expenses related to non-cancelable lease obligations, severance
obligations, and expense-reduction initiatives.
During 2003, CBIZ initiated plans of consolidation for offices in Orange
County California, which resulted in $0.2 million of costs related to
non-cancelable lease obligations and moving expenses, as well as plans in the
Cleveland market. In addition, CBIZ continued the consolidation in the Kansas
City market, which was initiated in 2002. During 2002, CBIZ recognized $1.7
million of costs for consolidations in Kansas City, related to non-cancelable
lease obligations. During 2001, expenses were incurred related to consolidations
in the Los Angeles, Chicago, Philadelphia, Phoenix, Southern California, and
Columbia, Maryland markets.
Consolidation and integration reserve balances as of December 31, 2003,
2002 and 2001, and activity during the twelve-month periods ended December 31,
2003 and 2002 were as follows (in thousands):
Amortized Estimated
Cost Fair Value
--------------- ----------------1999 PLAN OTHER PLANS
------------- -------------
LEASE LEASE
CONSOLIDATION CONSOLIDATION
------------- -------------
Due in one year or lessReserve balance at December 31, 2001........................ $1,097 $ 1,1822,295
Amounts charged against income (1)........................ -- 1,770
Adjustments (to) / against income (1)..................... (109) 742
Payments.................................................. (924) (1,102)
------ -------
Reserve balance at December 31, 2002........................ 64 3,705
Amounts adjusted against income (1)....................... 17 638
Payments.................................................. (81) (1,539)
------ -------
Reserve balance at December 31, 2003........................ $ 1,182
Due after one year through five years 21,904 21,969
Due after five years through ten years 3,701 3,795
Due after ten years 242 235
--------------- ----------------
27,029 27,181
Mortgage-backed securities 8,092 8,290
--------------- ------------------ $ 35,121 $ 35,471
=============== ================2,804
====== =======
The amortized cost- ---------------
(1) Amounts adjusted (to) or against income are included in operating expenses
and estimated fair valuecorporate general and administrative expenses in the accompanying
consolidated statements of fixed maturities held to
maturity atoperations. See the table below for the
respective amounts recorded in each line item.
Consolidation and integration charges incurred for years ended December 31,
19952003, 2002 and 2001 were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- ---------------2003 2002 2001
--------- --------- ---------------------
CORPORATE
OPERATING OPERATING OPERATING G&A
EXPENSES EXPENSES EXPENSES EXPENSES
--------- --------- --------- ---------
U.S. Treasury securitiesCONSOLIDATION AND INTEGRATION CHARGES FOR THE 1999
PLAN:
Adjustment to lease accrual.......................... $ 17 $ (109) $ (495) $ --
Adjustment to severance accrual...................... -- -- (127) (107)
------ ------ ------ -----
Subtotal............................................. 17 (109) (622) (107)
CONSOLIDATION AND INTEGRATION CHARGES FOR OTHER PLANS
Severance expense.................................... 205 43 296 185
Lease consolidation and obligations of U.S. government
corporationsabandonment.................. 1,087 3,290 1,231 --
Other consolidation charges.......................... 557 650 1,052 --
------ ------ ------ -----
Total consolidation and agenciesintegration charges.......... $1,866 $3,874 $1,957 $ 6,159 $ 81 $ (9) $ 6,231
Corporate securities 8,654 27 (62) 8,619
Mortgage-backed securities 496 18 - 514
--------------- ------------- ------------- ---------------
Totals $ 15,309 $ 126 $ (71) $ 15,364
=============== ============= ============= ===============78
====== ====== ====== =====
The amortized cost and estimated fair value of securities available for
sale at December 31, 1995 were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ------------- ------------- ---------------
Fixed Maturities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 6,522 $ 303 $ (7) $ 6,818
Obligations of states and political
subdivisions 8,339 167 (3) 8,503
Corporate securities 14,990 439 (15) 15,414
Mortgage-backed securities 2,244 174 - 2,418
--------------- ------------- ------------ ----------------
32,095 1,083 (25) 33,153
Equity securities 1,999 3,589 (162) 5,426
--------------- ------------- ------------ ----------------
$ 34,094 $ 4,672 $ (187) $ 38,579
=============== ============= ============ ================
On December 20, 1995, the Company reclassified a portion of their held to
maturity securities to available for sale. The amortized cost and
estimated fair value of the securities reclassified were $5,733,000 and
$5,897,000, respectively, as of the date of reclassification.
F-15F-18
46
INTERNATIONAL ALLIANCECENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
4. INVESTMENTS (Continued)
Net investment income was comprised of the following for the years ended
December 31 as follows (in thousands):
1996 1995 1994
------- ------- -------
Interest $ 3,652 $ 3,455 $ 2,588
Dividends 142 96 96
------- ------- -------
Total investment income 3,794 3,551 2,684
Less: Investment expense (230) (210) (207)
------- ------- -------
Net investment income $ 3,564 $ 3,341 $ 2,477
======= ======= =======
Realized gains and losses on investments for the years ended December 31 are as follows (in thousands):
1996 1995 1994
------- ------- -------
Realized gains:
Available for sale:
Fixed maturities $ 117 $ 114 $ -
Equity securities 1,381 9 146
Other 125 73 -
------- ------- -------
Total realized gains 1,623 196 146
------- ------- -------
Realized losses:
Available for sale:
Fixed maturities 32 27 42
Equity securities 35 3 24
Other 27 - -
------- ------- -------
Total realized losses 94 30 66
------- ------- -------
Net realized gains on investments $ 1,529 $ 166 $ 80
======= ======= =======
The change in net unrealized appreciation (depreciation) of investments is summarized as follows (in thousands):
1996 1995 1994
------- ------- -------
Available for sale:
Fixed maturities $ (709) $ 2,147 $(1,088)
Equity securities 1,437 3,583 (76)
------- ------- -------
$ 728 $ 5,730 $(1,164)
======= ======= =======
The components of unrealized appreciation (depreciation) on securities available for sale at December 31 were as follows
(in thousands):
1996 1995 1994
------- ------- -------
Gross unrealized appreciation (depreciation) $ 5,214 $ 4,485 $(1,208)
Deferred income tax (1,518) (1,219) -
------- ------- -------
Net unrealized appreciation (depreciation) $ 3,696 $ 3,266 $(1,208)
======= ======= =======
F-16
47
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
4. INVESTMENTS (Continued)
Fixed maturities held-- (CONTINUED)
11. EMPLOYEE BENEFITS
CBIZ has employee savings plans covering substantially all of its
employees. Participating employees may elect to maturity and certificatescontribute, on a tax-deferred
basis, a portion of deposittheir compensation, in accordance with a
carrying value of approximately $8,939,000 and $8,909,000 at December
31, 1996 and December 31, 1995, respectively, were on deposit with
regulatory authorities as required by law. At December 31, 1996 and
1995 all mortgage loans were secured by properties in the states of
California, Michigan and Ohio.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents, short-term investments and premiums receivable:
The carrying amounts reported in the consolidated and combined balance
sheets for these instruments are at cost, which approximates fair
value.
Investment securities: Fair values for investments in fixed maturities are
based on quoted market prices, where available. For fixed maturities
not actively traded, fair values are estimated using values obtained
from independent pricing services. The fair values for equity
securities are based on quoted market prices. Fair values for fixed
maturities available for sale and equity securities are recognized in
the consolidated and combined balance sheets.
Mortgage loans: The carrying amounts reported in the consolidated and
combined balance sheets are the aggregate unpaid balanceSection 401(k) of the
loans,
which approximates fair value.
5.Internal Revenue Code. Employer contributions made to the plans in 2003, 2002
and 2001, amounted to approximately $5.1 million, $5.3 million, and $5.0
million, respectively.
12. COMMON STOCK
The Company'sCBIZ's authorized common stock consists of 100,000,000 (20,000,000
at December 31, 1995)250 million shares of common
stock, par value $0.01 per share.share (Common Stock). The holders of the Company's Common StockCBIZ's common
stock are entitled to one vote for each share held on all matters voted on by shareholders. On
January 22, 1997,submitted to a
vote of stockholders. There are no cumulative voting rights with respect to the
Company completedelection of directors. Accordingly, the registrationholder or holders of 32,126,076a majority of the
outstanding shares of common stock (the "Shares")Common Stock will be able to elect the directors of whichCBIZ
then standing for election as terms expire. Holders of Common Stock have no
preemptive rights and are entitled to such dividends as may be declared by the
Board of Directors of CBIZ out of funds legally available therefore. The Common
Stock is not entitled to any sinking fund, redemption or conversion provisions.
On liquidation, dissolution or winding up of CBIZ, the holders of Common Stock
are entitled to 17,925,888share ratably in the net assets of CBIZ remaining after the
payment of any and all creditors. The outstanding shares of Common Stock are
issuable upon exercise of outstanding warrants.duly authorized, validly issued, fully paid and non-assessable. The Shares were
registeredtransfer
agent and registrar for the Common Stock is Computershare Investor Services,
LLC.
CBIZ completes registration filings related to its Common Stock to register
shares under the Securities Act of 1933 on behalf of certain
selling shareholders in order to permit1933. To date, CBIZ has registered the
public or private sale or
other public or private distribution of the Shares. Accordingly, the
Company will not receive any proceeds for these Shares.
On October 18, 1996, the Company issued 4,000,000following shares of the Company's
Common Stock for the following purposes: (i) approximately 6
million shares of our common stock, part of a Shelf Registration Statement, of
which a majority has yet to be sold thereunder; (ii) $125 million in shares of
our Common stock, debt securities, and warrants to purchase an additional 12,000,000common stock or debt
securities, of which $100 million remain available to be offered from time to
time to the public under our universal shelf registration statement; and (iii)
15 million shares of the Company'sour Common Stock, all of which remain available to be
offered from time to time in connection with acquisitions under our acquisition
shelf registration statement.
TREASURY STOCK
In August 2001, CBIZ's Board of Directors authorized the implementation of
a share repurchase plan. The initial plan authorized the purchase of up to one
million shares of CBIZ's common stock over the first six months of the plan. In
accordance with the plan, CBIZ purchases shares though the open market and can
privately negotiate purchases and reserve them for possible use in the future in
connection with acquisitions, the employee stock investment plan and other
general purposes. The repurchase program does not obligate CBIZ to acquire any
specific number of shares and may be suspended at exercise prices ranging from $2.625 to
$3.875 per share, expiring in two to fourany time. During the years
for an aggregate
purchase priceended December 31, 2003, 2002 and 2001, CBIZ repurchased approximately 104
thousand shares, no shares and 170 thousand shares at costs of $10,500,000.$0.4 million,
$0.0 million and $0.4 million, respectively.
In December 1996, the CompanyJuly 2003, CBIZ completed a private placementmodified Dutch Auction tender offer which
resulted in which the Company offered 3,251,888 units (the "Units") to qualified investors at
an aggregate purchase price of $9.00 per Unit. Each Unit consisted of
one share of common stock and one warrant to purchase one shareapproximately 10 million shares of common stock at an exercisea
purchase price of $11.00$3.30 per share, exercisable foror a three year period fromtotal cost (including expenses) of
approximately $33.2 million.
As part of the datecurrent credit agreement, repurchases are subject to
limitations based on net income. At December 31, 2003, CBIZ is in compliance
with this covenant.
EMPLOYEE STOCK INVESTMENT PLAN
Effective June 1, 2001, CBIZ established the Employee Stock Investment Plan
which provides CBIZ employees with a method of issuance. The Company realized net
proceedspurchasing shares of $ 27,737,000.
F-17CBIZ's
common stock. Participation in the plan is open to all CBIZ employees whose
payroll is processed by the designated CBIZ payroll provider. CBIZ pays all
opening and
F-19
48
INTERNATIONAL ALLIANCECENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 5. COMMON-- (CONTINUED)
transaction charges related to the enrollment and purchase of stock, other than
those due upon the sale of the shares.
Participants may also purchase shares of CBIZ stock by making optional cash
investments in accordance with the provisions of the Plan. Shares of CBIZ stock
purchased by participants in the Plan may be treasury or new issue stock, or at
CBIZ's option, CBIZ stock purchased in the open market or negotiated
transactions. Treasury or new issue stock is purchased from CBIZ at the market
price on the applicable investment date. The price of CBIZ stock purchased in
the open market or in negotiated transactions is the weighted average price at
which the shares are actually purchased.
WARRANTS
During 1997, CBIZ issued warrants in connection with acquisitions, which
are restricted from being transferred in accordance with various lock-up
agreements between the former shareholders of the acquired entities and CBIZ.
During 1999, certain holders of warrants gave up demand registration rights due
to them. In November 1999, the Board of Directors extended the expiration dates
of the aforementioned warrant holders by an additional twelve months in
consideration of foregoing demand registration rights.
In 1999, CBIZ issued 1.8 million restricted shares of common stock and
900,000 warrants to an outside party for a $25 million equity investment in
CBIZ. The restrictions on the common stock expired in 2001, and the warrants may
be exercised under the following terms: 300,000 shares for three years at $20
per share; 300,000 shares for four years at $25 per share; and 300,000 for five
years at $30 per share.
Information relating to warrants to purchase common stock is summarized
below (in thousands):
2003 2002 2001
---- ------ ------
Outstanding at beginning of year............................ 600 1,800 6,170
Granted /issued............................................. -- -- --
Expired/cancelled........................................... (300) (1,200) (4,370)
Exercised................................................... -- -- --
---- ------ ------
Outstanding at end of year (a).............................. 300 600 1,800
==== ====== ======
Exercisable at end of year.................................. 300 600 1,800
==== ====== ======
- ---------------
(a) Exercise prices for warrants outstanding at December 31, 2003 are $30.00.
Exercise prices for warrants outstanding at December 31, 2002 ranged from
$25.00 to $30.00. Exercise prices for warrants outstanding at December 31,
2001 ranged from $13.00 to $30.00.
STOCK (Continued)OPTIONS
Under the 1997 Agents Stock Option Plan, a maximum of 1.2 million options
may be awarded. The purpose of the plan is to provide performance-based
compensation to certain insurance agencies and individual agents who write
quality surety business for CBIZ's insurance subsidiaries. The options vest only
to the extent the agents satisfy minimum premium commitments and certain loss
ratio performance criteria. The options terminated in June 2002, or earlier
under certain conditions, including termination of the agency agreement.
Under the 1996 Employee Stock Option Plan, a maximum of 15 million options
may be awarded. The options awarded are subject to a 20% incremental vesting
schedule over a five-year period commencing from the date of grant. The options
are awarded at a price not less than fair market value at the time of the award
and expire six years from the date of grant. Further, under the 1996 plan
250,000 options were granted to non-employee directors. These options became
exercisable immediately upon being granted with a six-year expiration term from
the date of grant.
F-20
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 2002 Stock Incentive Plan is an amendment and restatement of the 1996
Employee Stock Option Plan. A maximum of 15 million options may be awarded,
which number shall include those shares that are available for grants under the
prior plan. Stock options, restricted stock and other stock based compensation
awards may be made under the plan. Stock options may be granted alone or in
addition to other awards granted under the plan and may be of two types:
Incentive Stock Options and Nonqualified Stock Options. The options awarded
under this plan continue to be subject to a 20% incremental vesting schedule
over a five-year period commencing from the date of grant. At the discretion of
the Compensation Committee of the Board of Directors, the options may vest
immediately, or in a time period shorter than five years. The options are
awarded at a price not less than fair market value at the time of the award and
expire six years from the date of grant. In the event the optionee of an
incentive stock option owns, at the time such stock option is awarded or
granted, more than ten percent (10%) of the voting power of all classes of stock
of CBIZ, the option price shall not be less than 110% of such fair market value.
Prior to the RESI Transaction, certain options were granted to employees,
directors and affiliates of RESI's former parent company. When RESI was spun-off
in April 1995 (the "Distribution Date"), optionees received options to acquire
RESI Common Stock at the ratio of one RESI option for each five options under
the former parent's 1990 and 1991 Stock Option plans. The outstanding options at
the Distribution Date and the RESI options granted with respect thereto are
stapled and are only exercisable if exercised together. UnvestedAs a result of the sale
of RESI in July 1997, options held and unvested
RESIunder these plans became fully vested. These
options granted, vest in accordance with the original vesting
scheduleremain vested as long as the optionee is employed by the former parent,
RESI or their affiliates. Options granted under these plans expire ten years
from the date of grant, and vest over varying periods. The option price is based on the fair market value of
the common shares on the date of grant.
RESI agreed to issue to holders of unexpired warrants of its former
parent, additional RESI warrants to acquire shares of RESI's Common
Stock equal to one fifth of the number of shares available. At the
Distribution Date, RESI adjusted the per share exercise price of the
RESI warrants to reflect the effect of the distribution on the market
prices of RESI and its former parent's common stock. These warrants are
designated as stapled warrants and expire at various dates through May
2003. In connection with the RESI Transaction, the holders of these
warrants are able to exercise under the original terms of the warrants
and will receive Company stock. At December 31, 1996 and 1995, there
were outstanding unexercised warrants to acquire 434,000 and 622,000
shares of the Company's Common Stock, respectively. During 1996,
188,000 RESI warrants were exercised at $3.60 with no cancellations. In
1995, 250,000 RESI warrants were exercised ranging in price from $1.08
to $5.10 with no cancellations.
Under the Company's 1995 Employee Stock Option Plan, a maximum of 500,000
options may be awarded. Such options are granted at no less than fair
market value at the date of grant, become exercisable in increments of
20% over a five-year vesting period and expire ten years from the date
of grant. In the event of a change of control, as defined in the plan,
all outstanding employee options shall become immediately exercisable
and the prescribed time limits for exercise will run from such vesting.
Information relating to the above stock option plans is summarized below:below (in
thousands):
1996 1995
------------- ------------2003 2002 2001
------ ------ ------
Outstanding at beginning of year 190,200 -year............................ 10,952 9,652 7,858
Granted at Distribution Date - 420,400
Granted (a) 230,000 31,000................................................. 558 2,684 3,420
Exercised (b) (101,960) (257,800)............................................... (375) (242) (34)
Expired or canceled (1,168) (3,400)
------------- ------------canceled......................................... (980) (1,142) (1,592)
------ ------ ------
Outstanding at end of year (c) 317,072 190,200
------------- ------------.............................. 10,155 10,952 9,652
====== ====== ======
Exercisable at end of year (d) 22,320 70,000
============= ============.............................. 5,764 4,257 3,086
====== ====== ======
Available for future grant at the end of year (e) 273,000 502,000
============= ============
(a) Options were granted at average costs of $2.31 and $1.50 in 1996 and
1995, respectively.
(b) Options were exercised at prices ranging from $1.08 to $3.60 and
averaging $3.43 in 1996 and $1.08 to $5.80 and averaging $5.07 in
1995.
(c) Prices for options outstanding at December 31, 1996 ranged from $1.08
to $4.10 and averaged $2.11 with expiration dates ranging from May
1997 to May 2006. Prices for options outstanding at December 31, 1995,
ranged from $1.08 to $5.80 and averaged $2.25 with expiration dates
ranging from May 1996 to May 2004.
(d) Options exercisable at December 31, 1996 and 1995 averaged $2.18 and
$3.15, respectively
(e) Includes stapled options and options relating to the Company's 1995
Employee Stock Option Plan.year............... 4,353 4,048 3,472
====== ====== ======
F-18- ---------------
(a) Options were granted at average prices of $3.12, $3.44 and $1.54 in 2003,
2002 and 2001, respectively.
(b) Options were exercised at prices ranging from $1.53 to $3.45 and averaging
$2.47 in 2003. Options were exercised at prices ranging from $1.53 to $3.41
and averaging $2.27 in 2002. Options were exercised at a price of $3.41 in
2001.
(c) Exercise prices for options outstanding at December 31, 2003 range from
$1.08 to $17.75 and average $4.58 with expiration dates ranging from March
2003 to May 2009. Exercise prices for options outstanding at December 31,
2002 ranged from $1.08 to $17.75 and averaged $4.81 with expiration dates
ranging from March 2003 to November 2008. Exercise prices for options
outstanding at December 31, 2001 ranged from $1.08 to $17.75 and averaged
$5.49 with expiration dates ranging from May 2002 to December 2007.
(d) Exercise prices for options exercisable at December 31, 2003, 2002, and 2001
averaged $5.64, $6.67, and $8.50, respectively.
F-21
49
INTERNATIONAL ALLIANCECENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 5. COMMON STOCK (Continued)
The Company is currently seeking shareholder approval with regards to the
1996 Employee Stock Option Plan. Under the 1996 Employee Stock Option
Plan, the Company will reserve 1,000,000 shares of Company Common
Stock. The options awarded will be subject to a 20% incremental vesting
schedule over a five-year period commencing from the date of grant. The
options will be awarded at a price not less than fair market value at
the time of the award and will expire six years from the date of grant.
Subject to shareholder approval, 251,000 options were granted on
December 26, 1996 at a cost of $11.00. Shareholders will also vote on
grants to non-employee directors of 150,000 options granted under the
1996 Employee Stock Option Plan, exercisable immediately, with a five
year expiration term from the date of grant. The price of these options
is $11.00 for 100,000 of the options and $12.00 for the remaining
50,000.-- (CONTINUED)
Had the cost of stock option plans been determined based on the provisionfair value
of SFAS No. 123,options at the Company'sgrant date, CBIZ's net income (loss) and earnings (loss) per
share pro forma amounts would be as follows (in thousands)(amounts in thousands, except per
share data):
As Reported Pro Forma
(unaudited)
Primary Fully Diluted Primary Fully Diluted
-------------- ------------- ------------- ------------AS REPORTED PRO FORMA
------------------- -------------------
BASIC DILUTED BASIC DILUTED
-------- -------- -------- --------
1996
Adjusted net income (1)2003
Net income.................................. $ 6,57915,316 $ 5,04015,316 $ 6,55314,792 $ 5,014
============== ============= ============= ============14,792
======== ======== ======== ========
Net income per common shareshare........................ $ .210.17 $ .160.17 $ .200.16 $ .16
============= ============= ============= ============
19950.16
======== ======== ======== ========
2002
Net incomeloss.................................... $(76,848) $(76,848) $(80,365) $(80,365)
======== ======== ======== ========
Net loss per share.......................... $ 3,469(0.81) $ 3,469(0.79) $ 3,468(0.85) $ 3,468
============= ============= ============= ============(0.83)
======== ======== ======== ========
2001
Net incomeloss.................................... $(16,000) $(16,000) $(19,205) $(19,205)
======== ======== ======== ========
Net loss per common shareshare.......................... $ .20(0.17) $ .20(0.17) $ .20(0.20) $ .20
============= ============= ============= ============
(1) See Note 3(0.20)
======== ======== ======== ========
The above results may not be representative of the effects of SFAS No. 123
on net income
for future years. The CompanyCBIZ applied the Black-Scholes option-pricing model to
determine the fair value of each option granted in 19962003, 2002 and 1995.2001. Below is
a summary of the assumptions used in the calculation:
Dividend Yield 0%
Expected Volatility 35%
Risk-free interest rate 6.01%, 6.03%
2003 2002 2001
----- ----- -----
Risk-free interest rate..................................... 2.36% 2.89% 4.39%
Expected volatility......................................... 35.54% 75.76% 76.38%
Expected option life (in years)............................. 3.75 3.75 3.75
13. EARNINGS PER SHARE
CBIZ presents both basic and 6.21%
Expected option life 3.75 yearsdiluted earnings per share. The stock optionsfollowing data
shows the amounts used in computing earnings (loss) per share and the effect on
the weighted average number of dilutive potential common shares. Included in
dilutive potential common shares are contingent shares, which represent shares
issued to key employeesand placed in 1996 were assumed to vest at
a rate of 100%.
F-19escrow that will not be released until certain performance
goals have been met.
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
2003 2002 2001
---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator
Net income (loss).................................... $15,316 $(76,848) $(16,000)
Denominator:
Basic
Weighted average common shares.................... 90,400 94,810 94,818
Diluted
Options (a)....................................... 2,362 2,182 --
------- -------- --------
Total........................................... 92,762 96,992 94,818
======= ======== ========
Basic net income (loss) per share (a).................. $ 0.17 $ (0.81) $ (0.17)
======= ======== ========
Diluted net income (loss) per share (a)................ $ 0.17 $ (0.79) $ (0.17)
======= ======== ========
F-22
50
INTERNATIONAL ALLIANCECENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 6. LIABILITY FOR UNPAID LOSSES AND LOSS EXPENSES
Activity-- (CONTINUED)
- ---------------
(a) The effect of the incremental shares from warrants, options, and contingent
shares of 1,624 in 2001, have been excluded from diluted weighted average
shares, as the net loss from continuing operations for the period would
cause the incremental shares to be anti-dilutive.
14. SUPPLEMENTAL CASH FLOW DISCLOSURES
During 2003, CBIZ received consideration for divestitures of $0.4 million
in the form of notes receivable, $0.1 million in other receivables and $0.2
million in the form of common stock, in lieu of cash. In addition, CBIZ reduced
$0.5 million of accruals for non-cancelable lease obligations due to changes in
the consolidation and integration plan.
During 2002, CBIZ received consideration for divestitures of $4.2 million
in the form of notes receivable in lieu of cash. In addition, CBIZ reduced $0.1
million of accruals for non-cancelable lease obligations due to changes in the
consolidation and integration plan.
During 2001, CBIZ received consideration for divestitures of $2.4 million
in the form of notes receivable in lieu of cash. CBIZ also reduced approximately
$0.5 million of accruals for non-cancelable lease obligations and $0.2 million
for severance obligations due to changes in the consolidation and integration
plan.
Cash paid (received) during the year for (in thousands):
2003 2002 2001
------- ------ -------
Interest.................................................. $ 1,045 $2,521 $ 6,894
======= ====== =======
Income taxes.............................................. $(2,262) $4,323 $(8,982)
======= ====== =======
15. RELATED PARTIES
The following is a summary of certain agreements and transactions between
or among CBIZ and certain related parties. It is CBIZ's policy to enter into
transactions with related parties on terms that, on the whole, are no less
favorable than those that would be available from unaffiliated parties. Based on
CBIZ's experience and the terms of its transactions with unaffiliated parties,
it is the Board of Directors' belief that the transactions described below met
these standards at the time of the transactions.
A number of the businesses acquired since October 1996 are located in
properties owned indirectly by and leased from persons employed by CBIZ. In the
aggregate, CBIZ paid approximately $1.4 million, $0.8 million and $1.5 million
for the years ended 2003, 2002 and 2001, respectively, under such leases which
management believes were at market rates.
Rick L. Burdick, a director of CBIZ, is a partner of Akin, Gump, Strauss,
Hauer & Feld, L.L.P. (Akin, Gump.) Akin, Gump performed legal work for CBIZ
during 2003, 2002 and 2001 for which the firm received approximately $180,000,
$119,000, and $69,000 from CBIZ, respectively.
Robert A. O'Byrne, a Senior Vice President, was indebted to CBIZ in the
amount of $250,000 and $325,000 at December 31, 2002 and 2001, respectively.
Likewise, CBIZ was indebted to the former shareholders of RDOB/GNG of which Mr.
O'Byrne is one, for $420,000 at December 31, 2002. The notes to CBIZ and Mr.
O'Byrne were paid in 2003, and no indebtedness remains at December 31, 2003. Mr.
O'Byrne also has an interest in a partnership that receives commissions from
CBIZ that are paid to certain eligible benefits and insurance producers in
accordance with a formal program to provide benefits in the event of death,
disability, retirement or other termination. The note and the program were both
in existence at the time CBIZ acquired the former company, of which Mr. O'Byrne
was an owner.
CBIZ maintains joint-referral relationships and service agreements with
licensed CPA firms under which CBIZ provides administrative services (including
office, bookkeeping, accounting, and other administrative
F-23
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
services, preparing marketing and promotion materials, and leasing of
administrative and professional staff) in exchange for a fee. A number of CBIZ
employees own interests in the independent companies maintaining administrative
services agreements with CBIZ. The CPA firms with which CBIZ maintains service
agreements operate as limited liability corporations, limited liability
partnerships or professional corporations. The firms are separate legal entities
with separate governing bodies and officers. Neither the existence of the ASAs
nor the providing of services thereunder is intended to constitute control of
the CPA firms by CBIZ. CBIZ and the CPA firms maintain their own respective
liability and risk of loss in connection with performance of its respective
services. Although the service agreements do not constitute control, CBIZ is one
of the beneficiaries of the agreements and may bear certain economic risks. As
such, the CPA firms with which CBIZ maintains administrative service agreements
may qualify as variable interest entities under FASB Interpretation No. 46 (FIN
46), "Consolidation of Variable Interest Entities". The impact to CBIZ of this
accounting pronouncement is discussed in the "New Accounting Pronouncements"
section of the accompanying Management's Discussion and Analysis of Financial
Condition and Results of Operations. See a more detailed discussion of this
arrangement in Part I of the accompanying Annual Report.
During 2003, CBIZ guaranteed two letters of credit for unpaid lossesa CPA firm with
which CBIZ maintains an administrative services agreement. The letters of credit
total $654,000.
In 2002, CBIZ executed a note receivable with a CPA firm whose partner
group has since joined MHM, PC, a CPA firm with which CBIZ maintains an
administrative services agreement. The balance on the note at December 31, 2003
and 2002 was approximately $222,000 and $263,000, respectively. The note does
not have a stated maturity date.
CBIZ divested several operations during 2003, 2002, and 2001, in an effort
to rationalize the business and sharpen the focus on non-strategic businesses.
In accordance with this strategy, CBIZ has sold and may sell in the future
businesses to former employees or shareholders. Management believes these
transactions were priced at market rates, competitively bid, and entered into at
arm's length terms and conditions.
16. ACQUISITIONS
During the year ended December 31, 2003, CBIZ completed the acquisition of
benefits and insurance firms in Boca Raton, Florida and Salt Lake City, Utah, as
well as accounting, tax & advisory firms in Orange County, California and
Stamford, Connecticut. In addition to the acquisitions of these businesses, CBIZ
purchased the client lists of four benefits agencies. The aggregate purchase
price of these acquisitions and client lists was approximately $11.2 million,
comprised of $2.8 million in cash and 177,000 shares of restricted common stock
(estimated stock value of $0.3 million at acquisition) paid at closing, $2.1
million of notes contributed, and up to an additional $6.0 million payable in
cash which is contingent on the businesses meeting certain future revenue
targets. The impact of acquisitions, including contingent consideration earned
during 2003 was an increase to goodwill, client lists and other intangibles
assets of $3.0 million, $4.5 million and $0.2 million, respectively.
During 2002, CBIZ acquired a benefits and insurance firm located in
Calverton, Maryland for an aggregate purchase price of approximately $4.1
million in cash. In 2001, CBIZ acquired an accounting tax and advisory firm for
approximately $0.3 million in cash.
The excess of purchase price over fair value of net assets acquired was
allocated to the purchased client lists, which are being amortized periods not
exceeding ten years, to certain non-compete agreements, which are being
amortized over two years to five years, and to goodwill. The operating results
of these firms have been included in the accompanying consolidated financial
statements since the dates of acquisition.
17. DIVESTITURES
During 2003, CBIZ sold or closed eight business operations consisting of
four ATA operations, two Benefit and Insurance operations and two National
Practice operations. Six of the business operations satisfied the criteria
F-24
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for treatment as discontinued operations, and were classified as such in the
accompanying financial statements (see note 20). The two operations that did not
meet the criteria for treatment as discontinued operations were reported under
gain (loss) on divested operations from continuing operations. These two
operations were sold for an aggregate purchase price of $4.3 million in cash,
and resulted in a pretax gain of $1.8 million. CBIZ also sold four client lists
and related assets within the ATA practice group for an aggregate purchase price
of $1.3 million in cash and $0.1 million in stock, resulting in a pretax gain of
$0.7 million. CBIZ may earn additional proceeds on the sale of a client list,
which are contingent upon future revenue generated by the client list. CBIZ will
record the proceeds as other income when they are earned.
During 2002, CBIZ sold, closed, or committed to sale the divestiture of
sixteen businesses. Five of the operations have been classified as discontinued
operations. The remaining eleven operations were either initiated before CBIZ's
adoption of SFAS No. 144 "Accounting for the Impairment of or the Disposal of
Long-Lived Assets", or did not meet the criteria for treatment as a discontinued
operation and were reported under gain (loss) on divested operations from
continuing operations. Of these eleven operations, CBIZ completed the sale or
closing of eight ATA operations, one Benefit and Insurance operation, and two
National Practice operations for an aggregate price of $7.1 million which
included $4.0 million notes receivable. These divestitures resulted in a pretax
gain of $0.9 million.
During the year ended December 31, 2001, CBIZ completed the sale or closing
of fifteen business operations. In addition, CBIZ also recorded an additional
charge related to the planned divestiture or closing of five additional business
units to be completed in 2002. The aggregate price of these divestitures was
$16.5 million which included $14.0 million cash, $2.4 million notes receivable
and $0.1 million in stock. In addition CBIZ also retained a $6.0 million
contingent note. These divestitures resulted in a pretax loss expensesof $7.1 million.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is summarizeda summary of the unaudited quarterly results of operations
for fiscal years 2003 and 2002 (in thousands, except per share amounts):
2003
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
Revenue............................... $144,758 $125,042 $118,991 $123,971
======== ======== ======== ========
Income from continuing operations..... $ 10,159 $ 3,562 $ 206 $ 1,595
======== ======== ======== ========
Net income (loss)..................... $ 10,001 $ 3,247 $ (238) $ 2,306
======== ======== ======== ========
Earnings (loss) per share:
Basic --
Continuing operations............ $ 0.11 $ 0.04 $ -- $ 0.02
======== ======== ======== ========
Net income (loss)................ $ 0.11 $ 0.03 $ -- $ 0.03
======== ======== ======== ========
Earnings (loss) per share:
Diluted --
Continuing operations............ $ 0.11 $ 0.04 $ -- $ 0.02
======== ======== ======== ========
Net income (loss)................ $ 0.11 $ 0.03 $ -- $ 0.03
======== ======== ======== ========
Basic weighted average common
shares.............................. 95,087 95,138 86,228 85,302
======== ======== ======== ========
Diluted weighted average common
shares.............................. 96,956 97,178 88,971 89,073
======== ======== ======== ========
F-25
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2002
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
Revenue............................... $140,299 $124,004 $114,978 $119,928
======== ======== ======== ========
Income (loss) from continuing
operations.......................... $ 9,894 $ 2,267 $ (3,999) $ (57)
======== ======== ======== ========
Net income (loss)..................... $(70,707) $ 1,136 $ (6,108) $ (1,169)
======== ======== ======== ========
Earnings (loss) per share:
Basic --
Continuing operations............ $ 0.10 $ 0.02 $ (0.04) $ --
======== ======== ======== ========
Net income (loss)................ $ (0.75) $ 0.01 $ (0.06) $ (0.01)
======== ======== ======== ========
Earnings (loss) per share:
Diluted --
Continuing operations............ $ 0.10 $ 0.02 $ (0.04) $ --
======== ======== ======== ========
Net income (loss)................ $ (0.73) $ 0.01 $ (0.06) $ (0.01)
======== ======== ======== ========
Basic weighted average common
shares.............................. 94,880 95,005 95,109 94,899
======== ======== ======== ========
Diluted weighted average common
shares.............................. 97,112 97,595 95,109 94,899
======== ======== ======== ========
19. SEGMENT DISCLOSURES
CBIZ's business units have been aggregated into three practice groups:
Accounting, Tax and Advisory Services, Benefits and Insurance and National
Practices. The business units have been aggregated based on the following
factors: similarity of the products and services; similarity of the regulatory
environment; the long-term performance of these units is affected by similar
economic conditions; and the business is managed along these segment lines,
which each report to a Practice Group Leader. These practice groups were each
reported as segments until 2001. During 2002, the medical practice management
unit under the National Practices group exceeded the quantitative threshold of
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," prompting CBIZ to disclose this reporting unit separately.
Accounting, Tax and Advisory Services. The Accounting, Tax and Advisory
Services practice group offers services in the following areas: cash flow
management; strategic planning; consulting; record-keeping; federal, state and
local tax return preparation; tax planning based on financial and investment
alternatives; tax structuring of business transactions such as mergers and
acquisitions; quarterly and year-end payroll tax reporting; corporate,
partnership and fiduciary tax planning and return preparation; outsourced chief
financial officer services and other financial staffing services; financial
investment analysis; succession, retirement, and estate planning; profitability,
operational and efficiency enhancement consulting to a number of specialized
industries, internal audit services and Sarbanes-Oxley consulting and compliance
services.
Benefits and Insurance Services. The Benefits and Insurance practice group
offers services in the following areas: employee benefits, brokerage,
consulting, and administration, including the design, implementation and
administration of qualified plans, such as 401(k) plans, profit-sharing plans,
defined benefit plans, and money purchase plans; actuarial services; health and
welfare benefits consulting, including group health insurance plans; dental and
vision care programs; group life insurance programs; accidental death and
dismemberment and disability programs; COBRA administration and voluntary
insurance programs; health care and dependent care spending accounts; premium
reimbursement plans; communications services to inform and educate employees
about their benefit programs; executive benefits consulting on non-qualified
retirement plans and business continuation plans; specialty high-risk life
insurance; employee benefit worksite marketing; and wealth
F-26
CENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
management services, including Registered Investment Advisory Services,
Investment Policy Statements, also known as IPS, mutual fund selection based on
IPS and ongoing mutual fund monitoring.
National Practices. The National Practices group offers services in the
following areas: payroll processing and administration; valuations of
commercial, tangible, and intangible assets and financial securities; mergers
and acquisitions and capital advisory services, health care consulting,
government relations; process improvement; and technology consulting, including
strategic technology planning, project management, development, network design
and implementation and software selection and implementation.
Medical Practice Management. The CBIZ MMP subsidiary of the National
Practice group offers services in the following areas: billing and accounts
receivable management; coding and automated claims filing; comprehensive
delinquent claims follow up and collections; compliance plans to meet government
and other third party regulations; local office management; and comprehensive
statistical and operational reporting; financial reporting, accounts payable,
payroll, general ledger processing; design and implementation of managed care
contracts with focus on negotiation strategies, pricing, cost containment and
utilization tracking; review and negotiation of hospital contracts; evaluation
of other strategic business partners; identification and coordination of
practice manager and integration opportunities; and coordination of practice
expansion efforts.
Corporate and other charges represent costs at the corporate office that
are not allocated to the business units, which include goodwill amortization and
impairment for all acquisitions accounted for under the purchase method of
accounting.
CBIZ operates in the United States and Toronto, Canada and there is no one
customer that represents a significant portion of sales.
Segment information for the years ended December 31, 2003, 2002, and 2001
was as follows (in thousands):
1996 1995 1994
-------------- -------------2003
-------------------------------------------------------------------
NATIONAL PRACTICE
GROUP
------------------
ACCOUNTING MEDICAL
TAX & BENEFITS & PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. OTHER AND OTHER TOTAL
---------- ---------- -------- ------- --------- --------
Balance at January 1
Revenue......................... $203,399 $162,095 $75,773 $71,495 $ 37,002-- $512,762
Operating expenses.............. 178,177 128,407 61,556 72,856 7,711 448,707
-------- -------- ------- ------- -------- --------
Gross margin.................. 25,222 33,688 14,217 (1,361) (7,711) 64,055
Corporate gen. and admin........ -- -- -- -- 19,647 19,647
Deprec. and amort............... 4,310 3,005 2,595 1,147 6,104 17,161
-------- -------- ------- ------- -------- --------
Operating income (loss)....... 20,912 30,683 11,622 (2,508) (33,462) 27,247
Other income (expense):
Interest expense.............. (49) (63) (5) (1) (937) (1,055)
Gain on sale of operations,
net........................ -- -- -- -- 2,519 2,519
Other income (expense), net... 397 (98) (94) 154 (1,452) (1,093)
-------- -------- ------- ------- -------- --------
Total other income
(expense)................ 348 (161) (99) 153 130 371
-------- -------- ------- ------- -------- --------
Income (loss) from continuing
operations before income
taxes......................... $ 34,66121,260 $ 29,528
Less: Reinsurance recoverables, net (8,914) (9,383) (8,505)
-------------- ------------- --------------
Net balance at January 1 28,088 25,278 21,023
-------------- ------------- --------------
Incurred related to:
Current year 17,216 17,297 14,753
Prior years 408 (2,180) (2,259)
-------------- ------------- --------------
Total incurred 17,624 15,117 12,494
-------------- ------------- --------------
Paid related to:
Current year 3,684 5,963 4,269
Prior years 9,043 6,344 3,970
-------------- ------------- --------------
Total paid 12,727 12,307 8,239
-------------- ------------- --------------
Net balance at December 31 32,985 28,088 25,278
Plus: reinsurance recoverables, net 8,114 8,914 9,383
-------------- ------------- --------------
Balance at December 3130,522 $11,523 $(2,355) $(33,332) $ 41,099 $ 37,002 $ 34,661
============== ============= ==============27,618
======== ======== ======= ======= ======== ========
In 1995 and 1994, the Company experienced lower than anticipated ultimate
losses on prior years due primarily to a reduction in claims severity
from that assumed in establishing the liability for losses and loss
expenses payable. The Company's environmental exposure from continuing
operations relates primarily to its coverage of remediation related
risks, thus management believes the Company's exposure to historic
pollution situations is minimal. The Company's non-insurance
environmental exposure from discontinued operations is discussed in
Note 15.
7. REINSURANCE
In the ordinary course of business, the Company assumes and cedes
reinsurance with other insurers and reinsurers. These arrangements
provide the Company with a greater diversification of business and
generally limit the maximum net loss potential on large risks. Excess
of loss reinsurance contracts in effect through December 31, 1996,
generally protect against individual property and casualty losses over
$200,000 and contract surety and miscellaneous bond losses over
$500,000. In addition to the excess of loss contract in effect for
contract surety business, a 50% quota share contract on the first
$500,000 in losses is in effect. Asbestos abatement, lead abatement,
environmental consultants professional liability and remedial action
contractors business is 75% ceded on a quota share basis to reinsurers.
Catastrophe coverage is also maintained.
F-20F-27
51
INTERNATIONAL ALLIANCECENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 7. REINSURANCE (Continued)-- (CONTINUED)
The impact of reinsurance is as follows (in thousands):
1996 1995 1994
-------------- ------------- --------------2002
-------------------------------------------------------------------
NATIONAL PRACTICE
GROUP
------------------
ACCOUNTING MEDICAL
TAX & BENEFITS & PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. OTHER AND OTHER TOTAL
---------- ---------- -------- ------- --------- --------
Premiums written:
Direct
Revenue......................... $205,728 $150,514 $66,156 $76,811 $ 42,420-- $499,209
Operating expenses.............. 177,239 123,369 54,481 75,491 9,336 439,916
-------- -------- ------- ------- -------- --------
Gross margin.................. 28,489 27,145 11,675 1,320 (9,336) 59,293
Corporate gen. and admin........ -- -- -- -- 19,672 19,672
Deprec. and amort............... 5,169 3,592 1,972 1,631 8,110 20,474
-------- -------- ------- ------- -------- --------
Operating income (loss)....... 23,320 23,553 9,703 (311) (37,118) 19,147
Other income (expense):
Interest expense.............. (56) (76) (7) (51) (2,288) (2,478)
Gain on sale of operations,
net........................ -- -- -- -- 930 930
Other income (expense), net... 495 359 (19) (1,656) (252) (1,073)
-------- -------- ------- ------- -------- --------
Total other income
(expense)................ 439 283 (26) (1,707) (1,610) (2,621)
-------- -------- ------- ------- -------- --------
Income (loss) from continuing
operations before income
taxes......................... $ 36,27823,759 $ 37,127
Assumed 468 1,417 742
Ceded (11,739) (11,018) (10,650)
-------------- ------------- --------------
Net23,836 $ 31,1499,677 $(2,018) $(38,728) $ 26,677 $ 27,219
============== ============= ==============
Premiums earned:
Direct $ 39,388 $ 36,005 $ 34,255
Assumed 591 1,507 414
Ceded (12,236) (10,550) (11,301)
-------------- ------------- --------------
Net $ 27,743 $ 26,962 $ 23,368
============== ============= ==============
Losses and loss expense incurred:
Direct $ 18,618 $ 16,342 $ 15,088
Assumed 210 1,223 (65)
Ceded (1,204) (2,448) (2,529)
-------------- ------------- --------------
Net $ 17,624 $ 15,117 $ 12,494
============== ============= ==============16,526
======== ======== ======= ======= ======== ========
The reinsurance payables were $2,869,000, $2,259,000 and $2,056,000 at
December 31, 1996, 1995 and 1994, respectively.
Reinsurance recoverables were comprised of the following as of December 31
(in thousands):
1996 1995 1994
-------------- ------------- --------------2001
-------------------------------------------------------------------
NATIONAL PRACTICE
GROUP
------------------
ACCOUNTING MEDICAL
TAX & BENEFITS & PRACTICE CORPORATE
ADVISORY INSURANCE MGMT. OTHER AND OTHER TOTAL
---------- ---------- -------- ------- --------- --------
Receivables
Revenue......................... $225,993 $141,287 $56,838 $86,416 $ -- $510,534
Operating expenses.............. 192,810 112,131 45,786 81,990 8,498 441,215
-------- -------- ------- ------- -------- --------
Gross margin.................. 33,183 29,156 11,052 4,426 (8,498) 69,319
Corporate gen. and admin........ -- -- -- -- 19,797 19,797
Deprec. and amort............... 4,530 3,683 1,516 1,701 29,047 40,477
-------- -------- ------- ------- -------- --------
Operating income (loss)....... 28,653 25,473 9,536 2,725 (57,342) 9,045
Other income (expense):
Interest expense.............. (91) (133) (16) (63) (6,494) (6,797)
Loss on unpaid losses and loss expensessale of operations,
net........................ -- -- -- -- (7,113) (7,113)
Other income (expense), net... 561 865 7 2,479 (27) 3,885
-------- -------- ------- ------- -------- --------
Total other income
(expense)................ 470 732 (9) 2,416 (13,634) (10,025)
-------- -------- ------- ------- -------- --------
Income (loss) from continuing
operations before taxes....... $ 8,11329,123 $ 8,91426,205 $ 9,383
Receivables on ceding commissions and other 2,703 2,892 1,026
Receivables on paid losses and expenses 369 841 478
-------------- ------------- --------------9,527 $ 11,1855,141 $(70,976) $ 12,647 $ 10,887
============== ============= ==============(980)
======== ======== ======= ======= ======== ========
The Company evaluates20. DISCONTINUED OPERATIONS
During 2002, CBIZ adopted formal business plans to sell or close five
business operations which were no longer part of CBIZ's strategic long-term
growth objectives. During 2003, CBIZ adopted formal plans to divest five
additional operations. These business operations are reported as discontinued
operations and the net assets and liabilities and results of operations are
reported separately in the consolidated financial condition of its reinsurers and
establishes a valuation allowance as reinsurance receivables are deemed
uncollectible. During 1996, the majority of ceded amounts were ceded to
Republic Western Insurance Company and Reliance Insurance Company. The
Company monitors concentrations of risks arising from similar
geographic regions or activities to minimize its exposure to
significant losses from catastrophic events.
F-21statements.
F-28
52
INTERNATIONAL ALLIANCECENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 8. DEFERRED POLICY ACQUISITION COSTS
At December 31, 1996 changes in deferred policy acquisition costs-- (CONTINUED)
Six operations were as
follows (in thousands):
1996 1995 1994
-------------- ------------- --------------
Balance, beginning of year $ 3,428 $ 3,726 $ 2,406
Policy acquisition costs deferred 8,616 7,476 6,748
Amortized to expense during the year (7,699) (7,774) (5,428)
-------------- ------------- --------------
Balance, end of year $ 4,345 $ 3,428 $ 3,726
============== ============= ==============
9. STATUTORY SURPLUS AND DIVIDEND RESTRICTION
Ohio law limits the payment of dividends by a company to its parent. The
maximum dividend that may be paid without prior approval of the
Director of Insurance is limited to the greater of the statutory net
income of the preceding calendar yearactually sold during 2003 or 10% of total statutory surplus
as of the prior December 31.
The consolidated and combined financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP"). The
Company's insurance subsidiaries have filed annual financial statements
with the Ohio Department of Insurance and Utah Department of Insurance,
respectively, and are prepared on the basis of accounting practices
prescribed by such regulatory authorities, which differ from GAAP.
Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners
("NAIC"), as well as state laws, regulations and general administrative
rules. Permitted statutory accounting practices encompass all
accounting practices not prescribed. All material transactions recorded
by the Company's insurance subsidiaries are in accordance with
prescribed practices.
In December 1993, the NAIC adopted the property and casualty Risk-Based
Capital ("RBC") formula. This model act requires every property and
casualty insurer to calculate its total adjusted capital and RBC
requirement, and providesprocess of
being closed, one of which was available for an insurance commissioner to intervene if
the insurer experiences financial difficulty. The model act became law
in Ohio in March 1996, and in Utah in April 1996, states where certain
subsidiaries of the Company are domiciled. The RBC formula includes
components for asset risk, liability risk, interest rate exposure and
other factors. The Company's insurance subsidiaries exceeded all
required RBC levels for December 31, 1996 and 1995.
CSC's statutory net income for the three years ended December 31, 1996,
was $1,916,000, $3,681,000 and $1,804,000, respectively, and the
statutory capital and surplus was $25,954,000, $22,034,000 and
$20,123,000, respectively.
F-22
53
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
10. INCOME TAXES
A summary of income tax expense (benefit) included in the Consolidated
and Combined Statements of Income is as follows (in thousands):
1996 1995 1994
-------------- ------------- -----------
Continuing operations
Current:
Federal $ 1,654 $ 2,121 $ 1,289
State and Local 13 - -
-------------- ------------- -------------
1,667 2,121 1,289
Deferred:
Federal (27) (699) 55
-------------- ------------- -------------
Total continuing operations 1,640 1,422 1,344
Discontinued operations 91 - -
-------------- ------------- -------------
$ 1,731 $ 1,422 $ 1,344
============== ============= =============
The provision for income taxes attributable to earnings from continuing
operations differed from the amount obtained by applying the federal
statutory income tax rate to income from continuing operations before
income taxes, as follows (in thousands):
1996 1995 1994
-------------- ------------- -------------
Tax at statutory rate (34%) $ 2,061 $ 1,663 $ 1,647
Change in valuation allowance (589) (169) 434
Tax exempt interest and dividends
received deduction (33) (106) (123)
Nontaxable income on participation
transaction - - (274)
Change in estimated liabilities 196 - -
Other, net 5 34 (340)
-------------- ------------- -------------
Provision for income tax from continuing
operations $ 1,640 $ 1,422 $ 1,344
============== ============= =============
Effective income tax rate 27.1% 29.1% 27.7%
============== ============= =============
F-23
54
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
10. INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilitiessale at December 31, 19962002.
Aggregate proceeds were $1.6 million cash, $0.4 million of notes receivable,
$0.1 million other receivables and 1995,$0.1 million stock. During 2002, four
operations were either sold or closed for an aggregate price of $4.6 million of
cash and $0.2 million of notes receivable. There are as follows (in thousands):
1996 1995
-------------- -----------
Deferred tax assets:
--------------------
Loss expenses payable discounting $ 2,176 $ 1,957
Net operating loss carryforwards 1,136 1,235
Unearned premiums not deductible 1,105 1,063
Other deferred tax assets 151 143
-------------- -------------
Total gross deferred tax assets 4,568 4,398
Less: valuation allowance (1,379) (1,968)
-------------- -------------
Net deferred tax assets 3,189 2,430
-------------- -------------
Deferred tax liabilities:
-------------------------
Unrealized appreciation on investments 1,518 1,219
Deferred policy acquisition costs 1,477 1,165
Reinsurance recoverable 302 -
Other deferred tax liabilities 219 99
-------------- -------------
Total gross deferred tax liabilities 3,516 2,483
-------------- -------------
Net deferred tax liability, included in income
taxes in the consolidated and combined
balance sheets $ 327 $ 53
============== =============
Net deferred tax liability attributable to
discontinued operations, included in net
assets held for disposal $ 1,340 $ -
============== =============
The company had net operating loss ("NOL") carryforwards of approximately
$3,300,000 and $3,600,000no operations available for
sale at December 31, 19962003.
Revenue and 1995, respectively,loss from the separate return yearsoperations of Evergreen National Indemnity
Corporation ("ENIC"). These losses are subject to limitations regarding
the offset of the company's future taxable income and will begin to
expire in 2007.
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
The Company determines a valuation allowance based on their analysis of
amounts available in the statutory carryback period, consideration of
future deductible amounts, and assessment of ENIC's separate company
profitability. The Company has established valuation allowances for
portions of ENIC's NOL carryforwards and other deferred tax assets. The
net change in the valuation allowancediscontinued businesses for the years
ended December 31 19962003, 2002 and 1995 was a decrease2001 were as follows:
2003 2002 2001
------- ------- -------
Revenue.................................................. $ 6,526 $12,367 $16,331
Loss from operations of discontinued businesses before
income taxes........................................... (1,442) (2,404) (4,683)
Income tax expense (benefit)............................. (510) 71 (1,871)
------- ------- -------
Net loss from operations of discontinued businesses...... $ (932) $(2,475) $(2,812)
======= ======= =======
Gain (loss) on disposal of $589,000discontinued businesses for the years ended
December 31 2003, 2002 and $169,000, respectively.
Even though the Company has had taxable income over the last several
years, significant income in some instances has been attributable to
non-recurring transactions2001 were as follows:
2003 2002 2001
------ ------- ----
Gain (loss) on disposal of discontinued businesses, before
tax....................................................... $1,457 $(3,884) $--
Income tax expense (benefit)................................ 731 (1,413) --
------ ------- --
Net gain (loss) on disposal of discontinued businesses...... $ 726 $(2,471) $--
====== ======= ==
The assets and thus there is no assurance that the
Company will remain profitable in future years. However, during 1996,
ENIC obtained all licenses necessary to fully operate, commenced
underwriting insurance, and reported two consecutive years of
profitability. As a result, management determined that a portionliabilities of the valuation allowance related to ENIC's NOL carryforwards was no longer
required. Otherwise, the Company maintains a policy of recognizing
other deferred tax assets recoverable in the carryback period and does
not consider future taxable income in excess.
F-24
55
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
11. SHORT-TERM BORROWINGS, NOTE PAYABLE AND CAPITALIZED LEASES
Short-Term Borrowings
---------------------
The Company secured a $6,000,000 credit facility used for additional
working capital and other funding needs. Up to $4,500,000 of the credit
facility is available for the issuance of standby letters of credit. At
December 31, 1996, the Company had issued $2,400,000 in standby letters
of credit. The unused portion of the facility is available for cash
borrowings. There were no cash borrowings under the credit facility
during 1996 and 1995.
The credit facility provides for the maintenance of certain restrictive
covenants including, among others, minimum working capital levels,
maintaining current and fixed charges ratios and a predetermined level
of interest coverage. The Company is also restricted from making any
dividend payments and incurring additional debt. This facility is
collateralized by certain Company assets.
Note Payable and Capitalized Leases
-----------------------------------
Note payable and capitalized leases, consiststen business units classified as
discontinued operations consisted of the following (in thousands):
December 31
--------------------------------
1996 1995
------------- --------------2003 2002
---- -------
Promissory note payable to a shareholder in quarterly installmentsAccounts receivable, net.................................... $152 $ 6,542
Property and equipment, net................................. 234 710
Deferred tax asset, net..................................... -- 7,715
Other assets................................................ 9 155
---- -------
Assets of $400,000 plus interest, based on 3 month LIBOR (5.51% at December 31,
1996) compounded daily, through December 15, 1999discontinued operation............................ 395 15,122
==== =======
Accounts payable............................................ 98 552
Accrued expenses............................................ 162 6,996
---- -------
Liabilities of discontinued operation....................... $260 $ 3,200 $ -
Capitalized leases, secured by equipment, payable
monthly through 1997 11 47
------------- --------------
$ 3,211 $ 47
============= ==============7,548
==== =======
At December 31, 1996, aggregate maturities of note payable and capitalized
leases, were as follows (in thousands):
YEARS ENDING
DECEMBER 31,
------------
1997 $ 1,611
1998 1,600
-------------
$ 3,211
=============
Management believes that21. SUBSEQUENT EVENTS (UNAUDITED)
In 2004, CBIZ implemented a nonqualified deferred compensation plan
developed for the carrying amounts of short-term borrowings,
note payable and capitalized leases recorded at December 31, 1996 were
not impaired and approximate fair values.
F-25
56
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
----------------
The Company leases certainbenefit of its premises and equipment under various
operating lease agreements. At December 31, 1996, future minimum rental
commitments becoming payable under all operating leases from continuing
operations are as follows (in thousands):
YEARS ENDING
DECEMBER 31,
------------
1997 $ 1,277
1998 1,202
1999 583
2000 563
2001 563
Thereafter 2,793
-------------
$ 6,981
=============
Total rental expense incurred under operating leases was $454,000,
$411,000 and $331,000 in 1996, 1995 and 1994, respectively.
Other
-----
Inhighly compensated employees. Under the ordinary course of business, the Company is a defendant in various
lawsuits. In the opinion of management, the effects, if any, of such
lawsuits are not expected to be material to the Company's results of
operations or financial position.
The Company has profit sharing plans covering substantially all of its
employees. Participatingplan,
employees may elect to contribute on a tax
deferredtax-deferred basis, a portion of their
compensation, in accordance with
Section 401(k)into a rabbi trust which is separated from the working capital of
the Internal Revenue Code. Employercompany and protected from a change in management or company control.
Amounts deferred are always 100% vested and are subject to FICA taxes at the
time of the deferral. The plan is exempt from ERISA minimum funding,
participation and vesting requirements. CBIZ does not make contributions
made to the
plan for 1996, 1995 and 1994, amountedplan.
On March 3, 2004, the Board of Directors authorized a share repurchase of
up to $240,000,
$141,000 and $111,000, respectively.
13. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company recorded the acquisition of RESI as8.5 million shares. On March 4, 2004, CBIZ announced a non-cash transaction
consisting of a $4,000,000 promissory note and recapitalization of
shareholders' equity of $16,244,000. Additionally, during 1996, the
Company acquired, in exchange for 792,500tender offer to
purchase up to 7.5 million shares of its outstanding common stock at a price of
$5.00 per share, which will expire on April 1, 2004. CBIZ anticipates that it
will obtain all of the funds necessary to purchase shares tendered, and other consideration, 100%to pay
related fees and expenses, by borrowing under its $73 million secured revolving
credit facility, which was amended on March 3, 2004, to permit CBIZ to borrow up
to an aggregate of SMR and ECI, which were also recorded
as non-cash transactions.
F-26$50 million for the repurchase, on or before December 31,
2004, of shares of CBIZ stock.
F-29
57
INTERNATIONAL ALLIANCECENTURY BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TOSCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES FOR THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
13. SUPPLEMENTAL CASH FLOW DISCLOSURES (Continued)
In December 1994, ENIC participated in a transaction whereby ENIC obtained
an agreed upon amount of net assets of an unrelated party as
consideration in completing the sale and the related settlements of
debt of two unrelated parties. The transaction included a contingent
receivable of up to $2,900,000 due ENIC from the unrelated party. Based
on the performance of the insurance operations sold, it was determined
that $807,000 and $1,150,000 be recognized as revenue during 1994 and
1996, respectively. ENIC does not have any future obligations with
respect to the insurance operations under the terms of the transaction
agreements.
CASH PAID DURING THE YEAR FOR:
1996 1995 1994
-------------- ------------- --------------
INTEREST $ 60 $ 216 $ 469
============== ============= =============
INCOME TAXES $ 1,290 $ 128 $ 64
============== ============= =============
14. RELATED PARTIES
In October 1996, the Company's Chairman purchased 1,900,000 shares of
common stock, and warrants to purchase an additional 5,700,000 shares
of common stock at exercise prices ranging from $2.625 to $3.875 per
share, for an aggregate price of $4,988,000. Additionally, the Chairman
held warrants to purchase 240,000 shares of common stock at $3.60 per
share
The Company's Chief Financial Officer ("CFO") was a one-third owner of
SMR. Among the liabilities assumed in connection with the SMR
acquisition is a deferred compensation arrangement to which the CFO is
entitled to receive 40% of the collections from the acquired
receivables of SMR. In addition, in connection with the SMR
transaction, the CFO received 195,600 shares of common stock and
293,400 warrants to purchase additional shares of common stock at an
exercise price of $10.375. The office building utilized by SMR is
leased under a ten-year lease from a partnership in which the CFO is
indirectly, a one-third owner.
The Company has issued six $500,000 bonds covering certain loans obtained
by an unrelated party, maturing from 1996 and 2002. Collateral for
these bonds includes the personal indemnification of an indirect
shareholder of the Company.
The Company's investment portfolios include loans to business
organizations associated with a relative of a shareholder of the
Company, which aggregate $2,900,000. These loans provide for interest
payments only until maturity, which range from December 31, 1997
through April 30, 1999.
The stock of ECI, which was acquired by the Company, was 45% owned by the
spouse of an officer of a subsidiary of the Company.
F-27
58
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
15. SUBSEQUENT EVENTS
In February 1997, the Company signed a letter of intent to sell the
Company's Environmental Services business. The sale is subject to a
definitive agreement and various governmental and regulatory approvals.
The Company anticipates that the sale will be completed during 1997 and
will realize the net carrying value of the net assets held for
disposal.
In accordance with the Company's intent to sell the environmental services
business, the related results of operations have been reflected in the
Company's results of operations as a discontinued operation for the
year ended December 31, 1996. Included in discontinued operations is
the following (in thousands):
Revenues $ 9,202
=============
Income before taxes $ 53
Income tax provision 91
-------------
Net loss $ (38)
=============
Net assets of the discontinued operations at December 31, 1996 consists of
(in thousands):
Cash $ 2,375
Accounts receivable, net 7,218
Property, plant and equipment, net 20,598
Excess of cost over net assets of businesses acquired, net 3,305
Other assets 1,074
Accounts payable (3,959)
Accrued environmental costs (3,203)
Accrued expenses and other liabilities (4,409)
-------------
$ 22,999
=============
Accruals for investigatory and remediation costs are recorded when it is
probable that a liability has been incurred and the amount of loss can
be reasonably estimated. Accrued costs include investigative,
administrative, legal and remediation costs associated with site
clean-up. Environmental compliance costs including maintenance,
monitoring and similar costs are expensed as incurred.
F-28
59
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
15. SUBSEQUENT EVENTS (Continued)
The measurement of environmental liabilities is based on an evaluation of
currently available facts with respect to each individual site and
considers factors such as existing technology, presently enacted laws
and regulations, and prior experience in remediation of contaminated
sites. While the current law potentially imposes joint and several
liability upon each party at any Superfund site, the Company's
contribution to clean up these sites is expected to be limited, given
the number of other companies which have also been named as potentially
responsible parties, the volumes of waste involved, and that most of
these matters are indemnified by the previous owners of certain RESI
facilities. A reasonable basis for apportionment of costs among
responsible parties is determined and the likelihood of contribution by
other parties is established. If it is considered probable that the
Company will only have to pay its expected share of the total site
cleanup, the liability reflects the Company's expected share. In
determining the probability of contribution, the Company considers the
solvency of the parties, whether responsibility is being disputed, the
terms of any existing agreements, and experience to date regarding
similar matters. These liabilities do not take into account any claims
for recoveries from insurance or third parties and are not discounted.
As assessments and remediation progress at individual sites, these
liabilities are reviewed periodically and adjusted to reflect
additional technical and legal information which becomes available.
Actual costs to be incurred at identified sites in future periods may
vary from the estimates, given inherent uncertainties in evaluating
environmental exposures. The Company believes it has sufficiently
reserved for all costs of remediation.
On January 7, 1997, the Company completed the acquisition of the assets
and business of Midwest Indemnity Corporation ("Midwest") located in
Skokie, Illinois for a total cost of approximately $9,900,000,
consisting of 407,256 shares of restricted common stock, $3,250,000 in
cash and $1,750,000 in non-interest bearing notes. Midwest markets
environmental and surety bond products throughout the United States
through a distribution system of agents and subagents.
On February 24, the Company completed the acquisition of Midland
Consultants, Inc. ("Midland"), located in Brooklyn, Ohio, for 87,500
shares of restricted common stock, $208,000 in cash and warrants to
purchase 20,000 shares of common stock at an exercise price of $11.625
per share exercisable through January 31, 2000. Midland provides
specialized employment services.
On March 3, 1997, the Company consummated its acquisition of M&N Risk
Management, Inc. and M&N Enterprises, Inc. (the "M&N Companies") and
MFC, Inc. of Cleveland, Ohio for 384,600 shares of restricted common
stock, $1,000,000 cash and 900,000 warrants at $13 per share
exercisable until March 3, 2000. The M&N Companies provide employers
with a turn-key approach to integrate workers' compensation actuarial
analysis and underwriting capabilities with claims administration.
On March 3, 1997, the Company announced it had entered into an agreement
to acquire The Benefits Group Agency, Inc. ("The Benefits Group"),
located in Cleveland, Ohio, for 395,000 shares of restricted common
stock, $2,500,000 in cash and 500,000 warrants to purchase common stock
at $12.50 per share over a three year period. The transaction is
subject to a definitive agreement and is expected to close by March 31,
1997. The Benefits Group is a full-service corporate benefits
administration company.
F-29
60
INTERNATIONAL ALLIANCE SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
16. UNAUDITED QUARTERLY FINANCIAL DATA
Quarterly financial data are summarized as follows (amounts in thousands,
except per share amounts):
1996 March 31, June 30, September 30, December 31,
--------- -------------- ------------- -------------- --------------
Revenues $ 9,320 $ 7,346 $ 9,389 $ 9,714
============== ============= ============= ==============
Income from continuing operations $ 655 $ 771 $ 839 $ 2,157
Loss from discontinued operation - - - (38)
-------------- ------------- ------------- --------------
Net income $ 655 $ 771 $ 839 $ 2,119
============== ============= ============= ==============
Earnings per common share:
Primary -
Continuing operations $ .04 $ .04 $ .05 $ .08
Discontinued operations - - - -
-------------- ------------- ------------- --------------
Net income per share $ .04 $ .04 $ .05 $ .08
============== ============= ============= ==============
Earnings per common share:
Fully Diluted -
Continuing operations $ .04 $ .04 $ .04 $ .04
Discontinued operations - - - -
-------------- ------------- ------------- --------------
Net income per share $ .04 $ .04 $ .04 $ .04
============== ============= ============= ==============
Weighted average common and
common share equivalents, primary
and fully diluted: 16,956 16,956 16,956 32,213
============== ============= ============= =============
1995 March 31, June 30, September 30, December 31,
-------- -------------- ------------- -------------- -------------
Revenues $ 7,971 $ 8,309 $ 6,496 $ 8,163
============== ============= ============= =============
Net income (loss) $ 508 $ (220) $ 101 $ 3,080
============== ============= ============= =============
Earnings per common share:
Primary $ .03 $ (.01) $ .01 $ .17
============== ============= ============= =============
Fully diluted $ .03 $ (.01) $ .01 $ .17
============== ============= ============= =============
Weighted average common and
common share equivalents, primary
and fully diluted: 16,956 16,956 16,956 16,956
============== ============= ============= =============
The increase in net income in the fourth quarter of 1996 and 1995 are a
result of the Company's historical policy of engaging an independent
actuary to calculate the loss reserves at year end and settling the
Company's reinsurance treaties in the fourth quarter. For future
periods, this analysis will be completed by management on a
quarterly basis.
F-30
61
INTERNATIONAL ALLIANCE SERVICES, INC.
SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
(In thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
-------- -------- -------- -----------
AMOUNT AT
WHICH SHOWN
IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
------------------ ---- ----- -------------
Fixed maturities--held to maturity:
Bonds:
U.S. government and government
agencies and authorities $ 6,136 $ 6,099 $ 6,136
States, municipalities and
political subdivisions -- -- --
Corporate securities 8,850 8,772 8,850
Mortgage-backed securities 495 505 495
Fixed maturities--available for sale:
Bonds:
U.S. government and government
agencies and authorities 16,067 16,198 16,198
Corporate securities 10,962 10,983 10,983
Mortgage-backed securities 8,092 8,290 8,290
------- ------- -------
Total fixed maturities 50,602 50,847 50,952
------- ------- -------
Equity securities:
Common stock:
Public utilities 209 189 189
Banks, trust and insurance
companies 225 252 252
Industrial, miscellaneous and
all other 1,178 6,014 6,014
Nonredeemable preferred stocks 2,737 2,758 2,758
------- ------- -------
TOTAL EQUITY SECURITIES 4,349 9,213 9,213
------- ------- -------
Mortgage loans 3,685 3,685
Short-term investments 4,799 4,799
------- -------
Total investments $63,435 $68,649
======= =======
See accompanying Independent Auditors' Report
F-31
62
INTERNATIONAL ALLIANCE SERVICES, INC.
SCHEDULE IV--REINSURANCE YEARS ENDED DECEMBER 31, 1996, 19952003, 2002, AND 1994
(In thousands)2001
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
COLUMN F
-------- -------- -------- -------- -------- --------
PERCENTAGE
CEDED- ----------------------------- ------------ -------------------------------------- ------------ ----------
ADDITIONS
--------------------------------------
BALANCE AT CHARGED TO ASSUMED FROMCHARGED BALANCE AT
BEGINNING OF AMOUNT
GROSSCOST & TO OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------ACQUISITIONS/ RECOVERIES / END OF
PERIOD EXPENSE ACCOUNTS DIVESTITURES DEDUCTIONS PERIOD
------------ ---------- --------- ------------- ------------ ------ ----------
Year ended December 31, 1996
Property--Casualty Earned
Premiums $39,388 $12,236 $591 $27,743 2.13%2003
Allowance deducted from
assets to which they apply:
Allowance for doubtful
accounts................ $ 8,755 $6,153 $ 199 $(164) $ (5,973) $ 8,970
======= ====== ======= ===== ======== =======
Year ended December 31, 1995
Property--Casualty Earned
Premiums $36,005 $10,550 $1,507 $26,962 5.59%2002
Allowance deducted from
assets to which they apply:
Allowance for doubtful
accounts................ $12,638 $7,393 $ (519) $(167) $(10,590) $ 8,755
======= ====== ======= ===== ======== =======
Year ended December 31, 1994
Property--Casualty Earned
Premiums $34,255 $11,3012001
Allowance deducted from
assets to which they apply:
Allowance for doubtful
accounts................ $20,281 $8,128 $(3,240) $ 414 $23,368 1.77%-- $(12,531) $12,638
======= ====== ======= ===== ======== =======
See accompanying Independent Auditors' Report
F-32
63
INTERNATIONAL ALLIANCE SERVICES, INC.
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
-------- -------- -------- -------- -------- -------- --------
FUTURE POLICY
DEFERRED BENEFITS, LOSSES OTHER POLICY
POLICY CLAIMS AND CLAIMS AND NET
ACQUISITION LOSS UNEARNED BENEFITS PREMIUM INVESTMENT
SEGMENT COST EXPENSES PREMIUMS PAYABLES REVENUE INCOME
------- ---- -------- -------- -------- ------- ------
Year Ended:
December 31, 1996 $4,345 $41,099 $18,637 N/A $27,743 $3,564
December 31, 1995 $3,428 $37,002 $15,636 N/A $26,962 $3,341
December 31, 1994 $3,725 $34,661 $15,453 N/A $23,368 $2,477
COLUMN H COLUMN I COLUMN J COLUMN K
-------- -------- -------- --------
AMORTIZATION OTHER DIRECT
LOSSES AND OF DEFERRED POLICY OPERATING PREMIUMS
LOSS EXPENSES ACQUISITION COSTS EXPENSES WRITTEN
------------- ----------------- --------- --------
Year Ended:
December 31, 1996 $17,624 $7,699 $4,384 $42,420
December 31, 1995 $15,117 $7,774 $3,157 $36,278
December 31, 1994 $12,494 $5,428 $4,544 $37,127
See accompanying Independent Auditor's Report
F-33
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, IASI has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL ALLIANCE SERVICES, INC.
(Registrant)
By: /s/ Edward F. Feighan
------------------------------
Edward F. Feighan
Chief Executive Officer
and President
March 31, 1997
KNOW ALL MEN BY THESE PRESENTS that each person whose signature
appears below on this Annual Report hereby constitutes and appoints Edward F.
Feighan, Gregory J. Skoda and Craig L. Stout, and each of them, with full power
to act without the other, his true and lawful attorney-in-fact and agent, with
full power of substitution for him and his name, place and stead, in any and all
capacities (until revoked in writing), to sign any and all amendments to this
Annual Report of International Alliance Services, Inc. and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each said attorneys-in-fact
and agents, full power and authority to do and perform each and every act and
thing requisite and necessary fully to all intents and purposes as he might or
could do in person, thereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this Annual Report has been signed below the following persons on
behalf of International Alliance Services, Inc. and in the capacities and on the
dates indicated.
/s/ Michael G. DeGroote
- ------------------------------------ -----------------------------------------
Michael G. DeGroote Harve A. Ferrill
Chairman of the Board and Director Director
March 31, 1997
/s/ Edward F. Feighan /s/ Douglas R. Gowland
- ------------------------------------ -----------------------------------------
Edward F. Feighan Douglas R. Gowland
Chief Executive Officer, President Vice President - Environmental Operations
and Director (Principal Executive Officer) and Director
March 31, 1997 March 31, 1997
/s/ Hugh P. Lowenstein /s/ Richard C. Rochon
- ------------------------------------ -----------------------------------------
Hugh P. Lowenstein Richard C. Rochon
Director Director
March 31, 1997 March 31, 1997
/s/ Gregory J. Skoda /s/ Craig L. Stout
- ------------------------------------ -----------------------------------------
Gregory J. Skoda Craig L. Stout
Executive Vice President and Chief Operating Officer
Chief Financial Officer and Director
(Principal Financial and Accounting Officer) March 31, 1997
March 31, 1997
65
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of
IASI (filed as Exhibit 3.1 to IASI's Registration Statement on
Form 10, file no. 0-25890, and incorporated herein by
reference).
3.2* Certificate of Amendment of the Certificate of Incorporation
of IASI dated October 18, 1996.
3.3 Amended and Restated Bylaws of IASI (filed as Exhibit 3.2
to IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
4.1 Form of Stock Certificate of Common Stock of IASI (filed
as Exhibit 4.1 to IASI's Registration Statement on Form 10,
file no. 0-25890, and incorporated herein by reference)
4.2 Promissory Note, dated October 18, 1996, in the aggregate
principal amount of $4.0 million issued by IASI payable to
Alliance Holding (filed as Exhibit 99.7 to IASI's Current
Report on Form 8-K dated October 18, 1996, and incorporated
herein by reference).
9.1 Voting Agreement, dated as of October 18, 1996, by and between
MGD Holdings and Alliance Holding (filed as Exhibit 99.6 to
IASI's Current Report on Form 8-K dated October 18, 1996, and
incorporated herein by reference).
10.1 Spin-off Agreement (filed as Exhibit 10.1 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.2 Alternative Dispute Resolution Agreement (filed as
Exhibit 10.2 to IASI's Registration Statement on Form 10, file
no. 0-25890, and incorporated herein by reference)
10.3 Assumption of Liabilities and Indemnification Agreement
(filed as Exhibit 10.3 to IASI's Registration Statement on
Form 10, file no. 0-25890 and incorporated herein by
reference)
10.4 Corporate Services Agreement (filed as Exhibit 10.4 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.5 Employee Benefits Agreement (filed as Exhibit 10.5 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.6 Insurance and Indemnification Agreement (filed as Exhibit
10.6 to IASI's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference)
10.7 Tax Sharing Agreement (filed as Exhibit 10.7 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.8 IASI's Adjustment Plan (filed as Exhibit 10.8 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
10.9 Form of Warrant to purchase 200,000 shares of IASI's
Common Stock issued to MGD Holdings Ltd. (filed as Exhibit
10.9 to IASI's Registration Statement on Form 10, file no.
0-25890, and incorporated herein by reference)
10.10 Form of Warrant to purchase 5,000 shares of IASI's Common
Stock issued to Douglas R. Gowland (filed as Exhibit 10.11 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
66
10.11 Form of Warrant to purchase 55,000 shares of IASI's Common
Stock issued for Douglas R. Gowland (filed as Exhibit 10.12 to
IASI's Registration Statement on Form 10, file no. 0-25890,
and incorporated herein by reference)
10.12 Credit Agreement dated as of May 11, 1995 by and among IASI
and its Subsidiaries, as Borrowers, and CoreStates Bank, N.A.
(filed as Exhibit 10.12 to IASI's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein
by reference)
10.13 Agreement and Plan of Merger by and among IASI, Republic/CSA
Acquisition Corporation, Republic/CSU Acquisition Corporation,
Alliance Holding, CSC and CSU (filed as Appendix I to IASI's
Definitive Schedule 14C Information Statement dated September
23, 1996 and incorporated herein by reference).
10.14 Amendment No. 1 to Agreement and Plan of Merger by and among
IASI, Republic/CSA Acquisition Corporation, Republic/CSU
Acquisition Corporation, Alliance Holding, CSC and CSU (filed
as Appendix IV to IASI's Definitive Schedule 14C Information
Statement dated September 23, 1996 and incorporated herein by
reference).
10.15 Amendment No. 2 to Agreement and Plan of Merger by and among
IASI, Republic/CSA Acquisition Corporation, Republic/CSU
Acquisition Corporation, Alliance Holding, CSC and CSU (filed
as
Appendix V to IASI's Definitive Schedule 14C Information
Statement dated September 23, 1996 and incorporated herein by
reference).
10.16 Stock Purchase Agreement by and between IASI and H. Wayne
Huizenga (filed as Appendix II to IASI's Definitive Schedule
14C Information Statement dated September 23, 1996 and
incorporated herein by reference).
10.17 Stock Purchase Agreement by and between IASI and MGD Holdings
(filed as Appendix III to IASI's Definitive Schedule 14C
Information Statement dated September 23, 1996 and
incorporated herein by reference).
10.18* Agreement and Plan of Merger by and among IASI, IASI/SMR
Acquisition Co., SMR and its shareholders dated November 30,
1996.
10.19* Agreement and Plan of Merger by and among IASI, IASI/ECI
Acquisition Co., ECI and its shareholders dated November 5,
1996.
11.1* IASI Earnings per Common Share Data.
21.1* List of Subsidiaries of IASI.
24.1* Consent of KPMG Peat Marwick LLP
99.1 Information Statement (filed as Exhibit 99.1 to IASI's
Registration Statement on Form 10, file no. 0-25890, and
incorporated herein by reference)
*Indicates documents filed herewith.F-30